THE
ART
OF
SERVICE
FINNING INTERNATIONAL INC.
2008 ANNUAL REPORT
In 2008, Finning achieved record
revenues of almost $6.0 billion.
Customer support revenues grew
11.7% to $1.9 billion. We attained the
second best operating results in our
history, a significant accomplishment
given the global economic downturn.
We successfully advanced key strategic
initiatives, strengthening our position
as the leading heavy equipment parts
and service provider. Our focus on
generating cash and reducing costs
continues. To ensure Finning’s long-
term success, we remain dedicated
to perfecting the art of service.
C
C
MONETARY AMOUNTS IN THIS ANNUAL REPORT ARE IN CANADIAN DOLLARS UNLESS OTHERWISE NOTED
Finning at a Glance
Financial Highlights
Letter to Shareholders
Chairman’s Letter
Financial Management
Canada
South America
United Kingdom
2
4
6
10
12
14
18
22
Power Systems
Corporate Responsibility
Financial Report
Board of Directors
Corporate Officers
Corporate Governance
Shareholder Information
26
28
30
94
95
96
Inside Back Cover
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).
territory
employees
industries served
Canada
Finning (Canada)
OEM
South ameriCa
Finning South America
united Kingdom
Finning UK Group
British Columbia, Alberta,
Yukon, the Northwest
Territories, a portion of
Nunavut
Chile, Argentina, Bolivia,
Uruguay
5,061
4,988
England, Scotland, Wales
3,506
Mining (including oil sands),
construction, pipelines, oil
& gas, forestry
Mining, construction,
oil & gas, forestry
Construction, mining,
quarrying, waste
management, power
systems, plant hire,
industrial
PoWer SYStemS
Caterpillar and
associated brands engine
sales and service
All Finning territories
Employees are recorded
within other Finning
divisions
Electric power, industrial,
marine, construction, oil &
gas, on-highway trucks
2008 NEW EQUIPMENT SALES BY INDUSTRY
3%
2%
7%
43%
18%
27%
MINING
CONSTRUCTION
POWER SYSTEMS
OTHER
OIL & GAS
FORESTRY
2
2008 scorecard
2008 Targets
2008 results
7% - 9%
12% -15%
$1.50 - $1.60
25% - 30%
15% - 20%
$100 - $120 million
15% CAGR(3)
40% - 50%
0.60
5.8%
(3.9)% (1)
$1.50 basic (1)
$1.49 diluted (1)
28.7% (1)
15.4% (1)
$23.2 million
11.7%
48.9%
0.38
Revenue growth
Diluted EPS annual growth (long-term goal)
EPS guidance range (2)
Dividend pay-out ratio
Return on equity (ROE)
Free cash flow (before dividends)
Customer support services business growth (2005 to 2010)
Net debt to total capital ratio
Safety (lost time injuries per 200,000 work hours)
2008
highlights
2009
priorities
• Record revenues - $6.0 billion, up 5.8% from 2007
• Growing customer support revenues - $1.9 billion,
up 11.7% from 2007
• Second highest diluted EPS performance - $1.49(1),
down 3.9% from 2007
• Significant improvement in free cash flow
• Continued attractive return on equity - 15.4% (1)
• Increased quarterly dividend to $0.11($0.44 annual
indicated dividend)
• Continued to expand customer support capabilities
in all territories
• Maintained industry leading safety performance
Cash generation
Increased focus on working capital management, significant
reduction in rental fleet additions and tight control of capital
expenditures
Balance sheet strength
Debt repayment to the lower end of the target range
operating efficiencies
Strong focus on cost control and re-alignment of resources
Support long-term strategic initiatives
Continued selective investment in technical training, physical
facilities and information technology, dependent on business
conditions
Continue to grow customer support services revenue
2010 target = $2.3 billion
(1) Adjusted for goodwill impairment - $0.88 and other
non-recurring items -$0.06
(2) Initial 2008 EPS guidance range $1.70 - $1.80
(3) Compound Annual Growth Rate
2008 FInnIng InTErnATIOnAl InC.
3
financial highlights
YEAR ENDED DECEMBER 31 ($millions, except per share amounts)
2008
2007
2006
OPERATING DATA (from continuing operations)
Revenue
Earnings before interest & income taxes (EBIT)
EBIT before goodwill impairment and non-recurring items*
Net income
Net income before goodwill impairment and non-recurring items*
Diluted earnings per share (EPS)
Diluted EPS before goodwill impairment and non-recurring items*
Return on equity
Return on equity before goodwill impairment and non-recurring items*
Cash flow from operations after working capital items
BALANCE SHEET DATA
Total assets
Invested capital
Total shareholders’ equity
Net debt to total capital
5,991.4
236.7
405.8
96.0
257.8
0.55
1.49
5.8%
15.4%
278.1
4,720.4
3,174.1
1,567.1
48.9%
5,662.2
455.8
4,853.2
373.7
280.1
236.2
1.55
1.31
16.8%
15.8%
404.4
460.2
4,134.2
2,794.8
1,617.8
40.8%
4,200.8
2,787.9
1,624.4
40.0%
REVENUE ($BILLIONS)
EBIT ($MILLIONS)
NET INCOME ($MILLIONS)
DILUTED EPS ($)
6.0
5.7
6.0
5.0
4.0
3.8
4.9
4.3
3.0
2.0
1.0
0.0
2004 2005 2006 2007 2008
500
400
300
200
100
0
456
374
406*
272
258
2004 2005 2006 2007 2008
300
250
200
150
100
50
0
280
258*
236
2.0
1.5
1.55
1.49*
1.31
162
115
1.0
0.90
0.72
0.5
0.0
2004 2005 2006 2007 2008
2004 2005 2006 2007 2008
* Excludes the goodwill impairment charge of $151.4 million for Hewden (EPS impact = $0.88), and other non-recurring items of $17.7 million pre tax
and $10.4 million after tax (EPS impact = $0.06).
The results of operations of the Materials Handling Divison have been reclassified as discontinued operations for 2006, 2005 and 2004.
The results of operations of the Tools Hire Divison have been reclassified as discontinued operations for 2007, 2006 and 2005.
4
FINANCIAL PERFORMANCE BY
CONTINUING OPERATIONS
($ MILLIONS)
Canada
South America
UK
REVENUE
EBIT
2008
3,216.9
1,501.6
1,272.9
2007
2,936.2
1,325.6
1,400.4
2008
234.5
148.2
53.6
2007
286.3
127.4
73.0
Power Systems
Power Systems revenues are reported within other Finning divisions
896.9
821.3
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
2008
2007
2,376.9
551.7
1,899.5
712.8
431.8
39.7%
9.2%
31.7%
11.9%
7.2%
2,233.5
503.0
1,701.2
781.2
417.6
39.4%
8.9%
30.0%
13.8%
7.4%
CUSTOMER SUPPORT SERVICES
REVENUE ($MILLIONS)
ASSETS BY OPERATIONS
GEOGRAPHIC BREAKDOWN
1,899
100%
2,000
1,750
1,500
1,250
1,196
1,701
1,583
1,340
1,000
750
500
250
0
2004 2005 2006 2007 2008
CANADA
FINSA
UK GROUP
80%
60%
40%
20%
0%
2004 2005 2006 2007 2008
REVENUE BY OPERATIONS
21.2%
25.1%
53.7%
CANADA
FINSA
UK GROUP
EBIT BY OPERATIONS
Excludes other corporate items and goodwill impairment
12.3%
53.7%
34.0%
CANADA
FINSA
UK GROUP
2008 FInnIng InTErnATIOnAl InC.
5
FOCUS,
EXECUTE &
DRIVE OUR
STRATEGY
FOR
SUCCESS
66
6
letter to shareholders
“We are completely focused on
maintaining customer service levels
and managing costs, while preserving
the strength of our balance sheet and
generating cash.”
Mike Waites
president & chief executive officer
What often distinguishes successful
companies is their ability to drive towards
a clear strategic vision while maintaining
equal focus on superior execution of
near-term operating plans. Backed by a
strong and well-trained workforce, these
companies know who they are, where
they are headed, and are driven to help
their customers succeed. As a result, these
companies tend to dominate the industries
in which they operate. I firmly believe that
Finning is such a company.
At Finning, we are driven to provide
unrivalled service to our customers. The
stories about our field technicians and
skilled staff are legendary and date back
to our early operating philosophy of “we
service what we sell”. In an ever changing
world, it is increasingly important to stand
for this level of commitment and service.
It is the combination of the Caterpillar
product and the Finning service that
differentiates us in the market place.
Investing in service and our people is of
paramount importance in this respect and
we believe our customers will reward us
with their loyalty and future business.
It is our intention to dominate the mining,
oil sands and heavy construction equipment
businesses in our territories. Further, we
believe we can grow our power systems
business substantially. These are the
areas where we can leverage our service
capabilities and continue to drive our
product support business forward. We
are well on our way towards achieving our
target of $2.3 billion of customer support
revenues in 2010.
Finning’s story is about dominating the sales
and service of large machines in Western
Canada and Northern Chile. It is a story
about a $1 billion book of business from
the oil sands in Canada and our ability to
drive the same success in Northern Chile.
It is a story about growing our engines
business revenue to reach $1 billion. And,
it is a story about customer service and
customer support. In short, we know who
we are and where we are going.
Turning to a review of how we executed
our strategic plan in 2008, it is fair to say
that the business environment when the
year began was significantly different than
when it ended. In describing our financial
results, it is gratifying to report that 2008
revenues were almost $6.0 billion, up 5.8%
from 2007 and a new record. Most notably,
our customer support revenues grew by
11.7% over 2007 to $1.9 billion. Annual
diluted earnings per share, excluding
certain non-recurring items of $0.06 per
share and a non-cash goodwill impairment
charge of $0.88 per share, was $1.49, down
3.9% from 2007. These were the second
best operating results in Finning’s history.
Free cash flow improved significantly. In
2008, we generated $23.2 million free
cash flow, before dividends, a significant
improvement over 2007 when we used
$110.7 million. In the fourth quarter
alone we generated $151.7 million of free
cash flow, before dividends. Cash flow is
expected to improve significantly in 2009.
Importantly, we also achieved an attractive
return on equity of 15.4% in 2008, adjusted
for the goodwill impairment charge and
other non-recurring items noted above.
During the year we increased our quarterly
dividend to $0.11 per share, our 7th
consecutive year of dividend increases.
2008 FInnIng InTErnATIOnAl InC.
2008 FInnIng InTErnATIOnAl InC.
7
7
letter to shareholders continued
Progress by operation
In Canada, revenues reached $3.2 billion,
an increase of 9.6% over 2007, driven
by strong demand for equipment and
product support from the existing oil
sands operations. Investment in people
to support the oil sands customers,
expenses related to the integration of our
new Red Deer facility and fourth quarter
restructuring costs reduced EBIT from the
Canadian operations by 18.1% to $234.5
million. Improving profitability at Finning
(Canada) is a key priority for 2009. We
began 2008 pursuing growth, and while
we aggressively managed our capital
programs and rental fleets, the capacity
additions were greater than what we
needed in a weaker business environment.
This is a short-term phenomenon and we
are rebalancing our cost base at Finning
(Canada) to align with expected revenues.
We expect the large installed equipment
base at the existing oil sands projects to
continue to drive our parts and service
business as well as generate opportunities
in heavy equipment overhaul. Additionally,
we believe that planned government
infrastructure spending in 2009 and beyond
will support the heavy construction sector.
Our South American operations posted
another record year. Driven by strong
growth in our customer support business,
revenues increased to $1.5 billion, up 13.3%
over 2007. EBIT reached $148.2 million, up
16.3% from 2007. Despite lower copper
prices, the mining sector continued to
perform well through the fourth quarter.
Our expense control measures were
effective in mitigating inflationary pressures
in the region, and our operating and
financial results in South America continue
to be very strong. Our mining customers
in South America are among the world’s
lowest cost copper producers, and we
believe they will continue to operate in this
environment of lower copper prices. Given
significant expansion in the installed large
equipment base over the past few years, we
expect our product support revenues to
continue to grow in 2009.
Our UK Group faced very challenging
market conditions throughout last
year. In local currency, 2008 UK Group
revenues were comparable to 2007
levels. In Canadian dollars, revenue
declined by 9.1% from the prior year.
The UK dealership operations had a
successful year in the heavy construction
and power systems divisions. We
achieved a 13.1% increase in customer
support revenues in local currency in
the U.K., which is particularly notable
given the adverse economic conditions.
We continued to experience challenges
with our Hewden business as the U.K.
rental market remained very weak given
the difficult economic conditions. Our
actions over the last couple of years have
been extensive and we continued to
rationalize and focus the business further
with the announced closure of 22 branches
and substantially reduced rental fleet
investment. As a result of deteriorating
market conditions, we recorded a goodwill
impairment charge of $151.4 million with
respect to Hewden in the fourth quarter
of 2008. This was a non-cash charge and
reflects the lower value of the business
in a significantly weaker economic
environment. The returns from our
Hewden operation were unacceptable and
we will take further actions as necessary
to improve Hewden’s performance.
Across our geographies, our consolidated
power systems revenues reached a
record $896.9 million*, a 9.2% increase
over 2007. The engine sales and service
business grew in all our regions and was
particularly strong in South America.
The oil & gas sector in Western Canada
remained soft; however, electric power
generation and large project work drove
considerable activity in the U.K.
In summary, there were many
achievements in 2008. Our primary
challenge was to quickly adjust our costs
and capacity in Canada and in our rental
operations in the U.K. given the economic
downturn. Towards the end of 2008,
we initiated in excess of $100 million of
future gross cost reductions and we will
continue to adjust our costs as necessary
depending on the economic environment.
Looking ahead
We are focused on prudently managing
our balance sheet through these uncertain
times while positioning the company for
future success and growth. Our balance
sheet is solid and we have adequate
operating credit facilities that are
committed until late in 2011. In addition,
there are no long-term debt maturities
until December 2011. In 2009, we expect to
generate significant cash flow as a result of
our focus on working capital management,
a further reduction in rental fleet additions
and a very disciplined approach to capital
spending. Our cash will be deployed to
reduce debt, pay dividends and selectively
fund long-term strategic initiatives as
economic conditions allow. This financial
strength provides the foundation for us
to grow and drive towards our vision.
The tremendous growth in our machine
population over recent years has paved
the way for product support opportunities
for years to come. We opened our new
Centre of Excellence (COE) in Red Deer,
Alberta in the first quarter of 2008. At
the COE, we have centralized activities
and implemented more efficient processes
related to preparation of new equipment
for delivery and rebuilding old machines,
thus freeing up customer service capacity
in our regular branches. This facility
gives us tremendous upside operating
leverage as activity builds in the future.
In Northern Chile, we opened a similar
facility to serve our mining customers.
The La Negra Truck Shop assembles
mining equipment and rebuilds and
refurbishes these machines for second
and subsequent lives. In 2009, we will
further increase our presence in this
strategic location with a large new Parts
Distribution Centre (PDC) in La Negra.
The PDC will support the large machine
population with parts and components
and increase efficiencies by consolidating
numerous warehouses in the vicinity.
Our commitment to serving our customers
more effectively and running our
operations more efficiently is underscored
by our investment in a new information
technology (IT) system. This new IT
platform will support all our business
processes. It will allow us to manage the
growing volume of transactions more
efficiently and will give us improved access
to information and tools for decision
making. The system is being implemented
in Canada first and will subsequently be
installed in South America and the U.K.
8
* Power Systems revenues are reported within other Finning divisions.
Share Value (excluding dividends) has grown
at an annual compound growth rate as follows:
relative Price Performance
Finning International Inc. vs. S&P/TSX Composite Index
Dec 31, 2003 to Dec 31, 2008
5 years
-1.0%
10 years
10.0%
20 years
8.6%
250
Finning International Inc.
200
S&P/TSX Composite Index
150
100
50
31-Dec-03
31-Dec-04
31-Dec-05
31-Dec-06
31-Dec-07
31-Dec-08
People
I will close with a final and important message about people. It is our employees who make Finning the leading equipment and service
supplier in our regions.
Our commitment to maintaining a safe work environment is at the core of our values. Our ‘lost time frequency rate’, a measure of
workplace safety, continues to improve and we are an industry leader in this area. Avoiding injuries in each of our operations will remain
at the top of our list of priorities.
Despite this focus on safety, we are deeply saddened by the untimely deaths of three of our employees during 2008. Such tragedies are
unacceptable and the executive team is absolutely committed to driving our safety values.
Our commitment to our people also extends to continued investments in technical and leadership training which support our employees’
ability to ensure we remain our customers’ service provider of choice.
I would like to acknowledge the support of Caterpillar as a strategic business partner. In my first year as President & Chief Executive
Officer, I’m also appreciative of the support and guidance received from our Board of Directors. I especially want to take this opportunity
to sincerely thank our employees for their ongoing dedication and hard work. You are the best in the business and it is a pleasure to work
with you every day.
executing our Strategy
While recognizing that these are uncertain times, I remain confident that we are driving the right strategy for our customers, our business
and our shareholders. We have a clear vision to dominate those businesses where we can truly differentiate our service commitment.
We have also taken decisive and quick action to address our organization’s cost structure and will continue to be responsive to market
conditions.
We have a good line of sight on product support opportunities resulting from the significant increase in equipment fleets in recent years
and we are focused on executing our strategy while remaining steadfast in our commitment to deliver the “art of service”.
Sincerely,
FINNING INTERNATIONAL INC.
Mike Waites
President & Chief Executive Officer
2008 FInnIng InTErnATIOnAl InC.
9
chairman’s letter
Conrad A. Pinette
Douglas W.G. Whitehead
chairman of the board
James E.C. Carter
Kathleen M. O’Neill
John M. Willson
“The Board of Directors is working with Finning’s senior
management team to navigate through these challenging
times, build on our operating performance, and ensure
that we continue to support our long-term strategic goals.”
10
10
David L. Emerson
Andrew H. Simon
Bruce L. Turner
John M. Reid
Ricardo Bacarreza
Michael T. Waites
It is my pleasure to report to you
for the first time in my role as
Chairman of the Board of Finning.
Despite the unprecedented economic
turmoil in the fourth quarter of 2008,
Finning reported its second highest
earnings per share performance in
company history and a new record of
almost $6.0 billion in revenue. The new
backdrop of weaker global markets
resulted in a significant shift in management
focus from managing rapid growth to
decisively adjusting our cost structure
while maintaining our high-quality service.
The Board of Directors is working with
Finning’s senior management team to
navigate through these challenging times,
build on our operating performance,
and ensure that we continue to support
our long-term strategic goals. Upholding
the highest governance standards
remains a key priority for your Board.
Finning has an established tradition of
excellence in corporate governance
and the Board remains resolute in our
commitment to fulfilling the duties
of stewardship and accountability.
Adding to your Board’s considerable
experience, we had the pleasure of
welcoming a new member in December
2008. David Emerson joined the Finning
Board of Directors bringing extensive
senior leadership experience in business,
as an elected Member of Parliament and
in the Canadian Federal Cabinet. I would
also like to acknowledge the retirement
of Don O’Sullivan from the Board in May
2008 after serving as a Director since 1991.
Throughout the years, Don contributed
to Finning’s success as a trusted advisor
and we will miss his incisive counsel.
In closing, I would like to thank my fellow
Directors for their contributions last
year and all Finning employees for their
continuing hard work and dedicated efforts
to lead the company into the future.
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 at www.finning.com.
On behalf of the Board of Directors,
Douglas W.G. Whitehead
Chairman of the Board
2008 FInnIng InTErnATIOnAl InC.
2008 FInnIng InTErnATIOnAl InC.
11
11
Free cash flow is expected to grow substantially in 2009.
Our top priority is to maintain our financial strength while
positioning Finning for future success and growth.
Financial
Performance
1.
2.
Focus on Cash
Generation
3.
Maintaining a Strong
Balance Sheet
Finning’s balance sheet remains healthy.
Our net debt to total capital ratio of
48.9% remains within our target range of
40-50%, although at the higher end. Our
top priority in 2009 is to reduce our net
debt to total capital ratio to the lower
end of our target range by using the
significant increase in projected free
cash flow to repay debt.
Finning has adequate operating
credit facilities that are committed
until December 2011. The main
short-term credit facility is an $800
million, unsecured, global borrowing
facility arranged with a syndicate of
mainly Canadian chartered banks. At
December 31, 2008 $261.6 million of
the facility was available. In addition,
$109.8 million in cash was available.
Finning has no long-term debt maturities
prior to December 2011, providing a stable
financial position for the Company.
2008 revenue grew by 5.8% to a record
$6.0 billion. Earnings before interest and
taxes (EBIT), after adjusting for non-
recurring items, decreased by 11.0% to
$405.8 million. These non-recurring items
totaled $169.1 million and included:
• non-cash goodwill impairment charge
of $151.4 million related to Hewden,
EPS impact = ($0.88)
• costs associated with the UK back-office
integration and Hewden depot closures -
$10.3 million, EPS impact = ($0.04)
• costs related to the transition and
integration of the Collicutt acquisition
into the COE - $12.6 million,
EPS impact = ($0.05)
• costs related to restructuring charges
incurred globally in the fourth quarter in
response to weakening market conditions -
$9.5 million, EPS impact = ($0.04)
• gains on sale of Hewden properties -
$14.7 million, EPS impact = $0.07
Diluted earnings per share, before these
non-recurring items, was $1.49, down 3.9%
compared to $1.55 in 2007. There were no
significant non-recurring items in 2007.
In 2008, Finning generated $576.7 million
cash from operations compared to $623.0
million in 2007. Free cash flow before
dividends, (cash from operating activities
less net expenditures on capital assets)
improved significantly in 2008. For the
full year, free cash flow of $23.2 million
was generated compared to a use of cash
in 2007 of $110.7 million. In the fourth
quarter 2008, we generated $151.7 million
of free cash flow before dividends, a
significant increase compared to the first
three quarters of 2008 as we saw a pattern
of improving cash flow generation each
consecutive quarter.
Capital expenditures, excluding the
Collicutt acquisition, totaled $100.4
million in 2008 compared to $74.2 million
in 2007. Apart from working capital, the
majority of Finning’s capital expenditures
are discretionary as the business has very
modest required capital expenditure needs.
Total net rental equipment expenditures
amounted to $204.8 million in 2008, less
than half of the $474.6 million that was
invested in rental equipment in 2007. Rental
additions were reduced significantly in the
fourth quarter of 2008 and will remain
low in 2009.
Free cash flow is expected to grow
substantially in 2009 as new equipment
inventories are reduced given lower
orders for equipment and shorter lead
time from Caterpillar and as we increase
our focus on managing other working
capital items as well as significantly reduce
expenditures on rental equipment and
tightly control our capital spending.
12
financial management
4.
Cost Control
and Operating
Efficiencies
5.
Selective Funding of
Long-Term Strategic
Initiatives
6.
Dividend Growth
Tight control of operating costs is a
key focus area for Finning as we look to
improve profitability in an environment
of lower new equipment sales.
Our 2009 capital expenditures will
depend on business conditions and will
be tightly controlled and prioritized around
long-term strategic initiatives.
During 2008, Finning raised its quarterly
dividend to $0.11 per share, our 7th
consecutive year of dividend increases.
The annual dividend has grown at an
average rate of over 17.1% per annum in
the last five years. The indicated annual
dividend is currently $0.44 per share.
We believe that an attractive dividend
represents an important part of total
shareholder return.
We remain committed to appropriately
funding our long-term strategic initiatives.
We are focused on dominating the mining
equipment related businesses, growing the
heavy construction equipment business
and ensuring that we have the physical and
people capabilities to continue to provide
our customers with the very best service.
In 2008, consolidated EBIT margins
declined as expenses increased to meet
planned revenue growth that did not
materialize to the extent we expected
due to lower demand. The largest portion
of the higher costs incurred in 2008
was related to the strategic initiatives in
Western Canada for anticipated future
growth in the oil sands. We also incurred
some one-time costs in the U.K. as we
continued to reduce excess capacity in
light of the weak business environment.
In addition, the design, development and
implementation of our new information
technology system resulted in $16.2 million
of expenses in 2008.
In the fourth quarter, in light of weaker
economic conditions, we acted quickly to
right size our operations in all our regions
by reducing costs and adjusting staffing
levels. The one-time costs associated
with this global restructuring totaled
$9.5 million.
In 2009 we will improve profitability at
Finning (Canada) by re-aligning costs and
capacity with projected revenues and also
improve results at our rental operations
in the U.K. Towards the end of 2008,
we initiated in excess of $100 million of
gross cost reductions that will benefit us
in 2009, and we will continue to adjust
our cost structure depending on the
economic environment.
ANNUAL DIVIDEND PER SHARE
5 year Compound Annual Growth Rate = 17.1%
$ 0.50
0.45
0.40
0.35
0.30
0.25
0.20
0.15
0.10
0.05
0.00
* Indicated Dividend
0.44*
0.43
0.36
0.28
0.22
0.20
2004 2005
2006
2007 2008 2009
2008 FInnIng InTErnATIOnAl InC.
13
SET THE
HIGHEST
STANDARD
FOR
SUPPORT
14
Finning West Edmonton Branch, Alberta
2008 Performance
Our Canadian operations achieved
an attractive revenue growth of 9.6%
reaching a record $3.2 billion in 2008.
Continued strong demand from the mining
sector, particularly the existing oil sands
operations, was the primary driver of a
15.4% increase in new equipment sales
and a 8.4% rise in customer support
revenues over 2007. Higher revenues
from our parts and service business
and strong equipment deliveries to oil
sands customers offset lower activity in
construction, petroleum and forestry
due to weaker market conditions.
2008 EBIT from our Canadian operations
declined by 18.1% to $234.5 million as a
result of higher costs mainly related to
a number of strategic initiatives during
the year to enhance our customer
service capabilities for anticipated
growth in Western Canada. Excluding
certain non-recurring items, EBIT
decreased by 10.9% to $255.1 million.
In the first half of 2008, we transitioned
the recently acquired Collicutt business
into the new Finning Centre of Excellence
(COE) in Red Deer, Alberta. This 24-
bay, 200,000 sq. ft. facility focuses on
new equipment preparation and major
equipment overhauls. The COE enables us
to standardize new equipment preparation
processes, improve efficiencies and
accelerate the delivery of newly purchased
machines to our customers. It also allows
Finning to take advantage of the growing
heavy equipment overhaul opportunities
with specialized expertise to generate
additional value. Customers can purchase
complete certified rebuilt machines
for a significant discount compared to
the purchase price of a new machine.
We incurred extra costs related to the
transition of COE, and bringing this
operation to target productivity levels.
We also made significant progress towards
implementing a new information technology
system to streamline our processes and
yield greater efficiencies. The new IT
system will allow us to effectively manage
a higher volume of transactions and provide
better access to information and tools for
decision making. This new information
technology system is scheduled to go live
in Canada in early 2010, and we incurred
$7.9 million of expenses related
to this project in 2008.
In addition, in light of weaker economic
conditions, we acted quickly to restructure
our Canadian operations in the fourth
quarter of 2008. The one-time costs
of $8.0 million associated with this
restructuring impacted our fourth
quarter results.
The largest portion of the higher costs
incurred by Finning (Canada) in 2008
was related to the rapid growth in the oil
sands where we increased our customer
service capabilities substantially to support
anticipated demand for equipment, parts
and service from our oil sands customers.
