GeaRed fOR
GROWTH
fINNING INTeRNaTIONaL INC. 2009 ANNUAL REPORT
In 2009, Finning delivered on its commitments
to reduce its cost structure, generate significant
free cash flow and strengthen its balance
sheet. At the same time, the combination of
Caterpillar’s quality product and Finning’s service
commitment continued to differentiate us in
the marketplace. With our unmatched product
support capability, highly engaged employees,
solid financial position, and improved operating
leverage, finning is geared for growth.
Monetary amounts in this annual report are in Canadian dollars unless noted otherwise.
Finning at a glanCe
SCoreCard
FinanCial HigHligHtS
letter to SHareHolderS
CHairMan’S letter
FinanCial ManageMent
Canada
SoutH aMeriCa
united KingdoM
Corporate reSponSibility
FinanCial report
board oF direCtorS
Corporate oFFiCerS
Corporate governanCe
SHareHolder inForMation
2
3
4
6
9
10
12
14
16
18
20
88
89
90
inside
back
Cover
andacollo Copper Mine, Chile
Finning at a glanCe
value propoSition to inveStorS
• Exclusive rights to distribute Caterpillar equipment and parts in some
of the most resource-rich territoriesin the world
• Unmatched product support capability and customer relationships
• Strong cash generating business model
• Well positioned for growth
Canada
edMonton
Fort MCMurray
FINNINg (CANAdA)
vanCouver
• Mining (including oil sands)
• Construction
• power systems
• oil & gas
• pipelines
• Forestry
United
Kingdom
CannoCK
FINNINg UK gROUP
• Coal mining
• Construction
• Quarrying
• Waste management
• power systems
• petroleum
• Marine
Bolivia
antoFagaSta
FINNINg SOUTh AmERICA
Chile
Uruguay
Santiago
argentina
• Mining
• Construction
• power systems
Finning International Inc. (TSX:FTT) is the world’s largest Caterpillar equipment dealer delivering unrivalled service to customers
since 1933. Finning sells, rents, and services equipment and engines to help customers maximize productivity. Headquartered
in Vancouver, Canada, the Company employs approximately 12,000 people and operates in Western Canada, Chile, Argentina,
Bolivia,Uruguay, and the United Kingdom.
2
sCOReCaRd
2009 targetS
2009 ResULTs
Free cash flow
net debt to total capital ratio
targeted Sg&a expense reduction
Safety*
$300 million
low end of 40%-50%
$150 million annually; revised to $200 million
0.48
$494 million
39%
on track
0.24
* lost time injuries per 200,000 work hours
2009 HigHligHtS
2010 prioritieS
Leaner cost structure
Cash generation
• generated record free cash flow of $494 million
• reduced net debt to total capital ratio from 49% to 39%
• achieved $110 million in targeted Sg&a cost reductions from 2008 levels
• generated strong growth in mining product support revenues in all operations
• achieved best ever safety performance
• on track to achieve over $200 million in annual cost reductions from 2008
• approximately 70% of the reduction to be sustainable in the longer term
• in excess of $200 million in free cash flow in 2010
• net rental expenditures to moderate at $100 - $150 million per year
• net capital expenditures of $75 - $100 million in 2010
• Continue to improve key working capital metrics
Balance sheet strength
• net debt to total capital ratio in mid 30% by the end of 2010
Product support revenue growth • product support revenue to be up from 2009
eBIT margin improvement
• operating leverage primarily from permanent Sg&a reductions
and productivity improvements
Hewden
safety
• Strategic review to be completed by the end of second quarter 2010
• Continuously improve safety performance
2009 Finning international inC. | 3 |
FinanCial HigHligHtS
year ended deCeMber 31 ($MillionS, exCept per SHare aMountS)
2009
2008
2007
Operating data (from continuing operations)
revenue
earnings before interest & income taxes (ebit)
ebit before goodwill impairment*
net income
net income before goodwill impairment*
diluted earnings per Share (epS)
diluted epS before goodwill impairment*
return on equity
return on equity before goodwill impairment*
earnings before interest, income taxes, depreciation and amortization (ebitda),
excluding goodwill impairment
Free Cash Flow
Balance sheet data
total assets
invested Capital
total Shareholders’ equity
net debt to total Capital
4,737.5
207.0
130.8
0.77
5,991.4
236.7
388.1
96.0
247.4
0.55
1.43
5,662.2
455.8
280.1
1.55
8.3%
5.8%
14.8%
16.8%
474.7
493.9
712.5
23.2
783.7
(110.7)
3,671.4
2,693.8
1,515.7
4,720.4
3,174.1
1,567.1
4,134.2
2,794.8
1,617.8
39.3%
48.9%
40.8%
From Continuing operations
revenue ($ billionS)
ebit ($ MillionS)
net inCoMe ($ MillionS)
diluted epS ($)
6.0
5.0
4.0
3.0
2.0
1.0
0.0
0
6
.
7
5
.
9
4
.
3
4
.
7
4
.
2005 2006 2007 2008 2009
500
400
300
200
100
0
6
5
4
4
7
3
*
8
8
3
300
250
200
0
8
2
6
3
2
*
7
4
2
8
5
2
150
2
6
1
7
0
2
2005 2006 2007 2008 2009
100
50
0
1
3
1
2005 2006 2007 2008 2009
2.0
1.5
1.0
0.5
0.0
5
5
1
.
*
3
4
1
.
1
3
1
.
0
9
0
.
7
7
0
.
2005 2006 2007 2008 2009
* 2008 results exclude the goodwill impairment charge of $151.4 million or $0.88 per share for Hewden.
the results of operations of the uK tools Hire divison have been reclassified as discontinued operations for 2007, 2006 and 2005.
the results of operations of the uK Materials Handling division have been reclassified as discontinued operations for 2006 and 2005.
4
FinanCial perForManCe by operationS ($ MillionS)
Canada
South america
uK
power Systems
power Systems revenues are reported within other Finning divisions
revenue by lineS oF buSineSS ($ MillionS)
new equipment
used equipment
equipment rental
product Support
other
revenue
ebit
2009
2,386.6
1,489.6
861.3
796.3
2009
1,984.7
337.8
510.4
1,892.6
12.0
2008
3,216.9
1,501.6
1,272.9
896.9
41.9%
7.1%
10.8%
39.9%
0.3%
2009
98.3
153.7
(20.1)
2008
234.5
148.2
53.6
2008
2,928.6
431.8
712.8
1,899.5
18.7
48.9%
7.2%
11.9%
31.7%
0.3%
From Continuing operations
produCt Support revenue
($ MillionS)
ebitda ($ MillionS)
2009 revenue by operationS
2,000
1,750
1,500
1,250
1,000
750
500
250
0
9
9
8
1
,
3
9
8
,
1
1
0
7
1
,
3
8
5
1
,
0
4
3
1
,
4
8
7
*
3
1
7
0
6
6
9
1
5
5
7
4
800
700
600
500
400
300
200
100
0
2005 2006 2007 2008 2009
2005 2006 2007 2008 2009
18%
32%
50%
Canada
FinSa
uK group
2009 neW eQuipMent deliverieS by induStry ($)
1% 6%
3%
23%
47%
20%
Mining
ConStruCtion
poWer SySteMS
oil & gaS
ForeStry
otHer
2009 Finning international inC. | 5 |
letter to SHareHolderS
Mike Waites, president & Chief executive officer
in last year’s letter to shareholders,
i emphasized the importance of prudently
managing our balance sheet while
positioning the Company for future success
and growth. given the uncertain economic
times, i also articulated that we would
prioritize generating significant cash flow
with an intense focus on working capital
management, a further reduction in rental
fleet additions and a disciplined approach
to capital spending. at the same time, we
were determined to continue to provide
the same great service and support that
our customers expect. our decisions
throughout 2009 were guided by these
objectives and i am gratified to see our
positive results.
Successful execution
briefly, these are the commitments we
made and the results we achieved:
• We committed to reduce our selling,
general and administrative (Sg&a)
expenses by $150 million annually over
2008. We have since raised our target
to over $200 million and are well on our
way towards achieving this goal, having
realized $110 million of Sg&a cost savings
in 2009. When business levels return, we
expect 70 percent of this Sg&a reduction
to be permanent.
• We targeted over $300 million in free
cash flow generation during the year and
achieved a record of $494 million. this
accomplishment underscores the focused
efforts of our people as well as the
tremendous cash generation capability
of our business model.
• our net debt to capital ratio was
49 percent at the end of 2008 and we
committed to reducing it to the lower
end of the 40-50 percent range. We
reduced our net debt to capital ratio at
the end of 2009 to 39 percent. We now
expect it to be in the mid-30s by the end
of the year and we continue to strengthen
the balance sheet.
• as part of our 2005 strategic plan, we
had also committed to double product
support revenues to $2.3 billion by 2010.
overall, product support remained flat
at $1.9 billion compared to 2008 despite
the severe economic downturn, thus
demonstrating the resiliency of this part of
our business. While our product support
revenue target for 2010 is impacted
by recessionary conditions, we remain
confident that we will reach this objective
in the near-term. the large machine
population owned by our customers
continues to hold promising product
support growth prospects. in fact, during
2009, product support revenues from our
mining customers grew significantly across
all operations over the prior year. We did
underestimate the impact of the recession
on non-mining customers; however, we
expect that we are building a backlog
of product support business with these
accounts.
Highlights from each of our regions included
the following:
• in Canada, all sectors showed significant
weakness in 2009 and we restructured to
operate our business with a lower fixed
cost base and to drive greater efficiencies.
6
in doing so, we have taken steps to
ensure customers continue to receive
the highest levels of service and we
maintained capacity to support higher
activity levels. towards the end of the
year, mining quotations and orders
increased significantly. once volumes
return, our Canadian operation is well
positioned to achieve higher earnings
due to a leaner cost structure and
productivity improvements.
• South america continued to deliver strong
results as the impact of the recession was
not nearly as significant as in the other
regions. orders for new equipment eased
off in all sectors, but product support
continued to be robust. We opened a
new parts distribution centre and a truck
shop in Chile’s northern mining region as
well as several other facilities to better
support our customers and the growing
machine population. overall, the outlook
for Finning South america remains strong.
Customers are placing large mining orders
and we expect ongoing product support
growth resulting from mining service
contracts.
• in spite of significant headwinds in the
u.K. during 2009, the dealership has
been successful in building market share
in the heavy construction segments,
including waste & recycling, quarrying,
mining, and power systems. the
dealership reduced Sg&a expenses and
continued to contribute positive ebit.
in 2010, the u.K. dealership will remain
focused on these key market segments
and their ongoing efforts to improve
operating efficiencies.
during 2009, we commenced a strategic
review of our Hewden rental business
in the u.K. with a view to assessing
alternatives that optimize shareholder
value. as part of our review, we have
implemented a plan to reduce the size
of the Hewden operation and we made
progress toward improving operating
efficiencies and profitability. parallel
to this restructuring process, we are
exploring an outright sale of Hewden
and have received a number of
expressions of interest. We anticipate
a decision by mid-2010.
geared for growth
in many ways, 2009 will likely be
remembered as a transformative year
for our business. as the global recession
unfolded, our executive team was
challenged to act quickly and decisively.
We immediately determined that it was
critical to right-size the business to align
with decreased demand and we took action
across our operations. at the same time,
we focused on ensuring that we would be
well-positioned to be a stronger company
as we emerged from the recession. this
translates into a fundamentally different
approach to our business underlined
by a new operating model in Canada, a
significant reshaping of our u.K. business
and a decision to contain our investment
in rental. as the worst of the recession
appears to be behind us and the recovery
is underway, we are now well positioned to
maximize our earnings potential.
Having been tried and tested during one
of the most severe recessions in recent
history, i can state with confidence that
our business model has proven to be
our greatest attribute. during a year in
which customers in all industry segments
significantly reduced their equipment
orders, we were able to generate record
cash flow and strengthen our balance sheet
significantly.
our business is capable of generating
strong free cash flow. Cash flow from
operations generally runs between $500
and $700 million per year. on a go forward
basis, we would expect to invest a net
amount of $100 - $150 million per year
in our rental fleet, which is significantly
lower than in past years. We also anticipate
investing a net $100 million in fixed capital
in an average year. after taking modest
investments in rental fleet and fixed capital
into account, as well as our enhanced
focus on working capital management, we
will continue to generate strong free cash
flow to support dividend payments. as a
result, significant cash will remain for debt
reduction or growth opportunities. We
see these growth opportunities in sectors
which count on our considerable product
support capabilities: mining, power systems
and heavy construction.
We are continuing to invest in our business
to take advantage of opportunities that
support the implementation of our strategy.
For instance:
• this year, we will go live with our new
information system in Canada. by
improving management information and
the speed of decision making, this system
will support us in achieving our goal
to become a world class distribution
company and service provider. the
system will be implemented in FinSa
and the uK next year.
• We are proceeding with an investment
in a shop at Fort McKay to support
customers in the oil sands. the feasibility
study is being completed and we will
soon reach a decision on the size and
functionality of this new facility.
the strengthening and sustainment
of commodity prices has given mining
customers the confidence to continue
to invest in their operations. From our
perspective, the recovery is being led
by mining and significant new equipment
orders from Kearl in Canada’s oil sands
and Codelco’s Ministro Hales mine in Chile
are a testament to this. We expect a much
improved order flow for new equipment
and ongoing growth of product support
revenue in mining. other sectors appear
to be slower to recover, but we believe we
have built a backlog of product support for
these non-mining sectors.
Finning people
i would be amiss to convey our Company’s
results without paying tribute to the
extraordinary commitment of Finning
employees. our achievements are
dependent on our employees’ dedicated
service to our customers and i thank
each and every Finning employee for their
continued support and engagement. under
very challenging business conditions and the
resulting impact on our workforce, Finning
continued to build on its high employee
engagement in 2009.
a further demonstration of our employees’
dedication comes in the form of continuous
improvement in our safety performance.
during 2009, our overall accident frequency
2009 Finning international inC. | 7 |
letter to SHareHolderS (Continued)
relative price performance
Finning International Inc. vs. S&P/TSX Composite Index
dec 31, 2004 to dec 31, 2009
200
150
100
S&p/tSx Composite index
Finning international inc.
50
31-DEC-04
31-DEC-05
31-DEC-06
31-DEC-07
31-DEC-08
31-DEC-09
In 2009, finning’s stock provided
shareholders with a capital gain of
17% and dividends totaling $0.44 per
share. Total return to shareholders
was over 20%.
excluding dividends, share value has
grown at the following compound
annual growth rates (CaGR):
5 years
-1%
10 years
9%
20 years
8%
rate continued its positive trend with a
37% decrease over prior year. despite
our commitment to upholding the highest
safety standards, we are deeply saddened
by the tragic fatality of an apprentice,
oliver padget Sandoval, at our Concepción
branch in Chile. in response, we initiated
a thorough investigation and implemented
all resultant safety recommendations. We
remain firmly committed to achieving the
highest environment, health and safety
standards in all of our operations.
Subsequent to 2009, Chile suffered a severe
earthquake with devastating consequences.
We feel very fortunate that every one of
our employees is safe and we thank them
for the support they have given to each
other, their families and their country as
part of the ongoing recovery efforts.
i will also take this opportunity to
acknowledge the insightful guidance of our
board of directors who provided invaluable
support towards our efforts to successfully
navigate through the recession.
building on our Strengths
in summary, Finning adeptly withstood
the global economic downturn of 2009
both financially and operationally while
continuing to invest in areas of strategic
importance. We emerged from the past
year with a tested management team,
improved operating leverage and strong
opportunities for future growth. Most
importantly, we never lost sight of the
key to our Company’s longstanding
tradition of success: the Caterpillar quality
product combined with Finning’s service
commitment. going forward, we will
continue to deliver on our promise of
unrivalled service in order to differentiate
ourselves from our competitors and earn
our customers’ loyalty.
Sincerely,
Mike Waites
president & Chief executive officer
8
CHairMan’S letter
i will take this opportunity to thank
my fellow directors for their valuable
contributions last year. on behalf of
the board, i would also like to thank
Finning’s employees for their unwavering
commitment throughout a challenging
2009. their dedicated efforts enabled us
to meet and exceed key corporate targets
while upholding our core values during one
of the toughest economic downturns.
For more information about our corporate
governance policies, please review the
Finning management proxy circular and
visit the Company’s corporate governance
section at www.finning.com.
on behalf of the board of directors,
douglas W. g. Whitehead
Chairman of the board
The Finning Board of directors’
foremost priority is to ensure
the Company’s performance
and results are maximized and
communicated within a context
of integrity and accountability.
the board fulfills its duty towards
maintaining the Company’s longstanding
reputation for corporate governance
excellence through active oversight
and by working closely with Finning’s
management team. in 2009, the board
met with the Company’s executives
six times in order to build on its best
practices, ensure sound corporate
governance and pursue opportunities for
continuous and strategic improvement.
in addition, the board of directors
continued to support the company’s drive
towards providing unrivalled services
that earn customer loyalty. despite
the challenging economic environment,
the Company successfully executed on
many of its key performance targets,
further advanced its strategic priorities
and strengthened its financial position.
the board maintained the quarterly
dividend of $0.11 per share, reflecting the
Company’s financial strength and record
free cash flow generation in 2009. the
board remains committed to providing
shareholders with an attractive dividend
as part of the total shareholder return.
2009 Finning international inC. | 9 |
FinanCial ManageMent
Financial performance
2009 was a challenging year due to the
economic downturn experienced throughout
the world. revenues declined by 21% to
$4.7 billion with lower revenues from all
operations and all lines of business. ebit was
down 47% to $207 million, and consolidated
ebit margin decreased to 4.4% from 6.5%
in 2008, after adjusting for the goodwill
impairment charge recorded in 2008. the
Company reacted quickly to the economic
downturn by reducing its cost structure.
basic earnings per share (epS) was $0.77
in 2009 compared to $0.56 in 2008. 2009
results included the following net non-
recurring charges totaling $0.08 per share:
• restructuring and severance costs of
$37 million. epS impact = ($0.15)
• new it system implementation costs
of $19 million. epS impact = ($0.08)
• gains on sale of certain properties
primarily in Hewden and South america
of $18 million. epS impact = $0.10
• one-time positive tax adjustment in
the second quarter of $9 million. epS
impact = $0.05.
2008 results included a goodwill impairment
charge of $151 million or $0.88 per share
relating to the Company’s investment in
Hewden as well as other net non-recurring
charges totaling $0.10 per share.
record Free Cash Flow
in 2009, Finning generated record free cash
flow of $494 million compared to $23 million
of free cash flow in 2008. Significant efforts
by management to improve working capital
levels as well as being selective on capital
and rental asset additions more than offset
the lower cash generated from operations.
the strong free cash flow generated in
2009 was primarily used to reduce our debt
levels resulting in a stronger balance sheet.
the Company’s working capital requirements
were significantly lower due to management
actions to focus on credit and collections
and to reduce inventories. We will continue
to closely manage working capital levels
going forward and improve the Company’s
cash-to-cash cycle.
efforts by the Company to be more
selective in our spending resulted in much
lower rental fleet additions. this combined
with higher disposals of underutilized assets
contributed $43 million of cash in 2009
compared to a net rental investment of
$205 million in 2008. as we continue with
our strategic shift to contain our investment
in rental, we expect net rental expenditures
to moderate from historical levels and will
average in the $100 – $150 million range
annually.
Finning’s business has modest capital
requirements, and the majority of our
capital expenditures are discretionary.
gross capital expenditures totaled $108
million and were comparable to 2008 levels.
going forward, we expect annual net capital
expenditures will average in the $75 - $100
million range.
We expect to continue to generate strong
free cash flow, and target over $200 million
in free cash flow in 2010.
“Our focus is to improve earnings
performance and return on
invested capital while maintaining
a strong balance sheet. We have
lowered our cost structure through
sustainable cost reductions
and productivity improvements.
We have also decreased our
asset base with disciplined
working capital management and
by directing rental and capital
spending to strategic areas.
As business volumes recover, we
expect EBIT margins to improve
in all operations.”
dave smith
executive vice president &
Chief Financial officer
10
annual dividend per SHare
$0.50
0.45
0.40
0.35
0.30
0.25
0.20
0.15
0.10
0.05
0.00
4
4
0
.
3
4
0
.
*
4
4
0
.
6
3
0
.
8
2
0
.
2
2
0
.
2005 2006 2007 2008 2009 2010
*
indicated dividend
dividends Maintained
We believe that an attractive dividend yield
represents an important component of total
shareholder return. in 2009 we maintained
our quarterly dividend at $0.11 per share, a
sound achievement considering the challenging
market conditions. the indicated annual
dividend is currently $0.44 per share, which
represents approximately 2.4% dividend
yield on a stock price of $18.00.
Selective Funding of long-
term Strategic initiatives
We remain committed to funding our
long-term strategic initiatives appropriately
and ensuring that we have the capabilities
to grow our business and provide our
customers with the best product support
in the industry.
in 2009, we continued to invest in a new
enterprise resource planning (erp) system
which is key to assisting us in achieving our
strategic goals. We are currently implementing
and testing this new it system in Canada,
where it is expected to go live in the second
half of 2010.
to support our growth strategy in the oil
sands, we plan to build a new equipment
service shop in Fort McKay, alberta. We
are currently assessing the future demand
for service in this region, and we expect to
proceed with the Fort McKay investment
in 2011.
in South america, we have recently expanded
our truck shop and built a new parts
distribution centre in antofagasta, a key
mining region in northern Chile. We will
continue to invest in our product support
infrastructure, including branches and
component rebuild capabilities.
Strong balance Sheet
We used the record free cash flow
generated in 2009 to strengthen our balance
sheet. We reduced our debt by $429 million
or 27% from the end of 2008. our net debt
to total capital ratio decreased to 39%, a
significant improvement from 49% at the end
of 2008. We will continue to strengthen our
financial position further, and expect the net
debt to total capital ratio to decline to the
mid 30% range by the end of 2010.
Finning has adequate operating credit
facilities that are committed until december
2011. at december 31, 2009, approximately
$725 million was available under the
committed facilities.