Improving profitability at Finning
(Canada) by re-aligning our costs with
projected revenues, improving operating
efficiencies and further developing our
product support capabilities for the
future will be key priorities in 2009.
Product Support makes a difference
Customer support revenues rose by 8.4%
in Canada in 2008. Excluding revenues from
the discontinued alliance with Shell, the
increase was 19.5%. Continuing to grow the
product support business remains another
one of our key priorities for 2009, and we
will continue to selectively fund initiatives
to strengthen our leading position as
a heavy equipment parts and service
provider.
From 2004 to 2008, our Canadian
operations have experienced
unprecedented growth in new equipment
sales of almost 30% on average per year.
This surge in demand has resulted in
a population of over 41,000 machines,
including about 25,000 units that are less
than 10 years old. Roughly half of this
population is comprised of heavy mining
and construction equipment, such as off-
highway trucks, dozers, loaders, graders
and scrapers. These large machines are
significant consumers of parts and service
during their operating lives and are eligible
for a complete rebuild when they reach
the later stages of their first life. This
substantial machine population is the
foundation for Finning’s future parts and
service business.
canada
CANADA REVENUE ($MILLIONS)
CANADA REVENUE ($ millions)
3,217
2,936
2,613
2,050
1,563
3,500
3,000
2,500
2,000
1,500
1,000
500
0
CANADA EBIT ($MILLIONS)
2004 2005 2006 2007 2008
CANADA EBIT ($ millions)
286
234
215*
300
250
200
150
100
50
150
132
0
2004 2005 2006 2007 2008
CANADA CUSTOMER SUPPORT
SERVICES REVENUE ($MILLIONS)
CANADA CUSTOMER SUPPORT
SERVICES REVENUE ($ millions)
1,200
1,000
800
712
600
564
982
906
873
400
200
0
2004 2005 2006 2007 2008
* 2006 EBIT excludes gains on sale of assets.
2008 FInnIng InTErnATIOnAl InC.
15
canada CONTINUED
Finning Truck Shop, Fort McMurray, Alberta
Our Customers Come First
Moe Prieur and Kirt laing were off work enjoying a leisurely Saturday when duty called. Damage to a wheel on a
Caterpillar 773 off-highway truck belonging to long-time customer, Syncrude, had brought the unit at their Aurora mine
in northern Alberta to a grinding halt. Exemplifying the commitment to service for which Finning is known, both Moe
and Kirt immediately launched a search for a replacement.
When a replacement wheel couldn’t be located through the usual means, they decided to broaden their search
by appealing to their other customers. Working with the Mildred lake branch, they eventually tracked down a
Fort McMurray client willing to loan a wheel until a replacement could be ordered. After obtaining the wheel, Kirt
personally travelled to Aurora to make the delivery. The trademark Finning persistence and the collective
efforts of Moe and Kirt paid off as the 773 was restored and ready to return to operation in record time.
Finning Centre of Excellence, Red Deer, Alberta
Finning West Edmonton Branch, Alberta
797 Haul Truck, Albian Sands, Alberta
16
canada CONTINUED
For over 75 years, Finning has been well
known for delivering outstanding product
support in Western Canada. We have
successfully worked with our customers
through many economic downturns. In the
current environment, moving material at
the lowest cost per ton is more critical than
ever to our customers as they strive to
keep the operating costs of their equipment
as low as possible. Our extensive service
capabilities and innovative service solutions
are geared toward supporting our
customers to achieve these goals.
Over the past five years, we have taken
deliberate steps to expand our customer
support capabilities in Western Canada.
This continues to give us a substantial
competitive advantage and expertise in
offering parts, service and machine and
component rebuilds. We have expanded
our physical capacity by investing in the
world-class OEM Remanufacturing facility
in Edmonton and the COE in Red Deer.
With our investment in OEM, we control
the supply of high quality remanufactured
components such as engines and
transmissions and produce the rebuilt
components that we use for maintaining
our customers’ machine fleets and for
performing major machine overhaul work
at the COE.
We have continued to invest in our
employees’ technical expertise by
implementing training programs while
reinforcing the highest safety standards.
Our oil sands operations in Fort McMurray
saw continued demand for heavy equipment
mechanics. Today, over 840 Finning
employees work at our four oil sands
branches compared to approximately 620
employees in 2007.
mining
Mining activity in Western Canada was
strong in the first three quarters of 2008
and held up reasonably well for the balance
of the year when commodity prices
weakened. Finning (Canada) had a very
successful year delivering new equipment
and product support to the mining industry,
particularly to the oil sands. Mining
customers accounted for 54% of all new
equipment sales in Western Canada as
we delivered a record number of mining
machines, including 68 Caterpillar 797 off-
highway trucks. Strong growth in the mining
equipment population over the last five
years gives us very good visibility for future
product support revenues.
While commodity prices are lower, we
expect the existing oil sands operations and
large coal and copper mines to continue
to operate and target the lowest per unit
production costs. As our largest customers
will need to run their fleets as efficiently as
possible, Finning will continue to support
them with reliable parts and service.
One of our key objectives in Western
Canada is to maintain our leading position
in the oil sands. To capitalize on the long-
term potential of this region, we have
developed a mining support infrastructure
in central and northern Alberta that is
unmatched in the industry.
The large new equipment purchased by
our customers is shipped from Caterpillar
factories to the COE in Red Deer where
we prepare it for delivery. Existing
customer machines are maintained by
Finning technicians working at our branches
or in the field. Parts are supplied through
our distribution network with Edmonton
serving as the hub. Large components
which need replacing are rebuilt at our
world-class component rebuild facility,
OEM Remanufacturing. Customers’
downtime is minimized, as Finning draws
on its component inventory to replace the
components being rebuilt. When a machine
reaches the later stages of its first life, it
is shipped to the COE where the machine
is rebuilt to an as-new standard with a
complete warranty. Components for these
rebuilt machines are provided by OEM. All
other parts are supplied by our Edmonton-
based parts operations.
heavy Construction
In 2008, about 21% of all new equipment
deliveries in Western Canada were
directed to our construction customers.
Activity in the heavy construction sector
was lower in 2008 than in the previous
two years. Most government-funded
infrastructure work such as building roads
and bridges continues in both provinces;
however, some projects have been slower
to start than expected.
We expect the announced infrastructure
spending plans by various levels of
governments to start supporting higher
volumes of heavy construction towards
the end of 2009. In addition, the large
population of heavy construction
equipment currently operating on
infrastructure and non-residential
construction projects in B.C and Alberta
will continue to require parts and service.
Focus on execution and efficiencies
Demand for new equipment is expected
to slow in 2009. Lower commodity prices
are impacting our customers in commodity
based industries in Western Canada. We
reduced certain orders from Caterpillar
in the fourth quarter of 2008 and we will
continue to align our inventory levels
with customer demand. The economic
downturn has resulted in delays to some
mining expansions and new projects.
Conventional oil and gas and forestry
sectors are expected to remain weak as
well. However, we expect the large machine
population in Western Canada, particularly
at the existing oil sands operations, to
continue to drive growth in our parts and
service business in 2009.
We expect that 2009 will be a year of
transition and opportunity for Finning
(Canada). Our key priority is to continue
aligning our costs and resources in response
to current market conditions while staying
the course on our long-term strategy of
providing timely service solutions to our
expanded machine population base and
growing our customer support business.
We are confident in our ability to improve
operating efficiencies and find more
innovative ways to provide equipment,
parts and service to our customers.
2008 FInnIng InTErnATIOnAl InC.
17
GO THE
DISTANCE
FOR
OUR
CUSTOMERS
18
18
Carmen de Andacollo Copper Mine, Chile
south america
2008 Performance
Finning South America (FINSA)
delivered very strong results in 2008.
FINSA revenues increased by 13.3%
over 2007 to a record $1.5 billion. EBIT
was up 16.3% over 2007 reaching $148.2
million. These results were driven by
strong growth in product support and
power systems revenues. Improved
profitability was attributable to a higher
proportion of customer support sales
in the total revenue mix and effective
cost control measures to mitigate the
impact of inflation in this region.
In 2009, our focus on cost controls,
management of inventory levels and
operating efficiencies will be at the
forefront of our priorities.
The past few years of high copper and
metal prices fueled tremendous growth
in the mining industry in Chile and, to a
lesser extent, in Argentina. We delivered
a record number of mining machines to
our customers in northern Chile. Most
of these heavy equipment fleets operate
with a customer support agreement where
Finning delivers parts and, in many cases,
service and maintenance. We expect that
most of this mining equipment will continue
to operate and generate strong demand
for parts and service as our largest mining
customers are among the lowest cost
producers of copper in the world. The
economic growth in the FINSA region also
translated into strong construction activity.
Finning was very successful in benefiting
from this strong demand for
new equipment.
In 2008, as expected, the revenue mix
shifted towards customer support services
which contributed over 44% of total FINSA
revenue. The healthy growth in parts and
service revenues is the result of a large and
growing population of mining and heavy
construction equipment in this region, as
well as our efforts in developing high-quality
product support capabilities to capture a
larger share of this higher-margin business.
Product Support makes a difference
FINSA achieved a 15% average annual
growth rate in customer support services
revenues over the last five years. Our
product support business in South
America is primarily driven by the copper
mining industry. We have long-standing
relationships with our copper mining
SOUTH AMERICA REVENUE ($MILLIONS)
SOUTH AMERICA REVENUE ($ millions)
1,502
1,326
1,007 1,010
870
1,600
1,400
1,200
1,000
800
600
400
200
0
2004 2005 2006 2007 2008
SOUTH AMERICA EBIT ($MILLIONS)
SOUTH AMERICA EBIT ($ millions)
148
127
109
93
160
120
83
80
40
0
2004 2005 2006 2007 2008
FINSA CUSTOMER SUPPORT SERVICES
REVENUE ($MILLIONS)
SOUTH AMERICA CUSTOMER SUPPORT
SERVICES REVENUE ($ millions)
800
600
400
382
400
664
550
472
200
0
2004 2005 2006 2007 2008
797 Haul Truck, Escondida Copper Mine, Chile
2008 FInnIng InTErnATIOnAl InC.
19
south america CONTINUED
Finning Truck Shop, Escondida Copper Mine, Chile
Our Customers Come First
Known as the driest place on earth, parts of the Atacama Desert along the coast of northern Chile have experienced
years without a drop of rain. It is in this arid climate, 3,100 meters above sea level that the Escondida mine is located
and the Finning service team operates. As one of the world’s largest copper producers, Escondida aimed to increase
productivity by contracting Finning to replace the engines on a fleet of sixty Caterpillar 797 off-highway trucks.
led by Francisco Vergara, a team of 30 Finning employees dedicated themselves to the task working in seven day rotations.
The desert climate and high altitude, plus the adjustment to camp life, presented a unique challenge making the team’s
efforts nothing less than remarkable. The Finning team was praised for improving the client’s equipment availability and
reliability which, in turn, led to meaningful productivity improvements. The team can also take pride in having fulfilled the
contract while maintaining a perfect safety record.
Finning Service Depot, Coquimbo Branch, Chile
Haul Truck, Carmen de Andacollo Copper Mine, Chile
Finning Service Depot, Coquimbo Branch, Chile
20
south america CONTINUED
Approximately 350 new employees (net),
mostly mechanics and customer support
staff joined FINSA in 2008. The strong
technical competencies of our employees
are critical to deliver best in class product
support, and we continue to invest in
training and development of our people.
The Chilean and Argentine governments
have announced additional investments in
infrastructure which should provide extra
support for the construction sector later
this year. Overall, we expect a lower level
of equipment sales to the construction
industry in 2009.
Looking ahead
We expect to see a steady stream of parts
and service revenues on the installed
equipment base, particularly from our
mining customers. We have the service
infrastructure and proven technical
capabilities in place, and we will work with
our customers to find the most effective
solutions to their equipment needs. In
addition, we will manage ongoing high
inflation and constrained credit availability
in Argentina.
FINSA’s solid product support strategy
makes us the market leader in our
territory. We have put tight cost control
and inventory management policies in
place. Our focus on execution and driving
operating efficiencies will serve us well
through the economic downturn and
position us to capitalize on further growth
opportunities when the markets recover.
mining
Mining customers account for over half
of FINSA’s total revenue. The product
support revenues from the mining industry
have grown substantially over the last few
years, reflecting the increasing number of
customer support agreements in the region.
In 2008, about 65% of mining revenues
were generated by parts and service. We
currently have 21 service contracts that
support about 600 machines operating in
the field. Approximately 60% of our FINSA
employees support mining customers.
In October 2008, FINSA delivered the
100th Caterpillar 797 truck, and during
2009, we will be delivering additional
units to this fleet of 400-ton trucks.
Chile’s copper mining industry is the largest
in the world, supplying over 30% of the
global copper production. It is also one of
the lowest cost copper producing regions
in the world. While copper prices have
dropped significantly, they continue to be at
a level that is economically viable for most
of our copper mining customers.
Our customers continue to demand
maximum equipment availability to achieve
the lowest cost per ton of material moved.
Finning will continue to deliver parts and
service and ensure optimum mechanical
availability.
general machinery
The general machinery business in
South America slowed in 2008. This was
mainly a reflection of slower economic
conditions and was felt most in Argentina.
Construction accounts for about 30% of
total FINSA revenues and for about half of
Argentina’s business.
customers and have been very successful in
delivering parts and service to this sector.
We made significant investments in our
product support capabilities in South
America, particularly in northern Chile,
where our largest mining customers
operate. Two years ago, we opened the
La Negra Truck Shop near Antofagasta
to assemble and rebuild large off-highway
trucks and other heavy equipment. An
expansion of this facility is now underway,
and in 2009 we will increase the shop space
to accommodate the growing volumes.
In early 2009, we opened a new 248,000 sq.
ft. Parts Distribution Centre (PDC), next
to our La Negra Truck Shop. The PDC will
consolidate several parts and components
warehousing facilities in the area and will
have the capacity to support future growth
in the mining machine population. Like our
other facilities, the PDC employs world
class contamination controls. All parts and
components are safely stored inside and
are not affected by the wide temperature
fluctuations that can occur in the Atacama
Desert where these facilities are located.
We have developed extensive service
capabilities in northern Chile to support
our customers’ equipment needs through
all stages of the machine life cycle.
In this region, the new equipment arrives
by ship at the port of Antofagasta and is
moved to our La Negra Truck Shop where
it is assembled and prepared for delivery to
our mining customers.
During its working life, the equipment
is serviced by Finning technicians at the
mine site. All parts consumed during the
machine’s life are supplied by our PDC
in La Negra. The components in need of
replacement are rebuilt at our Component
Rebuild Centre (CRC) in Antofagasta.
If a customer chooses to continue using
the machine for a second or subsequent
life, our La Negra Truck Shop can provide
a complete rebuild. All components
are removed and sent to the CRC in
Antofagasta for remanufacturing, and the
PDC supplies all required parts to the
Truck Shop and CRC.
2008 FInnIng InTErnATIOnAl InC.
21
BUILD
CUSTOMER
LOYALTY
& DELIVER
RESULTS
22
Finning Cannock Branch, UK
united kingdom
2008 Performance
In Canadian dollars, the UK Group’s
revenues declined by 9.1% in 2008 to
$1.3 billion. Despite challenging market
conditions throughout the year and
particularly in the fourth quarter of 2008,
UK Group revenues in local currency
were comparable to 2007 levels. Demand
for new equipment from the coal mining
industry continued to be strong and
contributed to the growth in our product
support revenues in 2008. However,
a slowdown in most other market
sectors, and especially in general
construction, affected new equipment
sales at the UK dealership.
The global financial crisis impacted the UK
economy earlier and more significantly than
other Finning regions. The severe downturn
in residential and commercial construction
negatively impacted the sales and rental
of general construction equipment. Sales
of heavy construction equipment were
also lower, but demand for smaller
construction equipment was affected to
a greater degree.
Large infrastructure construction projects
are continuing for the most part and are
expected to remain active, given projects
associated with the upcoming Summer
Olympics in London in 2012 and the
announced Government infrastructure
stimulus spending that is expected later
in 2009 and in 2010. Increased funding of
Private Finance Initiatives will help increase
infrastructure spending, which will benefit
construction customers.
In the equipment rental industry, much
softer equipment markets and a very price
competitive environment challenged both
Hewden and Finning’s other equipment
rental activities and reduced sales volumes
to this market sector considerably. As a
result, Hewden’s performance was weak
as our rental revenues were affected by
lower utilization rates and severe price
competition.
EBIT contribution from the UK Group was
$53.6 million, 26.6% lower than in 2007.
The decline in profitability was mainly
the result of a lower contribution from
Hewden and overall weakness in all the UK
equipment markets.
Product Support growth
Large machines in the coal mining, heavy
construction and power segments are the
primary drivers of our product support
business in the U.K. A strategic focus on
sales of large equipment and expanding
our customer service capabilities in skilled
people and service locations supported
attractive growth in customer support
revenues. In 2008, in local currency,
customer support revenues improved by
approximately 13.1% compared to 2007,
reflecting an increased machine population
and successful execution of our product
support strategy.
In 2008, approximately 20% of total UK
Group revenues were from customer
support services, compared to about 18% in
2007. Excluding the Hewden rental revenues
to make the results more representative of
a typical dealer operation, customer service
revenues represented roughly 27% of total
dealership revenues in 2008.
We have taken measures to significantly
improve our service capabilities in the
U.K. and deliver parts and service ‘closer
to the customer’. We have increased our
service bay capacity by 20% over the past
two years. We have also invested in extra
capacity at our Leeds Component Rebuild
Centre to achieve consistent component
repair quality. While capital investments
have been modest, the number of product
support contracts has increased by 20%
over the past two years. Our customers are
recognizing the added value that we deliver.
In a survey completed for Caterpillar in
2008, Finning Construction attained the
highest customer loyalty score of any
equipment dealer in Europe.
We will continue to strive to be ‘number
one for service’ in the U.K. We have bold
goals to grow our product support business
and we are confident we can add more value
to our customers in the coal mining and
heavy construction sectors by enhancing
our parts and service offerings.
Cost Savings and restructuring
In 2008, we made significant progress on a
number of cost savings and restructuring
activities. Our restructuring efforts at the
dealership and Hewden are continuing as we
streamline the operations, reduce excess
capacity and lower our cost structure to
reflect the changed business environment.
UK REVENUE FROM CONTINUING
UK REVENUE FROM
OPERATIONS($MILLIONS)
CONTINUING OPERATIONS ($ millions)
1,600
1,400
1,200
1,180
1,000
1,400
1,271
1,230
1,273
800
600
400
200
0
2004 2005 2006 2007 2008
UK CUSTOMER SUPPORT
SERVICES REVENUE
from continuinG operations ($ millions)
UK CUSTOMER SUPPORT SERVICES REVENUE
FROM CONTINUING OPERATIONS($MILLIONS)
300
250
250
245
238
253
228
200
150
100
50
0
2004 2005 2006 2007 2008
2008 FInnIng InTErnATIOnAl InC.
23
united kingdom CONTINUED
Halstead Branch, Service Engineers (from left to right: Darren Copping, Jamie Leach, Darren Fews)
Our Customers Come First
Channeling the team spirit and determination characteristic of champion athletes, the Finning team pulled together to
fulfill an urgent order bound for london’s 2012 Olympic site.
Territory sales representative, Martyn Dewey, was quick out of the blocks beginning the race to meet a tight deadline
when he took an order for six Cat 725 articulated dump trucks late on a Friday afternoon. From there, the baton was
handed over to the Halstead branch service engineers, Darren Copping, Darren Fews, Jamie leach, and delivery handover
engineer, graham Knighton, all of whom worked tirelessly through the night to prepare the equipment for delivery. In
the final leg of the relay, Finning’s specialist sign writers provided the finishing touch by adding the customer’s logo to the
equipment before sending it racing towards the finish line. Posting an impressive time of less than five days from start to
finish, both the customer and the Finning team were thrilled to claim victory.
Finning Service Depot, Cannock Branch, UK
Finning Service Depot, Cannock Branch, UK
Finning Parts Warehouse, Cannock Branch, UK
24
united kingdom CONTINUED
In 2008 we completed the centralization
of our business support services at one
location at Cannock, England with the
closure of the Tannochside administration
offices near Glasgow, Scotland. The back
office rationalization negatively impacted
EBIT by approximately $7.8 million in 2008,
and is expected to save approximately
$6.5 million per annum when fully
implemented. We also integrated the
General Construction division into the
Heavy Construction division with expected
savings of approximately $2.0 million
annually. A rationalization in the heavy
construction division at the dealership was
initiated late in 2008 and will result in a
reduction of approximately 85 positions
generating annual savings of approximately
$5.5 million.
At Hewden, late in 2008, we announced
the closure or merger of 22 branch
locations and staff reduction of over
200 people, which is expected to save
approximately $12.5 million per annum
when implemented. In addition, during
2008 significant reductions in the rental
fleet were completed as we disposed of
over $180 million gross book value of
Hewden rental assets.
the uK dealership
Despite very challenging market conditions,
the UK dealership had a successful year in
the large and core business and in power
systems. The entire UK New Construction
equipment industry contracted on a unit
basis by over 25% from 2007 levels to about
27,500 machines, however, some sectors
were more negatively impacted than
others. The largest impact was felt in the
small equipment or general construction
sector. Although the overall decline in
demand reduced our new equipment sales,
which were down 14.0% compared to 2007
revenues, Finning (UK) was able to achieve
market share growth in all important
equipment categories.
of Caterpillar 777 100-ton trucks have
increased significantly over the past few
years, and we expect additional demand
for up to 50 units per year over the next
several years as the UK Group continues
to support domestic coal production
over imports to meet energy needs.
About half of the coal mining equipment
population is serviced under customer
support agreements where Finning provides
parts, remanufactured components,
regular maintenance as well as complete
rebuilds. Each Caterpillar 777 requires
approximately $65,000 worth of parts and
service per annum, and our UK dealership
is in an excellent position to continue
capturing the growing customer support
business from this market sector.
The heavy construction equipment
industry in the U.K. is primarily driven
by infrastructure project work on roads,
rail and ports, to name a few. In addition,
there is a high level of scrap and demolition
activity associated with new construction
sites which are almost always ‘brown-
field’ in the U.K. Our large customers are
expected to benefit from the announced
infrastructure spending by the U.K.
Government which includes funds for such
major projects as Crossrail train network,
Olympic site development, and Thames
Gateway projects. We expect to see
increased demand for parts and service
from the heavy construction sector as
these projects are launched towards the
end of 2009 and into 2010, although idle
rental equipment capacity will absorb some
of this increase. Our construction division
is focused on customer segments that
produce opportunities in a lower economic
cycle such as ports, waste and rehandling
activities to support the UK population.
While Government Infrastructure spending
is an important economic contributor,
there are many opportunities in industry
segments driven by population and energy
requirements.
We continue to make market share gains
in those industries that drive customer
support opportunities for us, such as coal
mining and infrastructure construction.
The coal mining sector in the U.K. remains
active and production is projected to grow
production over the next two to three
years to meet the country’s energy needs.
There are currently over 20 coal mine sites
operating in the U.K. Our customers’ fleets
hewden
During 2008 we continued to execute
on our plan to reposition Hewden as a
smaller, more focused business generating
higher returns. Following the disposition
of the Hewden Tool Hire division in
2007, we initiated the next stage of
the Hewden business transformation
project. In 2008, the Hewden business
was reorganized into three sales regions
and a new senior management team was
appointed. We started to benefit from
the new information system implemented
in 2007, which provides us with accurate
and timely management information on
fleet utilization and pricing. We are now
focused on implementing a customer
centric, performance driven culture
among employees to increase revenues
and improve asset utilization and cost
management. We are determined to
improve the operating results from our
rental operations, and we are fortunate
to have employees at Hewden who
are committed to the turn-around
process. We have initiatives in place to
drive operational improvements and
achieve the required return on assets
when the economy begins to recover.
Priorities for 2009
For 2009 and beyond, the UK Group will
continue to focus on large equipment sales
to key market segments, expanding our
opportunities in the growing power and
energy sectors and developing customer
support capabilities. Despite the challenging
economic environment, opportunities exist
in mining and heavy construction equipment
markets as well as in power systems.
Projects related to the 2012 Summer
Olympics are moving forward including
construction of venues and transportation
infrastructure improvements. As well, coal
mining remains active with new sites under
development. Coal production levels are
projected to increase over the next several
years and expanding fleets will continue to
drive product support revenue growth.
At the Hewden operations, the emphasis
is on executing the business turn-
around. The asset base has been reduced
significantly and operating cost reductions
are being implemented. In 2009, our focus
is on executing the plan to complete the
restructuring and drive better returns
on the smaller Hewden asset base.
Our efforts in the U.K. are focused
around tight cost management as
we continue to lower our cost base
and asset portfolio while vigorously
pursuing growth opportunities in
select profitable industry segments.
2008 FInnIng InTErnATIOnAl InC.
25
INNOVATE
& ADD
VALUE IN
ALL WE
DO
26
26
Finning Power Systems Branch, Edmonton, Alberta
power systems
2008 highlights
Power Systems provides power and energy
solutions to a diverse group of customers.
We sell, rent, and support engines and
ancillary equipment in the oil and gas,
industrial, marine, on-highway trucking, and
Electric Power Generation (EPG) sectors
in all our territories.
Our power systems business experienced a
solid year in 2008. While market conditions
were mixed, continued demand for EPG
and large project work in all our regions
contributed to healthy growth. Globally,
power systems generated $896.9 million in
revenues during 2008, a 9.2% increase over
2007. Product support revenues were up
8.0% and new power and energy systems
sales rose by 9.7%. EBIT contribution from
power systems grew by 26.0% over 2007
reflecting our focus on growing higher-
margin product support and large power
project business.
Canada
In Canada, demand for power systems
products spans multiple sectors with oil
and gas, EPG and on-highway trucking
being the most significant. Power systems
revenues in Canada grew by 7.0% over
2007 driven by demand for engines for
gas compression packages, many of which
are exported by our customers to buyers
outside of Western Canada, and modest
growth in parts and service. Continued
demand for electric prime power in remote
locations, specialized electric power
projects and electric power rental also
contributed to revenue growth.
Weakness in the local oil and gas sector,
including a slowdown in natural gas drilling
activity, persisted through 2008. Overall
drilling activity is expected to remain low
in 2009 with the exception of the Montney
and Horn River areas in northeastern B.C.
which are providing some attractive power
systems opportunities.
South america
The power systems business was
particularly strong in South America in
2008 where revenues rose by 36.1% in local
currency compared to 2007. Finning South
America’s main markets for engines are
EPG, oil and gas and marine applications. In
addition to providing engine and generator
packages, Finning also delivers maintenance
under product support agreements with
our large power generating customers.
Power systems revenues grew in all
the product lines that we distribute:
Caterpillar, Perkins and FG Wilson.
Most of our power systems growth in
South America was driven by continued
demand for EPG equipment. The
constrained base electricity supply and
the resulting potential energy shortages
in Chile and Argentina are expected to
continue to provide us with opportunities
to supply engines for power plants and
power rentals, although we expect the
slowdown in activity in 2009 will reduce
overall demand for engines.
In the marine sector, shipbuilding and
fishing were very active in 2008 and the
new marine branch we opened in Mar del
Plata, Argentina was well received by our
customers.
united Kingdom
In the U.K., the power systems business
covers many sectors: EPG, industrial,
petroleum, pleasure craft and commercial
marine. Power systems revenues grew
4.1% in local currency over 2007, despite
soft markets for new engine sales.
Demand from oil and gas, diesel standby,
commercial marine and large pleasure craft
continued to be healthy, however, industrial
products and small pleasure craft slowed
considerably by mid-2008.
A considerable part of the power systems
growth in the U.K. was driven by EPG
projects where we have developed
widely recognized project management
and technical expertise. Our UK power
systems team sells and supports prime,
continuous, and stand-by power generation
installations to serve hospitals, data centres
and utility companies. We design, procure,
engineer and construct projects and
support them with ongoing operating and
maintenance contracts.
Finning also delivers innovative renewable
energy solutions for multiple applications.
We convert methane to energy at sewage
treatment plants, landfills and coal mines
to generate combined heat and power for
many customers. The unique expertise
of our UK power systems group opens
opportunities to engage in similar projects
around the world.
Looking ahead
We expect lower revenue from new engine
sales in most territories to be partly offset
by continued growth in customer support
and Electric Power Generation.
Finning’s power systems group is known
for its engineering capabilities and
innovative solutions that add considerable
value to the power projects demanding
customer specifications. The main
project value is often derived from
the mechanical, electrical or control
engineering work that Finning delivers as
part of the entire power systems solution.
For many large sophisticated power
projects the engine comprises only a
modest part of the total project’s value.
The power systems business remains
very promising with many opportunities
that extend beyond our traditional
geographic service territories. One of our
main strategic objectives is to capture
these opportunities and continue to
grow our market share in engine sales
as well as provide specialized design and
development services in addition to our
traditional parts and maintenance service.
POWER SYSTEMS REVENUE ($ millions)
Power Systems results are reported within other Finning divisions
POWER SYSTEMS REVENUE ($MILLIONS)
Power Systems results are reported within other Finning Divisions
1,000
800
600
400
200
0
897
821
694
610
479
2004 2005 2006 2007 2008
2008 FInnIng InTErnATIOnAl InC.
27
THE
FINNING
COMMITMENT
Our commitments
to our employees, our
customers, and our
shareholders are rooted
in Finning’s core values.
to our emPLoYeeS:
We will foster a workplace where
people’s actions are guided by: caring
for each other’s safety and well-being,
communicating openly, taking responsibility,
empowering and trusting one another, and
doing our best.
to our CuStomerS:
We will provide the best solutions
and value.
to our SharehoLderS:
We will deliver top quartile
shareholder returns.
our VaLueS: We Care. We Communicate. We Take Responsibility. We Empower. We Trust. We Do Our Best.
28
Finning Service Depot, Santiago, Chile
corporate responsibility
At Finning, we believe that our company’s
core values form the foundation on which
we have built our track record of success.
Our enduring values and business ethics are
reflected in our company’s commitments
and further reinforced through the Finning
Code of Conduct which guides our
employees’ actions. Inherent in our values
is a strong commitment to minimizing our
impact on the environment, contributing
to communities and maintaining the highest
health and safety standards.
Focus on the environment
Implementing practices that eliminate
or minimize Finning’s impact on the
environment is a high priority. Our
focus in this area is viewed as a shared
responsibility between each and every
Finning employee and is an important
part of our corporate culture.
As a leading supplier of renewable energy
solutions, Finning plays an important
role in reducing our collective impact on
land, water and climate systems. Over
the past decade, we have developed
extensive expertise in supplying and
servicing power generation systems which
produce electricity using bio-gas containing
methane from landfills, sewage treatment
plants, and coal mines. Harnessing
methane, which would otherwise
be released as a greenhouse gas, to
generate electricity is one example of our
commitment to sustainable development
and environmental stewardship.
Through our investment in OEM
Remanufacturing, a world-class facility
that rebuilds used equipment components
such as engines and transmissions, Finning
reduces waste, saves energy, and decreases
the consumption of raw materials
required to produce new components.
In 2008, Finning joined the Carbon
Disclosure Project (CDP) by becoming
a participant in their annual survey.
The CDP, a not-for-profit organization
representing global institutional investors,
encourages companies to measure,
manage and potentially reduce emissions
and climate change impacts. Our
submission to the 2008 questionnaire
is available on the CDP website, and
we will participate again in 2009.
in the Community
Finning derives great pride from playing
an active role in the communities in which
our employees live and work. Our support
takes many forms, including charitable
contributions through our Community
Investment Program, cultural sponsorships,
and employee giving campaigns. In
addition, Finning is proud to play a vital
role in helping students develop technical
skills and gain practical experience.
In 2008, we extended our commitment
to workforce training by contributing
$1 million to the Northern Alberta
Institute of Technology’s (NAIT) Heavy
Equipment Technician and Industrial Heavy
Equipment Technology program, along
with $1 million worth of equipment. In
South America, we support training and
development in association with local
schools by providing equipment, technical
expertise and practical work experience.
Through our Community Investment
Program, Finning partnered with
various non-profit organizations such
as Junior Achievement and Ronald
McDonald House to meet local needs.
In the U.K., our corporate giving was
primarily focused towards the Lighthouse
Club Benevolent Fund, a charity
dedicated to giving aid and assistance to
construction workers and their families
who suffer injuries or ill health.
Living up to Finning’s deeply-rooted
corporate values, employees company-
wide annually demonstrate their
commitment to enhancing the quality of
life for others through various fundraising
initiatives, including a spirited United
Way campaign. Last year, Finning raised
close to $1 million for the United Way
through the joint efforts of employees
and our corporate matching program.
Finning also channeled its community spirit
through various sponsorships, including
our support of the Alpine Canada Ski Team
to further Canada’s quest to become a
world-class alpine ski racing contender.
highest Safety Standards
Above all, Finning is committed to being an
industry leader in safety. In 2008, our safety
performance as measured by ‘lost time
frequency rate’ improved to 0.38 incidents
per 200,000 man hours worked, which is a
27% improvement compared to 2007 and
among the best safety performances in our
industry. This achievement demonstrates
the high awareness of our safety standards
among all employees and their continuous
efforts to follow the safety procedures.
By continuing to promote a safe working
environment, we aim to reduce the
frequency of injuries and the occurrence
of serious incidents.
Our strong corporate commitment in
the areas of environment and safety was
recognized in 2008 with two awards:
the Rental Environment Award from the
European Rental Awards to Hewden, and
the Silver RoSPA (Royal Society for the
Prevention of Accidents) Occupational
Health & Safety Award to Finning (UK)
and Hewden.
LOST TIME INJURY FREqUENCY (LTI)
Lost time injuries per 200,000 work hours
LOST TIME INJURY FREQUENCY (LTI)*
*Lost time injuries per 200,000 work hours
1.00
0.80
0.78
0.80
0.72
0.60
0.40
0.20
0.00
0.52
0.38
2004 2005 2006 2007 2008
2008 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
57
57
58
92
management’s discussion & analysis
This discussion and analysis of the financial results 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. Additional information relating
to the Company, including the Company’s Annual Information Form, can be found on the SEDAR (System for Electronic Disclosure and Retrieval)
website at www.sedar.com.
RESulTS oF oPERATIonS
The results from continuing operations include those of acquired businesses from the date of their purchase and exclude results from operations
that have been disposed or are classified as discontinued. Results of operations from businesses that qualified as discontinued operations in 2007
have been reclassified to that category in 2007 and prior periods presented unless otherwise noted. Please see the section entitled “Discontinued
operations – Tool Hire Division” for a discussion of these operations.
Fourth Quarter overview
($ mIllIonS)
Q4 2008
Q4 2007
Q4 2008
Q4 2007
(% oF REvEnuE)
Revenue
Gross profit
Selling, general & administrative expenses
other income (expenses)
Goodwill impairment
Earnings from continuing operations before
interest and income taxes (EBIT)(1)
Finance costs
Provision for income taxes
net income
$
$
1,566.7
432.2
(348.7)
(16.6)
66.9
(151.4)
(84.5)
(21.7)
(0.6)
(106.8)
$
$
1,459.5
408.9
(297.5)
0.8
112.2
–
112.2
(18.9)
(22.8)
70.5
27.6%
(22.3)%
(1.0)%
4.3%
(9.7)%
(5.4)%
(1.4)%
(0.0)%
(6.8)%
28.0%
(20.4)%
0.1%
7.7%
–
7.7%
(1.3)%
(1.6)%
4.8%
(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 almost $1.6 billion increased 7.3% from the fourth quarter of 2007 and
were the highest quarterly revenues ever recorded by Finning. Finning achieved record quarterly revenues driven primarily by strong demand
for customer support services, particularly in Canada and South America.
REVENUE BY OPERATION
($ millions) 3 months ended December 31
REVENUE BY LINE OF BUSINESS
($ millions) 3 months ended December 31
900
750
600
450
300
150
0
6
2
8
0
5
7
4
6
4
8
4
3
1
6
3
7
7
2
CANADA
SOUTH
AMERICA
UK GROUP
2007
2008
700
600
500
400
300
200
100
0
5
2
6
0
1
6
7
0
5
4
9
3
8
8
1
3
7
1
3
4
1
4
3
1
3
2
1
7
1
1
NEW
EQUIPMENT
POWER &
ENERGY
USED
EQUIPMENT
EQUIPMENT
RENTAL
CSS
OTHER
7 5
2007
2008
EBIT BY OPERATION*
($ millions) 3 months ended December 31
*excluding other operations – corporate head office
and goodwill impairment
70
60
50
40
30
20
10
0
(10)
9
6
7
4
8
3
8
2
6
1
9
-
2007
2008
CANADA
SOUTH
AMERICA
UK GROUP
2008 finning international inc. 31
31
2008 finning international inc.
management’s discussion & analysis
Revenues from the Company’s Canadian operations increased 10.1% in the fourth quarter of 2008 compared with the same period last year,
primarily reflecting strong revenues from customer support services. The increase in customer support services revenues was primarily due
to servicing the steadily increasing number of Caterpillar units in the Company’s Canadian dealership territory and the accompanying demand
for Caterpillar parts. The Canadian operations’ revenues also reflected solid market demand and growth in the mining sector, particularly in the
Alberta oil sands. Revenues from the Company’s South American operations increased 33.4% compared with the fourth quarter of 2007 driven
primarily by higher customer support services and increased equipment sales in the mining sector. Foreign exchange also had a positive impact
on revenues. Excluding the impact of foreign exchange when translating results, revenues for the fourth quarter of 2008 in functional currency
(the u.S. dollar) increased by 8.0% in the Company’s South American operations over the fourth quarter of 2007. In the u.K., revenues were
down 23.5% over 2007 driven primarily by reduced new equipment sales and lower rental activity in the Hewden rental business, partially offset
by higher customer support services revenues experienced at the Company’s uK dealership. In local currency, revenues were 19.3% lower when
compared to last year’s fourth quarter.
From a line of business perspective, strong demand continued in the fourth quarter of 2008 for customer support services, dominating the
revenue growth with an increase of 28.7% over the same period in 2007. Recent strong demand for equipment in the mining and infrastructure
sectors has resulted in an increase in demand for customer support services in order to service the larger population of equipment. used
equipment revenues were slightly higher in the fourth quarter of 2008 and typically vary depending on product availability, customer buying
preferences, and exchange rate considerations. lower rental revenues in the fourth quarter of 2008 reflected the lower rental activity in the
Hewden rental business.
Revenue mix in the fourth quarter of 2008 was weighted more towards customer support services as the Company services the large population
of equipment sold to customers. Customer support services revenues made up 32.3% of total revenues in the fourth quarter of 2008, compared
with 27.0% of total revenues in the same period last year.
Finning’s global order book or backlog (the retail value of new equipment units ordered by customers for future deliveries) continues to be
strong at $1.5 billion at the end of the fourth quarter of 2008, although is lower than the December 2007 level of $1.7 billion and the September
2008 level of $2.0 billion. Backlog and new orders were down in all operations, reflecting the worldwide economic slowdown. The Company has
proactively reconfirmed orders with customers to support the balances in the backlog. Finning has reduced and cancelled certain equipment
orders with Caterpillar without any penalty.
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. Availability of equipment has improved overall, and Finning continues to work
closely with Caterpillar and customers to ensure that demand for parts and equipment can be met. Although Caterpillar has recently announced
significant layoffs, this is not expected to impact the timely delivery of equipment on order.
Gross profit of $432.2 million in the fourth quarter of 2008 increased 5.7% over the same period last year. As a percentage of revenue, gross
profit for the quarter was 27.6%, down slightly when compared with 28.0% achieved in the fourth quarter of 2007. The lower gross profit as a
percentage of revenue (gross profit margin) on a consolidated basis was primarily due to lower rental and used equipment margins. The Canadian
operations earned a higher gross profit margin primarily due to price realization from customer support services. The South American operations
experienced lower gross profit margins primarily due to lower margins earned on certain new equipment sales. Gross profit margin for the
uK Group was lower when compared to the prior year’s quarter due to lower margins earned by the rental business in the u.K. This was
partially offset by a higher gross profit margin achieved by the uK dealership, due to a higher proportion of revenues from customer support
services, which typically have higher margins.
The Company performed its annual goodwill impairment review in the fourth quarter of 2008 and determined that the fair value of Hewden
Stuart Plc (Hewden) was less than its book value, which included goodwill recorded on acquisition. This determination resulted from a decline in
market multiples and a reduction of fair value as determined using a discounted cash flow methodology due to a change in assumptions in order
to reflect current market conditions. This resulted in a full goodwill impairment charge of $151.4 million for Hewden in the fourth quarter of
2008. The goodwill impairment charge is non-cash in nature and does not affect the Company’s liquidity, cash flows from operating activities, or
debt covenants and is not expected to have any adverse impact on future operations. The Company expects no income tax deduction from this
charge. A further discussion regarding the non-cash goodwill impairment charge can be found in the Goodwill Impairment section of this mD&A.
Earnings from continuing operations before interest and income taxes (EBIT) for the fourth quarter of 2008 were a loss of $84.5 million. EBIT
in the fourth quarter of 2008 included certain costs which are considered by the Company to be non-recurring. These items, which totalled
$166.4 million, included the goodwill impairment charge relating to Hewden, restructuring costs in connection with the business support
integration in the u.K., and costs incurred related to the restructuring of Hewden’s nationwide depot network, with the closure or merger of
22 depots. In addition, in response to deteriorating global market conditions, Finning undertook certain actions that resulted in restructuring
charges in the fourth quarter of 2008. Excluding these restructuring costs and goodwill impairment, EBIT would have been $81.9 million,
27.0% lower than the fourth quarter of 2007.
3232
management’s discussion & analysis
The lower EBIT in the fourth quarter of 2008 was primarily due to costs incurred in the design and implementation of a new global information
technology system to benefit future periods as well as higher variable operating costs to support the increased level of activity anticipated in the
near future for deliveries and product support. In addition, long-term incentive plan (lTIP) charges were $11.0 million higher in the fourth quarter
of 2008 compared to the same period in 2007. The mark-to-market impact on the valuation of certain stock-based compensation was fully
hedged in 2008, whereas the fourth quarter of 2007 included a favourable unhedged mark-to-market impact.
The Company’s EBIT margin (EBIT divided by revenues), excluding the restructuring costs and goodwill impairment charge noted above, was
5.2% in the fourth quarter of 2008, down from 7.7 % earned in the fourth quarter of 2007.
Consolidated net loss from continuing operations for the quarter was $106.8 million compared with net income of $70.5 million for the same
period in 2007. Adjusting for the restructuring costs and goodwill impairment noted above, net income from continuing operations would have
been $55.9 million.
Basic loss per share from continuing operations for the quarter was $0.63. Excluding the restructuring costs and goodwill impairment charge,
basic earnings per share (EPS) was $0.33 compared with $0.40 in the same period last year, a decrease of 17.5%. The total positive impact due
to the stronger Canadian dollar in the fourth quarter of 2008 compared to the same period last year was approximately $0.09 per share.
CASH Flow
Cash flow after changes in working capital for the fourth quarter was $169.0 million, down from cash flow of $221.3 million generated in the
same period last year. Strong demand, particularly in South America, from mining customers resulted in increased investments in inventory for
committed orders that will be delivered in early 2009. working capital demands have stabilized in the fourth quarter of 2008 and, combined with
initiatives to improve cash cycle times, have resulted in the improvement in cash flow after changes in working capital in the fourth quarter of
2008 (generation of $169.0 million) compared to the third quarter of 2008 (generation of $84.1 million).
The Company generated proceeds on the disposal of rental assets in excess of additions in the amount of $8.4 million in the fourth quarter of
2008, compared with a net investment in rental assets of $14.2 million in the same period in 2007. with lower utilization of rental assets in 2008,
asset additions were moderated and underutilized assets were sold.
As a result of these items, cash flow from operating activities was $177.2 million in the fourth quarter of 2008 compared to $207.3 million in
the fourth quarter of 2007. The cash flow generated in the fourth quarter of 2008 compares favourably to the previous three quarters in 2008.
During the fourth quarter of 2008, under the normal course issuer bid in place, the Company repurchased and cancelled 934,996 common shares
at an average price of $18.68 for an aggregate amount of $17.5 million. During the fourth quarter of 2007, the Company repurchased and
cancelled 2,465,200 common shares at an average price of $27.31 for an aggregate amount of $67.3 million.
2008 finning international inc. 33
33
2008 finning international inc.
management’s discussion & analysis
annual overview
($ mIllIonS)
2008
2007
2008
2007
(% oF REvEnuE)
Revenue
Gross profit
Selling, general & administrative expenses
other income (expenses)
Goodwill impairment
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
$
$
5,991.4
1,714.7
(1,309.8)
(16.8)
388.1
(151.4)
236.7
(83.6)
(57.1)
96.0
–
96.0
$
$
5,662.2
1,599.2
(1,144.8)
1.4
455.8
–
455.8
(72.8)
(102.9)
280.1
(2.0)
278.1
28.6%
(21.8)%
(0.3)%
6.5%
(2.5)%
4.0%
(1.4)%
(1.0)%
1.6%
–
1.6%
28.2%
(20.2)%
–
8.0%
–
8.0%
(1.3)%
(1.8)%
4.9%
–
4.9%
(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.
For the sixth consecutive year, consolidated revenues reached record levels. Annual revenues from continuing operations of almost $6 billion
increased 5.8%, year over year. Finning achieved record annual revenues for 2008 driven primarily by strong new equipment sales in Canada and
an increase in customer support services revenues in all dealership operations.
Revenues from the Company’s Canadian operations increased 9.6% in 2008 compared with 2007. new equipment sales continued to dominate
revenue growth in Canada as a result of extremely strong demand for equipment during the year, primarily in the mining sector and particularly
in the Alberta oil sands. Revenues from the Company’s South American operations increased 13.3% in 2008 compared with the prior year, with a
significant increase in customer support services revenues. The higher revenues from customer support services reflected the higher number of
Caterpillar units operating in the field and the increased coverage across the region as a result of the Company’s investment in branches. In the
u.K. revenues were down 9.1%, reflecting the negative impact from the strength of the Canadian dollar relative to the u.K. pound sterling. In local
currency, revenues generated by the uK Group were only marginally lower than the 2007 level, with reduced new equipment sales, reflecting the
softening of the market, and lower rental activity in the Hewden rental business, partially offset by improved customer support services revenues.
From a line of business perspective, strong demand continued in 2008 for new equipment and customer support services. These two lines
of business comprised 71.4% of consolidated revenues in 2008, compared with 69.5% in 2007. The demand from the mining and infrastructure
sectors for new equipment was high in 2008, and customer support services have increased to service the larger population of equipment,
particularly in South America. This is expected to continue into 2009 as the population of equipment in the Company’s territories increased
in 2008. The increase in customer support services revenues occurred in spite of no longer earning any revenues from the fuels and lubricants
distribution business with Shell Canada which was terminated in the fourth quarter of 2007. Excluding the revenues from the Shell business in
2007, customer support services revenues were 17.5% higher in 2008 compared with the prior year. lower rental revenues in 2008 reflected
the lower rental activity in the Hewden rental business.
REVENUE BY OPERATION
($ millions) 12 months ended December 31
REVENUE BY LINE OF BUSINESS
($ millions) 12 months ended December 31
7
1
2
6 3
3
9
,
,
2
2
0
5
1
,
6
2
3
1
,
0
0
4
1
,
3
7
2
1
,
CANADA
SOUTH
AMERICA
UK GROUP
2007
2008
3,500
3,000
2,500
2,000
1,500
1,000
500
0
3434
2,500
2,000
1,500
1,000
500
0
7
7
3
,
2
3
3
2
,
2
9
9
8
1 1
0
7
1
,
,
1
8
7
3
1
7
2
5
5
3
0
5
8
1
4
2
3
4
NEW
EQUIPMENT
POWER &
ENERGY
USED
EQUIPMENT
EQUIPMENT
RENTAL
CSS
OTHER
6
2
9
1
2007
2008
EBIT FROM CONTINUING OPERATIONS*
($ millions) 12 months ended December 31
*excluding other operations – corporate head office
and goodwill impairment
6
8
300 2
250
200
150
100
50
0
4
3
2
8
4
1
7
2
1
3
7
4
5
CANADA
SOUTH
AMERICA
UK GROUP
2007
2008
management’s discussion & analysis
Gross profit of $1,714.7 million in 2008 increased 7.2% over 2007 and was also slightly higher as a percentage of revenue. The gross profit
margin (gross profit divided by revenues) in the Canadian operations for 2008 was higher when compared to the prior year. This resulted
primarily from higher margins earned on customer support services, partially offset by the shift in revenue mix to lower margined new equipment
sales. South America contributed a higher gross profit margin due to its revenue mix shift towards higher margined customer support services.
The uK Group had a lower gross profit margin, reflecting lower rental utilization rates earned from the uK rental business partially offset by
higher gross profit margins earned on customer support services from the uK dealership.
EBIT was $236.7 million in 2008. Results in 2008 included certain items that are considered by the Company to be non-recurring. These items,
which totalled $169.1 million, included the Hewden goodwill impairment, costs related to the integration and transition of Collicutt, business
support and depot restructuring costs in the u.K., restructuring costs incurred globally by Finning in the fourth quarter of 2008 in light of the
current market conditions partially offset by the gains on the sale of certain properties in Hewden. Adjusting for these non-recurring items,
EBIT for 2008 would have been $405.8 million, 11.0% lower than the prior year.
The lower EBIT in 2008 can be attributed to a stronger Canadian dollar, on average for the year, and higher variable operating costs to support
the increased level of activity that was anticipated for deliveries and product support through to the end of the year. Forecasted activity levels
are being adjusted to take into account current global market conditions and actions have been taken by the Company globally to respond to
the deteriorating economic conditions. The reduction in EBIT was partially offset by lTIP charges that were $8.6 million lower in 2008 compared
with the same period in 2007. mark-to-market volatility was significantly reduced in 2008 through a compensation hedge, the cost of which is
reported in the other operating unit.
Consolidated net income from continuing operations in 2008 was $96.0 million compared with $280.1 million in 2007. Adjusting for the
non-recurring items noted above, net income from continuing operations would have been $257.8 million, 8.0% lower than the 2007 level.
Basic EPS from continuing operations for the year ended December 31, 2008 of $0.56 included a number of non-recurring items as described
above. Adjusting the 2008 results for these non-recurring items, including the goodwill impairment charge, basic EPS would have been $1.50 for
the year ended December 31, 2008 compared with $1.57 in 2007, a decrease of 4.5%. The total negative impact due to the stronger Canadian
dollar in 2008 compared to the prior year was approximately $0.10 per share.
CASH Flow AFTER CHAnGES In woRKInG CAPITAl
Cash flow after changes in working capital for the year ended December 31, 2008 was $278.1 million, compared with cash flow of $404.4 million
generated in 2007. Throughout all operations, management continues to focus on improving cash cycle times and operating efficiencies while
ensuring appropriate levels of working capital exist to support current activity levels.
The Company made a net investment in rental assets of $204.8 million in 2008, which was less than half of what was invested in 2007. As a result
of softening demand, rental investment moderated in 2008 compared to the very high demand for rental assets in 2007, particularly at the
Company’s Canadian and Hewden operations.
As a result of these items, cash flow provided by operating activities was $72.7 million in 2008 compared to cash flow used by operating activities
of $56.7 million in 2007.
For the year ended December 31, 2008, under a share repurchase program, the Company repurchased and cancelled 5,901,842 common shares
at an average price of $24.99 for an aggregate amount of $147.5 million. For the year ended December 31, 2007, the Company repurchased
and cancelled 3,691,400 common shares at an average price of $27.82 for an aggregate amount of $102.7 million.
FoREIGn ExCHAnGE
The Company’s reporting currency is the Canadian dollar. However, due to the geographical diversity of the Company’s operations, a significant
portion of revenue and operating expenses are in a different currency. The most significant currencies in which the Company transacts business
are the Canadian dollar, the u.S. dollar, and the u.K. pound sterling. The most significant foreign exchange impact on the Company’s net income
is the translation of foreign currency based earnings into Canadian dollars.
Compared to the fourth quarter of 2007, foreign exchange had a positive impact of approximately $150 million on consolidated revenues earned
by the Company in the fourth quarter of 2008 compared to the prior year due to the 23.5% weaker Canadian dollar relative to the u.S. dollar,
partially offset by a 5.3% stronger Canadian dollar relative to the u.K. pound sterling. As a result, net income was positively impacted by
approximately $0.09 per share in the fourth quarter of 2008 compared to the same period last year.
net income was negatively impacted by approximately $0.10 per share in 2008 compared to the year ended December 31, 2007 as the Canadian
dollar was marginally stronger (0.8%) in 2008 relative to the u.S. dollar, and 8.7% stronger relative to the u.K. pound sterling.
2008 finning international inc. 35
35
2008 finning international inc.
management’s discussion & analysis
The impact of foreign exchange due to the movement of the Canadian dollar relative to the u.S. dollar and the u.K. pound sterling is expected
to continue to affect Finning’s results in 2009. The sensitivity of the Company’s net earnings to fluctuations in the average annual foreign
exchange rates is summarized on page 50.
The following tables provide details of revenue and EBIT contribution by operation and the foreign exchange impact for the three and twelve
months ended December 31, 2008.