Significant Sg&a Cost
reductions on track
one of our main focus areas in 2009 was
to reduce our cost base and align expense
levels with revenues. in 2009, total selling,
general and administrative (Sg&a) expenses
decreased by $183 million or 14% from
2008, as a result of lower sales volumes,
aggressive cost management and the
successful implementation of productivity
improvement measures. the Canadian
operations accounted for over half of the
total Sg&a reduction in 2009 as they
shifted to a more variable cost base and
realigned facilities and resources to future
revenue opportunities.
Management took action when revenues
declined due to the economic downturn.
as a result of targeted cost reductions and
productivity improvement initiatives, the
Company was able to realize cost savings
of $110 million in 2009. We are currently
implementing additional Sg&a expense
reduction measures, and are on track to
achieve over $200 million in annual cost
savings going forward when compared to
2008 levels. these amounts do not include
costs that vary due to sales volumes. We
expect at least 70% of these targeted cost
reductions to be sustainable in the longer
term. as a result of lower Sg&a levels, we
expect 2010 ebit performance to improve
modestly.
2009 Finning international inC. | 11 |
Canada
“With a much leaner cost
structure and focus on
operational excellence, we are
well positioned to benefit from
strong operating leverage as
the economic recovery gains
momentum. We are confident in
our ability to grow the business
and capture opportunities
in product support and new
equipment sales.”
dave Parker
president, Finning (Canada)
12
2009 performance
2009 was a challenging year for our Canadian
operations as we managed through one of
the toughest economic downturns in history.
revenues declined 26% to $2.4 billion,
impacted by recessionary conditions in all
industries and lower volumes across all lines
of business. new equipment sales dropped
39%, reflecting weaker demand from
non-mining sectors and significantly lower
deliveries to the oil sands compared to an
exceptionally strong 2008. used equipment
sales and rental revenues decreased by
20% and 24% respectively. total product
support revenue proved to be more
resilient, declining only 5%. While demand
for parts and service in non-mining sectors
was negatively affected by low equipment
utilization and deferral of maintenance,
product support in mining remained strong
growing 30% over 2008. in the oil sands,
where mining operations continued to
run 24/7 with full utilization of their large
equipment fleets, product support revenues
were up 38%.
in 2009, our Canadian operations took major
steps to pull back on costs and align expense
levels with revenues. Sg&a expenses
decreased by 15%, and the Canadian
operations incurred restructuring charges
of approximately $20 million. unfortunately,
we had to make difficult decisions to reduce
Finning West edmonton branch, alberta, Canada
our workforce by about 20% from the end
of 2008. in addition, we implemented a plan
to shift to a more variable cost base and align
resources to future revenue opportunities.
this resulted in a consolidation in our branch
network from 12 to five regions in 2009.
in addition to the above measures, other
expense reduction and productivity
improvement initiatives will result in
$50 million in permanent Sg&a reductions
in 2010.
ebit from the Canadian operations was
down 58% to $98 million as a result of a
sharp decline in new equipment sales, lower
gross profit due to pricing pressures, and
higher restructuring and it implementation
costs. the resulting leaner cost structure
and productivity improvements will provide
us with solid operating leverage to improve
Canada’s earnings performance when
business volumes pick up.
operational excellence
in 2009, Finning (Canada) focused on
improving its business processes and
launched many initiatives designed to
enhance customer service and supplier
transactions. to support our efforts to
deliver unrivalled service, we implemented
the Customer Service Commitment
program, which guarantees on-time
completion and pricing. We also continued
Canada revenue ($ MillionS)
Canada ebit ($ MillionS)
Canada produCt Support revenue
($ MillionS)
3,500
3,000
2,500
2,000
1,500
1,000
500
0
,
7
1
2
6 3
3
9
2
,
3
1
6
2
,
0
5
0
2
,
7
8
3
,
2
2005 2006 2007 2008 2009
300
250
200
150
100
50
0
6
8
2
4
3
2
5
1
2
0
5
1
8
9
2005 2006 2007 2008 2009
2006 ebit excludes gains on sale of assets
1,000
800
600
400
200
0
2
8
9
5
3
9
6
0
9
3
7
8
2
1
7
2005 2006 2007 2008 2009
to improve productivity by becoming more
efficient and innovative in how we deliver
equipment, parts and service to customers.
We made changes to our supply chain
processes, including reducing time to invoice,
centralizing branch support functions and
improving parts and components forecasting.
in addition, the new enterprise resource
planning system, which will go live in
Canada in 2010, will tremendously benefit
our efforts towards achieving and sustaining
operational excellence.
Mining
as the fastest growing business segment,
mining has become an increasingly important
part of Finning (Canada)’s business over the
past few years. in addition to the oil sands,
our long-standing mining customers include
copper mines in the Kamloops area, coal
mines in the elk valley and tumbler ridge
regions of b.C. and the westerly regions of
central alberta including grande Cache and
Hinton, as well as the diamond mines in the
northern territories. in 2009, this industry
remained active, with mining customers
accounting for 56% of all new equipment
deliveries in Western Canada. While demand
for new equipment decreased significantly
from previous peak levels, the existing
production fleets of heavy haul trucks and
support equipment continued to operate
fairly continuously throughout 2009, at most
mines. this generated steady demand for
parts and service and resulted in strong
growth in mining product support revenues.
We expect strengthening commodity prices
to lead the recovery for mining, as evidenced
by encouraging signs at the start of 2010.
Quoting activity has picked up in the past
couple of quarters, and there is an increased
demand for heavy mining equipment and
product support from the oil sands, coal and
copper mining producers and contractors.
recent announcements of significant mining
deals further demonstrate our leading
position as the largest heavy equipment
supplier and service partner in the mining
sector, including the oil sands. in 2010, we
expect the expansion in metallurgical coal
production to drive more equipment sales
and product support opportunities. We look
forward to introducing the new Caterpillar
795 (345 ton) electric drive off-highway
truck, which will be tested on customer
mine sites in 2010.
our mining product support infrastructure
and technical expertise give us a strong
competitive advantage in providing parts,
service, component remanufacturing, and
machine overhauls. oeM remanufacturing,
the Company’s component rebuild facility
in edmonton, and our Centre of excellence
in red deer, where we rebuild large
equipment, remain the key elements of our
mining support infrastructure in Western
Canada. as part of our mining growth
strategy, we are currently assessing future
demand for shop and field services in the
oil sands to determine the requirements
for our planned Fort McKay facility.
outlook
new equipment orders have been improving
in Canada, primarily in mining, where quoting
activity and order intake are strong. We
expect continued growth in mining product
support, particularly in the oil sands. visibility
in the non-mining sectors remains limited
and we anticipate activity in the construction
sector to be soft in 2010. oil & gas and
forestry sectors are also likely to remain
slow and we do not anticipate a meaningful
improvement in these sectors until 2011.
an increase in product support business
is expected to precede demand for new
equipment in these non-mining sectors as
idled machines will be put back to work first.
overall, 2010 will be a transition year for
Finning (Canada). With a significantly reduced
cost structure combined with a focus
on operational excellence, the Canadian
operations are in an excellent position to
take advantage of the economic rebound.
2009 Finning international inC. | 13 |
SoutH aMeriCa
2009 performance
Finning South america had a very successful
year in 2009 despite challenging business
conditions. revenues of $1.5 billion were
1% lower compared to the record revenues
of 2008. new equipment sales declined by
11% (16% in functional currency, u.S. dollar)
as weak demand from the construction and
power systems sectors offset growing new
equipment sales to mining customers. driven
by the active mining sector, product support
revenues increased by almost 12% from 2008
(5% in functional currency). product support
revenues in mining were up 9% in functional
currency and contributed to solid ebit
performance. ebit of $154 million was 4%
higher than in 2008 (4% lower in functional
currency). Supported by tight cost controls
and continued strength in the higher margin
product support business, ebit margins
remained strong in 2009 at 10.3%.
operational excellence
our South american operations were
proactive in adjusting to the realities of
the global economic downturn having
transitioned into an austerity mode at the
end of 2008. this successfully executed plan
allowed Finning South america (FinSa)
to achieve very good results during a year
marked by one of the toughest global
Finning branch, Coquimbo, Chile
recessions. in addition to controlling costs
and managing inventory levels, FinSa
advanced initiatives designed to improve
operating efficiencies and create a high
performance culture among employees.
one of the key focus areas was the supply
chain. our South american operations are
located very far from Caterpillar’s factories
and parts distribution centres, which adds
considerable complexity to efficiently
transporting machines, parts, and components
to customers. as a result of its focused
efforts, FinSa improved its forecasting
capabilities, decreased landed costs of
products and reduced its cash to cash
cycle in 2009.
Sustaining a high performance culture is
another important element of our drive
towards achieving operational excellence in
South america. through ongoing investment
in people development at FinSa, we
have fostered a very capable management
team and continuously raise the technical
competencies of our mechanics.
Mining
Mining has always comprised the largest
portion of FinSa’s business, and this sector
grew even more dominant in 2009. While
“We were able to deliver
strong results even in these
challenging economic times. Our
outlook remains very solid. We
have invested in world-class
infrastructure, including branches,
warehousing and truck rebuild
capabilities, to continue to grow
our product support business.”
Juan Carlos Villegas
president, Finning South america
14
SoutH aMeriCa revenue ($ MillionS)
SoutH aMeriCa ebit ($ MillionS)
SoutH aMeriCa produCt Support revenue
($ MillionS)
1,600
1,400
1,200
1,000
800
600
400
200
0
2
0
5
1
,
0
9
4
,
1
6
2
3
1
,
7
0
0
1
,
0
1
0
1
,
2005 2006 2007 2008 2009
160
120
80
40
0
4
5
1
8
4
1
7
2
1
9
0
1
3
9
2005 2006 2007 2008 2009
construction and power systems activity
slowed down considerably, stronger copper
and gold prices drove the mining industry.
Mining accounted for about half of all new
equipment sales and over 60% of FinSa’s
total revenue in 2009.
in 2009, 65% of total mining revenue was
generated by product support, which is the
‘bread and butter’ of FinSa’s business and
the main driver behind the strong results
that our South american operations
consistently deliver. FinSa currently has
about 1,530 mining machines in its territory,
with approximately 740 units supported
under maintenance and repair contracts.
this represents the largest fleet in the
world supported by a single dealer. Mining
product support generates a stable and
resilient revenue stream. about 70% of all
mining parts revenue and over 80% of all
mining service revenue is derived from
these mining service contracts. We currently
have 25 service contracts, ranging in
duration from one to over 10 years, with
global copper and gold producers in South
america. about 3,000 employees or 60%
of FinSa’s workforce serve the mining
industry, most of them supporting mining
service contracts.
the mining opportunities in this low-cost
copper production region are significant. a
copper price in excess of uS$2.00/lb makes
it economically viable for most of our
copper mining customers to proceed with
planned projects and mine expansions. in
the next three years, close to uS$1.5 billion
is expected to be invested in equipment
fleets by mining companies. FinSa is in an
excellent position to capture a significant
portion of this new equipment business in
South america. recent large mining deals
confirm that we are the leading heavy
equipment supplier and service partner
in the Chilean mining industry.
We have long-standing relationships with
our copper mining customers and have been
very successful in meeting our customers’
needs for maximizing equipment availability
and achieving the lowest cost per ton of
material moved. our unmatched product
support capability is key to this success,
and we continue to invest in our product
support infrastructure in South america,
particularly in the antofagasta mining
region of northern Chile. We have recently
expanded our truck Shop and built a new
parts distribution Centre in antofagasta.
We have also opened a new Component
rebuild Centre in buenos aires, argentina.
800
700
600
500
400
300
200
100
0
1
4
7
4
6
6
0
5
5
2
7
4
0
0
4
2005 2006 2007 2008 2009
outlook
the mining industry is expected to remain
strong in 2010. With the current copper
and gold prices, the mining companies are
back in growth mode, and new project
planning is underway. the demand for large
equipment is expected to rise, and we
are actively quoting to mining customers.
Construction and power systems sectors
are starting to recover in Chile. Following
the devastating earthquake in February, the
Chileans will be rebuilding their damaged
infrastructure as well as commercial and
residential buildings. For 2010, construction
activity in argentina is likely to remain soft
while construction and power systems in
bolivia continue to improve.
For FinSa, the product support business
is expected to stay strong in 2010. this
will be driven primarily by existing mining
service contracts. in non-mining sectors,
equipment will remain well-utilized and
continue to generate parts and service
opportunities.
overall, 2010 looks promising for our South
american operations. We will continue
to expand the Caterpillar equipment fleets
in our territory, capture product support
opportunities and take full advantage of the
economic recovery.
2009 Finning international inC. | 15 |
united KingdoM
2009 performance
Finning uK group operates the Caterpillar
equipment and power dealership in the
u.K. as well as an equipment rental
company, Hewden. Within the dealership,
we operate two divisions: construction and
power systems.
the uK group’s revenues for 2009 were
$861 million, down 32% from 2008, primarily
due to challenging market conditions and
a slowdown in the construction sector.
revenues were down in all lines of business
compared to 2008, reflecting very weak
demand for equipment outside of coal
mining and some power systems sectors.
new and used equipment sales declined
by 40% and 34% respectively from 2008.
rental revenues were down 33% as a result
of continued weakness in the construction
sector and excess industry capacity.
However, an improvement in new equipment
orders during the fourth quarter of 2009
contributed to the u.K.’s first increase in
equipment backlog since 2007.
Sg&a costs declined from 2008 levels as
a result of lower volumes, targeted cost
reductions and productivity improvements.
the uK group incurred an ebit loss
of $20 million in 2009 due to lower
Finning branch, Cannock, uK
revenues in all lines of business and higher
restructuring costs compared to the prior
year. Hewden’s ebit loss of $40 million was
partially offset by the dealership’s positive
ebit of $20 million.
dealership
the dealership’s construction division has
successfully segmented its markets into coal
mining, quarrying, waste & recycling, scrap
& demolition, and construction industries.
Customers in these segments place greater
value on equipment productivity and
reliability, and on minimizing the total cost
of ownership. Finning is uniquely positioned
to meet these expectations by delivering
best-in-class product support. through
an increased focus on national accounts,
Finning has built significant market share
and earned strong customer loyalty in these
segments in 2009.
product support revenue for the
construction division has been growing
as a result of a concerted effort to
tailor product support solutions to the
various industry segments. our five-star
Component rebuild Centre and oil lab,
in particular, showcase the strength of
Finning’s product support facilities. to
continue to improve the level of service
“Our equipment and engine sales and
product support teams are focused
on growth market segments where
total solutions are adding value to
customers. In a mature market like
the U.K., our customers’ productivity
and cost drivers are critically important.
Through aggressive market sub-
segmentation, we are creating new
opportunities in coal mining, quarrying,
heavy construction, waste & recycling
and power & energy segments. We
are extremely proud of our team
completing 2009 with the best safety
record ever achieved.”
Andy Fraser
Managing director, Finning uK group
16
delivered to our customers, we shifted
some centralized service support functions
back to the branches and further increased
our investment in technical training for
our mechanics. the uK’s ‘think big’
apprenticeship program testing results
are placing its graduates in the top decile
in the world.
the product support business in the u.K.
remained solid in 2009 supported by the
active coal mining sector. product support
revenues at the dealership declined by
only 5% in local currency, a very modest
decrease compared to other lines of
business. Mining product support revenues
were up 10% from 2008 in local currency.
product support accounted for 34% of the
dealership’s total revenue in 2009 compared
to 27% in 2008.
the power systems division is focused on
the energy, marine, and petroleum sectors.
notably, the uK group has established an
outstanding reputation as a provider of
advanced energy solutions. recognized as
a Centre of excellence by Caterpillar, the
electric power generation team offers
customers much more than just engines.
the group provides switch gear and control
systems, engineering, procurement and
construction, and other value-added
services to data centres, power plants and
other demanding applications. in the
renewable energy field, Finning’s solutions
convert biogas from sewage plants and
landfills to energy and heat. our focus
in marine is on successfully supporting
customers in pleasure craft and off-shore
vessels. in the petroleum sector, Finning sells
and services power generation equipment
to oil producers. the petroleum team
recently won an exclusive contract with
a major oil producer in the north Sea to
support all of the company’s engines on
all of its off-shore rigs.
the power systems division in the u.K.
had a successful year given the challenging
market environment, with revenues down
6% in local currency from 2008 levels, and
new engine sales holding up relatively well.
power systems accounted for over half of
the total new equipment deliveries in the
u.K. in 2009.
uK group revenue
FroM Continuing operationS ($ MillionS)
uK group produCt Support revenue
FroM Continuing operationS ($ MillionS)
1,600
1,400
1,200
1,000
800
600
400
200
0
0
0
4
1
,
3
7
2
1
,
1
7
2
1
,
0
3
2
1
,
1
6
8
2005 2006 2007 2008 2009
300
250
200
150
100
50
0
3
5
2
5
4
2
8
3
8 2
2
2
7
1
2
2005 2006 2007 2008 2009
the dealership has reduced its expense
levels through cost reductions and improved
efficiencies through the successful
completion of various cost savings initiatives.
a shared services group was established
to support the finance functions for the
dealership and Hewden. other examples
of sustainable cost reductions include an
improved parts transportation network,
fewer suppliers, and the consolidation
of the general construction business and
Finnpave within the construction division.
in addition, increased focus on asset
management has improved inventory turns
and reduced accounts receivable.
Hewden
Hewden provides national rental solutions
to a variety of uK customers. this
market is currently very competitive
and oversupplied. as a consequence, the
business remained challenged by volume
and pricing. Within this context, we have
been driving a performance culture to
achieve operational excellence. additionally,
we have been implementing a recovery plan
to reduce the size of Hewden and improve
efficiency in rental excellence. the core
elements of Hewden’s recovery plan include
the disposal of underperforming assets,
achievement of operational efficiencies,
and greater customer-focus. in addition,
the new enterprise resource planning
system installed in 2007 provided us with
much improved management tools. as a
result, we have been able to significantly
improve equipment fleet composition and
machine utilization. We also streamlined
our organization from our previous five
divisions and five geographic regions down
to three geographic regions. We have
reduced expense levels and improved the
management of repair costs. importantly,
we are making inroads with our national
account customers that favour our value
proposition.
parallel to driving improved operating
performance at Hewden, we are exploring
a potential sale of this operation, and have
received a number of expressions of interest.
We anticipate this strategic review will lead
to a decision by mid-2010.
outlook
the uK dealership is a fundamentally strong
business. it remained profitable throughout
the economic downturn, and we see solid
growth opportunities when market
conditions begin to improve.
looking ahead, we will continue to pursue
opportunities for equipment sales and
product support in heavy construction and
power systems, where our product support
capabilities add significant value and enable
customers to obtain the most productivity
from their machines.
2009 Finning international inC. | 17 |
Corporate reSponSibility
Finning supplied a turnkey landfill-gas-to-energy (lFgte) solution to Capital power consisting of three containerized g3520 landfill gas engines that generate 4.8MW
of renewable energy using biogas captured from edmonton’s Municipal Solid Waste (MSW) at the Cloverbar landfill. Finning also has a maintenance contract for the
complete system.
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.
at Finning, our commitment to our
employees, the environment and the
community is underpinned by our Code
of Conduct and reflected in our values.
this commitment to uphold the highest
environmental, health and safety standards;
continuously inspire employee engagement;
and, support our communities is an integral
part of our corporate culture and something
that all Finning employees contribute towards.
in addition to our employees’ dedication,
Finning’s board of directors also plays an
active role by monitoring the activities
across our operations to ensure consistency
in meeting our world-class environment,
health and safety (eH&S) standards.
• identify, assess and minimize environmental
risk through a regular audit program.
• train employees on changes to
environmental laws and regulation.
• use suppliers who have high environmental
standards and practices and routinely audit
their performance.
• establish and maintain environmentally
acceptable methods for managing waste,
reusing and recycling materials.
• ensure that future development of our
facilities reflect our commitment to
environmental issues and energy
efficient solutions.
environment
at Finning, managing our business in a
manner designed to protect the environment
is an integral aspect of being a socially
responsible company. this operating
philosophy is reflected in the following
principles which govern our attitude, actions
and performance in environmental matters:
• adopt management practices and
procedures which meet and exceed
the environmental standards of
each community.
our commitment to the environment extends
to all aspects of our operations and takes
various forms including:
• rebuilding equipment components in order
to reduce waste, save energy, and
decrease the consumption of raw materials
required to produce new components.
• being a world leader in providing
renewable energy solutions that reduce
greenhouse gas emissions.
18
• Working with Caterpillar to provide
products, support and technologies
to help customers reduce the levels
of exhaust emissions and improve
fuel efficiency.
in 2009, Finning continued to build on our
environmental practices with new initiatives
in each of our operations:
• Finning uK launched the eco-drive
training course to educate customers
about energy use and offer practical tips
to reduce equipment fuel consumption.
• Finning South america incorporated
energy efficient technology in several
branches, including solar energy to
generate electricity and heat.
• Finning (Canada) made a significant
stride towards tracking environmental
impacts and the performance across its
operations by developing a centralized
information system.
Community involvement
despite challenging economic times, Finning
continued our strong tradition of investing
in communities both locally and globally.
Finning’s spirit of giving takes many forms,
including charitable contributions through
our Community investment program,
cultural sponsorships and employee
campaigns. through these different avenues,
Finning supports a wide range of education
and training, health and welfare, and arts
and cultural programs and organizations.
as part of our charitable giving in 2009,
Finning proudly supported the construction
of a new b.C. Children’s Hospital with a
$1 million pledge that will help construct
a new state-of-the-art-facility to improve
the quality of care that critically ill children
receive.
in the u.K., the company encourages
employees to undertake activities which
will benefit charitable organizations, in
many cases facilitating contributions and
volunteer work with matching grants and
other programs. in South america, Finning
partners with local schools to support
training and development programs.
employee engagement
We know that delivering unrivalled service
to customers relies on high-performing
employees so we work hard to attract and
retain the very best. dedicated people who
embody Finning’s core values have been the
foundation of our success and are the key
to achieving our future goals. accordingly,
cultivating a culture of engagement is a high
priority for our organization.