$
$
$
Canada
750.3
79.7
(4.0)
826.0
75.7
10.1%
(0.5)%
Canada
$ 2,936.2
(78.7)
359.4
$ 3,216.9
280.7
$
9.6%
12.2%
South
America
uK Group Consolidated
$
$
$
348.0
80.7
35.6
464.3
116.3
33.4%
10.2%
$
$
$
361.2
(9.0)
(75.8)
276.4
(84.8)
(23.5)%
(21.0)%
$ 1,459.5
151.4
(44.2)
$ 1,566.7
107.2
$
7.3%
(3.0)%
South
America
$ 1,325.6
6.9
169.1
$ 1,501.6
176.0
$
13.3%
12.8%
uK Group Consolidated
$ 5,662.2
(184.6)
513.8
$ 5,991.4
329.2
$
5.8%
9.1%
$
$
$
1,400.4
(112.8)
(14.7)
1,272.9
(127.5)
(9.1)%
(1.0)%
Goodwill
uK Group
other
Impairment Consolidated
South
America
Canada
69.3
8.9
(31.1)
47.1
(22.2)
(32.0)%
$
$
$
28.2
12.4
(2.3)
38.3
10.1
35.8%
$
$
$
16.1
(0.2)
(25.6)
(9.7)
(25.8)
(160.2)%
$
$
$
(44.9)%
(8.2)%
(159.0)%
(1.4)
–
(7.4)
(8.8)
(7.4)
–
–
$
$
$
–
–
(151.4)
(151.4)
(151.4)
–
$
$
$
112.2
21.1
(217.8)
(84.5)
(196.7)
(175.3)%
–
(194.1)%
Canada
286.3
(18.1)
(33.7)
234.5
(51.8)
(18.1)%
South
America
$
$
$
127.4
(2.5)
23.3
148.2
20.8
16.3%
uK Group
other
Impairment Consolidated
Goodwill
$
$
$
73.0
(5.2)
(14.2)
53.6
(19.4)
(26.6)%
$
$
$
(30.9)
–
(17.3)
(48.2)
(17.3)
–
–
$
$
$
–
–
(151.4)
(151.4)
(151.4)
–
$
$
$
455.8
(25.8)
(193.3)
236.7
(219.1)
(48.1)%
–
(42.4)%
(11.8)%
18.3%
(19.5)%
Three months ended December 31
($ mIllIonS)
Revenues – Q4 2007
Foreign exchange impact
operating revenue increase (decrease)
Revenues – Q4 2008
Total revenue increase (decrease)
– percentage increase (decrease)
– percentage increase, excluding foreign exchange
Twelve months ended December 31
($ mIllIonS)
Revenues – 2007 Annual
Foreign exchange impact
operating revenue increase (decrease)
Revenues – 2008 Annual
Total revenue increase (decrease)
– percentage increase (decrease)
– percentage increase, excluding foreign exchange
Three months ended December 31
($ mIllIonS)
EBIT – Q4 2007
Foreign exchange impact
operating EBIT increase (decrease)
EBIT – Q4 2008
Total EBIT increase (decrease)
– percentage increase (decrease)
– percentage increase (decrease),
excluding foreign exchange
Twelve months ended December 31
($ mIllIonS)
EBIT – 2007 Annual
Foreign exchange impact
operating EBIT increase (decrease)
EBIT – 2008 Annual
Total EBIT increase (decrease)
– percentage increase (decrease)
– percentage increase (decrease),
excluding foreign exchange
$
$
$
$
$
$
3636
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.
For year ended December 31, 2008
($ 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, 2007
($ mIllIonS)
new mobile equipment
new power & energy systems
used equipment
Equipment rental
Customer support services
other
Total
Revenue percentage by operations
Canada
$ 1,464.9
205.7
252.8
296.6
981.8
15.1
$ 3,216.9
53.7%
Canada
$ 1,253.2
194.9
269.3
290.1
905.8
22.9
$ 2,936.2
51.9%
Souths
America
$
575.9
161.7
37.2
58.8
664.4
3.6
$ 1,501.6
25.1%
Souths
America
$
574.4
108.7
42.8
46.6
550.3
2.8
$ 1,325.6
23.4%
uK Group Consolidated
$
336.1
184.3
141.8
357.4
253.3
–
$ 1,272.9
21.2%
$ 2,376.9
551.7
431.8
712.8
1,899.5
18.7
$ 5,991.4
100.0%
uK Group Consolidated
$
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%
Revenue
percentage
39.7%
9.2%
7.2%
11.9%
31.7%
0.3%
100.0%
Revenue
percentage
39.4%
8.9%
7.4%
13.8%
30.0%
0.5%
100.0%
The table below provides selected income statement information by business segment for continuing operations:
For year ended December 31, 2008
($ mIllIonS)
Canada
South
America
uK Group
other
Impairment Consolidated
Goodwill
Revenue from external sources
operating costs
Depreciation and amortization
other income (expenses)
Goodwill impairment
Earnings before interest and taxes
Earnings before interest and tax
– percentage of revenue
– percentage by operations (excluding goodwill)
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 tax
– percentage of revenue
– percentage by operations
$ 3,216.9
(2,801.8)
(164.5)
(16.1)
–
234.5
$
$ 1,501.6
(1,313.8)
(34.2)
(5.4)
–
148.2
$
$ 1,272.9
(1,099.8)
(125.5)
6.0
–
53.6
$
$
$
–
(46.7)
(0.2)
(1.3)
–
(48.2)
$
$
–
–
–
–
(151.4)
(151.4)
$ 5,991.4
(5,262.1)
(324.4)
(16.8)
(151.4)
236.7
$
7.3%
60.4%
Canada
9.9%
38.2%
South
America
4.2%
13.8%
–
(12.4)%
–
–
4.0%
100%
uK Group
other
Impairment Consolidated
Goodwill
$ 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
$
$
$
–
(30.9)
–
–
(30.9)
$
$
9.8%
62.8%
9.6%
28.0%
5.2%
16.0%
–
(6.8)%
–
–
–
–
–
–
–
$ 5,662.2
(4,879.9)
(327.9)
1.4
455.8
$
8.0%
100%
2008 finning international inc. 37
37
2008 finning international inc.
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), and
a 25% interest in Pipeline machinery International (Plm). on January 15, 2008, Finning (Canada) acquired the issued and outstanding common
shares of Collicutt, a leading Canadian oilfield service company. The results of Collicutt’s operations have been included in the consolidated
financial statements since the acquisition date.
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 (expenses)
Earnings before interest and taxes
Earnings before interest and taxes (EBIT)
– as a percentage of revenue
– as a percentage of consolidated EBIT (excluding goodwill impairment)
$
$
2008
3,216.9
(2,801.8)
(164.5)
(16.1)
234.5
7.3%
60.4%
$
$
2007
2,936.2
(2,486.0)
(165.5)
1.6
286.3
9.8%
62.8%
Record revenues were achieved in the Company’s Canadian operations in 2008. Revenues increased 9.6% over the 2007 levels to $3,216.9 million.
Revenues from most lines of business in Canada increased over 2007 levels, most notably in new equipment sales and customer support services.
The increase in new equipment revenues was primarily attributable to strong market demand and growth in the mining sectors, particularly the
Alberta oil sands.
new equipment orders from customers declined during the last quarter of 2008, reflecting the current slowdown in the global economy and
as a result, the backlog in Finning (Canada) is lower than the September 2008 level. Finning (Canada) has reduced and cancelled certain orders
with Caterpillar as a result of the slowdown. However, the backlog continues to reflect future deliveries to the mining sector, which is the key
strategic sector for Finning’s Canadian operations. Although global economic conditions are currently weaker in most sectors, activity in mining
is expected to partially counter weakness in other market areas.
Higher revenues from customer support services were primarily 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. This increase in revenues occurred in spite of
no longer earning any revenues from the fuels and lubricants distribution business with Shell Canada which was terminated in the fourth quarter
of 2007. Revenues from the Shell business were approximately $84 million in 2007.
CANADA – REVENUE BY LINE OF BUSINESS
($ millions) 12 months ended December 31
5
6
4
1
,
3
5
2
1
,
2
8
6 9
0
9
9
6
2
3
5
2
0
9
2
6
9
2
6
0
2
5
9
1
NEW
EQUIPMENT
POWER &
ENERGY
USED
EQUIPMENT
EQUIPMENT
RENTAL
CSS
OTHER
3
2
5
1
2007
2008
1,500
1,250
1,000
750
500
250
0
3838
management’s discussion & analysis
used equipment revenues are approximately 6% lower than the prior year, reflecting the slowdown in the general economy. Rental revenues
increased over 2007 as a result of strong customer demand in this sector, particularly in the last quarter of the year. Finning (Canada) increased
the number of the Company’s Cat Rental Stores in operation in western Canada to 37 at December 31, 2008, compared with 34 stores at
December 31, 2007.
Revenues from the Company’s 25% investment in Pipeline machinery International (Plm) increased 32% over the prior year to $111.0 million.
while the majority of revenues were earned in north America, Plm has experienced growth in international activity.
In Canada, overall gross profit as a percentage of revenue was slightly up compared to the prior year. This reflects higher margins from customer
support services, primarily due to price realization, partially offset by lower margins earned on the sale of used equipment.
Selling, general, and administrative (SG&A) costs in 2008 increased both in absolute dollars and as a percentage of revenue compared with 2007.
The higher costs in 2008 were primarily incurred to meet the long term strategic growth objectives of the Canadian operations, including an
increase in its product support capability and its support of the higher activity levels in the Alberta oil sands.
A large part of the higher SG&A was driven by an increased investment in people in two strategic areas; one area being the development of a
heavy equipment centre of excellence in Red Deer, Alberta, and the second was the Alberta oil sands. The integration of Collicutt was also a
contributing factor to increased SG&A costs in 2008 as compared to 2007. In addition, standard variable selling costs such as warranty and freight
have increased with the growth in new equipment revenues.
In the fourth quarter of 2008, the Canadian operations reacted to the downturn in the economy by downsizing its salaried workforce by
approximately 225 people. The restructuring costs of $8.0 million, primarily severance, were included in other expenses. Also included in other
expenses was the Canadian operations’ share of the costs related to the implementation of a new information technology system for the
Company’s global operations.
EBIT of $234.5 million in 2008 was 18.1% lower than the $286.3 million earned in 2007. EBIT margin (EBIT divided by revenues) of the Canadian
operating segment was 7.3% in 2008, down from 9.8% last year. The decline in EBIT margin is attributed primarily to the increase in SG&A costs
as discussed above.
In the first quarter of 2008, the Company completed the acquisition of Collicutt and incurred costs in the first two quarters of 2008 to integrate
and transition the Collicutt operations to support Finning customer service work. Excluding the costs incurred with this integration and
transition and the restructuring costs noted above, the 2008 EBIT margin for 2008 would have been 8.0% compared with 9.8% achieved in 2007.
This decrease reflects the higher costs incurred in 2008 to meet the long term strategic growth objectives, as discussed above.
The aggregate purchase price on the acquisition of Collicutt was $136.4 million. The purchase price was funded through $84.3 million in cash, and
15,403 common shares of the Company with a value of $0.4 million. Acquisition costs of $6.9 million were incurred and paid on the transaction.
on the date of the acquisition, the Company repaid $44.8 million of Collicutt’s existing bank debt resulting in aggregate consideration of
$136.4 million.
This acquisition is expected to provide Finning (Canada) with the opportunity to expand its capacity of regional branches to enable Finning to
undertake more higher-margin customer service work, accelerate throughput of new equipment prepared for delivery to customers, and increase
the ability to undertake machine overhaul and rebuild work. Finning (Canada) has relocated its Edmonton-based new equipment preparation to
its new facilities in Red Deer, Alberta. This heavy equipment centre of excellence is expected to free up existing service facility capacity and give
the Company the opportunity to develop a mining/heavy equipment overhaul rebuild capability in Red Deer.
Finning, Finning (Canada), and oEm have been involved in legal proceedings for the past three years with the Alberta division of the International
Association of machinists and Aerospace workers – local lodge 99 relating to Finning (Canada)’s outsourcing of component repair and rebuilding
services to oEm in 2005. These legal proceedings are continuing, and a number of applications are currently before the Alberta labour Relations
Board. Finning expects that it will be able to continue to manage the operational impacts of these proceedings.
2008 finning international inc. 39
39
2008 finning international inc.
management’s discussion & analysis
sOuth ameriCa
The Company’s South American operations include the results of its Caterpillar dealerships in Chile, Argentina, uruguay, and Bolivia.
The table below provides details of the results from the South American operations:
For years ended December 31
($ mIllIonS)
Revenue from external sources
operating costs
Depreciation and amortization
other expenses
Earnings before interest and taxes
Earnings before interest and taxes (EBIT)
– as a percentage of revenue
– as a percentage of consolidated EBIT (excluding goodwill impairment)
$
$
2008
1,501.6
(1,313.8)
(34.2)
(5.4)
148.2
9.9%
38.2%
$
$
2007
1,325.6
(1,171.7)
(25.9)
(0.6)
127.4
9.6%
28.0%
Annual 2008 revenues of $1,501.6 million were at record levels for Finning’s South American operations in both Canadian dollars and functional
currency (u.S. dollars), surpassing the previous record achieved in 2007. Finning South America’s revenues increased 13.3% over last year
(12.7% in functional currency), reflecting higher revenues in most lines of business, most notably in customer support services, new equipment
sales, and rentals. new equipment order backlog remains strong and is comparable to the levels achieved at the end of 2007.
Strong growth in customer support services, up 20.7% from 2007, was primarily driven by the higher number of Caterpillar units operating in
the field. The higher revenues also reflect the increasing number of mining maintenance and repair contracts entered into over the past couple
of years as well as the increased coverage across the region as a result of Finning’s investment in branches. Customer support services revenues
dominated revenue growth in 2008 and now make up 44.2% of total revenues (41.5% in 2007). The continued strong new equipment revenues
in 2008 were attributable to the demand in the mining sector. Power and energy system revenues were also up compared with the prior year,
primarily in Chile with higher demand for energy.
Gross profit increased in 2008 both in absolute terms and as a percentage of revenue. This occurred partially due to the revenue mix shift
towards customer support services, which typically have higher margins. The stronger margins achieved by customer support services reflect
price realization to offset inflationary cost and foreign exchange pressures.
SG&A costs have increased in absolute dollars, but as a percentage of revenue were comparable to 2007. In order to meet customer service
demand and the increasing number of service maintenance contracts, over 300 additional revenue-generating employees and support staff were
hired, representing a 6% increase over December 2007 levels. As a result of the increased headcount, SG&A expenses included higher salaries
and benefit costs in 2008. The increase in other SG&A costs was mostly driven by increased activity levels with higher associated selling costs, and
continued to reflect the upward pressure of inflationary increases. where possible, price increases have been implemented to offset rising costs,
and cost controls have been put in place to mitigate the general inflationary pressures in the region. Foreign exchange did not have a significant
impact on EBIT as the Canadian dollar relative to the u.S. dollar for the year ended December 31, 2008 was comparable to 2007.
In light of the current market conditions, Finning South America restructured its operations in the fourth quarter of 2008, and incurred costs
of $1.0 million which were included in other expenses. Also included in other expenses was the South American operations’ share of the costs
related to the implementation of a new information technology system for the Company’s global operations.
SOUTH AMERICA – REVENUE BY LINE OF BUSINESS
($ millions) 12 months ended December 31
4
7
5
6
7
5
4
6
6
0
5
5
2
6
1
9
0
1
3
4
7
3
9
7 5
4
NEW
EQUIPMENT
POWER &
ENERGY
USED
EQUIPMENT
EQUIPMENT
RENTAL
CSS
OTHER
3 4
2007
2008
700
600
500
400
300
200
100
0
4040
management’s discussion & analysis
EBIT of the Company’s South American operations of $148.2 million for the year ended December 31, 2008, was 16.3% higher than 2007,
reflecting the strong revenue growth. EBIT as a percentage of revenue for Finning South America increased to 9.9%, up from 9.6% in 2007. The
improvement was primarily a result of higher price realization as well as a higher proportion of customer support services revenues in 2008,
which earns a higher margin.
In the third quarter and early in the fourth quarter of 2008, the Company successfully renewed the collective agreements with the three unions
representing the vast majority of Finning (Chile) employees. The new collective agreements have a four year term, which include an enhanced
wage settlement. The contract enhancement will assist the Company in retaining and attracting the employees needed to meet future demand.
united KingdOm (“uK”) grOup
The Company’s uK Group includes the following three market units: Construction, Power Systems, and Rental (Hewden). In the fourth quarter
of 2008, the uK Group combined Heavy Construction and General Construction into one market unit.
on July 31, 2007, Hewden sold its Tool Hire Division. The results from the Tool Hire Division are recorded as discontinued operations with prior
period results restated accordingly.
The table below provides details of the results of the continuing operations from the uK Group:
For years ended December 31
($ mIllIonS)
Revenue from external sources
operating costs
Depreciation and amortization
other income
Earnings before interest and taxes
Earnings before interest and taxes (EBIT)
– as a percentage of revenue
– as a percentage of consolidated EBIT (excluding goodwill impairment)
$
$
2008
1,272.9
(1,099.8)
(125.5)
6.0
53.6
4.2%
13.8%
$
$
2007
1,400.4
(1,191.3)
(136.5)
0.4
73.0
5.2%
16.0%
Annual 2008 revenues of $1,272.9 million were down 9.1% from the prior year. Foreign exchange had a negative impact on the translation
of revenues due to the 8.7% strengthening of the Canadian dollar relative to the u.K. pound sterling year over year. In local currency, revenues
were comparable with 2007.
In local currency, revenues from customer support services and used equipment sales improved compared with 2007. Revenues from other lines
of business in 2008 were lower compared to the prior year, reflecting the softening of the market for new equipment sales.
Rental revenues continue to be affected by lower utilization rates at Hewden. A reorganization of this business unit is underway to improve
its focus on delivering on its commitments to customers, reducing its overall cost structure, and improving the performance of its assets.
Gross profit for the year ended December 31, 2008 was lower compared with the same period last year in absolute terms and as a percentage
of revenue. The rental business experienced lower margins in 2008 compared to the prior year for the reasons noted above, and margins were
also lower in new and used equipment.
UK GROUP – REVENUE BY LINE OF BUSINESS
FROM CONTINUING OPERATIONS
($ millions) 12 months ended December 31
500
400
300
200
100
0
4
4
4
8
5
3
3
5
2
5
4
2
6
0
4
6
3
3
9
9
1
4
8
1
2
4
1
6
0
1
NEW
EQUIPMENT
POWER &
ENERGY
USED
EQUIPMENT
EQUIPMENT
RENTAL
CSS
2007
2008
2008 finning international inc. 41
41
2008 finning international inc.
management’s discussion & analysis
SG&A costs were lower in 2008 compared with 2007 in absolute terms, and comparable as a percentage of revenue. The reduction is a result
of various initiatives and management’s focus on realizing cost efficiencies.
other income / expenses in 2008 include a number of non-recurring items.
•
•
•
As part of the ongoing reorganization of the uK Group business units first announced in the fourth quarter of 2006, it was announced in
early 2008 that Finning would centralize the business support services of its Finning uK Group into a single location at Cannock, England.
As a result, Hewden has closed its administration offices in Tannochside, near Glasgow and is strengthening a Hewden operational support
team in manchester. Combined with investments in new information technology last year, the move is designed to achieve lower overall
operating costs and better integrated information technology, finance, and other support services across the Finning uK Group. other
expenses for 2008 included restructuring costs of approximately $7.8 million incurred in connection with this integration of support services.
A further $2 million is anticipated to be spent during 2009. This integration will promote efficiencies and is expected to substantially reduce
administrative support costs over time.
In the fourth quarter of 2008, Hewden announced a restructuring of its nationwide depot network, with the closure or merger of 22 depots.
This restructuring included costs of approximately $2.5 million which were incurred in 2008. A further $6 million is anticipated to be spent
during 2009. The organization structure was simplified to provide a greater focus on the customer combined with opportunities for cost savings.
In light of the current market conditions, the uK Group also further restructured their operations and incurred restructuring costs of
$0.5 million. other income / expenses in 2008 also included a $14.7 million pre-tax gain on the sale of certain properties at Hewden, and
Finning (uK)’s share of the costs related to the implementation of a new information technology system for the Company’s global operations.
In 2008, the uK Group contributed EBIT of $53.6 million, compared with $73.0 million in 2007. After adjusting for the restructuring costs related
to the business support integration, depot closures, and global restructuring noted above, as well as the gain on the properties sale, EBIT would
have been $49.7 million, lower by 31.9% compared with last year. Excluding those same costs, EBIT as a percentage of revenue for the uK Group
of 3.9% in 2008 was lower than the 5.2% achieved in 2007.
DISConTInuED oPERATIonS – Tool HIRE DIvISIon
on July 31, 2007, the Company sold its Tool Hire Division. This division is classified as discontinued operations within the consolidated income
statements for all periods presented prior to the disposition.
The table below provides details of the discontinued operations of the Tool Hire Division for the year ended December 31, 2007, excluding the
gain and loss on sale:
For years ended December 31
($ THouSAnDS)
Revenue from external sources
operating costs
Depreciation and amortization
other expenses
Earnings before interest and taxes
Approximately 1,200 employees were transferred with the sale of the Tool Hire Division.
COrpOrate and Other OperatiOns
For years ended December 31
($ mIllIonS)
operating costs – corporate
operating costs – mark-to-market and equity investment
Depreciation and amortization
other expenses
Earnings before interest and taxes
2007
113.3
(82.2)
(23.4)
(8.0)
(0.3)
2007
(27.0)
(3.9)
–
–
(30.9)
$
$
$
$
2008
(25.8)
(20.9)
(0.2)
(1.3)
(48.2)
$
$
For the year ended December 31, 2008, corporate operating costs decreased to $25.8 million compared with $27.0 million in 2007.
4242
management’s discussion & analysis
Equity earnings from the Company’s investment in Energyst B.v. in 2008 were lower by $1 million compared with 2007. The mark-to-market lTIP
expense incurred at the corporate level in 2008 was $16.0 million higher than in 2007. The Company entered into a compensation hedge at the
end of 2007 which offsets the mark-to-market impact relating to certain stock-based compensation plans. The 2007 balance reflects the mark-
to-market impact following the valuation of certain stock-based compensation plans. The 2008 balance primarily reflects the mark-to-market
expense of the compensation hedge which offsets the lTIP mark-to-market gains recorded by the operating companies. on a consolidated basis,
the lTIP mark-to-market impact, net of hedging costs, is minimal for 2008.
Costs included in other expenses in 2008 relate to the implementation of a new information technology system for the Company’s global operations.
gOOdwill impairment
Goodwill is assessed for impairment at the reporting unit level at least annually. Any potential goodwill impairment is identified by comparing
the fair value of a reporting unit to its carrying value. If the fair value of the reporting unit exceeds its carrying value, goodwill is considered not
to be impaired. If the carrying value of the reporting unit exceeds its fair value, a more detailed assessment must be undertaken to determine the
fair value of goodwill. A goodwill impairment charge is recognized to the extent that, at the reporting unit level, the carrying value of goodwill
exceeds its fair value.
The Company determines the fair value of the reporting unit using a discounted cash flow model corroborated by other valuation techniques
such as market multiples. The process of determining these fair values requires management to make estimates and assumptions including, but not
limited to, projected future sales, earnings and capital investment, discount rates, and terminal growth rates. Projected future sales, earnings, and
capital investment are consistent with strategic plans presented to the Company’s Board of Directors. Discount rates are based on an industry
weighted average cost of capital. These estimates are subject to change due to uncertain competitive and economic market conditions or changes
in business strategies.
In the fourth quarter of 2008, the Company performed its annual goodwill impairment test and determined that the carrying value of goodwill
established on the acquisition of Hewden in 2001 exceeded its respective fair value. As a result, the Company recorded in other expenses a full
goodwill impairment charge of $151.4 million. The Company expects no income tax deduction from this non-cash goodwill impairment charge.
The determination that the fair value of goodwill was less than its carrying value resulted from a decline in market multiples. It was also due to
a reduction of fair value as determined using the discounted cash flow methodology, primarily due to a change in market assumptions principally
from the increasing economic uncertainty in the global market. Although the market conditions have changed in the fourth quarter of 2008,
management believes the Company’s strategy and rationalization efforts for Hewden are sound.
earnings BefOre interest and taxes (eBit)
on a consolidated basis, EBIT was $236.7 million in 2008. Gross profit increased 7.2% to $1,714.7 million in 2008 compared with 2007, and gross
profit margin (gross profit as a percentage of revenues) was 28.6%, up from the prior year gross profit margin of 28.2%. However, the increase
in gross profit was offset by higher SG&A costs, which were incurred to meet anticipated growth and customer demand primarily in the mining
sector, as well as cost increases in both western Canada and South America.
Results in 2008 included certain items that are considered by the Company to be non-recurring. These included the Hewden goodwill impairment
charge, costs related to the integration and transition of Collicutt, business support and depot restructuring costs in the u.K., restructuring costs
incurred globally by Finning in the fourth quarter of 2008 in light of the current market conditions, partially offset by the gains on the sale of
certain properties in Hewden. Adjusting for these non-recurring items, EBIT for 2008 would have been $405.8 million, 11.0% lower than the prior
year. EBIT as a percentage of revenue would have been 6.8%, compared with 8.0% for 2007.
EBIT BY OPERATION*
($ millions) 12 months ended December 31
*excluding other operations – corporate head office
and goodwill impairment
6
8
300 2
250
200
150
100
50
0
4
3
2
8
4
1
7
2
1
3
7
4
5
CANADA
SOUTH
AMERICA
UK GROUP
2007
2008
2008 finning international inc. 43
43
2008 finning international inc.
management’s discussion & analysis
major components of the annual EBIT variance were:
($ mIllIonS)
2007 eBit
net change in operations
Foreign exchange impact
Hewden goodwill impairment charge
Gain on sale of certain properties in Hewden
Collicutt integration and start-up costs
Restructuring costs in the u.K.
Global restructuring costs
lower lTIP costs
other net expenses
2008 eBit
$
$
455.8
(19.7)
(25.8)
(151.4)
14.7
(12.6)
(10.3)
(9.5)
8.6
(13.1)
236.7
finanCe COsts
Finance costs for the year ended December 31, 2008 of $83.6 million were 14.8% higher than 2007. The higher finance costs in 2008 were
primarily due to higher debt in 2008 as a result of the acquisition of Collicutt, the repurchase of the Company’s common shares as part of a
normal course issuer bid, as well as to support the Company’s higher working capital requirements.
prOvisiOn fOr inCOme taxes
Finning’s 2008 annual income tax expense was $57.1 million (37.3% effective tax rate) compared with $102.9 million (26.9% effective tax rate) for
2007. The higher effective tax rate in 2008 reflects a number of non-recurring items, primarily the goodwill impairment charge recorded in the
fourth quarter of 2008, which is not deductible for tax purposes. Adjusting for the non-recurring gains and costs discussed throughout this mD&A,
as well as the Hewden goodwill impairment charge, the effective tax rate would have been approximately 20%. This is lower than the 2007 effective
tax rate as well as management’s guidance of 25-30% for 2008 primarily due to the change in the Company’s earnings mix with proportionately
more income earned in lower tax jurisdictions. In addition, the Company benefited from tax adjustments resulting from the closure of previously
open tax years, lower capital tax rates applied to the sale of properties in the u.K., and a tax benefit recognized on the wind up of Collicutt.
net inCOme
Finning’s net income from continuing operations in 2008 was $96.0 million compared with $280.1 million in 2007. Finning’s 2008 earnings included
certain items considered by the Company to be non-recurring. These included a non-cash goodwill impairment charge, costs related to the
integration of Collicutt, business support and depot restructuring costs in the u.K., as well as global restructuring costs incurred by Finning in the
fourth quarter of 2008 in light of the current market conditions. These non-recurring costs were partially offset by gains on the sale of certain
properties in Hewden. Adjusting for these non-recurring items, net income from continuing operations would have been $257.8 million, 8.0% lower
than the 2007 level. The Company realized improved margins in 2008 but this was more than offset by higher costs to meet customer demand.
Basic EPS from continuing operations for the year ended December 31, 2008 of $0.56 included a number of non-recurring items as described
above. Adjusting the 2008 results for these non-recurring items, including the goodwill impairment charge, basic EPS would have been $1.50 for
the year ended December 31, 2008 compared with $1.57 in 2007, a decrease of 4.5%. The total negative impact due to the stronger Canadian
dollar in 2008 compared to the prior year was approximately $0.10 per share.
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.
4444
management’s discussion & analysis
Cash flOw frOm Operating aCtivities
For the year ended December 31, 2008, cash flow after working capital changes was $278.1 million, a decrease from cash flow of $404.4 million
generated last year. Throughout all operations, management continues to focus on improving cash cycle times and operating efficiencies while
ensuring appropriate levels of working capital exist to support current activity levels.
The Company made a net investment in rental assets of $204.8 million during 2008, less than half of the $474.6 million invested in 2007, and
slightly below management’s annual guidance given in the third quarter of 2008 of $220 million to $250 million. Rental investment moderated in
2008 compared to the very high demand for rental assets in 2007, particularly at the Company’s Canadian operations. with utilization of rental
assets decreasing in 2008, rental expenditures were reduced wherever possible and underutilized assets were sold.
overall, cash flow generated by operating activities was $72.7 million in 2008 which improved from the use of cash from operating activities
of $56.7 million in 2007.
Free cash flow (before dividends) is defined as cash flow provided by operating activities less net capital expenditures, discussed below. The
Company’s free cash flow (before dividends) for 2008 was $23.2 million, below the annual guidance provided of $100-$120 million primarily due
to the timing of cash receipts and higher inventory levels than expected in South America to support deliveries in early 2009.
Cash used fOr investing aCtivities
net cash used in investing activities in 2008 totalled $198.1 million compared with cash provided by investing activities of $181.3 million in 2007.
The primary use of cash in 2008 related to the acquisition of Collicutt for $135.8 million, net of cash received. The primary source of cash in
2007 was the net proceeds of $242.9 million received on the sale of the Tool Hire division in the u.K.
Gross capital additions for the year ended December 31, 2008 were $100.4 million compared with $74.2 million for the year ended December 31,
2007. net capital expenditures in 2008 of $49.5 million were slightly below management’s annual guidance given in the third quarter of 2008 of
$60 million to $75 million due to further delays in certain capital projects. The capital additions in 2008 and 2007 reflect general capital spending
to support operations. Capital additions in 2008 also included capitalized costs related to the Company’s new global information system, and
capital additions in the prior year also included the capitalization of certain costs related to the development of Hewden’s new information
system. The Company has committed to pay approximately $16 million over the next three years for consulting and implementation support for
the new information technology system solution for its global operations.
Investing activities in 2008 included approximately $8.6 million in proceeds on the sale of vehicles at Hewden. These vehicles were subsequently
leased back under an operating lease.
In 2008, the Company increased its investment in Energyst B.v. by $11.5 million, increasing its equity investment to 25.4%. In both 2008 and
2007, the Company acquired one Cat Rental Store for $1.3 million and $2.7 million, respectively. Also in 2007 the Company paid proceeds of
approximately $4.1 million on the settlement of foreign currency forwards that hedged foreign subsidiary investments.
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 2009. management believes that the 2009 results will by
highlighted by stronger cash generation as working capital requirements are reduced, expenditures on equipment for the rental fleets are
significantly reduced, and capital expenditures are actively managed, depending on business conditions, over the course of the year. 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
As at December 31, 2008, the Company’s short and long-term borrowings totalled $1.6 billion, an increase of $430.0 million, or 36.5% since
December 31, 2007, primarily to support the acquisition of Collicutt and the repurchase of common shares as part of a normal course issuer bid,
as well as support the Company’s higher working capital requirements.
To complement the internally generated funds from operating and investing activities, the Company has approximately $1.3 billion in unsecured
credit facilities. Included in this amount, Finning has committed bank facilities totalling approximately $870 million with various Canadian and
u.S. financial institutions. The largest of these facilities ($800 million) is in place until December 2011. As at December 31, 2008 over $300 million
was available under these committed facilities and no term debt matures until December 2011. Availability of these facilities, seasonal needs
for working capital, and the discretionary nature of some of the outflows like rental additions and share buybacks mean that the Company has
sufficient liquidity to meet operational needs in the foreseeable future.
2008 finning international inc. 45
45
2008 finning international inc.
management’s discussion & analysis
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 2008, the Company’s long-term debt rating was upgraded to A (low) by DBRS, and was confirmed at
BBB+ by S&P. The Company’s short-term debt rating was reconfirmed by DBRS at R-1 (low). The Company continues to utilize the Canadian
commercial paper market as well as borrowings under its credit facilities as its principal sources 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.
In may 2008, the Company issued two unsecured medium Term notes (mTn). The 5-year, $250 million mTn has a coupon interest rate of
5.16% per annum, payable semi-annually commencing September 3, 2008. The 10-year, $350 million mTn has a coupon interest rate of 6.02%
per annum, payable semi-annually commencing December 1, 2008. Proceeds from these issuances were used for debt repayment, including the
repayment of the Company’s existing $200 million 7.40% mTn which matured in June 2008 as well as outstanding commercial paper borrowings.
Financing activities in 2008 also included a payment of $8.9 million on the settlement of a derivative that hedged future cash flows associated
with the new mTn issuances noted above.
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.
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 2008 by one cent to eleven cents per common share. As a result, dividends
paid to shareholders increased in 2008 by $9.5 million to $74.0 million.
The Company has an active share repurchase program in effect until July 8, 2009. For the year ended December 31, 2008, the Company
repurchased and cancelled 5,901,842 common shares at an average price of $24.99 for an aggregate amount of $147.5 million. For the year ended
December 31, 2007, the Company repurchased and cancelled 3,691,400 common shares at an average price of $27.82 for an aggregate amount
of $102.7 million.
The Company’s overall net debt to total capitalization ratio was 48.9% at the end of 2008, compared with 40.8% at the end of 2007. This ratio is
higher than the prior year due to the higher debt in 2008, primarily as a result of the acquisition of Collicutt and the repurchase of the Company’s
common shares as part of a normal course issuer bid. The non-cash goodwill impairment charge did not have a significant impact on the net debt
to total capitalization ratio.
COntraCtual OBligatiOns
Payments on contractual obligations in each of the next five years and thereafter are as follows:
($ mIllIonS)
2009
2010
2011
2012
2013
Thereafter
Total
long-term debt
– principal repayment
– interest
operating leases
Capital leases
Total contractual obligations
$
$
2.6
63.3
71.2
26.3
163.4
$
$
3.4
63.2
63.2
6.8
136.6
$
$
557.0
63.1
49.7
1.2
671.0
$
$
–
47.2
31.7
1.1
80.0
$
$
504.9
47.2
23.5
1.1
576.7
$
$
350.0
94.8
150.8
14.7
610.3
$ 1,417.9
378.8
390.1
51.2
$ 2,238.0
The above table does not include obligations to fund pension benefits, although the Company is making regular contributions to their registered
defined benefit pension plans in Canada and the uK in order to fund the pension plans as required. Contribution requirements are based on
periodic (at least triennial) actuarial funding valuations performed by the Company’s (or plan Trustees’) actuaries. For 2008, approximately
$50 million was contributed towards the Company’s defined benefit pension plans. Currently, the Company is committed to maintain a similar
level of funding during 2009. However, the decreases in security values in global financial markets in the latter part of 2008 will likely increase
required pension funding levels in 2010. The amount of increase will be determined over the next 12-18 months as new funding valuations are
performed, with the resulting new funding requirements likely to come into effect commencing in 2010. management anticipates any increase
in funding requirements will be manageable.
4646
management’s discussion & analysis
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.
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 relating
to these transfers. In 2007, proceeds from revolving reinvestment of collections were $451.9 million.
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, 2008, 62% 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, 2008, 26% and 13% 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.
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, provisions for
inventory obsolescence, reserves for warranty, provisions for income tax, the determination of employee future benefits, the useful lives of the
rental fleet and related residual values, costs associated with maintenance and repair contracts, and provisions for restructuring costs.
A significant portion of goodwill recorded on the consolidated balance sheets related to the Company’s investment in Hewden Stuart plc
(Hewden), 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. The Company determined that the fair value of Hewden was less
than its book value, primarily due to the higher cost of capital assumptions in the valuation methodology, reflecting year-end market conditions. As
a result, the Company recorded a full goodwill impairment charge of $151.4 million. The goodwill impairment charge is non-cash in nature and does
not affect the Company’s liquidity, cash flows from operating activities, or debt covenants and will not have an impact on future operations.
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.
2008 finning international inc. 47
47
2008 finning international inc.
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.
A reconciliation between EBIT and net income from continuing operations is as follows:
For years ended December 31
($ mIllIonS)
Earnings from continuing operations before interest, income taxes, and goodwill impairment charge
Goodwill impairment
Earnings from continuing operations before interest and income taxes (EBIT)
Finance costs
Provision for income taxes
net income from continuing operations
$
$
2008
388.1
(151.4)
236.7
(83.6)
(57.1)
96.0
2007
455.8
–
455.8
(72.8)
(102.9)
280.1
$
$
Finning’s 2008 earnings included certain items considered by the Company to be non-recurring. These included a non-cash goodwill impairment
charge, costs related to the integration of Collicutt, business support and depot restructuring costs in the u.K., as well as global restructuring
costs incurred by Finning in the fourth quarter of 2008 in light of the current market conditions. These non-recurring costs were partially offset
by gains on the sale of certain properties in Hewden.
A reconciliation between Basic EPS and Adjusted Basic EPS, reflecting the per share impact of the non-recurring items noted above, is as follows:
($ mIllIonS)
Basic earnings (loss) per share
Per share impact of non-recurring items
Goodwill impairment charge
other non-recurring items
Adjusted basic earnings per share
three months
ended
December 31, 2008
twelve months
ended
December 31, 2008
$
(0.63)
$
0.89
0.07
0.33
0.56
0.88
0.06
1.50
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. on a quarterly basis, the Audit Committee
reviews the Company’s process with respect to risk assessment and management of key risks, including the Company’s major financial risks and
exposures and the steps taken to monitor and control such exposures. Changes to the key risks are also reviewed by the Audit Committee.
4848
management’s discussion & analysis
Financial Derivatives
The Company uses various financial instruments such as interest rate swaps, forward foreign exchange contracts, and collars as well as foreign
currency debt to manage its foreign exchange exposures, interest rate exposures, and stock-based compensation 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.
Financial risks anD uncertainties
lIQuIDITy RISK
liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company’s approach to managing
liquidity is to ensure, as far as possible, that it will always have sufficient cash flows to fund its operations and to meet its liabilities when due,
under both normal and stressed conditions. The Company also maintains certain credit facilities which can be drawn upon as needed.
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.
CREDIT RISK
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual
obligations, and arises principally from the Company’s receivables from customers, instalment notes receivables, and derivative counterparties.
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 derivative contracts and investments. There is a risk that counterparties to
these derivative contracts and investments 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 financial
institutions that have a credit rating of at least A- from S&P and A (low) from DBRS.
mARKET RISK
market risk is the risk that changes in market prices, such as foreign exchange rates and interest rates will affect the Company’s income or the
value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within
acceptable parameters.
The Company buys and sells derivatives in the ordinary course of business, and also incurs financial liabilities, in order to manage market risks.
All such transactions are carried out within the guidelines set by the Company’s Global Hedging Policy approved by the Audit Committee.
CuRREnCy RISK
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 (uSD), the Canadian dollar (CAD), the u.K. pound sterling (GBP), and the Chilean
peso (ClP). As a result, the Company has 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.
It is the Company’s objective to manage its exposure to currency fluctuations arising from its 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, net of tax, as an item of comprehensive income and accumulated
other comprehensive income. Cumulative currency translation adjustments, net of gains or losses of the associated hedging instruments,
are recognized in net income when there is a reduction in the Company’s net investment in the self-sustaining foreign operations. A 5%
hypothetical strengthening of the Canadian dollar relative to all other currencies from the December 2008 month end rates, assuming the
same current level of hedging instruments, would result in an after-tax deferred unrealized loss of approximately $29 million.
2008 finning international inc. 49
49
2008 finning international inc.
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 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 sales pricing policies and practices. 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.
A 5 percent strengthening of the Canadian dollar against the following currencies for a full year relative to the December 31, 2008 month end
rates would increase / (decrease) annual net income by the amounts shown below. This analysis assumes that all other variables, in particular
volumes, relative pricing, interest rates, and hedging activities are unchanged.
Currency
uSD
GBP
ClP
December 31, 2008
month end rates
1.2246
1.7896
0.0019
increase (decrease) in
annual net income
$ mIllIonS
(22)
(2)
1
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.
InTEREST RATE RISK
The Company’s interest bearing financial assets comprise instalment note receivables, which bear interest at a fixed rate. The Company’s debt
portfolio comprises both fixed and floating rate debt instruments, with terms to maturity ranging up to ten years. In relation to its debt financing,
the Company is exposed to potential changes in interest rates, which may cause the Company’s borrowing costs to fluctuate. Floating rate debt
exposes the Company to 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 and the mark-
to-market on the cross currency interest rate swaps may be negatively affected by changes 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.
CommoDITy PRICES
The Company’s revenues can be indirectly affected by fluctuations in commodity prices; in particular, changes in views on long-term commodity
prices. In Canada, commodity price movements in the forestry, metals, coal, and petroleum sectors can have an impact on customers’ demands
for equipment and customer service. In Chile and Argentina, significant fluctuations in the price of copper and gold can have similar effects, as
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. Significant fluctuations in commodity prices could result in a material adverse impact on the Company’s
financial results. with significantly lower commodity prices, demand is reduced as development of new projects is slowed or stopped and
production from existing projects can be curtailed, both leading to less demand for equipment. However, product support growth has been, and
will continue to be, important in mitigating the effects of downturns in the business cycle. Finning’s customer support services revenues typically
contribute higher gross margins than new equipment sales.
5050
management’s discussion & analysis
SToCK-BASED ComPEnSATIon RISK
Stock-based compensation is an integral part of the Company’s compensation program, and can be in the form of the Company’s common shares
or cash payments that reflect the value of the shares. Since Canadian GAAP require certain stock-based compensation which is accounted for as
liability-based awards to be recorded on a mark-to-market basis, compensation cost can vary significantly as the price of the Company’s common
shares changes. The Company has entered into a derivative contract to manage this potential exposure, called a variable Rate Share Forward (vRSF).
A 5% strengthening or weakening in the Company’s share price as at December 31, 2008, all other variables remaining constant, would have
increased or decreased net income by approximately $0.9 million as a result of revaluing certain of the Company’s stock-based compensation.
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.
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 CEo and the CFo, together with other members of management, have designed the Company’s disclosure controls and procedures in order
to provide reasonable assurance that material information relating to the Company and its consolidated subsidiaries would have been known to
them, and by others, within those entities.
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.
InTERnAl ConTRol ovER FInAnCIAl REPoRTInG
management is responsible for establishing and maintaining adequate internal control over financial reporting. management have designed internal
control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements in accordance with Canadian GAAP. There has been no change in the design of the Company’s internal control over financial reporting
during the quarter ended December 31, 2008, that would materially affect, or is reasonably likely to materially affect, the Company’s internal
control over financial reporting.
EvAluATIon oF EFFECTIvEnESS
As required by national Instrument 52-109, Certification of Disclosure in Issuers’ Annual and Interim Filings (nI 52-109) issued by the Canadian
Securities regulatory authorities, an evaluation and testing of the effectiveness of the design and operation of the Company’s disclosure
controls and procedures and internal control over financial reporting were conducted as of December 31, 2008, by and under the supervision
of management, including the CEo and CFo. In making the assessment of the effectiveness of the Company’s internal control over financial
reporting, management used the criteria set forth by the Committee of Sponsoring organizations of the Treadway Commission (CoSo) in
Internal Control – Integrated Framework. 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 and internal control over financial reporting
were effective as of December 31, 2008.
Regular involvement of Internal Audit and quarterly reporting to the Audit Committee and the Company’s external auditors assists in providing
reasonable assurance that the objectives of the control system are met. while the officers of the Company have designed the Company’s
disclosure controls and procedures and internal control over financial reporting, they expect that these controls and procedures may not prevent
all errors and fraud. A control system, no matter how well conceived or operated, can only provide reasonable, not absolute, assurance that the
objectives of the control system are met.
2008 finning international inc. 51
51
2008 finning international inc.
management’s discussion & analysis
selecteD Quarterly inForMation
($ mIllIonS, ExCEPT FoR SHARE AnD oPTIon DATA)
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
2008
2007
$ 826.0
464.3
276.4
$ 1,566.7
Revenue(1)
Canada
South America
uK Group
Total revenue
net income (loss)(1)(2)
from continuing operations $ (106.8)
from discontinued operations
–
Total net income
$ (106.8)
Basic earnings (loss)
per share(1)(2)(3)
from continuing operations $
from discontinued operations
Total basic EPS
Diluted earnings (loss) per
share(1)(2)(3)
from continuing operations $
from discontinued operations
Total diluted EPS
Total assets(1)
long-term debt
Current
non-current
Total long-term debt(4)
Cash dividends paid
per common share(3)
Common shares
outstanding (000’s)(3)
options outstanding (000’s)(3)
(0.62)
–
$
(0.62)
$ 4,720.4
2.6
$
1,410.7
$ 1,413.3
(0.63)
–
(0.63)
170,445
6,037
0.11
$
$
$ 748.9
389.7
324.6
$ 1,463.2
$ 849.1
340.7
341.5
$ 1,531.3
$ 792.9
306.9
330.4
$ 1,430.2
$ 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
$
$
$
$
64.8
–
64.8
0.38
–
0.38
$
$
67.2
–
67.2
$ 70.8
–
$ 70.8
$ 0.39
–
0.39
$
$
$
0.41
–
0.41
$
$
$
$
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
$
0.37
–
$
0.37
$ 4,604.4
$
0.39
–
$ 0.39
$ 4,603.8
2.5
$
1,313.1
$ 1,315.6
$ 100.5
1,121.8
$ 1,222.3
$
0.40
–
0.40
$
$ 4,527.8
$ 215.9
605.7
$ 821.6
$
0.39
–
$
0.39
$ 4,134.2
$
0.35
–
$
0.35
$ 4,079.7
$
0.42
(0.01)
$
0.41
$ 4,434.4
$ 215.7
590.4
$ 806.1
$ 204.2
554.5
$ 758.7
$ 204.1
600.6
$ 804.7
$
0.39
–
$
0.39
$ 4,386.2
$
2.2
753.8
$ 756.0
$
0.11
$
0.11
$
0.10
$
0.10
$
0.09
$
0.09
$
0.08
171,356
6,200
172,692
6,343
172,623
4,576
176,132
4,656
178,521
4,737
179,601
4,934
179,272
3,606
(1) on January 15, 2008 the Company’s Canadian operations purchased Collicutt Energy Services ltd. The results of operations and financial position of Collicutt
are included in the 2008 figures above.
on July 31, 2007, the Company’s u.K. subsidiary, Hewden Stuart Plc, sold its Tool Hire Division. Results from the Tool Hire Division 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. Revenues from the uK Tool Hire Division have been excluded from the revenue figures above.
Assets from the Tool Hire Division have been included in the total assets figures for periods prior to their sale.
(2) The Company performed its annual goodwill impairment review in the fourth quarter of 2008 and determined that the fair value of Hewden was less than its
book value, which included goodwill on acquisition. As a result, the Company recorded a full goodwill impairment of $151.4 million for Hewden in the fourth
quarter of 2008. The goodwill impairment charge is non-cash in nature and does not affect the Company’s liquidity, cash flows from operating activities, or debt
covenants and is not expected to have any adverse impact on future operations. The Company expects no income tax deduction from this charge.
(3) 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 2008, the Company repurchased 5,901,842 common shares at an average price of $24.99 as part of a
normal course issuer bid. During 2007, 3,691,400 common shares were repurchased at an average price of $27.82.
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 or year-to-date total.
(4) In the second quarter of 2008, the Company issued two unsecured medium Term notes (mTn); a five year $250 million mTn and a 10 year $350 million
mTn. Proceeds from these issuances were used for debt repayment, including the repayment of a $200 million mTn which expired in June 2008 as well as
outstanding commercial paper borrowings.
5252
management’s discussion & analysis
new accountinG pronounceMents
CHAnGES ADoPTED In 2008
Effective January 1, 2008, the Company adopted the following new accounting standards issued by the Canadian Institute of Chartered
Accountants (CICA): Section 3031, Inventories; Section 3862, Financial Instruments – Disclosures; and Section 3863, Financial Instruments –
Presentation. The principal changes related to these standards are described below.
(i) inventories
The new standard 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 standard has been applied prospectively; accordingly comparative periods have not been restated. However, prior period financial
statements retroactively reflect the classification of external unbilled service work in progress, which was previously presented in inventory.
Adjustments to the previous carrying amount of inventories have been recognized as an adjustment of the balance of retained earnings as at
January 1, 2008.
As at January 1, 2008, the impact on the consolidated balance sheet as a result of the adoption of these standards was an increase in inventory
of $8.7 million; an increase in future income tax liability of $2.4 million; and an increase in retained earnings of $6.3 million.
The effect on net income for the year ended December 31, 2008 as a result of adopting the new standard 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.
(ii) financial instrument Disclosures
Section 3862 Financial Instruments – Disclosures and Section 3863 Financial Instruments – Presentation, together comprise a complete set of
disclosure and presentation requirements that revise and enhance current disclosure requirements for financial instruments, as discussed further
in note 4 to the consolidated financial statements. 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.
FuTuRE ACCounTInG PRonounCEmEnTS
(a) 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 new
standard does not have a material impact on the Company’s consolidated financial statements.
(b) business combinations
In January 2009, the CICA issued Section 1582, Business Combinations, Section 1601, Consolidations, and Section 1602, Non-controlling Interests. These
new standards are harmonized with International Financial Reporting Standards (IFRS). Section 1582 specifies a number of changes, including:
an expanded definition of a business; a requirement to measure all business acquisitions at fair value; a requirement to measure non-controlling
interests at fair value; and a requirement to recognize acquisition-related costs as expenses. Section 1601 establishes the standards for preparing
consolidated financial statements. Section 1602 specifies that non-controlling interests be treated as a separate component of equity, not as a
liability or other item outside of equity. The new standards will become effective in 2011. Early adoption is permitted.
(c) convergence with international financial reporting stanDarDs
In February 2008, Canada’s Accounting Standards Board confirmed that Canadian GAAP, as used by public companies, will be converged with
International Financial Reporting Standards (IFRS) effective January 1, 2011. The transition from Canadian GAAP to IFRS will be applicable for
the Company for the first quarter of 2011 when the Company will prepare both the current and comparative financial information using IFRS.
2008 finning international inc. 53
53
2008 finning international inc.
management’s discussion & analysis
while IFRS uses a conceptual framework similar to Canadian GAAP, there are significant differences on recognition, measurement, and disclosures.
The Company commenced its IFRS conversion project in late 2007. The project consists of four phases: raise awareness; assessment; design;
and implementation. with the assistance of an external expert advisor, the Company has completed a high level review of the major differences
between Canadian GAAP and IFRS as applicable to the Company. while a number of differences have been identified, the areas of highest potential
impact include property, plant and equipment, certain aspects of revenue recognition, income taxes, foreign currency, employee future benefits,
stock-based compensation, presentation and disclosure, as well as the initial adoption of IFRS under the provisions of IFRS 1 First Time Adoption.
The Company expects the transition to IFRS to impact financial reporting, business processes, internal controls, and information systems.
The Company will initiate the design phase in 2009 which will involve establishing issue-specific work teams to focus on generating options and
making recommendations in the identified risk areas. The Company will also establish a communications plan, begin to develop staff training
programs, and evaluate the impact of the IFRS transition on other business activities.
earninGs coveraGe ratio
The following earnings coverage ratio is calculated for the twelve months ended December 31, 2008 and constitutes an update to the earnings
coverage ratio described in the Company’s short form base shelf prospectus dated may 5, 2008.
Twelve months ended December 31, 2008
Earnings coverage ratio
2.8
The earnings coverage ratio is calculated by dividing: (a) the Company’s earnings from continuing operations before interest and taxes for the
period stated; by (b) finance costs incurred over the period stated.
The earnings coverage ratio was negatively impacted by the non-cash goodwill impairment charge noted throughout this mD&A. Excluding the
impact of this charge, the earnings coverage ratio would have been 4.6.
outstanDinG share Data
As at February 13, 2009
Common shares outstanding
options outstanding
170,533,067
5,837,770
Market outlook
The world’s financial crisis and liquidity concerns continued through the fourth quarter of 2008. The resultant expected economic slowdown
has occurred and commodity prices have fallen to comparatively low levels. Spending has been curbed by consumers in most parts of the world.
Reduced consumer demand, lower availability of credit and reduced access to capital markets will impact some of Finning’s customers who will
have less demand for new equipment as a result.
However, Governments around the world have responded with stimulus packages that include significant amounts of capital spending directed
to infrastructure projects. much of this construction will require heavy equipment and will provide work for some of Finning’s customers.
In western Canada, existing operations in the oil sands as well as the larger coal and copper mining operations continue to operate at high levels
in order to maximize cash flow and achieve lowest cost per ton economics. High equipment operating levels support Finning’s parts and service
business. Some new projects have been delayed or deferred and capital expenditure plans have been scaled back pending a return to higher
commodity prices. Construction spending continues on infrastructure projects, especially by Governments. Engine sales to gas compression
packagers, for international sales, continues at good levels. The residential construction, forestry, and conventional oil and gas industries in
western Canada continue to experience considerably slower business conditions and equipment purchases are expected to remain at lower
levels. This situation is expected to continue through 2009.
Heavy equipment markets in Chile remain comparatively healthy and demand for the Company’s products and services continues at reasonable
levels at the present time. Demand for equipment and support services for the Chilean construction industry is fairly good. Sales of engines for
power generation have slowed considerably. while copper prices are significantly lower, they are expected to remain at levels which support
economic operations at most of Finning’s large South American mining customers. These companies are among the lowest cost producers of
copper in the world, and parts and service revenues are expected to continue to grow reflecting the impact of new equipment sales to the
industry in the recent past.
5454
management’s discussion & analysis
In Argentina, significant inflationary cost pressures continue and constrained liquidity in the banking sector is challenging customers in arranging
financing for equipment purchases. Finning has been actively managing its business in Argentina to reduce the level of exposure to an economic
crisis in that country. This includes keeping parts and equipment inventories at modest levels, ensuring accounts receivable are as current as
possible and by managing its operations to run as efficiently as possible with cost increases arising from inflation promptly passed along in the
form of price increases.
Business at the Caterpillar dealership in the uK has slowed in most sectors. Demand for equipment from the coal mining sector remains
satisfactory, but the downturn in the uK housing market and slowing business conditions are being felt in most other sectors. market conditions
in the uK plant hire (equipment rental) industry are also challenging. The business is highly competitive and utilization rates are lower.
A significant portion of Finning’s business is derived from the sale of parts and service for previously sold equipment operating in Finning’s
geographic territories. Given the large volumes of new equipment sold in recent years, the demand for parts and service is expected to remain
reasonably good. Finning’s large mining and oil sands customers continue to run their equipment at high levels and continue to require significant
parts and service from Finning.