For the past four years, Finning has
participated in Caterpillar’s annual employee
opinion survey (eoS) process. by helping
to identify what is working well and where
we can make improvements, the eoS plays
a critical role in continually improving
engagement at Finning.
in 2009, 85 percent of employees responded
to our annual survey. despite the impact of
the economic challenges on our business
and workforce, we continued to demonstrate
improvements in areas that impact
engagement. Here are a few highlights:
While we are proud of our work to reduce
ltis, we recognize that there is always room
for improvement and continue to strive
towards attaining our goal of zero injuries.
our efforts to create a work environment
that is completely incident-free continued in
2009 with the introduction of several
new initiatives across Finning’s operations,
including:
• Finning (Canada) utilized a new on-line tool
to report ‘near misses’ as part of its focus
on identifying leading indicators of injury to
help prevent accidents from occurring.
• Finning South america launched the
“living Safe” campaign to promote a
culture of risk prevention by highlighting
safety practices at work and at home in an
engaging and educational way.
• Finning uK implemented an “office Safety”
campaign specifically designed to raise
awareness of safety issues unique
to an office environment.
• scores improved in 9 of the 11 indices
loSt tiMe injury FreQuenCy (lti)*
1.0
0.8
0.6
0.4
0.2
0.0
• our employee engagement score
increased two percentage points,
from 81 to 83 percent
• our safety score surpassed the average
score of Caterpillar dealers reflecting
our employees on-going commitment
to safety.
Safety
Finning has distinguished itself as an industry
leader in safety standards due to our rigorous,
company-wide focus on safety. our approach
to maintaining this leadership position
emphasizes management commitment and
leadership, open communication, training,
prevention, sharing best practices and
continuous improvement of the safety of
our operations.
as a result of our dedication to maintaining
a safe workplace, Finning continues to reduce
the frequency of lost time incidents (ltis)
— a key indicator of safety performance.
in 2009, Finning achieved a 37 percent
reduction in our lost time frequency rate
compared to the previous year.
0
8
0
.
2
7
0
.
2
5
0
.
8
3
0
.
4
2
0
.
2005 2006 2007 2008 2009
*lost time injuries per 200,000 work hours
2009 Finning international inC. | 19 |
FinanCial
report
ManageMent’S diSCuSSion & analySiS
21
ManageMent’S report to tHe SHareHolderS
49
auditorS’ report
ConSolidated FinanCial StateMentS
ten year FinanCial SuMMary
50
51
86
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
Fourth Quarter overview
($ Millions)
(% of revenue)
Q4 2009
Q4 2008
Q4 2009
Q4 2008
revenue
gross profit
selling, general & administrative expenses
other income (expenses)
goodwill impairment
earnings (loss) before interest and income taxes (eBit)(1)
finance costs
Provision for income taxes
net income (loss)
Basic earnings (loss) per share (ePs)
earnings before interest, taxes, depreciation, and
amortization (eBitDa)(1), excluding goodwill impairment
free cash flow(1)(2)
$
$
$
$
$
1,135.1
301.5
(261.0)
(10.5)
30.0
–
30.0
(18.8)
5.1
16.3
0.10
89.1
130.4
$
$
$
$
$
1,566.7
422.0
(338.5)
(16.6)
66.9
(151.4)
(84.5)
(21.7)
(0.6)
(106.8)
(0.63)
152.8
151.7
26.5%
(23.0)%
(0.9)%
2.6%
–
2.6%
(1.6)%
0.4%
1.4%
26.9%
(21.6)%
(1.0)%
4.3%
(9.7)%
(5.4)%
(1.4)%
(0.0)%
(6.8)%
7.8%
9.8%
(1) these amounts do not have a standardized meaning under generally accepted accounting principles. for a reconciliation of these amounts to net income
and cash flow from operating activities, see the heading “Description of non-gaaP Measures” below.
(2) free cash flow is defined as cash flow provided by operating activities less net capital expenditures.
fourth quarter consolidated revenue of $1.1 billion decreased 27.5% from the fourth quarter of 2008, with lower revenues in all operations,
although most significantly from the company’s canadian operations.
the decrease in revenues from the company’s canadian operations was largely due to 35.7% lower new equipment sales as a result of the
economic downturn. Product support revenues reflected a decline of 5.1% in the fourth quarter of 2009 compared to the same period last year.
although total product support revenues were down slightly in canada, product support revenues from mining increased 19.2%, offset by a
slowdown in other sectors.
REVENUE BY OPERATION
($ millions) 3 months ended December 31
REVENUE BY LINE OF BUSINESS
($ millions) 3 months ended December 31
EBIT BY OPERATION*
($ millions) 3 months ended December 31
*excluding Corporate and Other Operations
and goodwill impairment
6
2
8
2
0
6
4
6
4
7
3
3
900
750
600
450
300
150
0
6
7
2
6
9
1
2008
2009
9
5
7
0
7
4
800
600
400
200
0
7
0
5
1
7
4
3
7
1
0
2
1
4
2
1
0
7
CANADA
SOUTH
AMERICA
UK GROUP
NEW
EQUIPMENT
USED
EQUIPMENT
EQUIPMENT
RENTAL
PRODUCT
SUPPORT
2008
2009
5 4
OTHER
50
40
30
20
10
0
(10)
7
4
8
3
2
3
1
-
CANADA
SOUTH
AMERICA
0
1
-
4
-
2008
2009
UK GROUP
2009 finning international inc. | 21 |
ManageMent’s Discussion & analysis
revenues from the company’s operations in south america decreased by 27.4% compared to the fourth quarter of 2008 (16.5% in functional
currency, the u.s. dollar). this was primarily due to lower new equipment sales which were down 43.8% as a result of a pause in mining deliveries in
the quarter, and weak demand from the construction and power systems sectors. Product support revenues declined 7.2% compared to the fourth
quarter of 2008. However, in functional currency (the u.s. dollar), product support revenues were up 6.6% supported by strong mining activity.
Mining product support revenue, in functional currency, was 5.9% higher in the fourth quarter of 2009 compared with the same period last year.
in the u.K., revenues were down 29.0% over the fourth quarter of 2008 (21.8% in local currency). Market conditions in the u.K. remained soft in
the fourth quarter, negatively impacting new and used equipment sales to the construction sector and rental revenues. Product support revenues
were not affected to the same degree primarily due to an active coal mining sector and power system activity. the weaker economic conditions
were reflected in lower new equipment sales (down 34.3%), rental revenues (down 20.2%) and, to a lesser extent, product support revenues
(down 13.8%).
overall, new equipment sales were down 38.1% compared with the fourth quarter of 2008, with lower volumes in all operations.
Product support revenues in the fourth quarter of 2009 were down 7.0% compared with the same quarter last year. growth in product support
revenues generated by the mining sectors in canada and south america were offset by continued weak demand for parts and service from
other sectors.
used equipment revenues were down 43.0% compared to the prior year’s fourth quarter. apart from the impact of the economic downturn,
used equipment sales typically vary depending on product availability, customer buying preferences, and exchange rate considerations.
rental revenues were 30.6% lower, down in all operations in the fourth quarter of 2009, particularly in canada and the uK rental business,
Hewden. activity in the construction market in the u.K. remains depressed and as a result rental revenues were low.
finning’s global order book or backlog (the retail value of new equipment units ordered by customers for future deliveries) was $0.6 billion at
the end of the fourth quarter of 2009, up from the september 2009 level of $0.5 billion, and down from the December 2008 levels of $1.5 billion.
new order intake increased by 2% compared to the fourth quarter of 2008, and was up 55% from the third quarter of 2009, driven by large
equipment orders from the mining sector in canada and south america. new equipment orders in the fourth quarter of 2009 were the highest
since 2008 in all operations.
Earnings Before Interest and Taxes (EBIT)
on a consolidated basis, eBit in the fourth quarter of 2009 was $30.0 million compared to an eBit loss of $84.5 million in the same period in
2008 primarily due to a goodwill impairment charge of $151.4 million related to Hewden recorded in the fourth quarter of 2008. excluding this
goodwill impairment charge, discussed in more detail below, eBit in the fourth quarter of 2009 was 55.2% lower than 2008.
gross profit decreased 28.6% to $301.5 million in the fourth quarter of 2009 compared with the fourth quarter of 2008, a result of 27.5% lower
revenues due to weak economic conditions. Quarterly gross profit margin (gross profit as a percentage of revenue) of 26.5% was slightly down
from the prior year. although the company experienced a shift in revenue mix to the higher margin product support business in all operations,
this was more than offset by lower gross profit margins in new, used, and rental equipment revenues. Product support revenues made up 41.5%
of total revenues in the fourth quarter of 2009, compared with 32.3% of total revenues in the same period last year.
selling, general, and administrative (sg&a) costs were down $77.5 million or 22.9% in the fourth quarter of 2009 compared to the same quarter
last year. Management has taken action to reduce the company’s costs in response to the economic downturn and continues to review its cost
structure to ensure it is aligned with the level of business activity.
fourth quarter results included restructuring and severance costs of $15.8 million and costs of $6.2 million related to the implementation of a new
information technology (it) system for the company’s global operations. comparatively, fourth quarter 2008 results included restructuring and
severance costs of $15.0 million and costs of $4.5 million related to the new it system. also included in the results for the fourth quarter of 2009
was a $11.5 million pre-tax gain on the sale of certain properties, primarily in Hewden and south america (Q4 2008: pre-tax gain of $2.9 million).
the company’s eBit margin (eBit divided by revenues) was 2.6% in the fourth quarter of 2009, down from 4.3% in the fourth quarter of 2008
(excluding the goodwill impairment charge noted below), primarily due to lower revenues and lower gross profit margin from the company’s
canadian operations, partially offset by higher gross profit margin contributed by the company’s south american and uK operations. sg&a costs
declined significantly in the fourth quarter of 2009 compared with the same quarter last year, but the reduction was not as much as the decline in
gross profit due to the fixed nature of certain costs.
22
ManageMent’s Discussion & analysis
Major components of the eBit variance were:
($ Millions)
2008 Q4 eBit
net change in operations
foreign exchange impact
Hewden goodwill impairment charge in 2008
Higher it system implementation costs in 2009
Higher gains on sale of certain properties in 2009
Higher restructuring costs in 2009
2009 Q4 eBit
$
$
(84.5)
(22.5)
(20.5)
151.4
(1.7)
8.6
(0.8)
30.0
the company’s canadian operations experienced an eBit loss of $0.2 million in the fourth quarter of 2009, compared with eBit of $47.1 million
in the comparable period last year, primarily as a result of higher restructuring and severance costs and lower revenues as noted above. in the
fourth quarter of 2009, a plan was implemented which included a regional consolidation of branches across finning (canada)’s current
12 regions. the plan included a consolidation of branches into 5 regions which will result in a further rationalization of facilities and re-allocation
of resources across these new regions. this plan, together with other productivity improvements, will be fully rolled out over the next few
quarters and is expected to drive a further reduction of $50 million in expenses in the canadian operations in 2010, to total over $200 million
for the company. as part of this plan, further headcount reductions were implemented in the fourth quarter. restructuring costs and severance
of $11.3 million were incurred in the fourth quarter of 2009, compared with $8.0 million in the fourth quarter of 2008.
eBit from the company’s south american operations of $32.4 million was 15.4% lower than the fourth quarter of 2008, primarily as a result
of lower revenues.
the uK operations experienced an eBit loss of $3.6 million in the fourth quarter of 2009, an improvement of 62.9% from the comparable period
in 2008. in the fourth quarter of 2009, the uK dealership contributed eBit of $5.9 million (2008: $1.5 million), which was offset by a $9.5 million
eBit loss (2008: $11.2 million) from the uK’s rental business, Hewden.
During the year, the company performed its annual goodwill impairment tests and determined that goodwill was not impaired at December 31,
2009. in 2008, the company 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. a further discussion regarding the non-cash goodwill impairment
charge can be found in the goodwill impairment section below.
Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) and Free Cash Flow
eBitDa, which management views as an indicator of a company’s operating performance and generation of operating cash flow, was $89.1 million
in the fourth quarter of 2009 compared to $152.8 million in the fourth quarter of 2008 after excluding the 2008 goodwill impairment charge
noted above.
free cash flow is defined as cash flow provided by (used in) operating activities less net capital expenditures. the company’s free cash flow
generated in the fourth quarter of 2009 was $130.4 million compared to $151.7 million in the comparable quarter last year.
Finance Costs
finance costs for the three months ended December 31, 2009 were $18.8 million compared with $21.7 million in the fourth quarter of 2008.
the lower finance costs in the fourth quarter of 2009 were primarily the result of lower interest rates on both short term and long term debt.
Provision for Income Taxes
the effective income tax rate for the fourth quarter of 2009 was (45.1)% compared to (0.6)% in the comparable period in 2008. the effective
tax rate for the fourth quarter of 2009 reflected losses incurred in high tax jurisdictions and lower capital gains tax rates applied to the sale of
properties in the u.K. and south america, as well as higher income earned in lower tax jurisdictions. the effective tax rate for the fourth quarter
of 2008 was impacted by the goodwill impairment charge, which was not deductible for tax purposes. in addition, the company benefited from
lower capital gains tax rates applied to the sale of properties in the u.K. in the fourth quarter of 2008.
Net Income
finning’s net income was $16.3 million in the fourth quarter of 2009 compared with a net loss of $106.8 million in the comparative period in
2008. excluding the goodwill impairment noted above, net income would have been $44.6 million in the fourth quarter of 2008.
Basic ePs was $0.10 per share in the fourth quarter of 2009 compared with the basic loss per share of $0.63 in the fourth quarter of 2008.
excluding the goodwill impairment charge, basic ePs in the fourth quarter of 2008 was $0.26. lower revenues and gross profit from all lines
of business contributed to the decline, partially offset by lower sg&a costs.
2009 finning international inc. | 23 |
ManageMent’s Discussion & analysis
annual overview
revenue
gross profit
selling, general & administrative expenses
other income (expenses)
goodwill impairment
eBit
finance costs
Provision for income taxes
net income
Basic ePs
eBitDa, excluding goodwill impairment
free cash flow
($ Millions)
(% of revenue)
2009
2008
2009
2008
$
$
$
$
$
4,737.5
1,329.6
(1,085.1)
(37.5)
207.0
–
207.0
(67.6)
(8.6)
130.8
0.77
474.7
493.9
$
$
$
$
$
5,991.4
1,672.9
(1,268.0)
(16.8)
388.1
(151.4)
236.7
(83.6)
(57.1)
96.0
0.56
712.5
23.2
28.1%
(22.9)%
(0.8)%
4.4%
–
4.4%
(1.4)%
(0.2)%
2.8%
10.0%
27.9%
(21.1)%
(0.3)%
6.5%
(2.5)%
4.0%
(1.4)%
(1.0)%
1.6%
11.9%
for the year ended December 31, 2009, revenues of $4.7 billion decreased 20.9% compared with 2008, with lower revenues from all operations.
revenues from the company’s canadian operations decreased 25.8% in 2009 compared with 2008, when record annual revenues were achieved.
the decline was largely due to lower new equipment sales as a result of the economic downturn. Product support revenues from the canadian
operations in 2009 were slightly lower (4.7%) compared with 2008, although this was partly due to the discontinued collicutt fabrication business
which contributed $37.4 million of product support revenue in 2008. Product support revenues from the mining sector continued to be strong
and increased 30.2% over the prior year.
the global economic downturn had only a modest negative impact on the results from finning south america and revenues were only slightly
lower compared with 2008. in u.s. dollar functional currency, revenues decreased 6.6%, primarily in new equipment revenues. Product support
revenues were up 5.0% in functional currency. new equipment and product support revenues contributed by the south american operations
continued to reflect solid equipment sales and good product support activity, mainly with mining customers. in fact, the south american
operations achieved record new equipment sales to the mining sector in 2009.
challenging economic conditions continued throughout 2009 in the u.K. market. the company’s uK group’s revenues for 2009 were
$861.3 million, down 32.3% from the prior year. this was partially due to translating the uK group’s pound sterling results into canadian dollars
with a 9.2% stronger canadian dollar in 2009. in local currency, total revenues were 25.4% lower compared to those reported in 2008. revenues
were lower in all lines of business compared with 2008, primarily new and used equipment sales, and rental revenues. this reflected a continued
decline in the strength of the underlying u.K. economy, particularly in the construction sector.
on a consolidated basis, new equipment sales were 32.2% lower than in 2008, and down in all operations in functional currency. Product support
revenues were comparable with annual 2008 revenues, with lower service revenue offset by higher parts revenue.
REVENUE BY OPERATION
($ millions) 12 months ended December 31
REVENUE BY LINE OF BUSINESS
($ millions) 12 months ended December 31
7
1
2
,
3
7
8
3
,
2
2
0
5
1
,
0
9
4
1
,
3
7
2
1
,
1
6
8
2008
2009
9
2
9
,
2
5
8
9
1
,
3,000
2,500
2,000
1,500
1,000
500
0
0
0
9
1
3
9
8
1
3
1
7
0
1
5
2
3
4
8
3
3
CANADA
SOUTH
AMERICA
UK GROUP
NEW
EQUIPMENT
USED
EQUIPMENT
EQUIPMENT
RENTAL
PRODUCT
SUPPORT
9
1
2
1
OTHER
2008
2009
3,500
3,000
2,500
2,000
1,500
1,000
500
0
24
EBIT BY OPERATION*
($ millions) 12 months ended December 31
*excluding Corporate and Other Operations
and goodwill impairment
300
250
200
150
100
50
0
(50)
5
3
2
4
5
1
8
4
1
8
9
4
5
0
2
-
UK GROUP
2008
2009
CANADA
SOUTH
AMERICA
ManageMent’s Discussion & analysis
used equipment revenues were down 21.8% in 2009 compared with last year, and rental revenues were 28.4% lower in 2009 which primarily
reflected lower activity in the uK rental business.
the positive impact on company revenues due to the weaker canadian dollar relative to the u.s. dollar in 2009 compared with 2008 was
approximately $110 million or 2%.
Earnings Before Interest and Taxes (EBIT)
eBit for the year ended December 31, 2009 was $207.0 million, compared to $388.1 million in 2008 (excluding the goodwill impairment charge
of $151.4 million recorded in the fourth quarter of 2008). lower eBit in 2009 compared with 2008 was primarily due to lower revenues as a
result of weak economic conditions and higher restructuring costs in 2009.
gross profit of $1,329.6 million in 2009 decreased 20.5% over the prior year. gross profit as a percentage of revenue was 28.1%, up from 27.9%
in 2008, primarily due to a shift in revenue mix to a higher proportion of product support revenues which generate higher margins. gross
margins were down in all lines of business other than product support.
sg&a costs were 14.4% lower in 2009 reflecting the implementation by management of cost reductions, productivity improvement measures, and
as a result of lower sales volumes. the company achieved sg&a cost reductions and productivity improvements of approximately $110 million in
2009, roughly on track with our estimate of $120 million, and expects to achieve its target of over $200 million in annual cost savings compared
to 2008 going forward.
results for 2009 included restructuring and severance costs of $36.9 million and costs of $18.9 million related to the implementation of a new
it system for the company’s global operations. comparatively, results for 2008 included non-recurring costs of $33.1 million related to the
integration of collicutt energy services ltd (collicutt) and restructuring costs, and costs of $16.2 million related to the new it system. also
included in the results for 2009 was an $18.3 million pre-tax gain on the sale of certain properties, primarily in Hewden and south america (2008:
pre-tax gain of $19.9 million). the 2008 results were adversely impacted by the goodwill impairment charge of $151.4 million relating to Hewden.
the company’s eBit margin was 4.4% in 2009, down from 6.5% in 2008 (adjusting for the goodwill impairment charge) due to the factors noted above.
Major components of the annual eBit variance were:
($ Millions)
2008 eBit
net change in operations
foreign exchange impact
Hewden goodwill impairment charge in 2008
Higher it system implementation costs in 2009
lower gains on sale of certain properties in 2009
collicutt integration and start-up costs in 2008
Higher restructuring costs in 2009
2009 eBit
$
$
236.7
(219.6)
46.6
151.4
(2.7)
(1.6)
12.6
(16.4)
207.0
Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) and Free Cash Flow
eBitDa, which management views as an indicator of the company’s operating performance and generation of operating cash flow, was
$474.7 million in 2009 compared to $712.5 million in 2008, after excluding the 2008 goodwill impairment charge noted above.
the company’s free cash flow generated in 2009 was $493.9 million compared to $23.2 million in the prior year. all of finning’s operations
have seen significant improvements in the generation of free cash flow in 2009 compared to the prior year. improvements to working capital
and the reduction of rental equipment expenditures to align with demand have more than offset lower earnings.
Finance Costs
finance costs in 2009 were $67.6 million compared with $83.6 million in 2008. the lower finance costs in 2009 were primarily due to lower
interest rates on both short-term and long-term debt.
2009 finning international inc. | 25 |
ManageMent’s Discussion & analysis
Provision for Income Taxes
the effective income tax rate in 2009 was 6.2% compared to 37.3% in 2008. the lower effective tax rate in 2009 was primarily due to a one-time
tax adjustment in the second quarter of 2009 resulting in an $8.5 million reduction in income tax expense as a result of a change in the estimated
tax rate related to certain items that had been recorded directly to other comprehensive income in prior periods. the effective tax rate in 2009
was also lower due to a higher proportion of earnings from lower tax jurisdictions, a positive outcome related to a review by tax authorities,
and the benefit from tax adjustments resulting from the closure of previously open tax years. the 2008 effective tax rate was higher due to the
goodwill impairment charge recorded in the fourth quarter of 2008, which was not deductible for tax purposes.
Management anticipates that for 2010, the consolidated effective tax rate will be in the low-to-mid-20%s.
Net Income
finning’s net income of $130.8 million in 2009 was higher than its net income of $96.0 million in 2008. excluding the goodwill impairment charge
noted above, net income would have been $247.4 million in 2008.