Given the current economic uncertainty, management’s confidence in predicting future business levels is lower than in the past. The current
outlook is for lower new equipment sales compared to 2008 and for parts and service revenues to grow, but at a more modest rate than the
prior year. 2009 results are also expected to generate higher cash flow than 2008 as working capital requirements are reduced, and assuming
budgeted levels of equipment sales are achieved. overall expenditures on equipment additions to Finning’s rental fleets are expected to be
meaningfully reduced in 2009; however, demand for rental equipment, as an alternative to purchasing, is increasing among Finning’s customers,
especially in Canada.
Finning’s financial condition is strong. The Company has committed bank facilities totalling approximately $870 million with various Canadian and
u.S. financial institutions. The largest of these facilities ($800 million) is committed until December 2011. At December 31, 2008 over $300 million
was available under these facilities. At January 31, 2009 approximately $230 million was available. Finning expects to generate higher cash flow
in 2009 as a result of lower capital spending, lower rental equipment additions, and reduced working capital requirements. Given the expected
improved cash flow, the committed credit facilities, and the discretionary nature of some of Finning’s cash outflows, such as rental additions and
capital expenditures, as well as the absence of any term debt maturities until late 2011, management believes that Finning has sufficient credit and
liquidity to meet operational needs in the foreseeable future.
Finning has taken extensive action to reduce its costs in the face of lower demand for equipment. In response to the current market conditions,
Finning incurred restructuring costs globally during the fourth quarter of 2008, resulting in a reduction of headcount of approximately 700
employees. However, its long term strategy is unchanged as it continues to focus on the parts and service business as well as the mining and
heavy construction sectors. Finning expects to continue to invest in technical training, and in some locations additional human resources are still
required to meet the projected strategic growth. These include Fort mcmurray, Edmonton, and some mining branches in Chile.
The decreases in security values in global financial markets in the latter part of 2008 will have an impact on the pension funding and expense
levels of Finning’s defined benefit pension plans going forward. The predominant pension arrangement in Canada going forward is a defined
contribution plan, with the existing defined benefit plan having been closed to new members (other than executives) since 2004. The Company’s
South American employees do not participate in a Company pension plan. As such, the more significant impact on pension funding and pension
expense would relate to the uK operations although the uK defined benefit plans are also essentially closed to new entrants (new hires now
participate in a defined contribution arrangement, if any), a significant liability still exists. At present, management anticipates that the changes to
the funded level and related pension expense of its defined benefit pension plans will be manageable.
Finning’s financial results are impacted by changes to the value of the 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 were negatively impacted as a result of translating foreign currency
based earnings from the strengthening of the Canadian dollar in the first half of 2008. nominal changes in average foreign exchange rates in
the third quarter of 2008 had a minimal impact on third quarter financial results. Foreign exchange had a positive impact on net income in the
fourth quarter due to the weaker Canadian dollar relative to the u.S. dollar, compared to the prior year’s fourth quarter. For the year ended
December 31, 2008, net income was negatively impacted by approximately $0.10 per share compared to last year. The impact of foreign exchange
due to the movement of the Canadian dollar relative to the u.S. dollar and the u.K. pound sterling is expected to continue to affect Finning’s
results in 2009.
February 18, 2009
2008 finning international inc. 55
55
2008 finning international inc.
management’s discussion & analysis
selecteD annual inForMation
($ mIllIonS, ExCEPT FoR SHARE DATA)
Total revenue(1)
net income (loss)(1)(2)
before goodwill impairment
goodwill impairment
from continuing operations
from discontinued operations
Total net income
Basic earnings (loss) per share(1)(2)(3)
before goodwill impairment
goodwill impairment
from continuing operations
from discontinued operations
Total basic EPS
Diluted earnings (loss) per share(1)(2)(3)
before goodwill impairment
goodwill impairment
from continuing operations
from discontinued operations
Total diluted EPS
Total assets(1)(2)
long-term debt(4)
Current
non-current
Cash dividends declared per common share(3)
2008
5,991.4
247.4
(151.4)
96.0
–
96.0
1.44
(0.88)
0.56
–
0.56
1.43
(0.88)
0.55
–
0.55
4,720.4
2.6
1,410.7
1,413.3
0.43
$
$
$
$
$
$
$
$
$
2007
2006
5,662.2
$
4,853.2
280.1
–
280.1
(2.0)
278.1
1.57
–
1.57
(0.01)
1.56
1.55
–
1.55
(0.01)
1.54
4,134.2
215.7
590.4
806.1
0.36
236.2
–
236.2
(32.1)
204.1
1.32
–
1.32
(0.18)
1.14
1.31
–
1.31
(0.18)
1.13
4,200.8
2.2
735.9
738.1
0.275
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
(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. 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.
on January 15, 2008 the Company’s Canadian operations purchased Collicutt Energy Services ltd. The results of operations and financial position of Collicutt
are included in the 2008 figures above.
(2) The Company performed its annual goodwill impairment review in the fourth quarter of 2008 and determined that the fair value of Hewden was less than its
book value, which included goodwill on acquisition. As a result, the Company recorded a full goodwill impairment charge of $151.4 million for Hewden in the
fourth quarter of 2008. The goodwill impairment charge is non-cash in nature and does not affect the Company’s liquidity, cash flows from operating activities,
or debt covenants, and is not expected to have any adverse impact on future operations. The Company expects no income tax deduction from this charge.
(3) 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 2008, the Company repurchased 5,901,842 common shares at an average price of $24.99 as part of a normal
course issuer bid. During 2007, 3,691,400 common shares were repurchased at an average price of $27.82.
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 or year-to-date total.
(4) In 2008, the Company issued two unsecured medium Term notes (mTn); a five year $250 million mTn and a 10 year $350 million mTn. Proceeds from
these issuances were used for debt repayment, including the repayment of a $200 million mTn which expired in June 2008 as well as outstanding commercial
paper borrowings.
5656
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 2008.
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.
m.T. waites
President & Chief Executive officer
February 18, 2009
vancouver, BC, Canada
D.S. Smith
Executive vice President & Chief Financial officer
Auditors’ Report
to the shareholDers oF FinninG international inc.:
we have audited the consolidated balance sheets of Finning International Inc. as at December 31, 2008 and 2007 and the consolidated statements
of income, comprehensive income, shareholders’ equity and cash flow for each of the years in the two year period ended December 31, 2008.
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, 2008 and 2007, and the results of its operations and its cash flows for each of the years in the two year period ended
December 31, 2008, in accordance with Canadian generally accepted accounting principles.
DEloITTE & TouCHE llP, Chartered Accountants
February 18, 2009
vancouver, BC, Canada
2008 finning international inc. 57
57
2008 finning international inc.
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
2008
2007
$ 2,376,933
551,710
431,804
712,791
1,899,483
18,704
5,991,425
4,276,749
1,714,676
$
2,233,512
503,012
417,613
781,194
1,701,253
25,660
5,662,244
4,063,079
1,599,165
Selling, general, and administrative expenses
1,309,756
1,144,753
other expenses (income) (note 2)
Goodwill impairment (note 17)
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 6)
net income from continuing operations
loss from discontinued operations, net of tax (note 16)
net income
Earnings (loss) per share – basic
From continuing operations (note 9)
From discontinued operations
Earnings (loss) per share – diluted
From continuing operations (note 9)
From discontinued operations
weighted average number of shares outstanding
Basic
Diluted
16,801
151,373
236,746
83,636
153,110
57,114
95,996
–
95,996
0.56
–
0.56
0.55
–
0.55
$
$
$
$
$
(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
$
$
$
$
$
172,361,881
173,318,957
178,844,411
180,459,955
The accompanying notes to the Consolidated Financial Statements are an integral part of these statements.
5858
December 31
($ THouSAnDS)
assets
Current assets
Cash and cash equivalents (note 20)
Accounts receivable
Service work in progress
Inventories (note 10)
other assets (note 11)
Total current assets
Finance assets (note 12)
Rental equipment (note 13)
land, buildings, and equipment (note 14)
Intangible assets (note 14)
Goodwill (note 17)
other assets (note 11)
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 18)
Future income taxes (note 6)
Total liabilities
Commitments and Contingencies (notes 24 and 25)
shareholDers’ eQuity
Share capital (note 7)
Contributed surplus
Accumulated other comprehensive loss
Retained earnings
Total shareholders’ equity
Approved by the Directors:
consolidated balance sheets
2008
2007
$
109,772
840,810
102,607
1,473,504
288,102
2,814,795
11,671
987,835
470,859
38,344
99,278
297,593
$ 4,720,375
$
193,635
1,316,818
3,187
2,643
1,516,283
1,410,727
96,296
129,965
3,153,271
$
$
$
61,860
728,696
83,742
1,207,802
166,842
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
554,966
25,441
(176,444)
1,163,141
1,567,104
$ 4,720,375
571,402
15,356
(232,223)
1,263,262
1,617,797
4,134,163
$
m.T. waites, Director
D.w.G. whitehead, Director
The accompanying notes to the Consolidated Financial Statements are an integral part of these statements.
2008 finning international inc. 59
59
2008 finning international inc.
consolidated statements of comprehensive income
For years ended December 31
($ THouSAnDS)
net income
other comprehensive income (loss), net of income tax
Currency translation adjustments
unrealized gains on net investment hedges, net of tax of $1.7 million
(2007: 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 $3.6 million
(2007: net of tax of $1.5 million)
Realized losses (gains) on cash flow hedges, reclassified to earnings, net of tax of $0.3 million
(2007: net of tax of $0.8 million)
Comprehensive income
2008
2007
$
95,996
$
278,057
60,536
2,154
–
(8,276)
(194,452)
47,394
443
(3,512)
1,365
151,775
$
(747)
127,183
$
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
Total
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
$
(77,046) $
(146,615)
–
–
–
–
$ (223,661) $
(4,303) $ 1,140,415 $ 1,640,339
127,183
278,057
(4,259)
8,153
–
–
(102,692)
(90,764)
–
9,260
–
–
(64,446)
(64,446)
–
(8,562) $ 1,263,262 $ 1,617,797
Transition adjustment (note 1)
Balance, January 1, 2008
Comprehensive income (loss)
Issued on exercise of stock options
Issued for acquisition (note 15)
Repurchase of common shares
(note 7)
Stock option expense
Dividends on common shares
Balance, December 31, 2008
–
176,131,879
–
199,627
15,403
–
$ 571,402
–
2,260
398
–
$ 15,356
–
(341)
65
–
$ (223,661) $
62,690
–
–
–
6,282
6,282
(8,562) $ 1,269,544 $ 1,624,079
151,775
95,996
(6,911)
1,919
–
–
463
–
–
(5,901,842)
–
–
170,445,067
(19,094)
–
–
$ 554,966
–
10,361
–
$ 25,441
(147,496)
10,361
(73,997)
$ (160,971) $ (15,473) $ 1,163,141 $ 1,567,104
(128,402)
–
(73,997)
–
–
–
–
–
–
The accompanying notes to the Consolidated Financial Statements are an integral part of these statements.
6060
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)
Goodwill impairment
Gain on disposal of discontinued operations (note 16)
other
Changes in working capital items (note 20)
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 16)
Acquisition of businesses (notes 11, 15 and 17)
Payment of contingent consideration
Payments on settlement of foreign currency forwards
Cash provided by (used in) investing activities
FinancinG activities
Decrease in short-term debt
Increase of long-term debt
Payment on settlement of derivative
Repurchase of securitized accounts receivable (note 27)
Defined benefit pension plan special funding (note 21)
Issue of common shares on exercise of stock options
Repurchase of common shares (note 7)
Dividends paid
Cash provided by (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 20
consolidated statements of cash flow
2008
2007
$
95,996
$
278,057
326,095
9,822
14,144
(19,892)
151,373
–
(816)
576,722
(298,589)
278,133
(204,800)
(652)
72,681
(100,417)
50,954
–
(148,639)
–
–
(198,102)
(198,147)
589,861
(8,914)
–
–
1,919
(147,496)
(73,997)
163,226
10,107
47,912
61,860
109,772
$
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
$
The accompanying notes to the Consolidated Financial Statements are an integral part of these statements.
2008 finning international inc. 61
61
2008 finning international inc.
notes to the consolidated financial statements
December 31, 2008 and 2007
1. signifiCant aCCOunting pOliCies
These Consolidated Financial Statements have been prepared in accordance with Canadian generally accepted accounting principles (GAAP) 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. The Company’s principal joint venture is Pipeline machinery International (Plm), in
which Finning has a 25% interest.
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 GAAP 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, provisions for inventory obsolescence, reserves for warranty, provisions for income tax, the
determination of employee future benefits, the useful lives of the rental fleet and related residual values, costs associated with maintenance and
repair contracts, and provisions for restructuring costs.
(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 currency 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.
(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. 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.
6262
notes to the consolidated financial statements
(F) INveNTORIeS
Inventories are assets held for sale in the ordinary course of business, in the process of production for sale, or in the form of materials or
supplies to be consumed in the production process or in the rendering of services. Inventories are stated at the lower of cost and net realizable
value. Cost is determined on a specific item basis for on-hand equipment, and on a weighted average cost basis for parts and supplies. The cost
of inventories includes all costs of purchase, conversion costs, and other costs incurred in bringing inventories to their existing location and
condition. In the case of internal service work in progress on equipment, cost includes an appropriate share of overhead costs based on normal
operating capacity.
(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 comprise instalment notes receivable 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, which range to a maximum period of ten years. Amortization is recorded in selling, general, and administrative expenses
in the consolidated statement of income.
(l) GOODwIll
Goodwill represents the excess cost of an investment over the fair value of the net assets acquired and is not amortized.
(m) ASSeT ImPAIRmeNT
The Company reviews both long-lived assets to be held and used and identifiable intangible assets with finite lives for impairment 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.
The deterioration in the global economic environment in the last quarter of 2008 triggered the requirement for an impairment analysis on the
Company’s long-lived assets and identifiable intangible assets with finite lives as at December 31, 2008. Based on management’s analysis, it was
determined there was no impairment of these assets at that time. As at December 31, 2007, the Company determined there were no triggering
events requiring an impairment analysis.
2008 finning international inc. 63
63
2008 finning international inc.
notes to the consolidated financial statements
1. signifiCant aCCOunting pOliCies (continued)
(m) ASSeT ImPAIRmeNT (CONTINUeD)
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 – see note 17.
(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 legal 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.
(q) STOCK-BASeD COmPeNSATION
The Company has stock option plans and other stock-based compensation plans for directors and certain eligible employees which are described
in note 8. Stock-based awards are measured and recognized using a fair value-based method of accounting.
For stock options granted after January 1, 2003, fair value is determined on the grant date of the stock option and recorded as compensation
expense over the vesting period, with a corresponding increase to contributed surplus. For stock options granted prior to January 1, 2003, the
Company recorded no compensation expense and will continue to use the intrinsic value-based method of accounting for those stock options.
when stock options are exercised, the proceeds received by the Company, together with any related amount recorded in contributed surplus,
are credited to share capital.
Compensation expense which arises from fluctuations in the market price of the Company’s common shares underlying other stock-based
compensation plans (net of hedging instruments) is recognized in selling, general, and administrative expense in the consolidated income
statement with the corresponding liability recorded on the consolidated balance sheet in long-term obligations.
6464
notes to the consolidated financial statements
(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 and represents changes in shareholders’ equity
during a period arising from non-owner sources. other comprehensive income includes currency translation adjustments on the Company’s 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.
financial assets anD financial liabilities
ClassifiCation
The Company has made the following classification of its financial assets and financial liabilities:
•
•
•
Cash equivalents are classified as Held for Trading. They are measured at fair value with realized and unrealized gains and losses reported
in net income.
Accounts receivable, instalment notes receivable, and supplier claims receivable are classified as Loans and Receivables. They are measured
at amortized cost using the effective interest rate method. At December 31, 2008 and 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, 2008 and 2007, the measured amount approximates fair value,
with the exception of long-term debt. The estimated fair value of the Company’s long-term debt as at December 31, 2008 and 2007 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.
2008 finning international inc. 65
65
2008 finning international inc.
notes to the consolidated financial statements
1. signifiCant aCCOunting pOliCies (continued)
(S) COmPReheNSIve INCOme, FINANCIAl INSTRUmeNTS, AND heDGeS (CONTINUeD)
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 and interest rate
exposures, and stock-based compensation 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 and collars 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, net of tax, 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 affects income. 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, 2008, approximately $8.8 million of 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.
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 typically 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 when
there is a reduction in the Company’s net investment in the self-sustaining foreign operation.
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.
6666
notes to the consolidated financial statements
(T) ChANGe IN ACCOUNTING POlICIeS
Effective January 1, 2008, the Company adopted the following new accounting standards issued by the CICA: Section 3031, Inventories; Section
3862, Financial Instruments – Disclosures; and Section 3863, Financial Instruments – Presentation. The principal changes related to these standards are
described below.
(i) Inventories
The new standard 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 standard has been applied retrospectively without restatement; accordingly comparative periods have not been restated. However,
prior period financial statements retroactively reflect the separate presentation of external unbilled service work in progress, which was
previously presented in inventory. Adjustments to the previous carrying amount of inventories have been recognized as an adjustment of the
balance of retained earnings as at January 1, 2008.
The adoption of the new standard resulted in the following adjustments as of January 1, 2008 in accordance with the transition provisions:
1. Allocation of Fixed and variable overhead
In accordance with the new standard, fixed and variable overheads have been applied to internal service work in progress. upon adoption,
the carrying value of internal service work in progress has been increased by $8.7 million, with an increase in future income tax liability of
$2.4 million and an increase in retained earnings of $6.3 million.
2. Presentation of Service work in Progress
Service work in progress relates to unbilled work in progress for external customers and represents the costs incurred plus recognized
profits, net of any recognized losses and progress billings. Revenue is recognized on service work in progress on a basis proportionate
to the service work that has been performed based on the parts and labour service provided. Service work in progress was previously
included in inventory. It is presented as a current asset and the 2007 figure has been reclassified for comparative purposes.
The effect on net income for the twelve months ended December 31, 2008 as a result of adopting the new standard is not material.
(ii) Financial Instrument Disclosures
Section 3862 Financial Instruments – Disclosures and Section 3863 Financial Instruments – Presentation, together comprise a complete set of
disclosure and presentation requirements that revise and enhance current disclosure requirements for financial instruments, as discussed
further in note 4 to the consolidated financial statements. 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.
(U) COmPARATIve FIGUReS
Certain comparative figures have been reclassified to conform to the 2008 presentation.
(v) FUTURe ACCOUNTING PRONOUNCemeNTS
(i) 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
new standard does not have a material impact on the Company’s consolidated financial statements.
(ii) Business Combinations
In January 2009, the CICA issued Section 1582, Business Combinations, Section 1601, Consolidations, and Section 1602, Non-controlling Interests.
These new standards are harmonized with International Financial Reporting Standards (IFRS). Section 1582 specifies a number of changes,
including: an expanded definition of a business, a requirement to measure all business acquisitions at fair value, a requirement to measure non-
controlling interests at fair value, and a requirement to recognize acquisition-related costs as expenses. Section 1601 establishes the standards
for preparing consolidated financial statements. Section 1602 specifies that non-controlling interests be treated as a separate component of
equity, not as a liability or other item outside of equity. The new standards will become effective in 2011. Early adoption is permitted.
(iii) Convergence with International Financial Reporting Standards
In February 2008, Canada’s Accounting Standards Board confirmed that Canadian GAAP, as used by public companies, will be converged with
IFRS effective January 1, 2011. The transition from Canadian GAAP to IFRS will be applicable for the Company for the first quarter of 2011
when the Company will prepare both the current and comparative financial information using IFRS.
2008 finning international inc. 67
67
2008 finning international inc.
notes to the consolidated financial statements
2. Other expenses (inCOme)
other expenses (income) include the following items:
For years ended December 31
($ THouSAnDS)
Gain on sale of properties in Hewden (a)
Restructuring (b)
Project costs (c)
Gain on sale of other surplus properties
Gain on disposition of distribution arrangement in Canada (d)
2008
(19,210)
20,496
16,197
(682)
–
16,801
$
$
2007
–
1,607
3,510
(4,144)
(2,408)
(1,435)
$
$
The tax recovery on other expenses for the year ended December 31, 2008 was $7.3 million (2007: tax expense of $0.1 million on other income).
(a) In 2008, the Company’s uK subsidiary, Hewden, sold certain properties for cash proceeds of approximately $37.8 million, resulting in a pre-tax
gain of $19.2 million.
(b) In 2008, the Company’s uK operations incurred restructuring costs of approximately $8 million in connection with the integration of business
support services. The uK operations also incurred costs of approximately $3 million in 2008 related to the restructuring of Hewden’s
nationwide depot network. In addition, Finning incurred restructuring costs globally in 2008 in response to the current market conditions.
(c) Project costs in 2008 relate to the implementation of a new information technology system for the Company’s global operations.
(d) 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 $2.4 million.
3. shOrt-term and lOng-term deBt
December 31
($ 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
5.16%, $250 million, due September 3, 2013
6.02%, $350 million, due June 1, 2018
5.625%, £125 million Eurobond, due may 30, 2013
other term loans (a)
less current portion of long-term debt
Total long-term debt
2008
2007
$
193,635
$
370,942
–
149,718
249,057
348,241
222,122
444,232
1,413,370
(2,643)
$ 1,410,727
200,812
149,622
–
–
242,881
212,730
806,045
(215,663)
590,382
$
(a) other term loans include u.S. $291.0 million and £10.0 million (2007: u.S. $130.6 million and £30 million) of unsecured borrowings under
committed bank facilities that are classified as long-term debt, and other unsecured term loans primarily from supplier merchandising
programs. other loans also include £2.4 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 $600 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 secured and unsecured bank credit facilities to support its subsidiary operations. As at
December 31, 2008, the Company had approximately $1,300 million (2007: $1,380 million) of unsecured credit facilities, and including all bank and
commercial paper borrowings drawn against these facilities, approximately $660 million (2007: $800 million) of capacity remained available.
Included in short-term debt is foreign currency denominated debt of u.S. $29.0 million (2007: u.S. $14.3 million) and £32.7 million (2007: £27.2 million).
The average interest rate applicable to the consolidated short-term debt for 2008 was 4.5% (2007: 5.3%).
6868
notes to the consolidated financial statements
lonG-TERm DEBT
The Company’s Canadian dollar denominated medium Term notes (mTns) 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.
In may 2008, the Company issued two unsecured mTns. The 5-year, $250 million mTn has a coupon interest rate of 5.16% per annum, payable
semi-annually commencing September 3, 2008. The mTn was priced at $99.994 of its principal amount to yield 5.163% per annum. The 10-year,
$350 million mTn has a coupon interest rate of 6.02% per annum, payable semi-annually commencing December 1, 2008. The mTn was priced
at $99.936 of its principal amount to yield 6.028% per annum.
Proceeds from these issuances were used for debt repayment, including the repayment of the Company’s $200 million 7.40% mTn which
matured in June 2008 as well as outstanding commercial paper borrowings.
The Company has an $800 million unsecured syndicated revolving credit facility, maturing in December 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, 2008, $538.4 million (2007: $438.2 million) was drawn
on this facility, including commercial paper issuances.
lonG-TERm DEBT REPAymEnTS
Principal repayments on long-term debt in each of the next five years and thereafter are as follows:
($ THouSAnDS)
2009
2010
2011
2012
2013
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
loss (gain) on interest rate derivatives
other finance related expenses, net of sundry interest earned
less: interest expense related to discontinued operations
Finance costs from continuing operations
$
$
2,643
3,367
556,995
–
504,927
350,000
1,417,932
2008
2007
$
$
15,866
61,495
77,361
1,578
4,697
83,636
–
83,636
$
$
25,600
46,444
72,044
(823)
5,381
76,602
(3,760)
72,842
4. finanCial instruments
ovERvIEw
Finning and its subsidiaries are exposed to market, credit, liquidity, and other risks from its use of financial instruments. The Enterprise Risk
management process within the Company’s risk management function is designed to ensure that such risks are identified, managed, and reported.
on a quarterly basis, the Audit Committee reviews the Company’s process with respect to risk assessment and management of key risks,
including the Company’s major financial risks and exposures and the steps taken to monitor and control such exposures. Changes to the key risks
are reviewed by the Audit Committee. The Audit Committee also reviews the adequacy of disclosures in the Company’s Annual Information Form,
management’s Discussion and Analysis, and Consolidated Financial Statements.
This note presents information about the Company’s exposure to credit, liquidity, and market risks and the Company’s objectives, policies, and
processes for managing these risks.
2008 finning international inc. 69
69
2008 finning international inc.
notes to the consolidated financial statements
4. finanCial instruments (continued)
CREDIT RISK
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual
obligations, and arises principally from the Company’s receivables from customers, instalment notes receivables, and derivative counterparties.
traDe anD other reCeivables
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.
The Company establishes an allowance for impairment that represents its estimate of potential losses in respect of trade and other receivables. The
main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loss component
established for groups of similar assets in respect of losses that may have been incurred but not yet specifically identified. The collective loss
allowance is determined based on historical data of payment statistics for similar financial assets, adjusted for current economic conditions.
Counterparty CreDit risk
The Company does have a certain degree of credit exposure arising from its derivative contracts and investments. There is a risk that counterparties
to these derivative contracts and investments 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 financial
institutions that have a credit rating of at least A- from Standard & Poor’s and A (low) from DBRS.
exposure to CreDit risk
The carrying amount of financial assets represents the maximum credit exposure. The exposure to credit risk at the reporting date was:
December 31
($ THouSAnDS)
Cash and cash equivalents
Accounts receivable
Service work in progress
Supplier claims receivable
Instalment notes receivable
Cross currency interest rate swaps used as a hedge of net investment
Forward foreign currency contracts
The maximum exposure to credit risk for trade receivables at the reporting date by geographic location of customer was:
2008
$
109,772
840,810
102,607
62,912
38,852
66,417
18,182
$ 1,239,552
2008
397,738
176,062
212,495
3,751
4,462
794,508
$
$
2008
Gross
allowance
$
$
527,331
172,473
65,498
12,323
44,037
821,662
$
$
176
284
1,618
2,127
22,949
27,154
December 31
($ THouSAnDS)
Canada
u.K.
South America
Europe
other
impairment losses
The aging of trade receivables at the reporting date was:
December 31
($ THouSAnDS)
not past due
Past due 1 – 30 days
Past due 31 – 90 days
Past due 91 – 120 days
Past due greater than 120 days
Total
7070
The movement in the allowance for doubtful accounts in respect of trade receivables during the period was as follows:
notes to the consolidated financial statements
For years ended December 31
($ THouSAnDS)
Balance, beginning of year
Additional allowance
Receivables written off
Foreign exchange translation adjustment
Balance, end of year
2008
28,229
12,331
(13,408)
2
27,154
$
$
2007
28,248
13,682
(10,489)
(3,212)
28,229
$
$
The allowance amounts in respect of trade receivables are used to record impairment losses unless the Company is satisfied that no recovery
of the amount owing is possible; at that point the amount is considered not recoverable and is written off against the financial asset directly.
lIQuIDITy RISK
liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company’s approach to managing
liquidity is to ensure, as far as possible, that it will always have sufficient cash flows to fund its operations and to meet its liabilities when due,
under both normal and stressed conditions. The Company also maintains certain credit facilities which can be drawn upon as needed.
The following are the contractual maturities of financial liabilities and derivatives. The amounts presented represent the future undiscounted
principal and interest cash flows and therefore do not equate to the carrying amount on the consolidated balance sheet.
carrying amount
December 31,
2008
2009
2010-2011
2012-2013
Thereafter
Contractual cash flows
$
193,635
747,016
222,122
436,226
8,006
1,316,818
$
(193,635)
(40,930)
(12,583)
(9,451)
(3,000)
(1,316,818)
$
–
(231,860)
(25,166)
(423,901)
(5,726)
–
$
–
(317,940)
(248,866)
(32,539)
–
–
$
–
(444,786)
–
–
–
–
(23,892)
29,497
(364,005)
446,181
–
66,417
(1,045)
–
–
18,182
(3,389)
–
(487)
–
(9,592)
–
(11,946)
14,749
(146)
13
(137,500)
155,221
(309,824)
306,579
(56,011)
55,107
(72,115)
64,884
(23,892)
29,497
(416)
37
(2,620)
3,146
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(26,876)
–
$
$
–
–
$
–
–
(54,142)
35,164
$
$
Canadian dollar (CAD)
united States dollar (uSD)
British pound (GBP)
Chilean peso (ClP)
2008 finning international inc. 71
71
2008 finning international inc.
($ THouSAnDS)
non-derivative financial
liabilities
Short-term debt
unsecured mTns
Eurobond
unsecured bank facilities
other term loans
Accounts payable and accruals
Derivatives
Cross currency interest
rate swaps
Pay GBP (fixed)
Receive CAD (fixed)
Interest rate swaps
Pay uSD (fixed)
Receive uSD (floating)
Forward foreign currency
contracts and collars
Sell CAD
Buy uSD
Sell uSD
Buy CAD
Sell ClP
Buy uSD
Sell uSD
Buy ClP
Share forward
Sell
Buy
notes to the consolidated financial statements
4. finanCial instruments (continued)
mARKET RISK
market risk is the risk that changes in market prices, such as foreign exchange rates and interest rates will affect the Company’s income or the
value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within
acceptable parameters.
The Company buys and sells derivatives in the ordinary course of business, and also incurs financial liabilities, in order to manage market risks.
All such transactions are carried out within the guidelines set by the Company’s Global Hedging Policy approved by the Audit Committee.
CuRREnCy RISK
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 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 other
comprehensive income and accumulated other comprehensive income.
It is the Company’s objective to manage its exposure to currency fluctuations arising from its 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 other comprehensive income and accumulated other
comprehensive income. Cumulative currency translation adjustments, net of gains or losses of the associated hedging instruments, are recognized
in net income when there is a reduction in the Company’s net investment in the self-sustaining foreign operations.
TRANSACTION exPOSURe
many of the Company’s operations purchase, sell, rent, and lease products as well as incur costs throughout the world in different currencies.
This 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 sales pricing policies and practices. 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 its 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.
7272
notes to the consolidated financial statements
exposure to currency risk
The Company is exposed to foreign currency risk. The currencies of the Company’s financial instruments, based on notional amounts, were as follows:
December 31
(THouSAnDS)
Cash and cash equivalents
Accounts receivable
Short-term and long-term debt
Accounts payable and accruals
Gross balance sheet exposure
Cross currency interest rate swaps
Foreign forward exchange contracts and collars
caD
usD
GBp
clp
2008
22,076
377,032
(912,311)
(310,433)
(823,636)
328,190
166,459
58,353
79,025
(319,990)
(522,651)
(705,263)
–
(137,567)
848
99,298
(169,220)
(130,249)
(199,323)
(150,000)
–
4,702,208
72,432,169
–
(50,658,822)
26,475,555
–
3,388,336
sensitivity analysis
A 5% strengthening of the Canadian dollar against the following currencies for a full year relative to the December 31, 2008 month end rates
would increase / (decrease) profit or loss by the amounts shown below. A 5% strengthening of the Canadian dollar against the following
currencies from the December 31, 2008 month end rates would increase / (decrease) equity by the amounts shown below. This analysis assumes
that all other variables, in particular volumes, relative pricing, interest rates, and hedging activities are unchanged.
December 31
($ THouSAnDS)
uSD
GBP
ClP
2008
equity
profit or loss
$
$
$
(11,800)
(17,200)
–
$
$
$
(22,500)
(2,200)
700
A 5% weakening of the Canadian dollar against the above currencies relative to the December 31, 2008 month end rates would have an equal but
opposite effect on the above currencies in the amounts shown above, on the basis that all other variables are unchanged.
InTEREST RATE RISK
The Company’s interest bearing financial assets comprise instalment note receivables, which bear interest at a fixed rate. The Company’s debt
portfolio comprises both fixed and floating rate debt instruments, with terms to maturity ranging up to ten years. In relation to its debt financing,
the Company is exposed to potential changes in interest rates, which may cause the Company’s borrowing costs to fluctuate. Floating rate debt
exposes the Company to 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 and the mark-
to-market on the cross currency interest rate swaps may be negatively affected by changes 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.
PROFIle
At the reporting date the interest rate profile of the Company’s interest-bearing financial instruments was as follows:
December 31
($ THouSAnDS)
Fixed rate instruments
Financial assets
Financial liabilities
variable rate instruments
Financial liabilities
2008
$
$
42,719
(986,113)
(943,394)
$
(637,867)
2008 finning international inc. 73
73
2008 finning international inc.
notes to the consolidated financial statements
4. finanCial instruments (continued)
FAIR vAlUe SeNSITIvITy ANAlySIS FOR FIxeD RATe INSTRUmeNTS
The Company does not account for any fixed rate financial assets and liabilities at fair value through the income statement, and the Company
does not currently have any derivatives (interest rate swaps) designated as hedging instruments under a fair value hedge accounting model.
Therefore a change in interest rates at the reporting date would not affect net income.
A change of 100 basis points in interest rates for a full year relative to the interest rates at the reporting date would have increased or decreased
equity by approximately $4.8 million.
CASh FlOw SeNSITIvITy ANAlySIS FOR vARIABle RATe INSTRUmeNTS
A change of 100 basis points in short-term interest rates for a full year relative to the interest rates at the reporting date would have increased
or decreased net income by approximately $4.5 million. This analysis assumes that all other variables, in particular foreign currency rates,
remain constant.
oTHER RISK
The Company’s revenues can be indirectly affected by fluctuations in commodity prices; in particular, changes in views on long-term commodity
prices. In Canada, commodity price movements in the forestry, metals, coal, and petroleum sectors can have an impact on customers’ demands
for equipment and customer service. In Chile and Argentina, significant fluctuations in the price of copper and gold can have similar effects, as
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. Significant fluctuations in commodity prices could result in a material adverse impact on the Company’s
financial results.
SToCK-BASED ComPEnSATIon CoSTS RISK
Stock-based compensation is an integral part of the Company’s compensation program, and can be in the form of the Company’s common shares
or cash payments that reflect the value of the shares. Since Canadian GAAP require certain stock-based compensation which is accounted for as
liability-based awards to be recorded on a mark-to-market basis, compensation cost can vary significantly as the price of the Company’s common
shares changes. The Company has entered into a derivative contract to manage this potential exposure, called a variable Rate Share Forward (vRSF).
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 the time of settlement and the execution price plus accrued interest. The average execution
price per share was $28.71 on 2.0 million common shares, which approximated the number of outstanding deferred share units and vested share
appreciation units as at December 31, 2007.
At December 31, 2008, the vRSF relates to 1.7 million common shares at a price of $28.71 plus interest maturing in 2012. A 5% strengthening or
weakening in the Company’s share price as at December 31, 2008, all other variables remaining constant, would have increased or decreased net
income by approximately $0.9 million as a result of revaluing certain of the Company’s stock-based compensation. As the Company’s share price
changes, the mark-to-market impact related to the stock-based compensation liability is effectively offset by the mark-to-market impact related
to the vRSF.
FAIR vAluES
The following fair value information is provided solely to comply with financial instrument disclosure requirements. The Company cautions
readers in the interpretation of the impact of these estimated fair values. The fair value of financial instruments is determined by reference to
quoted market prices for actual or similar instruments, where available, or by estimates derived using present value or other valuation techniques.
The fair value of accounts receivable, notes receivable, short-term debt, and accounts payable and accruals approximates their recorded values
due to the short-term maturities of these instruments.
7474
notes to the consolidated financial statements
The fair values of the derivatives below have been estimated using market information as at December 31, 2008 and 2007, and are recorded at
fair value on the balance sheet as indicated below. These fair values approximate the amount the Company would receive or pay to terminate
the contracts:
notional
value
Term to
maturity
Fair value
Receive (Pay)
($ oR £ THouSAnDS)
Balance Sheet Classification
2008
Foreign exchange
Cross Currency Interest Rate Swaps
Pay GBP fixed / receive CAD fixed other assets – long-term
Forwards buy uSD / sell CAD
Swaps sell uSD / buy CAD
Forwards buy uSD / sell ClP
Forwards sell uSD / buy ClP
Collars sell uSD / buy ClP
other assets – current
accounts payable and accruals
accounts payable and accruals
accounts payable and accruals
accounts payable and accruals
GBp 150,000
usD 129,321
usD 253,000
usD 45,000
usD 34,889
usD 24,000
perpetual
1-13 months
1-6 months
1-2 months
1-12 months
1-12 months
$
$
$
$
$
$
$
66,417
18,182
(3,389)
(487)
(6,240)
(3,352)
(1,045)
accounts payable and accruals
usD 11,250
1-3 years
interest rates
Interest Rate Swaps
long-term incentive plans
variable Rate Share Forward
long-term obligations
$
48,809
november 2012
$
(26,876)
2007
Foreign exchange
Cross Currency Interest Rate Swaps
Pay GBP fixed / receive CAD fixed other assets – long term
Forwards buy uSD / sell CAD
Forwards buy uSD / sell ClP
Forward buy uSD / sell CAD
Accounts payable and accruals
Accounts payable and accruals
other assets – current
GBP
150,000
uSD 166,921
48,000
uSD
3,875
uSD
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
$
uSD
200,000
11,250
September 2008
1-4 years
long-term obligations
$
57,422
november 2012
$
$
$
$
$
$
$
41,637
(3,283)
(48)
71
(5,028)
(325)
(193)
lonG-TERm DEBT
The fair value of the Company’s long-term debt is estimated as follows:
December 31
($ THouSAnDS)
long-term debt
2008
2007
Book value
Fair value
Book value
Fair value
$ 1,413,370
$ 1,336,351
$
806,045
$
788,459
5. management Of Capital
The Company’s objective when managing capital is to maintain a flexible capital structure which optimizes the cost of capital at acceptable risk. In
the management of capital, the Company includes shareholders’ equity, cash and cash equivalents, short-term and long-term debt in the definition
of capital.
The Company manages its capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics
of its underlying assets. In order to maintain or adjust the capital structure, the Company may purchase shares for cancellation pursuant
to normal course issuer bids, issue new shares, issue new debt, issue new debt to replace existing debt with different characteristics, or adjust
the amount of dividends paid to shareholders.
The Company monitors the following ratios: net debt to total capitalization and dividend payout ratio. net 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.
2008 finning international inc. 75
75
2008 finning international inc.
notes to the consolidated financial statements
5. management Of Capital (continued)
net debt to total capitalization is calculated as short-term and long-term debt, net of cash and cash equivalents (net debt) divided by total
capitalization. Total capitalization is defined as the sum of net 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.
The Company’s strategy is to maintain the targets set out in the following table. The Company believes that these target ratios are in the optimal
range and provide access to capital at a reasonable cost.
As at and for years ended December 31
($ THouSAnDS, ExCEPT AS noTED)
components of Debt and coverage ratios
Cash and cash equivalents
Short-term debt
Current portion of long-term debt
long-term debt
net debt
Shareholders’ equity
net debt to total capitalization
Dividend payout ratio
2008
2007
$
(109,772)
193,635
2,643
1,410,727
$ 1,497,233
$ 1,567,104
$
$
$
(61,860)
370,942
215,663
590,382
1,115,127
1,617,797
company targets
40 - 50%
25 - 30%
2008
48.9%
77.2%
2007
40.8%
22.9%
The net debt to total capitalization ratio is within the Company’s target. This ratio is higher than the prior year due to the higher debt in 2008,
primarily as a result of the acquisition of Collicutt Energy Services Inc. and the repurchase of the Company’s common shares as part of a normal
course issuer bid. The non-cash goodwill impairment charge negatively impacted the net debt to total capitalization ratio by 2.3% as a result of
a $151.4 million reduction to equity.
The dividend payout ratio was impacted by the non-cash goodwill impairment charge noted above. Excluding the impact of this charge, the
dividend payout ratio would have been 29.9%, an increase over the 2007 level and within the Company’s target.
CovEnAnT
The Company is subject to a maximum net debt to total capitalization level pursuant to a covenant within its syndicated bank credit facility.
As at December 31, 2008 and 2007, the Company is in compliance with this covenant.
6. inCOme taxes
PRovISIon FoR InComE TAxES
As the Company operates in several tax jurisdictions, its income is subject to various rates of taxation. The components of the Company’s income
tax provision are as follows:
For years ended December 31
($ THouSAnDS)
Provision for income taxes
Current
Canada
International
Future
Canada
International
7676
2008
2007
$
$
38,663
8,629
47,292
(4,037)
13,859
9,822
57,114
$
$
70,954
19,352
90,306
230
12,362
12,592
102,898
notes to the consolidated financial statements
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
Goodwill impairment
Change in statutory tax rates in uK and Canada
non-deductible stock-based compensation
and other expenses
Income not subject to tax
non-taxable capital gain
other
Provision for income taxes
2008
2007
$
46,010
30.05%
$
125,971
32.89%
(17,349)
43,126
(799)
5,393
(2,953)
(11,939)
(4,375)
57,114
$
(11.33)%
28.17%
(0.52)%
3.52%
(1.92)%
(7.81)%
(2.86)%
37.30%
(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%
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
$66.9 million (2007: $51.8 million) and $1.7 million (2007: $2.6 million), respectively.
Temporary differences and tax loss carry-forwards that give rise to future income tax assets and liabilities are as follows:
December 31
($ 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
other
net future income tax liability
2008
2007
$
$
63,696
6,435
4,203
1,172
–
75,506
(6,663)
(81,767)
(46,267)
(1,364)
(136,061)
(60,555)
$
$
51,096
5,416
10,938
849
1,800
70,099
(12,968)
(63,392)
(38,214)
–
(114,574)
(44,475)
The Company has recognized the benefit of the following tax loss carry-forwards available to reduce future taxable income and capital gains
expiring through 2028 for Canada and available indefinitely for International:
December 31
($ THouSAnDS)
Canada
International
2008
19,809
5,571
25,380
$
$
2007
14,464
5,821
20,285
$
$
2008 finning international inc. 77
77
2008 finning international inc.
notes to the consolidated financial statements
7. 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, 2008 and 2007.
The Company is authorized to issue an unlimited number of common shares.
The Company repurchased and cancelled 5,901,842 common shares during 2008 as part of a normal course issuer bid. These shares were
repurchased at an average price of $24.99, which has been allocated to reduce share capital by $19.1 million and retained earnings by
$128.4 million. During 2007, the Company repurchased and cancelled 3,691,400 common shares at an average price of $27.82, which were
allocated to reduce share capital by $11.9 million and retained earnings by $90.8 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.
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. In may 2008, the rights plan was extended for three years such that it will automatically terminate at the end of the Company’s
Annual meeting of shareholders in 2011 unless further extended by the shareholders prior to that time.
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.
8. stOCK-Based COmpensatiOn plans
The Company has a number of stock-based compensation plans, which are described below.
SToCK oPTIonS
The Company has several stock option plans for certain employees and directors with vesting occurring over a three-year period. The exercise
price of each option is based on the closing price of the common shares of the Company on the date of the grant. options granted after
January 1, 2004 are exercisable over a seven-year period. options granted prior to January 1, 2004 are exercisable over a ten-year period.
under the 2005 Stock option Plan, the Company may issue up to 7.5 million common shares pursuant to the exercise of stock options. At
December 31, 2008, 2.1 million common shares remain eligible to be issued in connection with future grants under this Stock option Plan.
Details of the stock option plans are as follows:
For years ended December 31
options outstanding, beginning of year
Granted
Exercised
Cancelled
options outstanding, end of year
Exercisable at year end
2008
weighted
average
exercise price
$
$
$
$
$
$
20.99
29.83
10.47
26.85
23.72
17.54
options
4,656,402
1,853,100
(209,832)
(262,400)
6,037,270
2,726,492
2007
weighted
Average
Exercise Price
$
$
$
$
$
$
14.44
31.59
11.50
19.86
20.99
11.92
options
3,903,526
1,721,000
(746,188)
(221,936)
4,656,402
1,745,280
In the second quarter of 2008, the Company granted 1,853,100 common share options to senior executives and management of the Company
(2007: 1,721,000 common share options). In 2008 and 2007, long term incentives for executives and senior management were made primarily 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.
7878
notes to the consolidated financial statements
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
2008 Grant
2007 Grant
1.27%
25.44%
4.25%
5.5 years
1.21%
21.57%
4.09%
5.5 years
At the grant date, the weighted average fair value of each option granted during the year was $8.35 (2007: $7.89). Total stock option expense
recognized in 2008 was $10.4 million (2007: $9.3 million).
The following table summarizes information about stock options outstanding at December 31, 2008:
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
1.5 years
3.0 years
4.3 years
5.9 years
4.7 years
$
$
$
$
$
6.23
15.79
19.75
30.66
23.72
777,502
433,002
990,996
524,992
2,726,492
$
$
$
$
$
6.23
15.79
19.75
31.59
17.54
number
outstanding
777,502
433,002
1,509,066
3,317,700
6,037,270
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.
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 impact of movements in the Company’s share price on these
stock-based compensation plans – see note 4.
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 39,512 deferred share units in 2008 (2007: 14,301 share units), which were
granted to the Directors and expensed over the calendar year as the units are issued.
2008 finning international inc. 79
79
2008 finning international inc.
notes to the consolidated financial statements
8. stOCK-Based COmpensatiOn plans (continued)
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.
As at December 31, 2008 and 2007, all outstanding DSu units have vested.
Details of the deferred share unit plans, which reflect the mark-to-market adjustments, excluding the impact of the vRSF hedge, are as follows:
For years ended December 31
2008
2007
unITS
Dsu-a
Dsu-B
DDsu
total
DSu-A
DSu-B
DDSu
Total
outstanding and vested,
beginning of year
Additions
Exercised
outstanding and vested,
end of year
lIABIlITy
($ THouSAnDS)
57,179
867
(32,834)
1,139,700
16,365
(439,854)
294,033
52,226
(81,817)
1,490,912
69,458
(554,505)
104,964
789
(48,574)
1,353,496
14,525
(228,321)
358,280
25,402
(89,649)
1,816,740
40,716
(366,544)
25,212
716,211
264,442
1,005,865
57,179
1,139,700
294,033
1,490,912
Balance, beginning of year $ 1,639
Expense (income)
(319)
Exercised
(961)
Balance, end of year
359
$
$ 32,664
(9,860)
(12,598)
$ 10,206
$ 8,427
(2,540)
(2,119)
$ 3,768
$ 42,730
(12,719)
(15,678)
$ 14,333
$
$
2,508
406
(1,275)
1,639
$ 32,342
6,632
(6,310)
$ 32,664
$
$
8,561
2,636
(2,770)
8,427
$ 43,411
9,674
(10,355)
$ 42,730
mANAGemeNT ShARe APPReCIATION RIGhTS (SAR) PlAN
Beginning in 2002, awards under the SAR Plan 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 Company’s 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.
8080
In 2008 and 2007, there were no SAR units issued to management. Details of the SAR plans, excluding the impact of the vRSF hedge, are as follows:
notes to the consolidated financial statements
For years ended December 31
unITS
outstanding, beginning of year
Exercised
Cancelled
outstanding, end of year
vested, beginning of year
vested
Exercised
Cancelled
vested, end of year
lIABIlITy
($ THouSAnDS)
Balance, beginning of year
Expense (income)
Exercised
Balance, end of year
Strike price ranges:
2008
2007
836,875
(162,351)
(28,920)
645,604
711,102
122,105
(162,351)
(25,252)
645,604
1,162,132
(317,557)
(7,700)
836,875
762,722
265,937
(317,557)
–
711,102
$
$
11,443
(9,378)
(1,849)
216
$13.03 - $16.22
$
$
9,965
6,413
(4,935)
11,443
SummARy – ImPACT oF SToCK-BASED ComPEnSATIon PlAnS
Changes in the value of all deferred share units and share appreciation rights is a result of fluctuations in the Company’s common share price
and the impact of new issues, including stock options, partially offset by the impact of the vRSF hedge. The total impact was an expense of
$16.9 million in 2008 (2007: $25.5 million).
9. earnings per share
Basic earnings per share (EPS) is calculated by dividing net income available to common shareholders by the weighted average number of
common shares outstanding during the period. Diluted earnings per share is calculated to reflect the dilutive effect of exercising outstanding
stock options by applying the treasury stock method.
Earnings used in determining earnings per share from continuing operations are presented below. Earnings used in determining earnings per
share from discontinued operations are the earnings from discontinued operations as reported within the consolidated statements of income.
For years ended December 31
($ THouSAnDS, ExCEPT SHARE AnD PER SHARE AmounTS)
2008
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
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
Income
Shares
Per Share
$
95,996
–
172,361,881
957,076
$
95,996
173,318,957
$
280,107
–
178,844,411
1,615,544
$
280,107
180,459,955
$
$
$
$
0.56
–
0.55
1.57
–
1.55
2008 finning international inc. 81
81
2008 finning international inc.
notes to the consolidated financial statements
10. inventOries
December 31
($ THouSAnDS)
on-hand equipment
Parts and supplies
Internal service work in progress
Inventories
2008
2007
$ 1,013,204
384,112
76,188
$ 1,473,504
$
$
844,699
326,581
36,522
1,207,802
For the year ended December 31, 2008, on-hand equipment, parts, supplies, and internal service work in progress recognized as an expense
amounted to $3,776.2 million (2007: $3,570.5 million). For the year ended December 31, 2008, the write-down of inventories to net realizable
value, included in cost of sales, amounted to $20.8 million (2007: $23.5 million).
11. Other assets
December 31
($ THouSAnDS)
other assets – current:
Future income taxes (note 6)
value Added Tax receivable
Prepaid expenses
Current portion of finance assets (note 12)
Supplier claims receivable
Income taxes recoverable
Short-term derivative contracts receivable (note 4)
other
other assets – long-term:
Accrued defined benefit pension asset (note 21)
long-term swap contracts receivable (note 4)
Investment in Energyst B.v. (a)
Deferred project costs
Future income taxes (note 6)
other
2008
2007
$
$
$
$
66,889
7,868
21,980
29,344
62,912
45,081
18,182
35,846
288,102
157,028
66,417
34,655
–
2,521
36,972
297,593
$
$
$
$
51,806
6,519
13,817
11,789
45,780
582
–
36,549
166,842
126,747
41,637
17,105
746
2,567
16,834
205,636
(a) The Company accounts for its 25.4% investment in Energyst using the equity method of accounting. In 2008, the Company increased its
interest in Energyst by purchasing 36,455 new shares that were issued from Treasury for cash of $11.5 million (EuR 7.6 million). As a result,
the Company’s equity interest in Energyst increased to 25.4% from 24.4%.
12. finanCe assets
December 31
($ THouSAnDS)
Instalment notes receivable
Equipment leased to customers
less accumulated depreciation
Total finance assets
less current portion of instalment notes receivable
2008
38,852
2,676
(513)
2,163
41,015
(29,344)
11,671
$
$
2007
36,590
2,636
(723)
1,913
38,503
(11,789)
26,714
$
$
Depreciation of equipment leased to customers for the year ended December 31, 2008 was $0.4 million (2007: $5.7 million). Depreciation
expense in 2007 reflects a full year of depreciation on a higher balance of equipment leased to customers before significant disposals in the fourth
quarter of 2007.
8282
13. rental eQuipment
December 31
($ THouSAnDS)
Cost
less accumulated depreciation
notes to the consolidated financial statements
2008
2007
$ 1,621,494
(633,659)
987,835
$
$
$
1,707,545
(679,244)
1,028,301
Rental equipment under capital leases of $40.4 million (2007: $22.9 million), net of accumulated depreciation of $6.5 million (2007: $9.4 million),
are included above. Depreciation of rental equipment for the year ended December 31, 2008 was $273.0 million (2007: $278.7 million).
14. Capital assets
lAnD, BuIlDInGS, AnD EQuIPmEnT
December 31
($ THouSAnDS)
land
Buildings and equipment
2008
accumulated
depreciation
cost
net book
value
2007
Accumulated
depreciation
Cost
net book
value
$
71,224
610,253
$ 681,477
$
–
(210,618)
$ (210,618)
$
71,224
399,635
$ 470,859
$
$
55,217
488,848
544,065
$
$
–
(195,142)
(195,142)
$
$
55,217
293,706
348,923
land, buildings, and equipment under capital leases of $12.1 million (2007: $13.5 million), net of accumulated depreciation of $2.9 million
(2007: $2.2 million), are included above. Depreciation of buildings and equipment for the year ended December 31, 2008 was $44.4 million
(2007: $38.1 million).
InTAnGIBlE ASSETS
December 31
($ THouSAnDS)
Subject to amortization
Customer contracts and related
customer relationships
Software
Indefinite lives
Distribution rights
2008
accumulated
depreciation
cost
net book
value
2007
Accumulated
depreciation
Cost
net book
value
$
$
12,879
44,844
57,723
$
(3,248)
(16,777)
(20,025)
$
9,631
28,067
37,698
646
58,369
–
(20,025)
$
$
646
38,344
$
$
$
3,132
34,994
38,126
(1,549)
(12,675)
(14,224)
$
646
38,772
$
–
(14,224)
$
1,583
22,319
23,902
646
24,548
The Company acquired intangible assets subject to amortization of $18.9 million in 2008 (2007: $10.8 million). Amortization of intangible assets
subject to amortization for the year ended December 31, 2008 was $6.8 million (2007: $4.1 million).
Certain intangible assets are considered to have indefinite lives because they are expected to generate cash flows indefinitely.
15. aCQuisitiOn
on January 15, 2008, the Company’s Canadian operation, Finning (Canada), acquired all of the issued and outstanding common shares of Collicutt
Energy Services ltd. (Collicutt), a Canadian oilfield service company. The purchase is accounted for under the purchase method of accounting.
The results of Collicutt’s operations have been included in the consolidated financial statements since that date.
The purchase price of the Collicutt acquisition totaled $136.4 million. The purchase price was funded through $84.3 million in cash and 15,403
common shares of the Company with a value of $0.4 million. Acquisition costs of $6.9 million were incurred and paid on the transaction. on the
date of the acquisition, the Company repaid $44.8 million of Collicutt’s existing bank debt resulting in aggregate consideration of $136.4 million.
In December 2008, the Company finalized its valuation of the Collicutt net assets acquired and modified the purchase price allocation. This
resulted in an increase in goodwill of $3.0 million from that reported in the third quarter of 2008.
2008 finning international inc. 83
83
2008 finning international inc.
notes to the consolidated financial statements
15. aCQuisitiOn (continued)
The following table summarizes the fair value of the assets acquired and liabilities assumed at the date of acquisition.