Basic ePs was $0.77 per share in 2009 compared with basic ePs of $0.56 in 2008. as noted above, the results from 2009 included non-recurring
costs of $0.23 per share related to restructuring and severance costs and it implementation costs. these non-recurring costs were partially
offset by an income tax recovery of approximately $0.05 per share related to the second quarter of 2009 change in the estimated tax rate noted
above, and $0.10 per share of gains on sale of certain properties, primarily in Hewden and south america. the results for 2008 included $0.88 per
share related to the Hewden goodwill impairment charge and $0.20 per share of other non-recurring costs related to the integration of collicutt,
restructuring and severance, and it implementation, partially offset by $0.10 per share of gains on sale of certain properties (primarily Hewden).
Foreign exchange
Translation
the company’s reporting currency is the canadian dollar. However, due to the geographic diversity of the company’s operations, a significant
portion of revenue and operating expenses are in different currencies. the most significant currencies in which the company transacts business
are the u.s. dollar, the canadian dollar, and the u.K. pound sterling. changes in the canadian dollar / u.s. dollar and canadian dollar / u.K. pound
sterling relationship affected reported results on the translation of the financial statements of the company’s south american and uK group
operations as well as u.s. dollar based earnings of the company’s canadian operations.
compared to the fourth quarter of 2008, foreign exchange had a negative impact on consolidated revenues in the fourth quarter of 2009 of
approximately $95 million due to a stronger canadian dollar relative to the u.s. dollar (12.8% stronger than the fourth quarter of 2008), and a
9.2% stronger canadian dollar relative to the u.K. pound sterling. as a result, net income was negatively impacted by approximately $0.10 per
share in the fourth quarter of 2009 compared to the prior year’s fourth quarter.
net income was positively impacted by approximately $0.19 per share for the full 2009 year compared to the previous year due to the weaker
canadian dollar relative to the u.s. dollar (7.1% weaker than in 2008), partially offset by a 9.2% stronger canadian dollar relative to the u.K.
pound sterling.
the canadian dollar has recently been strongly correlated to commodity prices. if commodity prices weaken, the canadian dollar is likely to
weaken. in this scenario, the company’s mining and oil sands business typically slows; however, the company benefits from u.s. dollar based
revenues and earnings being translated into higher canadian dollar reported revenues and earnings due to the weaker canadian dollar, although
lags may occur.
the impact of foreign exchange due to the movement of the canadian dollar relative to the u.s. dollar and u.K. pound sterling is expected to
continue to affect finning’s financial results. the sensitivity of the company’s net income to fluctuations in the average annual foreign exchange
rates is summarized in the risk Management section of this MD&a.
Investment in Foreign Operations
assets and liabilities of the company’s self-sustaining foreign operations 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.
currency translation adjustments arise as a result of fluctuations in foreign currency exchange rates at the period end. the unrealized currency
translation loss of $165.6 million recorded in 2009 resulted from the stronger spot canadian dollar against the u.s. dollar and the u.K. pound
sterling of 14.5% and 5.5%, respectively, at December 31, 2009 compared to December 31, 2008. this was partially offset by $37.6 million of
unrealized foreign exchange gains on net investment hedges.
26
ManageMent’s Discussion & analysis
the following tables provide details of revenue and eBit contribution by operation and the foreign exchange impact for the three and twelve
months ended December 31, 2009.
three months ended December 31
($ Millions)
revenues – Q4 2008
foreign exchange impact
operating revenue increase (decrease)
revenues – Q4 2009
total revenue increase (decrease)
– percentage increase (decrease)
– percentage increase (decrease), excluding foreign exchange
twelve months ended December 31
($ Millions)
revenues – 2008 annual
foreign exchange impact
operating revenue increase (decrease)
revenues – 2009 annual
total revenue increase (decrease)
– percentage increase (decrease)
– percentage increase (decrease), excluding foreign exchange
three months ended December 31
($ Millions)
canada
south
america
$
$
$
canada
826.0
(28.3)
(195.9)
601.8
(224.2)
(27.1)%
(23.7)%
canada
$ 3,216.9
121.5
(951.8)
$ 2,386.6
(830.3)
$
(25.8)%
(29.6)%
south
america
uK group consolidated
$
$
$
464.3
(47.2)
(80.1)
337.0
(127.3)
(27.4)%
(17.3)%
$
$
$
276.4
(20.3)
(59.8)
196.3
(80.1)
(29.0)%
(21.6)%
$ 1,566.7
(95.8)
(335.8)
$ 1,135.1
(431.6)
$
(27.5)%
(21.4)%
south
america
$ 1,501.6
77.8
(89.8)
$ 1,489.6
(12.0)
$
(0.8)%
(6.0)%
uK group consolidated
$ 5,991.4
110.9
(1,364.8)
$ 4,737.5
$ (1,253.9)
(20.9)%
(22.8)%
$
$
$
1,272.9
(88.4)
(323.2)
861.3
(411.6)
(32.3)%
(25.4)%
goodwill
uK group
other
impairment consolidated
eBit – Q4 2008
foreign exchange impact
operating eBit increase (decrease)
eBit – Q4 2009
total eBit increase (decrease)
– percentage increase (decrease)
– percentage increase (decrease), excluding
foreign exchange
$
$
$
47.1
(8.3)
(39.0)
(0.2)
(47.3)
(100.4)%
$
$
$
38.3
(12.2)
6.3
32.4
(5.9)
(15.4)%
$
$
$
(9.7)
–
6.1
(3.6)
6.1
62.9%
$
$
$
(82.8)%
16.4%
62.9%
(8.8)
–
10.2
1.4
10.2
–
–
$
$
$
(151.4)
–
151.4
–
151.4
–
$
$
$
(84.5)
(20.5)
135.0
30.0
114.5
135.5%
–
159.8%
twelve months ended December 31
($ Millions)
eBit – 2008 annual
foreign exchange impact
operating eBit increase (decrease)
eBit – 2009 annual
total eBit increase (decrease)
– percentage increase (decrease)
– percentage increase (decrease), excluding
foreign exchange
canada
234.5
27.5
(163.7)
98.3
(136.2)
(58.1)%
$
$
$
south
america
uK group
other
impairment consolidated
goodwill
$
$
$
148.2
18.2
(12.7)
153.7
5.5
3.7%
$
$
$
53.6
0.9
(74.6)
(20.1)
(73.7)
(137.5)%
$
$
$
(48.2)
–
23.3
(24.9)
23.3
–
$
$
$
(151.4)
–
151.4
–
151.4
–
$
$
$
236.7
46.6
(76.3)
207.0
(29.7)
(12.5)%
(69.8)%
(8.6)%
(139.2)%
–
–
(32.2)%
2009 finning international inc. | 27 |
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,
engines, 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 year ended December 31, 2009
($ Millions)
new equipment
used equipment
equipment rental
Product support
other
total
revenue percentage by operations
for year ended December 31, 2008
($ Millions)
new equipment
used equipment
equipment rental
Product support
other
total
revenue percentage by operations
canada
$ 1,015.8
202.2
224.4
935.2
9.0
$ 2,386.6
50.4%
canada
$ 1,670.6
252.8
296.6
981.8
15.1
$ 3,216.9
53.7%
south
america
$
656.0
41.9
47.9
740.8
3.0
$ 1,489.6
31.4%
south
america
$
737.6
37.2
58.8
664.4
3.6
$ 1,501.6
25.1%
uK group consolidated
$
$
312.9
93.7
238.1
216.6
–
861.3
18.2%
$ 1,984.7
337.8
510.4
1,892.6
12.0
$ 4,737.5
100.0%
uK group consolidated
$
520.4
141.8
357.4
253.3
–
$ 1,272.9
21.2%
$
$
2,928.6
431.8
712.8
1,899.5
18.7
5,991.4
100.0%
revenue
percentage
41.9%
7.1%
10.8%
39.9%
0.3%
100.0%
revenue
percentage
48.9%
7.2%
11.9%
31.7%
0.3%
100.0%
the table below provides selected income statement information by business segment:
for year ended December 31, 2009
($ Millions)
canada
south
america
uK group
other
impairment consolidated
goodwill
revenue from external sources
operating costs
Depreciation and amortization
other income (expenses)
it system implementation costs
other
earnings before interest and taxes
earnings before interest and tax
– percentage of revenue
– percentage by operations
for year ended December 31, 2008
($ Millions)
revenue from external sources
operating costs
Depreciation and amortization
$ 2,386.6
(2,125.7)
(132.6)
128.3
$ 1,489.6
(1,299.4)
(37.4)
152.8
(10.6)
(19.4)
98.3
(5.6)
6.5
153.7
$
$
$
$
861.3
(774.8)
(97.5)
(11.0)
(2.4)
(6.7)
(20.1)
$
$
–
(25.4)
(0.2)
(25.6)
(0.3)
1.0
(24.9)
$
$
4.1%
47.5%
canada
10.3%
74.2%
south
america
(2.3)%
(9.7)%
–
(12.0)%
uK group
other
impairment consolidated
goodwill
–
–
–
–
–
–
–
–
–
$ 4,737.5
(4,225.3)
(267.7)
244.5
(18.9)
(18.6)
207.0
$
4.4%
100.0%
–
–
–
–
$ 5,991.4
(5,262.1)
(324.4)
404.9
–
–
(151.4)
(151.4)
$
(16.2)
(0.6)
(151.4)
236.7
4.0%
100.0%
$ 3,216.9
(2,801.8)
(164.5)
250.6
$ 1,501.6
(1,313.8)
(34.2)
153.6
$ 1,272.9
(1,099.8)
(125.5)
47.6
$
$
–
(46.7)
(0.2)
(46.9)
(1.3)
–
–
(48.2)
$
$
(2.6)
8.6
–
53.6
$
other income (expenses)
it system implementation costs
other
goodwill impairment
earnings before interest and taxes
earnings before interest and tax
– percentage of revenue
– percentage by operations (excluding goodwill)
$
(7.9)
(8.2)
–
234.5
7.3%
60.4%
$
(4.4)
(1.0)
–
148.2
9.9%
38.2%
28
4.2%
13.8%
–
(12.4)%
–
–
ManageMent’s Discussion & analysis
Canadian Operations
the canadian operating segment includes finning (canada), the company’s interest in oeM remanufacturing company inc. (oeM), and a
25% interest in Pipeline Machinery international (PlM). finning (canada) sells, services, and rents mainly caterpillar mobile equipment in
British columbia, alberta, the yukon territory, the northwest territories, and a portion of nunavut. the company’s end markets are comprised
of mining (including the oil sands), construction, conventional oil and gas, forestry, and power systems.
the table below provides details of the results from the canadian operating segment:
for years ended December 31
($ Millions)
revenue
operating costs
Depreciation and amortization
other expenses
information technology system implementation costs
restructuring costs and other
earnings before interest and taxes (eBit)
eBit
– as a percentage of revenue
– as a percentage of consolidated eBit (excluding goodwill impairment)
earnings before interest, taxes, depreciation, and amortization (eBitDa)
2009
2,386.6
(2,125.7)
(132.6)
128.3
(10.6)
(19.4)
98.3
4.1%
47.5%
230.9
$
$
$
2008
3,216.9
(2,801.8)
(164.5)
250.6
(7.9)
(8.2)
234.5
7.3%
60.4%
399.0
$
$
$
2009 revenues of $2,386.6 million decreased 25.8% compared to 2008, when record annual revenues were achieved. the decline was largely
due to lower new equipment sales resulting from the economic downturn. new equipment sales were 39.2% lower than 2008. new equipment
orders in the fourth quarter of 2009 were the highest since 2008 which is positive, although strong deliveries in the last quarter of the year
contributed to an overall decrease in backlog compared with the september 2009 level for the canadian operations. the existing backlog reflects
future deliveries largely to mining customers scheduled to be made in 2010. Demand for construction and conventional oil and gas sectors
remains soft.
2009 revenues from all lines of business in the company’s canadian operations were lower than in 2008. Product support revenues in 2009 were
slightly lower (4.7%) compared with 2008, although this was mostly due to the discontinued collicutt fabrication business which contributed
$37.4 million of product support revenue in 2008. in addition, in some sectors, customers were not fully utilizing their equipment and were
deferring maintenance and repairs or in-sourcing some of this work. Product support revenues from the mining sector continued to be strong
and increased 30.2% over the prior year.
CANADA – REVENUE BY LINE OF BUSINESS
($ millions) 12 months ended December 31
2,000
1,500
1
7
6
1
,
1,000
500
0
6
1
0
1
,
2
8
9
5
3
9
3
5
2
2
0
2
7
9
2
4
2
2
NEW
EQUIPMENT
USED
EQUIPMENT
EQUIPMENT
RENTAL
PRODUCT
SUPPORT
5
1
9
OTHER
2008
2009
2009 finning international inc. | 29 |
ManageMent’s Discussion & analysis
used equipment revenues were 20.0% lower than the prior year, also reflecting the slowdown in the general economy. rental revenues decreased
24.3% over 2008 and continued to be pressured by lower demand and competitive pricing in the market.
foreign exchange had a positive impact of approximately $122 million on revenues in 2009 due to a 7.1% weaker canadian dollar relative to the
u.s. dollar compared to last year.
in canada, gross profit as a percentage of revenue was higher than in 2008 due to the shift in revenue mix to a higher proportion of product
support revenues which typically return higher margins than new equipment sales. Product support revenues made up 39.2% of total revenues in
2009, compared with 30.5% of total revenues in 2008. the improvement in the gross profit margin due to a higher percentage of product support
revenues was partially offset by lower gross profit margins in new, used, and rental equipment revenues.
sg&a costs in 2009 were lower than 2008, reflecting lower salary and wages as a result of reduced headcount as well as actions taken to reduce
discretionary expenses and improve efficiencies. Most discretionary expense levels are down over the prior year and cost savings from further
actions taken in the fourth quarter of 2009 are expected to be fully realized in 2010. although sg&a costs were down in absolute terms, they
were higher as a percentage of revenue compared to 2008 resulting from lower revenues and the fixed nature of certain costs that could not be
reduced at the same rate as the revenue decline in 2009.
included in other expenses were restructuring costs of $19.5 million incurred in 2009 (2008: $8.0 million). finning (canada)’s headcount was
approximately 1,200 lower than september 2008, primarily due to downsizing its workforce in response to the downturn in the economy and
aligning its costs with revenue levels. in the fourth quarter of 2009, a plan was implemented which included a consolidation of branches into 5
regions which will result in a further rationalization of facilities and allocation of resources across these new regions. this plan, together with
other productivity improvements, will be fully rolled out over the next few quarters and is expected to drive a further $50 million in expenses
out of the canadian operations in 2010.
finning (canada) incurred $10.6 million of costs in 2009 (2008: $7.9 million) representing its share of the costs related to the implementation
of a new information technology (it) system for the company’s global dealership operations.
eBit totalled $98.3 million in 2009 compared with $234.5 million in 2008. eBit margin (eBit divided by revenues) was 4.1%, significantly lower
than the eBit margin of 7.3% achieved in 2008. the reduction in eBit was primarily due to lower new equipment sales and higher restructuring
and it implementation costs. this reduction was partially offset by lower sg&a costs from actions taken by the canadian operations.
other Developments
in the fourth quarter of 2009, finning (canada) and the international association of Machinists and aerospace Workers (iaM), vancouver lodge
692 (covering approximately 800 unionized employees located in British columbia), successfully settled a new two-year collective bargaining
agreement which will expire in april 2011. finning (canada)’s collective bargaining agreement with the alberta division of the iaM – local lodge
99 will expire at the end of april 2010. negotiations with the alberta union will commence in Q1 2010. the company is committed to the
collective bargaining process and to concluding a fair contract for its employees and for finning.
the company continues to be involved in alberta labour relations Board proceedings with the iaM – local lodge 99 relating to finning
(canada)’s outsourcing of component repair and rebuilding services to oeM in 2005. Decisions from the alberta labour relations Board are
expected some time in 2010.
in february 2010, finning (canada) secured a key mining equipment and product support agreement. imperial oil limited has chosen finning as
a mining mobile equipment supplier for the Kearl oil sands project. the ten-year agreement includes the supply of caterpillar equipment, parts,
specialized maintenance labour, and training.
30
ManageMent’s Discussion & analysis
South America
finning’s south american operation sells, services, and rents mainly caterpillar mobile equipment in chile, argentina, uruguay, and Bolivia. the
company’s end markets are comprised of mining, construction, and power systems.
the table below provides details of the results from the south american operations:
for years ended December 31
($ Millions)
revenue
operating costs
Depreciation and amortization
other income (expenses)
information technology system implementation costs
gain on sale of property, partly offset by restructuring costs (2008: restructuring costs)
earnings before interest and taxes (eBit)
eBit
– as a percentage of revenue
– as a percentage of consolidated eBit (excluding goodwill impairment)
earnings before interest, taxes, depreciation, and amortization (eBitDa)
2009
1,489.6
(1,299.4)
(37.4)
152.8
(5.6)
6.5
153.7
10.3%
74.2%
191.1
$
$
$
2008
1,501.6
(1,313.8)
(34.2)
153.6
(4.4)
(1.0)
148.2
9.9%
38.2%
182.4
$
$
$
the global economic downturn had only a modest impact on the results of finning south america. 2009 revenues were only slightly lower
compared with 2008. in u.s. dollar functional currency, revenues decreased 6.6%. foreign exchange had an approximately $78 million positive
impact on the translation of those revenues, due to the 7.1% weakening of the canadian dollar relative to the u.s. dollar.
2009 revenues reflected softer new equipment sales partially offset by solid growth in product support activity, mainly with mining customers.
in functional currency, new equipment sales and product support revenues from the mining sector were up 16.6% and 9.2%, respectively, over
the prior year. in fact, the south american operations experienced record new equipment sales from the mining sector in 2009. this was more
than offset by weaker demand in the power systems and construction sectors and as a result, new equipment sales in 2009 were down by
16.3% in functional currency.
new order levels in the fourth quarter of 2009 were higher than any other quarter in 2009 and as a result, new equipment backlog as of
December 31, 2009 was higher compared to the september 2009 level, but was roughly 60% the level of December 2008.
Product support revenues continued to grow, and were 11.5% higher in 2009 (5.0% in functional currency) compared with 2008. growth in
product support revenues continues to be primarily driven by the larger number of mining maintenance and repair contracts entered into in
recent years and the higher number of caterpillar units operating in the field.
in functional currency, gross profit decreased 7.9% in 2009 compared with last year, and in line with the revenue decline. as a percentage of
revenue, gross profit was comparable with 2008 as a result of a shift in revenues to higher margin product support revenues, offset by lower
margins on mining new equipment sales and rental revenues. Product support revenues made up 49.9% of total revenues in 2009, compared
with 44.4% of total revenues in the last year.
SOUTH AMERICA – REVENUE BY LINE OF BUSINESS
($ millions) 12 months ended December 31
800
700
600
500
400
300
200
100
0
8
3
7
6
5
6
1
4
7
4
6
6
7
3
2
4
9
5
8
4
NEW
EQUIPMENT
USED
EQUIPMENT
EQUIPMENT
RENTAL
PRODUCT
SUPPORT
2008
2009
4 3
OTHER
2009 finning international inc. | 31 |
ManageMent’s Discussion & analysis
sg&a costs, in functional currency, decreased both in absolute dollars and as a percentage of revenue. the south american operations continued
to benefit from ongoing cost savings programs.
other income for 2009 included a $7.2 million pre-tax gain on the sale of a finning chile property in exchange for a new head office property.
in addition, the company’s south american operations incurred costs of $5.6 million (2008: $4.4 million) related to the implementation of a new
it system for the company’s global dealership operations.
eBit from the company’s south american operations of $153.7 million was 3.7% higher than in 2008. in functional currency, eBit decreased
3.6% over the prior year. the lower eBit (in functional currency) in 2009 reflected lower new equipment revenues as a result of weaker demand
from power systems and construction sectors, and lower new equipment and rental margins, partially offset by continued strong product support
margins, and lower sg&a. eBit as a percentage of revenue for finning south america was solid at 10.3%, up from the eBit margin of 9.9%
achieved in 2008.
other Developments
in february 2010, the company’s south american operations received a letter of intent from codelco, chile’s state-owned mining company, that
includes the supply of 20 caterpillar 797 mining trucks and 15 pieces of support equipment, plus a ten-year maintenance and repair contract (Marc).
the approximate value of the deal, including the maintenance services, is us$400 million. the letter of intent is subject to final project approval
by codelco’s Board which is expected in mid 2010. the equipment will be delivered in the first half of 2011 to codelco’s Ministro Hales mine.