($ THouSAnDS)
Cash
Inventories
other current assets
Future income taxes – current
Property, plant, and equipment
Intangible assets
Goodwill
Total assets acquired
Current liabilities
Future income taxes – long-term
Total liabilities assumed
net assets acquired
$
$
159
29,914
20,985
4,203
99,255
6,670
10,282
171,468
18,320
16,795
35,115
136,353
The intangible assets acquired primarily represent customer relationships and non-competition agreements. Customer relationships valued
at $4.4 million are being amortized on a straight-line basis over their estimated life of three years, and non-competition agreements valued at
$1.9 million are being amortized on a straight-line basis over their estimated life of seven years.
The goodwill was assigned to the Canada operating segment and is not deductible for tax purposes.
16. dispOsitiOn Of disCOntinued OperatiOn
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 $0.1 million.
The results of operations of the Tool Hire Division have been included in the consolidated statements of cash flow up to the date of disposition
and as discontinued operations in the consolidated statements of income up to the date of disposition. The results of the Tool Hire Division had
previously been reported in the Finning uK Group segment.
loss from the Tool Hire Division to the date of disposition is summarized as follows:
For year ended December 31
($ THouSAnDS)
Revenue
loss before provision for income taxes
Gain on sale of discontinued operations
Provision for income tax expense
loss from discontinued operations
The significant net cash flows from the Tool Hire Division are as follows:
For year ended December 31
($ THouSAnDS)
Cash flows used in operating activities
Cash used in investing activities
8484
2007
113,272
(4,108)
38,590
(36,532)
(2,050)
2007
(3,795)
(561)
$
$
$
$
notes to the consolidated financial statements
17. gOOdwill
The change in the carrying amount of goodwill is as follows:
December 31, 2008
($ THouSAnDS)
Goodwill, beginning of year
Acquired (a) (note 15)
Goodwill impairment (b)
Disposed
Foreign exchange translation adjustment
Goodwill, end of year
December 31, 2007
($ THouSAnDS)
Goodwill, beginning of year
Acquired (a)
Adjustment to purchase price
Disposed (note 16)
Foreign exchange translation adjustment
Goodwill, end of year
canada
south america
uk Group
consolidated
$
$
$
$
33,431
10,380
–
–
–
43,811
$
$
28,504
40
–
–
6,833
35,377
Canada
South America
32,388
1,043
–
–
–
33,431
$
$
33,342
–
253
–
(5,091)
28,504
$
$
$
$
189,164
–
(151,373)
(1,428)
(16,273)
20,090
$
$
251,099
10,420
(151,373)
(1,428)
(9,440)
99,278
uK Group
Consolidated
316,140
–
–
(91,136)
(35,840)
189,164
$
$
381,870
1,043
253
(91,136)
(40,931)
251,099
(a) In 2008, the Company acquired the assets and business operations of Fort Saskatchewan Rentals Inc., an equipment rental company based
in Saskatchewan, Canada for cash of approximately $1.3 million, and all of the issued and outstanding common shares of Collicutt, as described
in note 15. 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.
(b) The Company performed its annual goodwill impairment review in the fourth quarter of 2008 and determined that the fair value of Hewden
was less than its book value, primarily due to increasing economic uncertainty in the global market and the higher cost of capital assumptions
in the valuation methodology. As a result, the Company recorded a goodwill impairment of $151.4 million.
18. lOng-term OBligatiOns
December 31
($ THouSAnDS)
Stock-based compensation (note 8)
leasing obligations (a) (note 24)
Employee future benefit obligations
Sale leaseback deferred gain
Asset retirement obligations (b)
other
2008
41,425
16,975
20,311
7,854
1,119
8,612
96,296
$
$
2007
54,173
12,618
17,498
8,470
1,423
7,517
101,699
$
$
(a) Capital leases issued at varying rates of interest from 0.7% – 17.4% 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. The total undiscounted amount of
estimated cash flows is $1.7 million, and the expected timing of payment of the cash flows is estimated to be over the next thirty years.
19. Cumulative CurrenCy translatiOn adJustments
The Company’s subsidiaries operate in three functional currencies: Canadian dollars, u.S. dollars, and the u.K. pound sterling. The Company
experiences foreign currency translation gains or losses as a result of consolidating the financial statements of self-sustaining foreign operations.
These unrealized foreign currency translation gains or losses are recorded in the Accumulated other Comprehensive Income/loss account
on the Consolidated Balance Sheet. Currency translation adjustments arise as a result of fluctuations in foreign currency exchange rates at the
period end. The cumulative currency translation adjustment for 2008 mainly resulted from the weaker Canadian dollar relative to the u.S. dollar
(23.9% weaker), and stronger relative to the u.K. pound sterling (8.7% stronger), from December 31, 2007 to December 31, 2008.
2008 finning international inc. 85
85
2008 finning international inc.
notes to the consolidated financial statements
19. Cumulative CurrenCy translatiOn adJustments (continued)
The exchange rates of the Canadian dollar against the following foreign currencies were as follows:
December 31
Exchange rate
u.S. dollar
u.K. pound sterling
For years ended December 31
Average exchange rates
u.S. dollar
u.K. pound sterling
20. supplemental Cash flOw infOrmatiOn
non CASH woRKInG CAPITAl CHAnGES
For years ended December 31
($ 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
2008
1.2246
1.7896
1.0660
1.9617
2007
0.9881
1.9600
1.0748
2.1487
2008
2007
$
$
(159,284)
(112,587)
(43,045)
85,340
(69,013)
(298,589)
2008
$
$
105,905
3,867
109,772
$
$
$
$
(158,857)
(65,548)
(31,897)
31,215
6,499
(218,588)
2007
16,533
45,327
61,860
2008
2007
$
$
(83,569)
(94,767)
$
$
(74,668)
(105,091)
21. 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.
8686
notes to the consolidated financial statements
•
•
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 Company contribution rate for all members.
The Company will also partially match employee contributions to a maximum additional Company contribution 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%.
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 $4.3 million was expensed in 2008 (2007: $4.8 million) for a total obligation at December 31, 2008 of $20.3 million (2007: $17.5 million).
The expense for the Company’s benefit plans, primarily for pension benefits, is as follows:
For years ended December 31
($ THouSAnDS)
Defined contribution plans
net benefit plan expense
Defined benefit plans
Current service cost, net of
employee contributions
Interest cost
Actual loss (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 gain 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
canada
uk hewden
total
Canada
uK
Hewden
Total
2008
2007
$ 21,163
$ 1,104
$
159
$ 22,426
$ 16,193
$
823
$
241
$ 17,257
$ 7,014
18,474
$ 3,713
24,329
$ 1,436
10,324
$ 12,163
53,127
$ 8,343
16,563
$ 5,328
26,238
$ 2,039
10,582
$ 15,710
53,383
42,184
(60,837)
–
86,407
(99,297)
–
33,859
(30,120)
–
162,450
(190,254)
–
(8,120)
(3,559)
–
(17,619)
(75,643)
–
(7,321)
(21,148)
958
(33,060)
(100,350)
958
6,835
15,152
15,499
37,486
13,227
(61,696)
(14,890)
(63,359)
(62,505)
(115,187)
(45,539)
(223,231)
(11,707)
(11,498)
(4,280)
(27,485)
64,060
100,941
30,693
195,694
5,769
82,102
22,894
110,765
298
(647)
(143)
(492)
298
(709)
–
(411)
(19)
(1,140)
1,259
100
(19)
(1,248)
1,523
256
8,669
$ 29,832
(881)
223
1,769
$ 1,928
9,557
$ 31,983
$
7,568
$ 23,761
6,951
$ 7,774
5,247
$ 5,488
19,766
$ 37,023
(a) As a result of the sale of the Tool Hire Division, the Company recognized a curtailment to reflect the impact of the significant reduction of the
expected years of future service of active employees participating in the Hewden defined benefit plans.
2008 finning international inc. 87
87
2008 finning international inc.
notes to the consolidated financial statements
21. emplOyee future Benefits (continued)
Total cash payments for employee future benefits for 2008, which is made up of cash contributed by the Company to its defined benefit plans and
its defined contribution plans was $49.3 million and $22.4 million, respectively (2007: $78.5 million and $17.2 million, respectively).
Information about the Company’s defined benefit plans is as follows:
For years ended December 31
($ THouSAnDS)
accrued benefit obligation
Balance at beginning of year
Current service cost
Interest cost
Benefits paid
Actuarial (gains) losses
Foreign exchange rate changes
Balance at end of year
plan assets
Fair value at beginning of year
Actual return (loss) on
plan assets
Employer contributions (a)
Employees’ contributions
Benefits paid
Foreign exchange rate changes
Fair value at end of year
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) (b)
canada
uk hewden
total
Canada
uK
Hewden
Total
2008
2007
$ 318,152
8,708
18,474
(17,244)
(60,837)
–
$ 267,253
$ 400,820
6,179
24,329
(14,191)
(99,297)
(27,567)
$ 290,273
$ 169,964
2,346
10,324
(9,053)
(30,120)
(12,451)
$ 131,010
$ 888,936
17,233
53,127
(40,488)
(190,254)
(40,018)
$ 688,536
$ 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
$ 215,008 $ 1,060,242
21,492
53,383
(47,134)
(100,350)
(98,697)
$ 169,964 $ 888,936
3,298
10,582
(8,820)
(21,148)
(28,956)
$ 298,994
$ 407,486
$ 159,086
$ 865,566
$ 295,019
$ 424,982
$ 160,792 $ 880,793
(42,184)
16,369
1,694
(17,244)
–
$ 257,629
(86,407)
22,018
2,466
(14,191)
(28,751)
$ 302,621
(33,859)
11,980
910
(9,053)
(11,197)
$ 117,867
(162,450)
50,367
5,070
(40,488)
(39,948)
$ 678,117
8,120
12,485
1,725
(18,355)
–
$ 298,994
17,619
46,169
2,798
(19,959)
(64,123)
$ 407,486
7,321
23,268
1,259
(8,820)
(24,734)
33,060
81,922
5,782
(47,134)
(88,857)
$ 159,086 $ 865,566
$ (9,624) $ 12,348
$ (13,143) $ (10,419)
$ (19,158) $ 6,666
$ (10,878) $
(23,370)
63,115
71,196
35,697
170,008
64,670
63,740
22,306
150,716
1,769
(6,496)
(1,655)
(6,382)
2,067
(7,762)
–
(5,695)
2,934
1,659
897
5,490
3,984
1,833
998
6,815
(83)
(5,129)
3,543
(1,669)
(102)
(6,756)
5,139
(1,719)
$ 58,111
$ 73,578
$ 25,339
$ 157,028
$ 51,461
$ 57,721
$ 17,565 $ 126,747
(a) In 2007, an additional pension payment of $17.1 million was made to fund the uK pension plans as agreed at the time of the sale of the
materials Handling Division.
(b) The accrued benefit asset or liability is classified in either other assets or long-term obligations, respectively, on the consolidated balance
sheets.
Included in the above accrued benefit obligation and fair value of plan assets at the year-end are the following amounts in respect of plans that are
not fully funded:
For years ended December 31
($ THouSAnDS)
canada
uk hewden
total
Canada
uK
Hewden
Total
2008
2007
Accrued benefit obligation
Fair value of plan assets
Funded status – plan deficit
$ 219,457
205,180
$ 14,277
$
$
–
–
–
$ 118,702
105,409
$ 13,293
$ 338,159
310,589
$ 27,570
$ 262,895
236,336
$ 26,559
$
$
–
–
–
$ 154,093
143,011
$ 11,082
$ 416,988
379,347
$ 37,641
For measurement purposes, assets and liabilities of the plans are valued as at november 30. Plan assets do not include direct investment in
common shares of the Company at December 31, 2008 and 2007.
8888
notes to the consolidated financial statements
Plan assets are principally invested in the following securities at november 30, 2008:
Equity
Fixed-income
Real estate
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
7.50%
5.80%
7.25%
3.50%
8-11
canada
45%
46%
9%
2008
uk
7.20%
6.20%
7.00%
4.00%
14
hewden
Canada
7.20%
6.20%
7.25%
4.00%
13
5.80%
5.25%
7.25%
3.50%
10-15
uk
61%
39%
–
2007
uK
6.20%
5.30%
7.00%
4.00%
14
hewden
58%
42%
–
Hewden
6.20%
5.30%
7.25%
4.00%
13
Discount rates are determined based on high quality corporate bonds at the measurement date, november 30. Recent market conditions and
the current economic environment have resulted in significantly higher corporate bond yields at november 30, 2008 than in previous years. If
yields were lower, the accrued defined benefit pension obligations as presented in this note would be higher. As an indication of the sensitivity of
Finning’s defined benefit pension obligation, if the discount rates were 0.25% lower at november 30, 2008, the accrued defined benefit pension
obligation presented would have increased by approximately $8 million for Finning (Canada)’s plans, £7 million for the Finning uK plan, and
£3 million for the Hewden plans.
Defined benefit pension plans are country and entity specific. The major defined benefit plans and their respective valuation dates are:
Defined Benefit Plan
last Actuarial valuation Date
next Actuarial valuation Date
Canada – BC Regular & Executive Plan
Canada – Executive Supplemental Income Plan
Canada – General Supplemental Income Plan
Canada – Alberta Defined Benefit Plan
Finning uK Defined Benefit Scheme
Hewden Stuart Pension Scheme
Hewden Pension Plan
December 31, 2006
December 31, 2006
December 31, 2006
December 31, 2005
December 31, 2005
December 31, 2005
January 1, 2008
December 31, 2009
December 31, 2009
December 31, 2009
December 31, 2008
December 31, 2008
December 31, 2008
January 1, 2011
22. eCOnOmiC relatiOnships
The Company distributes and services heavy equipment and related products. The Company has dealership agreements with numerous equipment
manufacturers, of which the most significant are with subsidiaries of Caterpillar Inc. Distribution and servicing of Caterpillar products account for
the major portion of the Company’s operations. Finning has a strong relationship with Caterpillar Inc. that has been ongoing since 1933.
2008 finning international inc. 89
89
2008 finning international inc.
notes to the consolidated financial statements
23. segmented infOrmatiOn
The Company and its subsidiaries have operated primarily in one industry during the year, that being the selling, servicing, and renting of heavy
equipment and related products.
The reportable operating segments are as follows:
•
•
•
•
Canadian operations: British Columbia, Alberta, the Yukon Territory, the Northwest Territories, and a portion of Nunavut.
South American operations: Chile, Argentina, Uruguay, and Bolivia.
UK Group operations: England, Scotland, Wales, Falkland Islands, and the Channel Islands.
Other: corporate head office.
For year ended December 31, 2008
($ thousands)
Canada
South
America
uK Group
other
Impairment Consolidated
Goodwill
Revenue from external sources
operating costs
Depreciation and amortization
other income (expenses)
Goodwill impairment (note 17)
Earnings before interest and taxes
Finance costs
Provision for income taxes
net income
Identifiable assets
Capital assets
Gross capital expenditures(1)
Gross rental asset expenditures
$ 3,216,946
(2,801,877)
(164,489)
(16,102)
–
$ 234,478
$ 1,501,633
(1,313,753)
(34,217)
(5,428)
–
$ 148,235
$ 1,272,842
(1,099,805)
(125,447)
6,036
–
53,626
$
$
$
$ 2,094,186
$ 278,171
$ 143,269
$ 296,166
$ 1,350,929
$ 115,626
$ 47,940
$ 76,715
$ 1,135,352
$ 114,811
$
15,234
$ 161,803
$
4
(46,709)
(208)
(1,307)
–
$ 5,991,425
–
(5,262,144)
–
(324,361)
–
(16,801)
–
(151,373)
(151,373)
(48,220) $ (151,373) $ 236,746
(83,636)
(57,114)
$
95,996
$ 4,720,375
$ 509,203
$ 206,443
$ 534,684
$
$
$
$
–
–
–
–
$ 139,908
595
$
–
$
–
$
For year ended December 31, 2007
($ thousands)
Canada
South
America
uK Group
other
Impairment Consolidated
Goodwill
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
$ 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
9090
notes to the consolidated financial statements
24. 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)
2009
2010
2011
2012
2013
Thereafter
less imputed interest
less current portion of capital lease obligation
Total long-term capital lease obligation
Capital
leases
26,336
6,799
1,235
1,083
1,064
14,720
51,237
(10,607)
40,630
(23,655)
16,975
$
$
operating
leases
71,168
63,159
49,684
31,752
23,465
150,832
390,060
n/a
390,060
n/a
390,060
$
$
25. 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 $16 million over the next three years for consulting and implementation support for
a new information technology system solution for its global operations.
26. 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, 2008, the total estimated value of these
contracts outstanding is $172.4 million coming due at periods ranging from 2009 to 2015. 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, 2008, Finning had no material liabilities recorded
for these indemnifications.
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, 2008, 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.
27. 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.
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 relating
to these transfers.
In 2007, proceeds from revolving reinvestment of collections were $451.9 million.
2008 finning international inc. 91
91
2008 finning international inc.
ten year financial summary
For years ended December 31
($ 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)(2)
As a percent of revenue
net income(1)(2)
As a percent of revenue
EARnInGS PER Common SHARE(1)(2)
Basic
Diluted(3)
DIvIDEnDS
Per common share
Cash flow after working capital changes
Cash flow per share
Gross capital expenditures
RATIoS
Asset turnover ratio
net debt to total capitalization(4)
Book value per common share
Return on average shareholders’ equity(1)(2)
Common SHARE PRICE
High
low
year end
Common shares outstanding (thousands)
Revenue per employee
net income per employee(2)
numBER oF EmPloyEES
Canada
South America
uK Group
International
ToTAl
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
$ 3,216,946
$ 1,501,633
$ 1,272,842
4
$
$ 5,991,425
$
$
$
$
$
$
$
$
$
$
$
$
$
$
236,746
4.0%
95,996
1.6%
0.56
0.55
0.43
278,133
1.63
206,443
1.35
49%
9.19
5.8%
31.15
12.09
14.25
170,445
439,899
7,048
5,061
4,988
3,506
65
13,620
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
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
41%
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
40%
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
46%
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
50%
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
42%
6.16
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
37%
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
Certain comparative figures have been reclassified to conform to the 2008 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. (Hewden) sold its Tool 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 2008, the Company performed its annual goodwill impairment review and determined that the fair value of Hewden was less than its book value, which
included goodwill on acquisition. As a result, the Company recorded a full goodwill impairment charge of $151.4 million ($0.88 basic and diluted loss per share)
for Hewden in the fourth quarter of 2008.
3. In 2000, the diluted earnings per share calculation was changed to reflect the dilutive effect of exercising outstanding stock options by application of the treasury
stock method. Diluted earnings for the years ended 1999 to 2005 have been stated using this method.
4. In 2008, the net debt to total capitalization calculation was changed to include cash and cash equivalents in the definition of net debt; accordingly, net debt to
total capitalization for years 1999 to 2007 has been restated. Equity ratio for years 2001 to 2003 included non-controlling interest that was treated as equity.
Equity ratio for 2000 year does not include investment in Hewden.
9292
For years ended December 31
($ 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)(2)
As a percent of revenue
net income(1)(2)
As a percent of revenue
EARnInGS PER Common SHARE(1)(2)
Basic
Diluted(3)
DIvIDEnDS
Per common share
Cash flow after working capital changes
Cash flow per share
Gross capital expenditures
RATIoS
Asset turnover ratio
net debt to total capitalization(4)
Book value per common share
Return on average shareholders’ equity(1)(2)
Common SHARE PRICE
High
low
year end
Common shares outstanding (thousands)
Revenue per employee
net income per employee(2)
numBER oF EmPloyEES
Canada
South America
uK Group
International
ToTAl
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
ten year financial summary
$ 3,216,946
$ 1,501,633
$ 1,272,842
4
$ 5,991,425
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
236,746
4.0%
95,996
1.6%
0.56
0.55
0.43
278,133
1.63
206,443
1.35
49%
9.19
5.8%
31.15
12.09
14.25
170,445
439,899
7,048
5,061
4,988
3,506
65
13,620
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
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
41%
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
40%
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
46%
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
50%
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
42%
6.16
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
37%
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
Certain comparative figures have been reclassified to conform to the 2008 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. (Hewden) sold its Tool 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
2. In 2008, the Company performed its annual goodwill impairment review and determined that the fair value of Hewden was less than its book value, which
included goodwill on acquisition. As a result, the Company recorded a full goodwill impairment charge of $151.4 million ($0.88 basic and diluted loss per share)
for those years.
for Hewden in the fourth quarter of 2008.
3. 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.
4. In 2008, the net debt to total capitalization calculation was changed to include cash and cash equivalents in the definition of net debt; accordingly, net debt to
total capitalization for years 1999 to 2007 has been restated. Equity ratio for years 2001 to 2003 included non-controlling interest that was treated as equity.
Equity ratio for 2000 year does not include investment in Hewden.
2008 finning international inc. 93
93
2008 finning international inc.
Board of Directors
ricarDo Bacarreza
Santiago, Chile
President, Proinvest S.A.
Director since 1999
member of the Audit Committee and Pension Committee
JaMes e.c. carter
Edmonton, Alberta, Canada
Director of EPCoR utilities Inc., Clark Builders, the Alberta
Research Council and CAREERS: The next Generation
Director since 2007
member of the Audit Committee and the
Environment, Health and Safety Committee
hon. DaviD l. eMerson, p.c.
vancouver, British Columbia, Canada
Senior Advisor, Farris vaughn, wills & murphy llP
and CAI managers
Director of Conair-Cascade Aerospace, Canada China
Business Council, Timberwest Forest Corporation
and British Columbia Transmission Corporation
Director since 2008
member of the Audit Committee and the Pension Committee
kathleen M. o’neill
Toronto, ontario, Canada
Director of Tmx Group Inc. and Canadian Tire Bank,
a subsidiary of Canadian Tire Corporation
Director since 2007
Chair of the Pension Committee and a member of, and the
designated ‘financial expert’ for the Audit Committee, a member
and Pension lead Director of the Human Resources Committee
conraD a. pinette
vancouver, British Columbia, Canada
Director of A&w Revenue Royalties Income Fund,
Canfor Corporation, northgate minerals Corporation
and Timberwest Forest Corporation
Director since 1992
Chair of the Corporate Governance Committee and a member
of the Human Resources Committee and the Pension Committee
John M. reiD
vancouver, British Columbia, Canada
Director of methanex Corporation
Director since 2006
Chair of the Audit Committee and a member
of the Corporate Governance Committee
anDrew h. siMon, oBe
Bougy-villars, Switzerland
Director of CDR Tabasco Parentco limited,
SGl Carbon AG Supervisory Board, Dalkia plc, Travis Perkins plc
and management Consulting Group plc
Director since 1999
member of the Audit Committee and the Environment,
Health and Safety Committee
Bruce l.turner
Santiago, Chile
President, Turner minerals S.A.
Director since 2006
Chair of the Environment, Health and Safety Committee
and a member of the Human Resources Committee
and the Corporate Governance Committee
Michael t. waites
vancouver, British Columbia, Canada
President and Chief Executive officer, Finning International Inc.
Director since 2008
member of the Environment, Health and Safety Committee
DouGlas w.G. whiteheaD
north vancouver, British Columbia, Canada
Director of Ballard Power Systems Inc., Inmet mining Corporation,
International Forest Products ltd. and Belkorp Industries
Director since 1999
Chairman of the Board of Directors
John M. willson
vancouver, British Columbia, Canada
Director of nexen Inc., Garaventa (Canada) ltd.
and the ymCA of Greater vancouver
Director since 2000
lead Director, Chair of the Human Resources Committee
and a member of the Corporate Governance Committee
please refer to the Company’s management proxy circular for detailed biographies of finning directors.
9494
DouGlas w.G. whiteheaD
CHAIRmAn oF THE BoARD
FInnInG InTERnATIonAl InC.
anDrew w. Bone
PRESIDEnT, PowER SySTEmS
FInnInG InTERnATIonAl InC.
Michael t. waites
PRESIDEnT AnD CHIEF ExECuTIvE oFFICER
FInnInG InTERnATIonAl InC.
anDrew s. Fraser
mAnAGInG DIRECToR
FInnInG GRouP, uK
anna p. Marks
SEnIoR vICE PRESIDEnT AnD
CoRPoRATE ConTRollER
FInnInG InTERnATIonAl InC.
thoMas M. Merinsky
vICE PRESIDEnT,
InvESToR RElATIonS AnD
CoRPoRATE AFFAIRS
FInnInG InTERnATIonAl InC.
DaviD e. parker
PRESIDEnT
FInnInG (CAnADA)
Corporate officers
DaviD F. n. priMrose
SEnIoR vICE PRESIDEnT,
CoRPoRATE HumAn RESouRCES
FInnInG InTERnATIonAl InC.
J. Gail sexsMith
CoRPoRATE SECRETARy
FInnInG InTERnATIonAl InC.
DaviD s. sMith
ExECuTIvE vICE PRESIDEnT
AnD CHIEF FInAnCIAl oFFICER
FInnInG InTERnATIonAl InC.
Juan carlos villeGas
PRESIDEnT
FInnInG SouTH AmERICA
2008 finning international inc. 95
95
2008 finning international inc.
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 11 members. All directors, other than michael T. waites (who is the President and Chief
Executive officer of the Corporation) and Douglas w.G. whitehead (who was the former President and Chief Executive officer) 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 Douglas w.G. whitehead) and Chief Executive officer (currently michael T. waites). Further, to ensure
objectivity, the Board has appointed John m. willson as lead Director. The Board further ensures its independence by convening an independent
director-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 five standing committees of the Board of Directors: the Audit Committee, the Corporate Governance Committee,
the Environment, Health and Safety Committee, the Pension Committee and the Human Resources Committee. Each committee operates
in accordance with Board-approved terms of reference.
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 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 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 pension committee
The mandate of the Pension Committee is to oversee all of the Corporation’s pension plans, including registered pension plans and supplemental
pension arrangements. This oversight includes the responsibility to analyze policies and strategies developed by management in the area of
pensions and to review the Corporation’s performance with respect to meeting its fiduciary obligations as they relate to the Corporation’s
pension plans. Items to be addressed by the Board Pension Committee include, but are not limited to, governance, compliance, plan design and
benefit strategy, investment strategy and funding policies, the ongoing performance of the plans and their investments, and the selection of
certain advisors.
the human resources committee
The Human Resources Committee provides oversight of the design of the Corporation’s compensation programs and policies and also provides
recommendations to the Board of Directors on key compensation and human resources matters. The Committee makes recommendations to
the full Board of Directors with respect to executive and key employee continuity and any changes to the Corporation’s executive compensation
program which the Committee considers to be necessary from time to time.
The Corporation’s management proxy circular issued in connection with the 2009 Annual meeting of Shareholders and the corporate governance section
of the Corporation’s website provide a full discussion of Finning’s corporate governance policies and practices.
9696
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 14, 2009
10:00 am PDT
Terminal City Club
837 West Hastings 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 and Corporate Affairs.
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
www.finning.com
By selecting the papers used for this report 27 trees, 9,995 gallons
of water and 8,000 lbs of wood were saved. In addition, 2,473 lbs
of greenhouse emissions, 1,322 pounds of solid waste, and 19,000
BTU (000) of energy were saved.