United Kingdom (“UK”) Group
the company’s uK group sells, services and rents mainly caterpillar mobile equipment in england, scotland, Wales, falkland islands, and the
channel islands. the company’s end markets are comprised of mining, quarrying, construction, power systems, and rental services.
the table below provides details of the results of the continuing operations from the uK group:
for years ended December 31
($ Millions)
revenue
operating costs
Depreciation and amortization
other income (expenses)
information technology system implementation costs
restructuring partly offset by gain on sale of properties (2008: gain on sale of properties
partly offset by restructuring)
earnings before interest and taxes (eBit)
eBit
– as a percentage of revenue
– as a percentage of consolidated eBit (excluding goodwill impairment)
earnings before interest, taxes, depreciation, and amortization (eBitDa)
2009
861.3
(774.8)
(97.5)
(11.0)
(2.4)
(6.7)
(20.1)
(2.3)%
(9.7)%
77.4
$
$
$
2008
1,272.9
(1,099.8)
(125.5)
47.6
(2.6)
8.6
53.6
4.2%
13.8%
179.1
$
$
$
UK GROUP – REVENUE BY LINE OF BUSINESS
($ millions) 12 months ended December 31
600
500
400
300
200
100
0
32
0
2
5
3
1
3
7
5
3
8
3
2
3
5
2
7
1
2
2
4
1
4
9
NEW
EQUIPMENT
USED
EQUIPMENT
EQUIPMENT
RENTAL
PRODUCT
SUPPORT
2008
2009
ManageMent’s Discussion & analysis
the uK group’s revenues for 2009 were $861.3 million, down 32.3% from the prior year primarily due to challenging economic conditions which
continued throughout 2009. in local currency, total revenues were 25.4% lower compared to those reported in 2008, reflecting a 9.2% stronger
canadian dollar in 2009.
revenues were lower in all lines of business compared with 2008, primarily in new and used equipment sales, and rental revenues. in local
currency, in 2009, revenues from new equipment and product support were lower by 33.7% and 5.7%, respectively, compared with last year.
this reflected a continued decline in the strength of the underlying u.K. economy, particularly in the construction sector.
although new equipment orders continued to be lower than prior year levels, new orders in the fourth quarter of 2009 were the highest of
any quarter in the year and contributed to the first increase in backlog over the past eight quarters for the uK operations. the new equipment
backlog was higher compared to the september 2009 level, but was approximately 40% lower than the level at December 2008.
rental revenues were also affected by the weak economic conditions in the uK and were down 26.4% in local currency compared with 2008.
in response to Hewden’s weak operating results and the ongoing weak economic conditions in the u.K., a significant reorganization of Hewden,
the uK group’s rental services operation, occurred in the first half of 2009. further streamlining of the Hewden depot network continued in
the second half of 2009. as a result, Hewden’s overall cost structure has decreased and the rental fleet has been downsized. asset utilization has
started to recover, and Hewden’s operating performance is expected to improve.
gross profit, in local currency, in 2009 was lower compared with the prior year in absolute terms, which was generally in line with the sales
decline, and as a percentage of revenue. the rental operations experienced lower margins in 2009 compared to last year due to lower utilization
rates and pricing challenges as a result of a significant decline in u.K. construction market activities. Margins in most other lines of business were
also down primarily due to weaker market conditions. Margins from product support activities, although slightly down compared to the prior
year, continue to be solid. a higher proportion of revenues from product support as well as good margins from this line of business partially
offset the impact of lower margins from rental revenues.
sg&a costs were lower in 2009 compared with 2008 in absolute terms, but despite successful cost-cutting initiatives, higher as a percentage of
revenue due to the fixed nature of some costs. Management has implemented a number of initiatives to reduce operating cost levels, dispose of
surplus rental fleet in line with current market conditions, and improve the performance of other assets. further actions will be taken as needed
to respond to market conditions.
other expenses in 2009 included restructuring costs related to the integration of support services in the u.K. and depot restructuring. the
organizational structure of the uK group was streamlined to provide a more consistent and effective service offering to customers at a reduced
cost. in addition, in response to declining market conditions, the uK group incurred further restructuring and severance costs as staffing levels
were reduced. in total, in 2009, the uK group incurred restructuring charges of $14.9 million (2008: $11.5 million). the initiatives noted above
resulted in a reduction of approximately 750 employees since september 2008. Partially offsetting these restructuring charges in 2009 were
pre-tax gains of $9.3 million related to the sale of certain properties at Hewden. the results for 2008 included a $19.2 million pre-tax gain on
sale of certain Hewden properties.
in 2009, the uK group incurred a loss before interest and tax of $20.1 million, compared with eBit of $53.6 million in 2008. the lower results
in 2009 compared with the prior year were primarily due to lower revenues in all lines of business as well as higher restructuring and severance
costs. eBit losses of $39.7 million were incurred in 2009 by the uK group’s rental business, Hewden (2008: eBit of $4.9 million), partially offset
by a positive eBit of $19.6 million at the uK dealership (2008: $48.7 million).
Management has initiated a strategic review of Hewden in 2009 which is progressing according to plan. one option is to continue with the
implementation of a recovery plan to drive operational improvement at Hewden which is progressing well. the second option is to dispose of
the Hewden operation and, as a result of exploring alternatives, the company has received expressions of interest from a number of parties.
the company continues to explore both options and anticipates a decision by the end of the second quarter of 2010 which will be driven by the
need to optimize shareholder value.
2009 finning international inc. | 33 |
ManageMent’s Discussion & analysis
Corporate and Other Operations
for years ended December 31
($ Millions)
operating costs – corporate
gain (loss) from equity investment
ltiP mark-to-market
Depreciation and amortization
other expenses (income)
information technology system implementation costs
other income – gain on sale of property, partly offset by restructuring costs
earnings before interest and taxes
2009
(22.9)
(2.4)
(0.1)
(0.2)
(25.6)
(0.3)
1.0
(24.9)
$
$
$
$
2008
(25.8)
0.8
(21.7)
(0.2)
(46.9)
(1.3)
–
(48.2)
for the year ended December 31, 2009, corporate operating costs decreased to $22.9 million compared with $25.8 million in 2008 due to efforts
by management to reduce costs and improve efficiencies.
loss from equity investment in 2009 is from the company’s investment in energyst B.v., reflecting reduced activity levels as a result of the
economic downturn in europe. in response to the downturn, energyst’s management has taken steps to reduce its cost structure and improve
the operating performance of its european depot network, including downsizing its rental fleet. those actions are anticipated to improve
profitability going forward.
the company entered into a compensation hedge at the end of 2007 in order to offset the mark-to-market impact relating to certain stock-based
compensation plans. the long-term incentive plan (ltiP) expense or income recorded at the corporate level primarily reflects the fair value impact
of the compensation hedge in total. this amount primarily offsets the ltiP mark-to-market gains or losses recorded by the operating companies.
other income for 2009 included a $1.7 million pre-tax gain on the sale of a property. in addition, the company incurred costs related to the
ongoing 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 or as warranted by events or circumstances. 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 its reporting units 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.
During the year, the company performed its annual goodwill impairment tests and determined that goodwill was not impaired at December 31,
2009. in 2008, the company determined that the carrying value of goodwill established on the acquisition of Hewden in 2001 exceeded its
respective fair value. as a result, in 2008, the company recorded in other expenses a full goodwill impairment charge of $151.4 million. the
company did not expect an 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.
34
ManageMent’s Discussion & analysis
liQuiDity anD capital resources
Management of the company assesses liquidity in terms of finning’s ability to generate sufficient cash flow, along with other sources of liquidity
including cash and borrowings, to fund its operations and growth in 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 capital expenditures, acquisitions of complementary businesses, and divestitures of non-core businesses; and
external financing, including bank credit facilities, commercial paper, long-term debt, and other capital market activities, providing both short
and long-term financing.
Cash Flow from Operating Activities
for the year ended December 31, 2009, cash flow after working capital changes was $546.4 million, compared with $278.1 million generated in
2008. throughout all operations, management has focused on improving cash cycle times and operating efficiencies while ensuring appropriate
levels of working capital exist to support current activity levels. as a result, the company’s working capital investment in 2009 was $458.7 million
lower compared with the prior year.
the company generated proceeds on the disposal of rental assets in excess of additions in the amount of $43.2 million in 2009, compared with
a net investment in rental assets of $204.8 million in 2008. this was an improvement from management’s annual guidance of under $50 million net
investment spend in rental assets due to significant efforts by management to minimize rental fleet additions and dispose of underutilized assets.
as a result of this focus on reducing rental expenditures and lower market demand, rental investment reduced significantly compared to 2008,
particularly at the company’s canadian and Hewden operations.
as a result of these items, cash flow provided by operating activities was $562.4 million in 2009, a significant improvement when compared to
cash provided by operating activities of $72.7 million in 2008.
eBitDa was $474.7 million in 2009 compared to $712.5 million in 2008, after excluding the 2008 goodwill impairment charge noted above.
the company’s free cash flow generated in 2009 was $493.9 million compared to $23.2 million in 2008. the 2009 annual free cash flow
exceeded management’s estimate provided in the third quarter of 2009 of close to $400 million due to a higher than expected level of collections
from customers late in the year. all of finning’s operations have seen significant improvements in the generation of free cash flow compared to
the same period in the prior year. improvements to working capital levels to align with demand and a reduction of rental equipment investments
have more than offset lower earnings.
Management anticipates generating positive free cash flow greater than $200 million in 2010 from continued disciplined and closely managed
working capital management and strategic investments in capital and rental expenditures. this free cash flow is expected to be used for dividend
payments and to continue to reduce debt as appropriate. the company’s Debt ratio (net debt to total capitalization ratio) at December 31, 2009
was 39.3%, and is expected to be in the mid 30% range by year end 2010.
Cash Used For Investing Activities
net cash used in investing activities in 2009 totalled $48.4 million compared with $198.1 million in 2008. the primary use of cash in 2008 related
to the acquisition of collicutt for $135.8 million, net of cash received. in 2008, the company also increased its investment in energyst B.v. by
$11.5 million, and acquired one cat rental store for $1.3 million.
gross capital additions for the year ended December 31, 2009 were $107.8 million which is slightly higher compared with $100.4 million in 2008.
capital additions in 2009 and 2008 reflect general capital spending to support operations. capital additions in 2009 included capitalized costs
of $11.8 million related to the company’s new global it system (2008: $11.9 million). the company has committed to pay approximately
$11 million over the next year for consulting and implementation support for the new global it system. all capital spending is being monitored
closely by management.
in 2009, the company paid approximately $12.3 million on the settlement of foreign currency swaps, and received proceeds of $32.3 million
on the settlement of a cross currency interest rate swap, that was partially hedging the company’s investment in a foreign subsidiary.
the company’s planned net capital expenditures for 2010 are projected to be in the range of $75 million to $100 million. net rental additions
for 2010 are projected to be in the $100 million to $150 million range.
the company believes that internally generated cash flow, supplemented by borrowing from existing financing sources, if necessary, will be
sufficient to meet anticipated capital expenditures and other cash requirements in 2010. Management believes that the 2010 results will continue
to generate strong cash flows as working capital requirements, capital expenditures, and investment in rental fleets continue to be actively
managed. at this time, the company does not reasonably expect any presently known trend or uncertainty to affect its ability to access its
historical sources of cash.
2009 finning international inc. | 35 |
ManageMent’s Discussion & analysis
Financing Activities
as at December 31, 2009, the company’s short and long-term borrowings totalled $1.2 billion, a decrease of $0.4 billion, or 26.7%, from
December 31, 2008, mainly as a result of strong free cash flow generation.
to complement the internally generated funds from operating and investing activities, the company has approximately $1.2 billion in unsecured
credit facilities. included in this amount, finning has committed bank facilities totalling approximately $955 million with various canadian, u.s.,
u.K., and south american financial institutions. the largest of these facilities, an $800 million global credit facility, matures in December 2011. as
at December 31, 2009 approximately $725 million was available under these committed facilities and no long-term debt matures until December
2011. Based upon the availability of these facilities, the company’s business operating plans, and the discretionary nature of some of the outflows
like rental and capital expenditures, the company believes it has sufficient liquidity to meet its operational needs.
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 2009, the company’s long-term debt ratings were reconfirmed at a (low) by DBrs and 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. the company’s commercial paper program is
backstopped by the global credit facility. the maximum authorized limit of the company’s commercial paper program is $600 million.
Dividends paid to shareholders in 2009 were $75.0 million, an increase of $1.0 million compared to 2008.
the company had a share repurchase program in place until July 8, 2009. the company did not repurchase any common shares during 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.
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 $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 $8.9 million on the settlement of a derivative that hedged future cash flows associated with
the new Mtn issuances noted above.
the company’s overall Debt ratio was 39.3% at the end of 2009, compared with 48.9% at the end of 2008. this ratio is lower than the prior year
due to the strong free cash flow generation which contributed to the reduction in overall debt levels.
Contractual Obligations
Payments on contractual obligations in each of the next five years and thereafter are as follows:
($ Millions)
2010
2011
2012
2013
2014
thereafter
total
long-term debt
– principal repayment
– interest
operating leases
capital leases
total contractual obligations
$
$
24.2
52.5
71.1
8.1
155.9
$
$
168.0
52.3
56.6
2.2
279.1
$
$
–
45.2
39.4
1.2
85.8
$
$
475.3
44.9
28.4
1.1
549.7
$
$
–
21.1
20.2
1.1
42.4
$
$
348.4
94.8
137.9
13.7
594.8
$ 1,015.9
310.8
353.6
27.4
$ 1,707.7
the above table does not include obligations to fund pension benefits, although the company is making regular contributions to its 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 2009, approximately
$43 million was contributed towards the company’s defined benefit pension plans. currently, the company is expecting a higher level of required
defined benefit plan contributions for 2010, at approximately $50-$55 million, as a result of changes in the global financial markets in the latter
part of 2008. However, the actual level of contribution requirements for 2010 and the years that follow for the canadian and Hewden plans will
not be known until later in 2010 following the completion of the December 31, 2009 canadian actuarial valuations and the December 31, 2008
Hewden actuarial valuation. Management anticipates any increase in funding requirements will be manageable.
36
ManageMent’s Discussion & analysis
Employee Share Purchase Plan
the company has employee share purchase plans for its canadian and south american employees. under the terms of these plans, eligible
employees may purchase common shares of the company in the open market at the then current market price. the company pays a portion
of the purchase price to a maximum of 2% of employee earnings. at December 31, 2009, 68% and 2% of eligible employees in the company’s
canadian and south american operations, respectively, were contributing to these plans. 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, 2009, 27% 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. effective January 1, 2010, the company has suspended the matching share element
of the employee share Purchase ownership Plan in finning (uK) and Hewden.
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 company’s 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. 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 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 judgements 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.
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 goodwill was not impaired at December 31, 2009. in 2008,
the company determined that the fair value of its investment in 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, in 2008, the company recorded a full goodwill
impairment charge of $151.4 million. the goodwill impairment charge was non-cash in nature and did 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.
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 are expected to have a material effect on the company’s consolidated financial position or results of operations.
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 comprise 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.
2009 finning international inc. | 37 |
ManageMent’s Discussion & analysis
DescriPtion of non-gaaP Measures
eBit is defined herein as earnings before interest expense, interest income, and income taxes. eBitDa is defined as earnings before interest, taxes,
depreciation, and amortization. free cash flow is defined as cash flow provided by (used in) operating activities less net capital expenditures.
eBit, eBitDa, and free cash flow are measures of performance utilized by management to measure and evaluate the financial performance of its
operating segments. eBitDa and free cash flow are measures commonly reported and widely used by investors as an indicator of a company’s
cash operating performance and ability to raise and service debt. eBitDa is also commonly regarded as an indirect measure of operating cash
flow, a significant indicator of success for many businesses and is a common valuation metric.
Management believes that these measures provide important information regarding the operational performance of the company’s business.
By considering these measures in combination with the comparable gaaP measures set out below, management believes that shareholders are
provided a better overall understanding of the company’s business and its financial performance during the relevant period than if they simply
considered the gaaP measures alone. eBit, eBitDa, and free cash flow do not have any standardized meaning prescribed by gaaP and are
therefore unlikely to be comparable to similar measures presented by other issuers. accordingly, these measures 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 eBitDa, eBit, and net income is as follows:
($ Millions)
2009
2008
2009
2008
three months ended
December 31
twelve months ended
December 31
earnings before interest, taxes, depreciation, and
amortization, excluding goodwill impairment
goodwill impairment
earnings before interest, taxes, depreciation, and
amortization (eBitDa)
Depreciation and amortization
earnings before interest and income taxes (eBit)
finance costs
Provision for income taxes
net income
a reconciliation of free cash flow is as follows:
($ Millions)
cash provided by (used in) operating activities
additions to capital assets
Proceeds on disposal of capital assets
free cash flow
risK ManageMent
$
$
$
$
89.1
–
89.1
(59.1)
30.0
(18.8)
5.1
16.3
$
$
152.8
(151.4)
1.4
(85.9)
(84.5)
(21.7)
(0.6)
(106.8)
three months ended
December 31
2009
128.5
(18.6)
20.5
130.4
$
$
2008
177.2
(31.6)
6.1
151.7
$
$
$
$
474.7
–
474.7
(267.7)
207.0
(67.6)
(8.6)
130.8
$
$
twelve months ended
December 31
2009
562.4
(107.8)
39.3
493.9
$
$
712.5
(151.4)
561.1
(324.4)
236.7
(83.6)
(57.1)
96.0
2008
72.7
(100.4)
50.9
23.2
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. also 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.
38
ManageMent’s Discussion & analysis
financial Derivatives
the company uses or may use various financial instruments such as forward and swap foreign exchange contracts, interest rate swaps, and
equity hedges, as well as non-derivative foreign currency debt to manage its foreign exchange exposures, interest rate exposures, and stock-based
compensation expense exposures (see note 4 of the 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 have sufficient liquid financial resources to fund its operations and meet its commitments and
obligations. the company maintains bilateral and syndicated bank credit facilities, a commercial paper program, continuously monitors actual and
forecast cash flows, and manages maturity profiles of financial liabilities. undrawn credit facilities at December 31, 2009 were $1,012 million
(2008: $660 million), of which approximately $725 million (2008: $300 million) relates to committed credit facility. the company believes that it
has reasonable access to capital markets which is supported by its investment grade credit ratings.
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 existing bank facilities, is not sufficient to fund future
capital requirements, the company will require additional debt or equity financing in the capital markets. the company’s ability to access capital
markets on terms that are acceptable will be dependent upon prevailing market conditions, as well as the company’s future financial condition.
further, the company’s ability to increase its debt financing may be limited by its financial covenants or its credit rating objectives. although
the company does not 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.
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 fair value of its 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.
Foreign Exchange 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 main types of
foreign exchange risk of the company can be categorized as follows:
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 are considered self-sustaining and 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.
to the extent practical, 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, periodically, through 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 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 operation.
2009 finning international inc. | 39 |
ManageMent’s Discussion & analysis
transaction exposure
Many of the company’s operations purchase, sell, rent, and lease products as well as incur costs in currencies other than their functional
currency. this mismatch of currencies creates transactional exposure at the operational level, which may affect the company’s profitability
as exchange rates fluctuate. the company’s competitive position may also be impacted as relative currency movements affect the business
practices and/or pricing strategies of the company’s competitors.
the company is also exposed to currency risks related to the future cash flows on its non-canadian denominated short and long term debt.
to the extent practical, it is the company’s objective to manage the impact of exchange rate movements and volatility on its financial 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.
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%
strengthening of the canadian dollar against the following currencies for a full year relative to the December 31, 2009 month end rates would
increase / (decrease) net income by the amounts shown below. a 5% strengthening of the canadian dollar against the following currencies
from the December 31, 2009 month end rates would increase / (decrease) other comprehensive 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, 2009
month end rates
1.0466
1.6918
0.0021
net income
($ tHousanDs)
$
$
$
(17,000)
1,000
1,700
other
comprehensive
income
($ tHousanDs)
$
$
$
(22,100)
(17,000)
–
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
changes in market interest rates will cause fluctuations in the fair value or future cash flows of financial instruments.
the company is exposed to changes in interest rates on its interest bearing financial assets including cash and cash equivalents, instalment notes
receivable, and cross currency interest rate swaps. the short term nature of investments included in cash and cash equivalents limits the impact
to fluctuations in fair value, but interest income earned will be impacted. instalment notes receivable bear interest at a fixed rate thus their fair
value will fluctuate prior to maturity, but absent monetization, future cash flows do not change. the fair value of the company’s cross currency
interest rate swap will be impacted by relative changes in interest rates related to the two swapped currencies. as interest rates related to the
swap are fixed, future cash flows do not change. subsequent to December 31, 2009, the company settled its cross currency interest rate swap.
the company is exposed to changes in interest rates on its interest bearing financial liabilities including short and long term debt and variable
rate share forward (vrsf). the company’s debt portfolio comprises both fixed and floating rate debt instruments, with terms to maturity ranging
up to eight years. floating rate debt due to its short term nature exposes the company to limited fluctuations in changes to fair value, but finance
expense and cash flows will increase or decrease as interest rates change.
the fair value of the company’s fixed rate debt obligations fluctuate with changes in interest rates, but absent early settlement, related cash flows
do not change. for reporting purposes the company does not measure any fixed rate long-term debt at fair value. the company is exposed to
future interest rates upon refinancing of any debt prior to or at maturity.
the company pays floating interest rates on its vrsf. Both fair value and future cash flows are impacted by changes in interest rates.
the company manages 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 may utilize derivative instruments such as interest rate swaps to adjust the balance of fixed and
floating rate debt.
40
ManageMent’s Discussion & analysis
Commodity Prices
the company’s revenues can be indirectly affected by fluctuations in commodity prices; in particular, changes in expectations of longer-term
prices. in canada, commodity price movements in the forestry, metals, coal, and petroleum sectors can have an impact on customers’ demands
for equipment and product support. 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 price 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 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 is expected
to continue to be, important in mitigating the effects of downturns in the business cycle. finning’s product support revenues typically contribute
higher gross margins than new equipment sales.
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 cash and cash equivalents, receivables from customers, instalment notes receivable, and
derivative assets. credit risk associated with cash and cash equivalents is managed by ensuring that these financial assets are held with major
financial institutions with strong investment grade ratings and by maintaining limits on exposures with any single institution. an ongoing review
is performed to evaluate the changes in the credit rating of 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
instruments relating to counterparties defaulting 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 monitoring, and by dealing only with major financial institutions that
have a credit rating of at least a- from s&P and a (low) from DBrs.
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 plans accounted for as
liability-based awards to be recorded at intrinsic value, compensation expense can vary as the price of the company’s common shares changes.
the company has entered into a derivative contract to partly offset this exposure, called a vrsf.
a 5% strengthening in the company’s share price as at December 31, 2009, all other variables remaining constant, would have increased net
income by approximately $1.0 million as a result of revaluing the company’s vrsf with a 5% weakening having the opposite effect. this impact
partially mitigates changes in the stock based compensation expense; as the company’s share price changes, the intrinsic value impact related to
the stock-based compensation liability is partially offset by the fair value impact related to the vrsf.
contingencies anD guarantees
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.
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, 2009, the total estimated value of
these contracts outstanding is $164.4 million coming due at periods ranging from 2010 to 2016. 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 $0.8 million.
for further information on the company’s contingencies, commitments, guarantees, and indemnifications, refer to notes 24 and 25 of the notes
to the consolidated financial statements.
2009 finning international inc. | 41 |
ManageMent’s Discussion & analysis
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, 2009, that would materially affect, or is reasonably likely to materially affect, the company’s internal
control over financial reporting.
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, 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.
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 of the design and testing of the effectiveness of the operation of the company’s disclosure
controls and procedures and internal control over financial reporting were conducted as of December 31, 2009, by and under the supervision of
management, including the ceo and cfo. in making the assessment of the effectiveness of the company’s disclosure controls and procedures
and 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, testing, 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 procedures and internal control over
financial reporting were effective as of December 31, 2009.
42
ManageMent’s Discussion & analysis
selecteD Quarterly inforMation
($ Millions, excePt for
sHare anD oPtion Data)
Q4
2009
Q3
Q2
Q1
Q4
2008
Q3
Q2
Q1
revenue(1)
canada
south america
uK group
total revenue
net income (loss)(1)(2)
Basic earnings (loss)
per share(1)(2)(3)
Diluted earnings (loss)
per share(1)(2)(3)
total assets(1)
long-term debt
current
non-current
total long-term debt(4)
cash dividends paid
per common share
common shares
outstanding (000’s)(3)
options outstanding (000’s)
$ 601.8
337.0
196.3
$ 1,135.1
16.3
$
$ 489.9
376.9
206.4
$ 1,073.2
21.7
$
$ 582.0
363.0
219.9
$ 1,164.9
47.8
$
$ 712.9
412.7
238.7
$ 1,364.3
45.0
$
$ 826.0
464.3
276.4
$ 1,566.7
$ (106.8)
$ 748.9
389.7
324.6
$ 1,463.2
64.8
$
$ 849.1
340.7
341.5
$ 1,531.3
67.2
$
$ 792.9
306.9
330.4
$ 1,430.2
70.8
$
$
0.10
$
0.13
$
0.28
$
0.26
$
(0.63)
$
0.38
$
0.39
$
0.41
$
0.10
$ 3,671.4
$
0.13
$ 3,892.4
$
0.28
$ 4,357.3
$
0.26
$ 4,639.6
$
(0.62)
$ 4,720.4
$
0.37
$ 4,604.4
$
0.39
$ 4,603.8
$
0.40
$ 4,527.8
$
24.2
991.7
$ 1,015.9
$
23.9
1,013.8
$ 1,037.7
$
2.6
1,206.4
$ 1,209.0
$
2.6
1,437.3
$ 1,439.9
$
2.6
1,410.7
$ 1,413.3
$
2.5
1,313.1
$ 1,315.6
$ 100.5
1,121.8
$ 1,222.3
$ 215.9
605.7
$ 821.6
$
0.11
$
0.11
$
0.11
$
0.11
$
0.11
$
0.11
$
0.11
$
0.10
170,747
6,299
170,661
6,537
170,631
6,606
170,545
5,807
170,445
6,037
171,356
6,200
172,692
6,343
172,623
4,576
(1) on January 15, 2008 the company’s canadian operations purchased collicutt energy services ltd. the results of operations and financial position of collicutt
have been included in the figures above since the date of acquisition.
(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 negative impact on basic earnings per share (ePs) for the fourth quarter of 2008 was $0.89 per share (diluted ePs: $0.88 per share). the
goodwill impairment charge was non-cash in nature and did 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 did not expect an income tax deduction from this charge.
(3) 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.
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.
2009 finning international inc. | 43 |
ManageMent’s Discussion & analysis
neW accounting PronounceMents
changes aDopteD in 2009
(i) Goodwill and Intangible Assets
effective January 1, 2009, the company adopted section 3064, Goodwill and Intangible Assets, issued by the cica. the new standard replaces
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. the new standard does not have a material impact on the company’s consolidated financial statements.
(ii) Financial Instruments Disclosures
effective December 31, 2009, the company has adopted the amendments to section 3862, Financial Instruments – Disclosures, which are effective
for annual financial statements for fiscal years ending after september 30, 2009, and which enhance current disclosure requirements for financial
instruments, as discussed further in note 4 to the consolidated financial statements. these amendments require disclosure of additional details
about fair value measurements, including the relative reliability of the inputs used in those measurements, and about the liquidity risk of financial
instruments.
Future accounting pronouncements
(i) 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 change in the basis of measurement of non-
controlling interests, 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.
effective January 1, 2010, the company early adopted sections 1582, 1601, and 1602 in accordance with the transitional provisions. the adoption
of sections 1601 and 1602 is not expected to have a material impact on the company’s consolidated financial statements. Whether the company
will be materially affected by the new recommendations of section 1582 will depend upon the specific facts of business combinations, if any,
occurring subsequent to January 1, 2010.
(ii) 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.
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 completed a high level review of the major
differences between canadian gaaP and ifrs as applicable to the company. While a number of differences were identified, the areas of highest
potential impact included property, plant and equipment, certain aspects of revenue recognition, income taxes, employee future benefits, stock-
based compensation, presentation, and disclosure, as well as the initial selection of applicable transitional exemptions under the provisions of ifrs
1 first time adoption. the company has not identified any further areas subject to significant change during subsequent phases of the transition
project. the conversion project is on schedule, and a timetable for developing the opening balance sheet and comparative information preparation
is in place for 2010. all activities required to be complete prior to January 1, 2010 were completed, including designation of all hedging
arrangements in an ifrs-compliant manner.
44
ManageMent’s Discussion & analysis
the current focus of the project is the identification of local level impacts for the opening balance sheet in each of the company’s operations,
and finalization of the ifrs 1 transitional exemptions to be taken. the following summary of opening balance sheet transitional provisions to
be adopted and their likely impacts indicates the progress of our work in each topic area identified as having a potential high impact. it is not
an exhaustive list; if further transitional elections are found to be beneficial to the transition process as the opening balance sheet preparation
progresses, then such exemptions may be taken.
•
•
•
Property, plant, and equipment: no transitional elections will be taken. the company will retain assets at historical cost upon transition rather
than taking the allowed election to recognize assets at fair value.
Employee future benefits: any unamortized defined benefit pension plan actuarial gains and losses accumulated at January 1, 2010 will be
recognized in retained earnings in accordance with the ifrs 1 transitional exemption.
the company’s future accounting policy choice under ifrs with respect to defined benefit pension plans is not yet confirmed, as this is an
area subject to ongoing standard-setting activity by the iasB.
Stock based compensation: ifrs 2, share Based Payments, encourages application of its provisions to equity instruments granted on or before
november 7, 2002, if fair value information about these instruments had previously been publicly disclosed. as the fair value of the company’s
instruments had not been historically disclosed, the company will not restate share based payment balances in relation to fully vested awards
of share based payments. an immaterial opening balance sheet adjustment will be made to account for unvested share based payment plans
upon transition.
in addition to the key areas outlined above, the use of the following additional transitional exemptions, available under ifrs 1, has also been
agreed by management and the audit committee:
•
•
•
Borrowing costs: Borrowing costs will not be capitalized retrospectively and the company will only capitalize borrowing costs for those assets
whose capitalization commencement date is after the date of transition (January 1, 2010).
Business combinations: the company will not retrospectively restate any business combinations; ifrs 3 will be applied prospectively
to acquisitions after January 1, 2010. this date is consistent with the company’s adoption of the cica’s revised sections for business
combinations, consolidations, and non controlling interests.
Cumulative translation adjustments: all cumulative translation adjustments and associated cumulative hedging gains and losses will be transferred
to retained earnings from accumulated other comprehensive income upon transition.
Management continues to monitor standards to be issued by the international accounting standards Board (iasB), but it is difficult to predict the
ifrs that will be effective at the end of the company’s first ifrs reporting period, as the iasB work plan anticipates the completion of several
projects in calendar years 2010 and 2011. their projects on employee benefits, leases, and financial instruments are especially relevant to the
company, and management will be monitoring any changes to these standards closely.
the company’s transition plan includes a comprehensive training plan; initial training sessions have been provided to key finance personnel
and management in all geographic regions, and further in depth sessions will be provided to relevant personnel throughout the implementation
process. the Board of Directors have also participated in a comprehensive education session. an investor communication plan is under
development and communication activities with internal stakeholders are in place and will be ongoing throughout 2010 and 2011.
Management has also begun to consider the impact of the transition on the company’s business practices, systems, and internal control over financial
reporting and anticipate that the most significant impact of ifrs on its compliance programme will be with regards to financial reporting controls.
earnings coverage ratio
the following earnings coverage ratio is calculated for the twelve months ended December 31, 2009 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, 2009
earnings coverage ratio(1)
3.1
(1) 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.
2009 finning international inc. | 45 |
ManageMent’s Discussion & analysis
outstanDing sHare Data
as at february 19, 2010
common shares outstanding
options outstanding
outlooK
170,858,800
6,152,726
in each of the company’s regions, new equipment order intake in the fourth quarter was the highest since 2008. the resulting growth in backlog
is mainly driven by the mining sector. Quotation activity continues to be strong in the mining sector, and the company expects this to result in
mining orders in 2010.
in non-mining sectors, the company has limited visibility of future revenues. in the construction, forestry, and oil and gas sectors, there is an
excess supply of dealer inventory and market weakness is expected to continue for several more quarters.
Product support revenues continue to grow in the mining sector in all operations as the equipment sold in recent years remains highly utilized.
in all regions, there is an increase in equipment rebuild work and related quoting activity for large mining equipment. in non-mining sectors, where
some customers are deferring maintenance and some equipment remains idle, the company believes that a backlog of product support is being
accumulated. increased economic activity is expected to result in further product support growth.
in canada, product support revenues continue to grow in the mining industry. the company is experiencing increased demand for equipment and
product support from oil sands, coal, and copper mine producers and contractors. incremental business from government funded infrastructure
initiatives is expected to positively impact the construction sector towards the end of 2010 and into 2011. Demand for conventional oil and gas
equipment remains soft and no rebound is expected until late 2010.
in south america, the company is actively quoting to mining customers and receiving new orders for large mining equipment. at current copper
and gold prices, the mining industry is expected to remain strong. construction and power systems activity is forecast to increase in chile and to
be flat in argentina in 2010. Mining contracts are expected to continue to drive product support growth throughout 2010. non-mining equipment
remained well-utilized throughout the economic downturn and will also contribute to ongoing product support growth in south america.
in the uK, market conditions are expected to remain soft. the company sees opportunities with coal mines, quarries, and large infrastructure
customers for new equipment sales and product support. opportunities in power systems remain strong as evident from the high level of
quoting activity for projects in the energy, marine, and oil & gas sectors. at Hewden, while a strategic review is underway, management continues
to improve operating performance. fleet utilization has increased, while pressure on rental rates continues due to overcapacity in the industry.
Hewden’s cash flow remains positive. the strategic review of Hewden is progressing according to plan and, in exploring alternatives, the company
is receiving expressions of interest from a number of parties. the conclusion of this review is expected by the end of the second quarter of 2010
and will be driven by the need to optimize shareholder value.
in 2010, revenues are expected to be slightly below 2009, with lower new equipment sales partly offset by slightly higher product support
revenues. sg&a expenses will continue to decrease, albeit at a slower pace than in 2009. as a result, we expect to see a modest improvement
in eBit in 2010.
on a consolidated basis, free cash flow in 2010 is expected to be in excess of $200 million. it will be lower than in 2009 as the company begins
to purchase equipment to fill orders for mining customers and stock up certain models of other equipment for anticipated sales. the net debt
to capital ratio is expected to be in the mid-30% range by the end of 2010.
the company has targeted sg&a expense reductions of over $200 million in 2010 compared to 2008 expense levels and is on track to meet
this goal.
february 23, 2010
46
ManageMent’s Discussion & analysis
selecteD annual inforMation
($ 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)
long-term debt(4)
current
non-current
cash dividends declared per common share
2009
4,737.5
130.8
–
130.8
–
130.8
0.77
–
0.77
–
0.77
0.77
–
0.77
–
0.77
3,671.4
24.2
991.7
1,015.9
0.44
$
$
$
$
$
$
$
$
$
$
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
5,662.2
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
$
$
$
$
$
$
$
$
$
$
(1) 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 2007 is the after-tax gain
on the sale of the tool Hire Division of $0.1 million. revenues and assets from the uK tool Hire Division have been excluded from the figures above.
on January 15, 2008 the company’s canadian operations purchased collicutt energy services ltd. the results of operations and financial position of collicutt
have been included in the figures above since the date of acquisition.
(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 was non-cash in nature and did 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 did not expect an income tax deduction from this charge.
(3) 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.
(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.
2009 finning international inc. | 47 |
ManageMent’s Discussion & analysis
forWarD-looKing DisclaiMer
this report contains statements about the company’s business outlook, objectives, plans, strategic priorities and other statements that are
not historical facts. a statement we make is forward-looking when it uses what we know and expect today to make a statement about the
future. forward-looking statements may include words such as aim, anticipate, assumption, believe, could, expect, goal, guidance, intend, may,
objective, outlook, plan, project, seek, should, strategy, strive, target, and will. forward-looking statements in this report include, but are not
limited to, statements with respect to: expectations with respect to the economy and associated impact on the company’s financial results; the
estimated annualized cost savings and anticipated restructuring charges related to actions taken by the company in response to the economic
downturn; the potential outcome of the company’s strategic review of Hewden; expected revenue and eBit growth; anticipated effective tax
rate; anticipated generation of free cash flow (including projected net capital and rental expenditures), and its expected use; anticipated defined
benefit plan contributions; and expected target range of Debt ratio. all such forward-looking statements are made pursuant to the ‘safe harbour’
provisions of applicable canadian securities laws.
unless otherwise indicated by us, forward-looking statements in this report describe our expectations at february 23, 2010. except as may be
required by canadian securities laws, we do not undertake any obligation to update or revise any forward-looking statement, whether as a result
of new information, future events, or otherwise.
forward-looking statements, by their very nature, are subject to numerous risks and uncertainties and are based on several assumptions which
give rise to the possibility that actual results could differ materially from our expectations expressed in or implied by such forward-looking
statements and that our business outlook, objectives, plans, strategic priorities and other statements that are not historical facts may not
be achieved. as a result, we cannot guarantee that any forward-looking statement will materialize. factors that could cause actual results or
events to differ materially from those expressed in or implied by our forward-looking statements include: general economic and credit market
conditions; foreign exchange rates; commodity prices; the level of customer confidence and spending, and the demand for, and prices of, our
products and services; our dependence on the continued market acceptance of caterpillar’s products and caterpillar’s timely supply of parts
and equipment; our ability to continue to implement our cost reduction initiatives while continuing to maintain customer service; the intensity
of competitive activity; our ability to raise the capital we need to implement our business plan; regulatory initiatives or proceedings, litigation
and changes in laws or regulations; stock market volatility; changes in political and economic environments for operations outside canada; with
respect to Hewden, not being successful in generating the expected improvements in the underlying business performance or not being able to
successfully negotiate and complete a transaction on terms acceptable to the company or at all. forward-looking statements are provided in
this report for the purpose of giving information about management’s current expectations and plans and allowing investors and others to get a
better understanding of our operating environment. However, readers are cautioned that it may not be appropriate to use such forward-looking
statements for any other purpose.
forward-looking statements made in this report are based on a number of assumptions that we believed were reasonable on the day we made
the forward-looking statements. refer in particular to the Market outlook section of the MD&a. some of the assumptions, risks, and other
factors which could cause results to differ materially from those expressed in the forward-looking statements contained in this report are
discussed in the company’s current annual information form (aif) in section 4.
We caution readers that the risks described in the aif are not the only ones that could impact us. additional risks and uncertainties not
currently known to us or that we currently deem to be immaterial may also have a material adverse effect on our business, financial condition,
or results of operations.
except as otherwise indicated by us, forward-looking statements do not reflect the potential impact of any non-recurring or other unusual items
or of any dispositions, mergers, acquisitions, other business combinations or other transactions that may be announced or that may occur after
the date hereof. the financial impact of these transactions and non-recurring and other unusual items can be complex and depends on the facts
particular to each of them. We therefore cannot describe the expected impact in a meaningful way or in the same way we present known risks
affecting our business.
48
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 2009.
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 and chief executive officer
february 23, 2010
vancouver, Bc, canada
D.s. smith
executive vice President and chief financial officer
2009 finning international inc. | 49 |
auDitors’ rePort
to the shareholDers oF Finning international inc.
We have audited the consolidated balance sheets of finning international inc. as at December 31, 2009 and 2008 and the consolidated statements
of income, comprehensive income, shareholders’ equity and cash flow for the years then ended. 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, 2009 and 2008, and the results of its operations and its cash flows for the years then ended in accordance with canadian generally
accepted accounting principles.
Deloitte & toucHe llP, chartered accountants
february 23, 2010
vancouver, Bc, canada
50
consoliDateD stateMents of incoMe
for years ended December 31
($ tHousanDs, excePt sHare anD Per sHare aMounts)
revenue
new equipment
used equipment
equipment rental
Product support
other
total revenue
cost of sales
gross profit
2009
2008
$ 1,984,727
337,806
510,439
1,892,571
11,998
4,737,541
3,407,972
1,329,569
$
2,928,643
431,804
712,791
1,899,483
18,704
5,991,425
4,318,542
1,672,883
selling, general, and administrative expenses
1,085,035
1,267,963
other expenses (income) (note 2)
goodwill impairment (note 16)
earnings before interest and income taxes
finance costs (notes 3 and 4)
income before provision for income taxes
Provision for income taxes (note 6)
net income
earnings per share (note 9)
Basic
Diluted
Weighted average number of shares outstanding
Basic
Diluted
37,514
–
207,020
67,608
139,412
8,589
130,823
0.77
0.77
$
$
$
16,801
151,373
236,746
83,636
153,110
57,114
95,996
0.56
0.55
$
$
$
170,607,892
170,993,485
172,361,881
173,318,957
the accompanying notes to the consolidated financial statements are an integral part of these statements.
2009 finning international inc. | 51 |
2009
2008
$
197,904
622,641
62,563
993,523
207,030
2,083,661
32,604
691,120
482,777
41,469
94,254
245,550
$ 3,671,435
$
162,238
749,941
8,624
24,179
944,982
991,732
110,147
108,888
2,155,749
$
$
$
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
557,052
33,509
(293,869)
1,218,994
1,515,686
$ 3,671,435
554,966
25,441
(176,444)
1,163,141
1,567,104
4,720,375
$
consoliDateD Balance sHeets
December 31
($ tHousanDs)
assets
current assets
cash and cash equivalents (note 19)
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 16)
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 17)
future income taxes (note 6)
total liabilities
commitments and contingencies (notes 23 and 24)
shareholDers’ eQuity
share capital (note 7)
contributed surplus
accumulated other comprehensive loss
retained earnings
total shareholders’ equity
approved by the Directors:
M.t. Waites, Director
D.W.g. Whitehead, Director
the accompanying notes to the consolidated financial statements are an integral part of these statements.
52
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
tax recovery (expense) on net investment hedges
foreign currency translation and gain (losses) on net investment hedges
unrealized gains (losses) on cash flow hedges
realized losses on cash flow hedges, reclassified to earnings
tax recovery (expense) on cash flow hedges
gains (losses) on cash flow hedges
2009
2008
$
130,823
$
95,996
(165,606)
55,594
(18,040)
(128,052)
10,318
2,657
(2,348)
10,627
60,536
496
1,658
62,690
(11,851)
1,565
3,375
(6,911)
comprehensive income
$
13,398
$
151,775
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, 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
176,131,879
–
199,627
15,403
$ 571,402
–
2,260
398
$
15,356
–
(341)
65
$ (223,661) $
62,690
–
–
(8,562) $ 1,269,544 $ 1,624,079
151,775
95,996
(6,911)
1,919
–
–
463
–
–
(5,901,842)
–
–
(19,094)
–
–
–
10,361
–
–
–
–
–
–
–
(128,402)
–
(73,997)
(147,496)
10,361
(73,997)
Balance, December 31, 2008
comprehensive income (loss)
issued on exercise of stock options
stock option expense
Dividends on common shares
Balance, December 31, 2009
170,445,067
–
301,733
–
–
170,746,800
$ 554,966
–
2,086
–
–
$ 557,052
$ 25,441
–
(121)
8,189
–
$ 33,509
$ (160,971) $ (15,473) $ 1,163,141 $ 1,567,104
13,398
(128,052)
130,823
1,965
–
–
–
8,189
–
(74,970)
–
(74,970)
(4,846) $ 1,218,994 $ 1,515,686
10,627
–
–
–
$ (289,023) $
the accompanying notes to the consolidated financial statements are an integral part of these statements.
2009 finning international inc. | 53 |
consoliDateD stateMents of casH floW
for years ended December 31
($ tHousanDs)
operating activities
net income
add items not affecting cash
Depreciation and amortization
future income taxes
stock-based compensation
gain on disposal of capital assets (note 2)
goodwill impairment
other
changes in working capital items (note 19)
cash provided after changes in working capital items
rental equipment, net of disposals
equipment leased to customers, net of disposals
cash flow provided by operating activities
investing activities
additions to capital assets
Proceeds on disposal of capital assets
Proceeds on settlement of derivatives
acquisition of businesses (notes 11,15 and 16)
cash used in investing activities
Financing activities
increase (decrease) in short-term debt
increase (decrease) in long-term debt
Payment on settlement of derivative
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 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 19
2009
2008
$
130,823
$
95,996
271,107
(7,685)
11,520
(18,313)
–
1,632
389,084
157,310
546,394
43,166
(27,203)
562,357
(107,808)
39,342
20,020
–
(48,446)
7,663
(344,477)
–
1,965
–
(74,970)
(409,819)
(15,960)
88,132
109,772
197,904
$
326,095
9,822
16,924
(19,892)
151,373
(816)
579,502
(301,369)
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
$
the accompanying notes to the consolidated financial statements are an integral part of these statements.
54
notes to tHe consoliDateD financial stateMents
December 31, 2009 and 2008
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., finning soluciones Mineras s.a., finning
uruguay s.a., and finning Bolivia s.a. the company’s principal joint ventures are oeM remanufacturing company inc., in which finning owns
100% of the voting shares, and 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, asset retirement obligations, 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 of the foreign operation 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 these hedging instruments are accounted for as items of other comprehensive income
and presented in the accumulated other comprehensive loss account on the consolidated balance sheet. these exchange gains or losses are
recognized in net income when there is a reduction in the net investment in the self-sustaining foreign operation.
(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) 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.
2009 finning international inc. | 55 |
notes to tHe consoliDateD financial stateMents
1. SIGNIFICANT ACCOUNTING POLICIES (continued)
(F) 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.
(G) 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.
(h) 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. Depreciation is recorded in cost of sales in the consolidated statement of
income.
(I) 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. Depreciation is recorded in cost of sales in the consolidated statement of income.
(j) CAPItAl ASSEtS
land, buildings, and equipment are recorded at cost, net of accumulated depreciation. Depreciation of 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.
(K) GOODwIll
goodwill represents the excess cost of an investment over the fair value of the net assets acquired and is not amortized.
(l) 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. as a
result of the continuing weak economic performance of the company’s uK subsidiary, Hewden, management performed an impairment analysis
on Hewden’s long-lived assets and identifiable intangible assets with finite lives in the fourth quarter of 2009. 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 in 2009 and 2008, it was determined there
was no impairment of these assets at that time.
56
notes to tHe consoliDateD financial stateMents
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 16.
(m) 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.
(N) 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.
(O) 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 equipment 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 product support 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. Product support is 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. any
losses estimated during the term of the contract are recognized when identified.
(P) 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.
(q) 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 post employment benefit plans. the company accrues its obligations to employees under these arrangements based on the actuarial
valuation of anticipated payments to employees.
2009 finning international inc. | 57 |
notes to tHe consoliDateD financial stateMents
1. SIGNIFICANT ACCOUNTING POLICIES (continued)
(q) EmPlOyEE FUtURE BENEFItS (CONtINUED)
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 fair 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 fair 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.
(R) 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, 2009 and 2008, the recorded amount approximates fair value.
short-term and long-term debt and accounts payable are classified as “other financial liabilities”. they are measured at amortized cost using
the effective interest rate method. at December 31, 2009 and 2008, 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, 2009 and 2008 is disclosed in note 4.
transaction costs directly attributable to the acquisition or issue of a financial asset or financial liability (except those held for trading) are
included in the carrying amount of the financial asset or financial liability, and are amortized to income using the effective interest rate method.
Derivatives
all derivative instruments are recorded on the balance sheet at fair value.
embeDDeD Derivatives
Derivatives may be embedded in other financial instruments (host instruments). embedded derivatives are treated as separate derivatives when
their economic characteristics and risks are not closely related to those of the host instrument, the terms of the embedded derivative are
the same as those of a stand-alone derivative, and the combined contract is not classified as Held for trading. these embedded derivatives are
measured at fair value on the balance sheet with subsequent changes in fair value recognized in income. the company has not identified any
embedded derivatives that are required to be accounted for separately from the host contract.
58
notes to tHe consoliDateD financial stateMents
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 instrument 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 for periods up to a year in advance. 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, 2009, approximately $7.5 million of net gains (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.
(S) ChANGE IN ACCOUNtING POlICIES
(i) goodwill and intangible assets
effective January 1, 2009, the company adopted section 3064, Goodwill and Intangible Assets, issued by the cica. the new standard replaces
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. the new standard does not have a material impact on the company’s consolidated financial statements.
(ii) financial instruments Disclosures
effective December 31, 2009, the company has adopted the amendments to section 3862, Financial Instruments – Disclosures, which are
effective for annual financial statements for fiscal years ending after september 30, 2009, and which enhance current disclosure requirements
for financial instruments, as discussed further in note 4 to the consolidated financial statements. these amendments require disclosure of
additional details about fair value measurements, including the relative reliability of the inputs used in those measurements, and the liquidity
risk of financial instruments.
2009 finning international inc. | 59 |
notes to tHe consoliDateD financial stateMents
1. SIGNIFICANT ACCOUNTING POLICIES (continued)
(t) COmPARAtIvE FIGURES
certain comparative figures have been reclassified to conform to the 2009 presentation.
(U) FUtURE ACCOUNtING PRONOUNCEmENtS
(i) 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 change in the basis of
measurement of non-controlling interests, 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.
effective January 1, 2010, the company early adopted sections 1582, 1601, and 1602 in accordance with the transitional provisions. the
adoption of sections 1601 and 1602 is not expected to have a material impact on the company’s consolidated financial statements. Whether
the company will be materially affected by the new recommendations of section 1582 will depend upon the specific facts of business
combinations, if any, occurring subsequent to January 1, 2010.
(ii) 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.
2. OTHER EXPENSES (INCOME)
other expenses (income) include the following items:
for years ended December 31
($ tHousanDs)
gain on sale of properties (a)
restructuring (b)
Project costs (c)
gain on sale of other properties
2009
(16,501)
36,970
18,857
(1,812)
37,514
$
$
2008
(19,210)
20,496
16,197
(682)
16,801
$
$
the tax recovery on other expenses for the year ended December 31, 2009 was $14.7 million (2008: $7.3 million).
(a) in 2009, the company’s uK subsidiary, Hewden, sold certain properties for cash proceeds of approximately $16.7 million (2008: $37.8 million),
resulting in a pre-tax gain of $9.3 million (2008: $19.2 million).
in 2009, the company’s south american subsidiary, finning chile s.a., sold a property in exchange for a new head office property. this new
property was recorded at approximately $10.6 million which was the fair value of the old property at the time of exchange. the transaction
resulted in a pre-tax gain on sale of approximately $7.2 million.
(b) in 2009, the company incurred other restructuring and severance costs of $23 million globally in 2009 (primarily in the company’s canadian
operations) in response to market conditions (2008: $9 million). in addition, the company’s uK operations incurred restructuring costs of
approximately $1 million in connection with the integration of business support services (2008: $8 million). the uK operations also incurred
costs of approximately $11 million in 2009 related to the restructuring of Hewden’s nationwide depot network (2008: $3 million).
(c) Project costs incurred in 2009 and 2008 relate to the implementation of a new information technology system for the company’s global operations.
60
notes to tHe consoliDateD financial stateMents
3. SHORT-TERM AND LONG-TERM DEBT
December 31
($ tHousanDs)
short-term debt
long-term debt:
Medium term notes
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%, £115 million (2008: £125 million) eurobond, due May 30, 2013
other term loans (a)
less current portion of long-term debt
total long-term debt
2009
2008
$
162,238
$
193,635
149,813
249,258
348,427
193,495
74,918
1,015,911
(24,179)
991,732
$
149,718
249,057
348,241
222,122
444,232
1,413,370
(2,643)
1,410,727
$
(a) other term loans include u.s. $66.6 million and £nil million (2008: u.s. $291.0 million and £10.0 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 £1.7 million (2008: £2.4 million) of rental equipment financing secured by the related equipment, with
varying rates of interest from 5.8% – 6.8% 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 the company’s principal source of
short-term funding. this commercial paper program is backstopped by credit available under an $800 million committed credit facility. in addition,
the company maintains certain other committed and uncommitted bank credit facilities to support its subsidiary operations. as at December 31,
2009, the company had approximately $1,240 million (2008: $1,300 million) of unsecured credit facilities, and including all bank and commercial
paper borrowings drawn against these facilities, approximately $1,012 million (2008: $660 million) of capacity remained available, of which
approximately $725 million (2008: $300 million) is committed credit facility capacity.
included in short-term debt is foreign currency denominated debt of u.s. $150.7 million (2008: u.s. $29.0 million) and £nil million (2008: £32.7 million).
the average interest rate applicable to the consolidated short-term debt for 2009 was 1.5% (2008: 4.5%).
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 £115.0 million (2008: £125.0 million) 5.625% eurobond is unsecured, and interest is payable annually with principal
due on maturity.
in the fourth quarter of 2009, the company redeemed £10 million ($17.3 million) of the 5.625% eurobond at an average price of £102.80. the
company recorded a pre-tax charge of approximately $0.9 million (recorded in finance costs), reflecting the recognition of deferred financing
costs and other costs associated with this purchase.
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, 2009, $142.5 million (2008: $538.4 million) was drawn on
this facility, including commercial paper issuances.
2009 finning international inc. | 61 |
notes to tHe consoliDateD financial stateMents
3. SHORT-TERM AND LONG-TERM DEBT (continued)
long-terM DeBt rePayMents
Principal repayments on long-term debt in each of the next five years and thereafter are as follows:
($ tHousanDs)
2010
2011
2012
2013
2014
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 on interest rate derivatives
interest income on tax reassessment
other finance related expenses, net of sundry interest earned
finance costs
$
$
24,179
167,976
–
475,329
–
348,427
1,015,911
2009
2008
$
$
4,347
55,499
59,846
2,232
(3,529)
9,059
67,608
$
$
15,866
61,495
77,361
1,578
–
4,697
83,636
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.
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 cash and cash equivalents, receivables from customers, instalment notes receivable, and
derivative assets.
exposure to CreDit risk
the carrying amount of financial assets and service work in progress 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
Derivative assets
62
2009
197,904
622,641
62,563
40,121
32,126
29,499
984,854
$
$
2008
109,772
840,810
102,607
62,912
38,852
84,599
1,239,552
$
$
notes to tHe consoliDateD financial stateMents
Cash anD Cash equivalents
credit risk associated with cash and cash equivalents is managed by ensuring that these financial assets are held with major financial institutions
with strong investment grade ratings and by maintaining limits on exposures with any single institution. an ongoing review is performed to
evaluate the changes in the credit rating of counterparties.
aCCounts reCeivable, serviCe work in progress, anD other reCeivables
accounts receivable comprises trade accounts and non-trade accounts. 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.
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 makes estimates for allowances that represent 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 estimated based on historical data of payment statistics for similar financial assets, adjusted for current economic conditions.
the maximum exposure to credit risk for trade receivables at the reporting date by geographic location of customer was:
December 31
($ tHousanDs)
canada
u.K.
chile
argentina
Bolivia
uruguay
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
2009
310,172
123,151
109,193
37,125
4,782
1,484
5,689
591,596
$
$
2008
397,738
176,062
156,483
47,917
5,021
3,074
8,213
794,508
$
$
2009
2008
gross
allowance
gross
allowance
$
$
411,699
123,118
36,656
6,094
38,229
615,796
$
$
804
1,223
1,153
745
20,275
24,200
$
$
527,331
172,473
65,498
12,323
44,037
821,662
the movement in the allowance for doubtful accounts in respect of trade receivables during the period was as follows:
for years ended December 31
($ tHousanDs)
Balance, beginning of year
additional allowance
receivables written off
foreign exchange translation adjustment
Balance, end of year
2009
27,154
12,675
(13,388)
(2,241)
24,200
$
$
$
$
$
$
176
284
1,618
2,127
22,949
27,154
2008
28,229
12,331
(13,408)
2
27,154
the allowance amounts in respect of trade receivables are used to record possible 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.
2009 finning international inc. | 63 |
notes to tHe consoliDateD financial stateMents
4. FINANCIAL INSTRUMENTS (continued)
Derivative assets
the company does have a certain degree of credit exposure arising from its derivative instruments relating to counterparties defaulting 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 monitoring, and by dealing only with major financial institutions that have a credit rating of at least a- from standard & Poor’s and
a (low) from DBrs.
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 have sufficient liquid financial resources to fund its operations and meet its commitments and
obligations. the company maintains bilateral and syndicated bank credit facilities, a commercial paper program, continuously monitors actual and
forecast cash flows, and manages maturity profiles of financial liabilities. undrawn credit facilities at December 31, 2009 were $1,012 million (2008:
$660 million). the company believes that it has reasonable access to capital markets which is supported by its investment grade credit ratings.
the following are the contractual maturities of non-derivative and derivative financial liabilities. the amounts presented represent the future
undiscounted principal and interest cash flows and therefore do not equate to the carrying amount on the consolidated balance sheet.
($ tHousanDs)
non-derivative financial
liabilities
short-term debt
unsecured Mtns
eurobond
unsecured bank facilities
other term loans
capital lease obligations
accounts payable and accruals
(excluding derivative liabilities
below)
Derivatives
cross currency interest
rate swap(1)
Pay gBP (fixed)
receive caD (fixed)
interest rate swaps
Pay usD (fixed)
receive usD (floating)
forward foreign currency
contracts and swaps
sell caD
Buy usD
sell gBP
Buy usD
sell clP
Buy usD
sell usD
Buy clP
share forward
sell
Buy
carrying amount
December 31,
2009
2010
2011-2012
2013-2014
thereafter
contractual cash flows
$
(162,238)
(747,498)
(193,495)
(69,730)
(5,188)
(19,262)
$
(163,567)
(40,930)
(10,944)
(21,421)
(3,439)
(8,118)
$
–
(224,900)
(21,888)
(16,798)
(2,015)
(3,386)
$
–
(305,040)
(205,501)
(32,597)
–
(2,130)
$
–
(444,815)
–
–
–
(13,731)
(743,672)
(743,672)
–
–
–
–
26,079
(600)
–
(5,669)
–
–
325
–
747
–
2,348
(4,517)
5,888
(2,076)
375
(98,347)
92,655
(15,701)
16,022
(40,022)
40,817
(25,118)
27,307
(26,144)
–
$
$
–
–
$
(9,034)
11,775
(930)
172
–
–
–
–
–
–
–
–
–
–
(9,034)
11,775
(128,611)
166,602
–
–
–
–
–
–
–
–
–
–
(30,314)
–
$
$
–
–
–
–
–
–
–
–
–
–
–
–
canadian dollar (caD)
united states dollar (usD)
British pound (gBP)
chilean peso (clP)
(1) subsequent to December 31, 2009, the company settled its cross currency interest rate swap.
64
notes to tHe consoliDateD financial stateMents
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
fair value of its 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.
foreign excHange 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 main types of foreign
exchange risk of the company can be categorized as follows:
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 are considered self-sustaining and 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.
to the extent practical, 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, periodically, through 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 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 operation.
During 2009, the company received proceeds of $32.3 million on the settlement of a £90 million cross currency interest rate swap that hedged
the company’s uK investments. subsequent to December 31, 2009, the company received proceeds of $26.0 million on the settlement of the
remaining £60 million cross currency interest rate swap.
tRANSACtION ExPOSURE
Many of the company’s operations purchase, sell, rent, and lease products as well as incur costs in currencies other than their functional currency.
this mismatch of currencies creates transactional exposure at the operational level, which may affect the company’s profitability as exchange
rates fluctuate. the company’s competitive position may also be impacted as relative currency movements affect the business practices and/or
pricing strategies of the company’s competitors.
the company is also exposed to currency risks related to the future cash flows on its non-canadian denominated short and long term debt.
to the extent practical, it is the company’s objective to manage the impact of exchange rate movements and volatility on its financial 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.
exposure to Foreign exChange risk
the currencies of the company’s financial instruments were as follows:
December 31
(tHousanDs)
caD
usD
gBp
clp
2009
cash and cash equivalents
accounts receivable
short-term and long-term debt
accounts payable and accruals
net balance sheet exposure
cross currency interest rate swap
foreign forward exchange contracts and swaps
10,669
310,759
(754,355)
(253,054)
(685,981)
131,276
(98,347)
85,712
46,834
(217,315)
(197,520)
(282,289)
–
118,838
39,515
72,137
(116,061)
(104,720)
(109,129)
(60,000)
(9,281)
7,950,752
49,970,186
–
(32,303,749)
25,617,189
–
(6,166,140)
2009 finning international inc. | 65 |
notes to tHe consoliDateD financial stateMents
4. FINANCIAL INSTRUMENTS (continued)
exposure to Foreign exChange risk (Continued)
December 31
(tHousanDs)
cash and cash equivalents
accounts receivable
short-term and long-term debt
accounts payable and accruals
net 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, 2009 month end rates
would increase / (decrease) net income by the amounts shown below. a 5% strengthening of the canadian dollar against the following currencies
from the December 31, 2009 month end rates would increase / (decrease) other comprehensive 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.
December 31
currency
($ tHousanDs)
usD
gBP
clP
2009
other
comprehensive
income
2008
other
comprehensive
allowance
net income
net income
$
$
$
(17,000)
1,000
1,700
$
$
$
(22,100)
(17,000)
–
$
$
$
(22,500)
(2,200)
700
$
$
$
(11,800)
(17,200)
–
a 5% weakening of the canadian dollar against the above currencies relative to the December 31, 2009 month end rates would have an
equivalent but opposite effect on the above accounts in the amounts shown on the basis that all other variables are unchanged.
interest rate risk
changes in market interest rates will cause fluctuations in the fair value or future cash flows of financial instruments.
the company is exposed to changes in interest rates on its interest bearing financial assets including cash and cash equivalents, instalment notes
receivable, and cross currency interest rate swaps. the short term nature of investments included in cash and cash equivalents limits the impact
to fluctuations in fair value, but interest income earned will be impacted. instalment notes receivable bear interest at a fixed rate thus their fair
value will fluctuate prior to maturity but, absent monetization, future cash flows do not change. the fair value of the company’s cross currency
interest rate swap will be impacted by relative changes in interest rates related to the two swapped currencies. as interest rates related to the
swap are fixed, future cash flows do not change. subsequent to December 31, 2009, the company settled its cross currency interest rate swap.
the company is exposed to changes in interest rates on its interest bearing financial liabilities including short and long term debt and variable
rate share forward (vrsf). the company’s debt portfolio comprises both fixed and floating rate debt instruments, with terms to maturity ranging
up to eight years. floating rate debt due to its short term nature exposes the company to limited fluctuations in changes to fair value, but finance
expense and cash flows will increase or decrease as interest rates change.
the fair value of the company’s fixed rate debt obligations fluctuate with changes in interest rates, but absent early settlement, related cash flows
do not change. the company does not measure any fixed rate long-term debt at fair value. the company is exposed to future interest rates upon
refinancing of any debt prior to or at maturity.
the company pays floating interest rates on its vrsf. Both fair value and future cash flows are impacted by changes in interest rates.
the company manages 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.
66
notes to tHe consoliDateD financial stateMents
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 assets
financial liabilities
2009
2008
$
$
$
$
58,205
(960,255)
(902,050)
197,904
(263,300)
(65,396)
$
$
$
$
105,269
(1,009,768)
(904,499)
109,772
(664,743)
(554,971)
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 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.
an increase of 1.0% in interest rates for a full year relative to the interest rates at the reporting date would have decreased equity by
approximately $1.6 million (2008: $4.8 million) with a 1.0% decrease having the opposite effect.
net inCome sensitivity analysis For variable rate instruments
an increase of 1.0% in short-term interest rates for a full year relative to the interest rates at the reporting date would have decreased net
income by approximately $0.4 million (2008: $3.6 million) with 1.0% decrease having the opposite effect. 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 expectations of longer-term
prices. in canada, commodity price movements in the forestry, metals, coal, and petroleum sectors can have an impact on customers’ demands for
equipment and product support. 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 price 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 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 plans accounted for as
liability-based awards to be recorded at intrinsic value, compensation expense can vary as the price of the company’s common shares changes.
the company has entered into a derivative contract to partly offset this exposure, called a vrsf.
the vrsf is a derivative contract that 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.
at December 31, 2009 and 2008, the vrsf relates to 1.7 million common shares at a price of $28.71 plus interest maturing in 2012. a 5%
strengthening in the company’s share price as at December 31, 2009, all other variables remaining constant, would have increased net income
by approximately $1.0 million (2008: $0.9 million) as a result of revaluing the company’s vrsf with a 5% weakening having the opposite effect.
this impact partially mitigates changes in the stock based compensation expense; as the company’s share price changes, the intrinsic value impact
related to the stock-based compensation liability is partially offset by the fair value 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 classification of fair value measurements is based upon a fair value hierarchy that reflects the significance of the inputs used in making the
measurements. the level within which the fair value measurement is categorized is based upon the lowest level of input that is significant to the
measurement. level inputs are as follows:
level 1 – quoted prices in active markets for identical securities
level 2 – significant observable inputs other than quoted prices included in level 1
level 3 – significant unobservable inputs
2009 finning international inc. | 67 |
notes to tHe consoliDateD financial stateMents
4. FINANCIAL INSTRUMENTS (continued)
fair values (continueD)
as of December 31, 2009, all of the inputs used to value finning’s financial instruments were level 2, except cash and cash equivalents that were
designated within level 1 of the fair value hierarchy. the company did not identify any level 3 measurements as of December 31, 2009. the
company did not move any instruments between levels of the fair value hierarchy during the year ended December 31, 2009.
the fair value of accounts receivable, instalment notes receivable, short-term debt, and accounts payable approximates their recorded values due
to the short-term maturities of these instruments.
the fair values of the derivatives below approximate the amount the company would receive or pay to transfer such contracts to a third party:
notional
value
term to
Maturity
fair value
receive (Pay)
(tHousanDs)
Balance sheet classification
2009
Foreign exchange
cross currency interest rate swaps
Pay gBP fixed / receive caD fixed other assets – long-term
forwards and swaps buy
usD / sell caD
forwards buy usD / sell clP
forwards sell usD / buy clP
forwards buy usD / sell gBP
accounts payable and accruals
other assets – current
other assets – current
other assets – current
gBp 60,000
December 2020
usD 88,530
usD 39,000
usD 24,000
usD 15,309
1-8 months
1-2 months
1-12 months
1-3 months
interest rates
interest rate swaps
long-term incentive plans
variable rate share forward
accounts payable and accruals
usD 11,250
1-2 years
long-term obligations
caD 48,809
november 2012
$
(26,144)
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
forward 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
45,000
usD
34,889
usD
24,000
usD
December 2020
1-13 months
1-6 months
1-2 months
1-12 months
1-12 months
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
caD
48,809
november 2012
$
(26,876)
long-terM DeBt
the fair value of the company’s long-term debt is estimated as follows:
December 31
($ tHousanDs)
long-term debt
2009
2008
Book value
Fair value
Book value
fair value
$ 1,015,911
$ 1,058,466
$
1,413,370
$
1,336,351
the following methods and assumptions were used to determine the fair value of each class of assets and liabilities recorded at fair value on the
consolidated balance sheet:
CASh AND CASh EqUIvAlENtS (lEvEl 1)
the fair value of cash and cash equivalents is determined using quoted market prices in active markets for foreign denominated cash and cash equivalents.
68
$
$
$
$
$
$
26,079
(5,669)
747
2,348
325
(600)
$
$
$
$
$
$
$
66,417
18,182
(3,389)
(487)
(6,240)
(3,352)
(1,045)
notes to tHe consoliDateD financial stateMents
DERIvAtIvE INStRUmENtS (lEvEl 2)
the fair value of derivative instruments is determined using present value techniques applied to estimated future cash flows. these techniques
utilize a combination of quoted prices and market observed inputs. Where appropriate, fair values are adjusted for credit risk based on observed
credit default spreads or fair market yield curves for counterparties when the instrument is an asset and based on finning’s credit risk when the
instrument is a liability. finning’s credit risk is derived from yield spreads on finning’s market quoted debt.
the fair value of foreign currency forward contracts, interest rate swaps, and cross currency interest rate swap is determined by discounting
contracted future cash flows using a discount rate derived from swap curves for comparable assets and liabilities. contractual cash flows are
calculated using a forward price at maturity date derived from observed forward prices.
vARIABlE RAtE ShARE FORwARD (lEvEl 2)
the fair value of the variable rate share forward is determined based on the present value of future cash flows required to settle the share
forward which are derived from the current share price, actual interest accrued to date and future interest cost to termination of the share
forward. future interest cost is derived from market observable forward interest rates and contractual interest spreads.
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 an acceptable risk.
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, repay 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.
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 shareholders’ equity (share capital, contributed surplus,
accumulated other comprehensive loss, and retained earnings).
Dividend payout ratio is calculated as the indicated annual dividend declared per share divided by basic earnings per share from continuing
operations for the preceding twelve month period.
the company’s strategy is to manage, over a longer-term average basis, to the target ranges set out below. the company believes that these
target ratios are appropriate and provide access to capital at a reasonable cost.
as at and for years ended December 31
($ tHousanDs, excePt as noteD)
components of Debt ratio
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
2009
2008
$
(197,904)
162,238
24,179
991,732
$
980,245
$ 1,515,686
$
$
$
(109,772)
193,635
2,643
1,410,727
1,497,233
1,567,104
company targets
35 - 45%
25 - 30%
2009
39.3%
57.1%
2008
48.9%
77.2%
Due to changes in capital markets, economic, and business conditions, the company has marginally reduced its net debt to total capitalization
target from the previous target of 40-50%. the company will maintain targets in the future that it believes provide flexibility to manage its
business through the economic cycle while maintaining an investment grade credit rating to enable access to the debt capital markets at a
reasonable cost. the actual ratio is lower than the prior year due to the significant cash flow from operations which was utilized to reduce overall
debt levels.
2009 finning international inc. | 69 |
notes to tHe consoliDateD financial stateMents
5. MANAGEMENT OF CAPITAL (continued)
as a result of lower earnings, the dividend payout ratio in 2009 is above the company’s target; however, management believes that the company’s
target of 25-30% is still appropriate over a longer term and has the cash flow available to fund the dividend at this level. over time, the company
expects to return to this payout range. the dividend payout ratio in 2008 was impacted by the non-cash goodwill impairment charge in 2008.
excluding the impact of this charge, the dividend payout ratio in 2008 would have been 29.9%, within the company 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, 2009 and 2008, 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
2009
2008
$
$
(11,862)
27,908
16,046
5,279
(12,736)
(7,457)
8,589
$
$
38,663
8,629
47,292
(4,037)
13,859
9,822
57,114
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
recovery related to items previously charged
to other comprehensive income
income not subject to tax
non-taxable capital gain
non-deductible stock-based compensation
goodwill impairment
other
Provision for income taxes
2009
2008
$
40,917
29.35%
$
46,010
30.05%
(17,892)
(12.83)%
(17,349)
(11.33)%
(8,513)
(4,083)
(3,370)
1,454
–
76
8,589
$
(6.11)%
(2.93)%
(2.42)%
1.04%
–
0.06%
6.16%
–
(2,953)
(11,937)
1,932
43,126
(1,715)
57,114
$
–
(1.92)%
(7.81)%
1.26%
28.17%
(1.12)%
37.30%
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
$48.8 million (2008: $66.9 million) and $1.5 million (2008: $2.5 million), respectively.
70
notes to tHe consoliDateD financial stateMents
temporary differences and tax loss carry-forwards that give rise to future income tax assets and liabilities are as follows:
December 31
($ tHousanDs)
future income tax assets:
accounting provisions not currently deductible for tax purposes
loss carry-forwards
other stock-based compensation
goodwill of foreign subsidiaries
future income tax liabilities:
Derivative financial instruments
capital, rental, and leased assets
employee benefits
other
net future income tax liability
2009
2008
$
$
52,862
3,563
7,373
1,004
64,802
(6,272)
(65,909)
(47,366)
(3,806)
(123,353)
(58,551)
$
$
63,696
6,435
4,203
1,172
75,506
(6,663)
(81,767)
(46,267)
(1,364)
(136,061)
(60,555)
the company has recognized the benefit of the following tax loss carry-forwards available to reduce future taxable income and capital gains expiring
through 2015 for canada and available indefinitely for international, with the exception of argentina, which expire through 2015 ($7.2 million):
December 31
($ tHousanDs)
canada
international
2009
1,700
10,638
12,338
$
$
2008
19,809
5,571
25,380
$
$
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, 2009 and 2008.
the company is authorized to issue an unlimited number of common shares.
the company had a share repurchase program in place until July 8, 2009. the company did not repurchase any common shares during 2009.
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 was allocated to reduce share capital by $19.1 million and retained earnings by $128.4 million.
a shareholders’ rights plan is in place which is intended to provide all holders of common shares with the opportunity to receive full and
fair value for all of their shares in the event a third party attempts to acquire a significant interest in the company. the company’s dealership
agreements with subsidiaries of caterpillar inc. are fundamental to its business and any change in control must be approved by caterpillar inc.
the plan provides that one share purchase right has been issued for each common share and will trade with the common shares until such
time as any person or group, other than a “permitted bidder”, bids to acquire or acquires 20% or more of the company’s common shares, at
which time the plan rights become exercisable. the rights may also be triggered by a third party proposal for a merger, amalgamation or a similar
transaction. 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.
2009 finning international inc. | 71 |
notes to tHe consoliDateD financial stateMents
8. STOCK-BASED COMPENSATION PLANS
the company has a number of stock-based compensation plans in the form of stock options and other stock-based compensations plans noted 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,
2009, 1.5 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
2009
weighted
average
exercise price
$
$
$
$
$
$
23.72
14.64
6.51
26.63
22.94
22.01
options
6,037,270
978,703
(301,733)
(414,786)
6,299,454
3,827,509
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
in 2009, long term incentives for executives and senior management were a combination of both stock options and performance share units
(2008: primarily in the form of stock options). in the second quarter of 2009, the company granted 978,703 common share options to senior
executives and management of the company (2008:1,853,100 common share options). the company’s practice is to grant and price stock
options only when it is felt that all material information has been disclosed to the market.
the company determines the cost of all stock options granted since January 1, 2003 using the fair value-based method of accounting for stock
options. this method of accounting uses an option-pricing model to determine the fair value of stock options granted which is amortized over
the vesting period. the fair value of the options granted has been estimated on the date of grant using the Black-scholes option-pricing model
with the following weighted-average assumptions:
Dividend yield
expected volatility
risk-free interest rate
expected life
2009 grant
2008 grant
1.78%
38.45%
3.66%
5.5 years
1.27%
25.44%
4.25%
5.5 years
the weighted average grant date fair value of options granted during the year was $5.07 (2008: $8.35). total stock option expense recognized in
2009 was $8.2 million (2008: $10.4 million).
the following table summarizes information about stock options outstanding at December 31, 2009:
options outstanding
options exercisable
number
outstanding
503,369
1,321,153
1,448,732
3,026,200
6,299,454
weighted
average
remaining
life
weighted
average
exercise
price
0.9 years
5.2 years
3.3 years
4.9 years
4.2 years
$
$
$
$
$
6.56
14.99
19.75
30.67
22.94
number
outstanding
weighted
average
exercise
price
503,369
380,802
1,448,732
1,494,606
3,827,509
$
$
$
$
$
6.56
15.84
19.75
30.97
22.01
range of exercise prices
$6.23 - $8.50
$14.64 - $16.27
$19.75 - $19.82
$25.85 - $31.67
72
notes to tHe consoliDateD financial stateMents
otHer stocK-BaseD coMPensation Plans
the company has other stock-based compensation plans in the form of deferred share units, performance share units, and stock appreciation
rights that use notional common share units. these notional units 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 volatility caused by movements in the company’s share price
on the value of 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 cessation of service on the Board of Directors and must be redeemed by December 31st
of the year following the year in which the cessation 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 21,690 deferred share units in 2009 (2008: 39,512 share units), which were
granted to the Directors and expensed over the calendar year as the units are issued.
ExECUtIvE
deFerred share unit plan a (dsu-a)
under the Dsu-a Plan, senior executives of the company may be awarded deferred share units as approved by the Board of Directors. this plan
utilizes notional units that are fully vested upon issuance to the executives. these units accumulate dividend equivalents in the form of additional
units based on the dividends paid on the company’s common shares. units are redeemable only following cessation of employment and must be
redeemed by December 31st of the year following the year in which the cessation 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 cessation 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.
perFormanCe share unit plan (psu)
in May 2009, the Board of Directors approved a new Performance share unit Plan (Psu Plan) for executives. under the Psu Plan, executives
of the company may be awarded performance share units as approved by the Board of Directors. this plan utilizes notional units that become
vested dependent on achieving future specified performance levels. vesting of the awards is based on the extent to which the company’s average
return on equity achieves or exceeds the specified performance levels over a three-year period. vested performance share units are redeemable
in cash based on the common share price at the end of the performance period.
only vested units accumulate dividend equivalents in the form of additional units based on the dividends paid on the company’s common shares.
compensation expense for the Psu Plan is recorded over the three-year performance period. the amount of compensation expense is adjusted
over the three-year performance period to reflect the current market value of common shares and the number of shares anticipated to vest
based upon the company’s forecast three-year average return on equity.
executives of the company were allocated a total of 341,253 performance share units in 2009, based on 100% vesting (2008: nil).
2009 finning international inc. | 73 |
notes to tHe consoliDateD financial stateMents
8. STOCK-BASED COMPENSATION PLANS (continued)
the specified levels and respective vesting percentages are as follows:
Performance level
Below threshold
threshold
target
Maximum
average return on equity
(over three-year period)
Proportion of Psus vesting
< 12%
12%
15%
17% or more
nil
25%
100%
150%
Details of the deferred share unit and performance share unit plans, which reflect the valuation changes, excluding the impact of the vrsf hedge,
are as follows:
for year ended December 31
units
outstanding, beginning of year
additions
exercised
outstanding, end of year
liaBility
($ tHousanDs)
Dsu-a
Dsu-B
25,212
684
(8,463)
17,433
716,211
19,221
(164,942)
570,490
Balance, beginning of year
expense (income)
exercised
Balance, end of year
$
$
359
73
(142)
290
$
$
10,206
1,928
(2,618)
9,516
for year ended December 31
units
outstanding, beginning of year
additions
exercised
outstanding, end of year
liaBility
($ tHousanDs)
Dsu-a
57,179
867
(32,834)
25,212
Dsu-B
1,139,700
16,365
(439,854)
716,211
Balance, beginning of year
expense (income)
exercised
Balance, end of year
$
$
1,639
(319)
(961)
359
$
$
32,664
(9,860)
(12,598)
10,206
2009
DDsu
264,442
43,064
–
307,506
$
$
$
$
3,768
1,362
–
5,130
2008
DDsu
294,033
52,226
(81,817)
264,442
8,427
(2,540)
(2,119)
3,768
$
$
$
$
psu
total
–
–
–
–
–
–
–
–
1,005,865
62,969
(173,405)
895,429
$
$
14,333
3,363
(2,760)
14,936
Psu
total
–
–
–
–
–
–
–
–
1,490,912
69,458
(554,505)
1,005,865
$
$
42,730
(12,719)
(15,678)
14,333
as at December 31, 2009 and 2008, all outstanding deferred share units (Dsu-a, Dsu-B, DDsu) have vested. as at December 31, 2009, none of
the performance share units (Psu) were vested.
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. and are exercisable over a seven-year
period. 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.
74
notes to tHe consoliDateD financial stateMents
no sar units have been issued to management since 2005. Details of the sar plans, excluding the impact of the vrsf hedge, are as follows:
for years ended December 31
units
outstanding, beginning of year
exercised
cancelled
outstanding, end of year
vested, beginning of year
vested
exercised
cancelled
vested, end of year
liaBility
($ tHousanDs)
Balance, beginning of year
expense (income)
exercised
Balance, end of year
strike price ranges:
2009
2008
645,604
(81,754)
(89,186)
474,664
645,604
–
(81,754)
(89,186)
474,664
836,875
(162,351)
(28,920)
645,604
711,102
122,105
(162,351)
(25,252)
645,604
$
$
216
699
(198)
717
$
$
11,443
(9,378)
(1,849)
216
$13.03 - $16.22
suMMary – iMPact of stocK-BaseD coMPensation Plans
changes in the value of all deferred share units, performance share units, and share appreciation rights is a result of fluctuations in the company’s
common share price, management’s estimate of achieving performance targets, and the impact of new issues, including stock options, partially
offset by the impact of the vrsf hedge. the net impact was an expense of $11.5 million in 2009 (2008: $16.9 million).
9. EARNINGS PER SHARE
Basic earnings per share (ePs) is calculated by dividing net income available to common shareholders by the weighted average number of
common shares outstanding during the period. Diluted earnings per share is calculated to reflect the dilutive effect of exercising outstanding
stock options by applying the treasury stock method.
for years ended December 31
($ tHousanDs, excePt sHare anD Per sHare aMounts)
2009
Basic earnings per share: net income
effect of dilutive securities: stock options
Diluted earnings per share: net income and assumed conversions
2008
Basic earnings per share: net income
effect of dilutive securities: stock options
Diluted earnings per share: net income and assumed conversions
income
shares
Per share
$
$
$
$
130,823
–
130,823
170,607,892
385,593
170,993,485
95,996
–
95,996
172,361,881
957,076
173,318,957
$
$
$
$
0.77
–
0.77
0.56
–
0.55
2009 finning international inc. | 75 |
notes to tHe consoliDateD financial stateMents
10. INVENTORIES
December 31
($ tHousanDs)
on-hand equipment
Parts and supplies
internal service work in progress
inventories
2009
589,983
326,481
77,059
993,523
$
$
2008
$
$
1,013,204
384,112
76,188
1,473,504
for the year ended December 31, 2009, on-hand equipment, parts, supplies, and internal service work in progress recognized as an expense
amounted to $2,972.8 million (2008: $3,776.2 million). for the year ended December 31, 2009, the write-down of inventories to net realizable
value, included in cost of sales, amounted to $35.3 million (2008: $20.8 million).
11. OTHER ASSETS
December 31
($ tHousanDs)
other assets – current:
future income taxes (note 6)
supplier claims receivable
income taxes recoverable
Prepaid expenses
current portion of finance assets (note 12)
value added tax receivable
Derivative assets (note 4)
other
other assets – long-term:
accrued defined benefit pension asset (note 20)
investment in energyst B.v. (a)
Derivative assets (note 4)
future income taxes (note 6)
other
2009
2008
$
$
$
$
48,803
40,121
35,826
29,350
23,479
12,400
3,420
13,631
207,030
174,538
27,687
26,079
1,534
15,712
245,550
$
$
$
$
66,889
62,912
45,081
21,980
29,344
7,868
18,182
35,846
288,102
157,028
34,655
66,417
2,521
36,972
297,593
(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
2009
32,126
29,253
(5,296)
23,957
56,083
(23,479)
32,604
$
$
2008
38,852
2,676
(513)
2,163
41,015
(29,344)
11,671
$
$
Depreciation of equipment leased to customers for the year ended December 31, 2009 was $5.0 million (2008: $0.4 million).
76
notes to tHe consoliDateD financial stateMents
13. RENTAL EQUIPMENT
December 31
($ tHousanDs)
cost
less accumulated depreciation
2009
2008
$ 1,261,387
(570,267)
691,120
$
$
$
1,621,494
(633,659)
987,835
rental equipment under capital leases of $19.6 million (2008: $40.4 million), net of accumulated depreciation of $10.2 million (2008: $6.5 million),
are included above, of which $6.8 million was acquired during the year. Depreciation of rental equipment for the year ended December 31, 2009
was $211.9 million (2008: $273.0 million).
14. CAPITAL ASSETS
lanD, BuilDings, anD eQuiPMent
December 31
($ tHousanDs)
land
Buildings and equipment
2009
accumulated
depreciation
cost
net book
value
2008
accumulated
depreciation
cost
net book
value
$
62,761
636,546
$ 699,307
$
–
(216,530)
$ (216,530)
$
62,761
420,016
$ 482,777
$
$
71,224
610,253
681,477
$
$
–
(210,618)
(210,618)
$
$
71,224
399,635
470,859
land, buildings, and equipment under capital leases of $11.8 million (2008: $12.1 million), net of accumulated depreciation of $3.0 million (2008:
$2.9 million), are included above, of which $1.2 million was acquired during the year. Depreciation of buildings and equipment for the year ended
December 31, 2009 was $42.3 million (2008: $44.4 million).
intangiBle assets
December 31
($ tHousanDs)
subject to amortization
customer contracts and related
customer relationships
software
indefinite lives
Distribution rights
2009
accumulated
cost amortization
net book
value
2008
accumulated
amortization
cost
net book
value
$
$
13,349
54,888
68,237
$
(6,766)
(20,648)
(27,414)
$
6,583
34,240
40,823
646
68,883
–
(27,414)
$
$
646
41,469
$
$
$
12,879
44,844
57,723
(3,248)
(16,777)
(20,025)
$
646
58,369
$
–
(20,025)
$
9,631
28,067
37,698
646
38,344
the company acquired intangible assets subject to amortization of $14.4 million in 2009 (2008: $18.9 million). the additions in 2009 primarily
related to costs incurred in connection with the development of software to be used internally. amortization of intangible assets subject to
amortization for the year ended December 31, 2009 was $8.4 million (2008: $6.8 million).
certain intangible assets are considered to have indefinite lives because they are expected to generate cash flows indefinitely.
2009 finning international inc. | 77 |
notes to tHe consoliDateD financial stateMents
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 was 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 collicutt 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 and the company repaid
$44.8 million of collicutt’s existing bank debt, resulting in aggregate consideration of $136.4 million.
the following table summarizes the fair value of the assets acquired and liabilities assumed at the date of acquisition.
($ 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 consist primarily of 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 $1.9 million are being amortized on a straight-line basis over their estimated life of seven years. the goodwill was assigned to the canada
operating segment and is not deductible for tax purposes.
16. GOODWILL
the change in the carrying amount of goodwill is as follows:
December 31, 2009
($ tHousanDs)
goodwill, beginning of year
acquired (a)
foreign exchange translation adjustment
goodwill, end of year
December 31, 2008
($ tHousanDs)
goodwill, beginning of year
acquired (a) (note 15)
goodwill impairment (b)
Disposed
foreign exchange translation adjustment
goodwill, end of year
canada
south america
uK group
consolidated
$
$
$
$
43,811
–
–
43,811
$
$
35,377
1,276
(5,202)
31,451
canada
south america
33,431
10,380
–
–
–
43,811
$
$
28,504
40
–
–
6,833
35,377
$
$
$
$
20,090
–
(1,098)
18,992
$
$
99,278
1,276
(6,300)
94,254
uK group
consolidated
189,164
–
(151,373)
(1,428)
(16,273)
20,090
$
$
251,099
10,420
(151,373)
(1,428)
(9,440)
99,278
(a) in 2009, the company acquired the remaining issued and outstanding common shares of finning servicio especializado s.a., a machine repair,
recovery, and reconditioning company based in chile for cash of approximately $3 million. as a result, the company now holds 100% of the
issued and outstanding common shares.
in 2008, the company acquired the assets and business operations of fort saskatchewan rentals inc., an equipment rental company based in
alberta, canada for cash of approximately $1.3 million, and all of the issued and outstanding common shares of collicutt, as described in note 15.
(b) there was no goodwill impairment identified in 2009 following the company’s annual impairment review. in 2008, the company performed
its annual goodwill impairment review 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 $151.4 million.
78
notes to tHe consoliDateD financial stateMents
17. LONG-TERM OBLIGATIONS
December 31
($ tHousanDs)
stock-based compensation (note 4 and 8)
leasing obligations (a) (note 23)
employee future benefit obligations
sale leaseback deferred gain
asset retirement obligations (b)
other
2009
41,797
12,086
23,974
6,990
3,010
22,290
110,147
$
$
2008
41,425
16,975
20,311
7,854
1,119
8,612
96,296
$
$
(a) capital leases issued at varying rates of interest from 0.2% – 25.3% 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 $13.4 million, and the expected timing of payment of the cash flows is estimated to be over the next thirty years.
18. CUMULATIVE CURRENCY TRANSLATION ADJUSTMENTS
the company’s principal subsidiaries operate in three functional currencies: canadian dollars, u.s. dollars, and the u.K. pound sterling. the
company experiences foreign currency translation gains or losses as a result of consolidating the financial statements of self-sustaining foreign
operations. these unrealized foreign currency translation gains or losses are recorded in the accumulated other comprehensive income/loss
account on the consolidated Balance sheet. currency translation adjustments arise as a result of fluctuations in foreign currency exchange rates
between period ends. the cumulative currency translation adjustment for 2009 mainly resulted from the stronger canadian dollar relative to the
u.s. dollar (14.5% stronger), and the u.K. pound sterling (5.5% stronger), at December 31, 2009 compared to December 31, 2008.
the exchange rates of the canadian dollar against the following foreign currencies were as follows:
December 31
exchange rate
u.s. dollar
u.K. pound sterling
for years ended December 31
average exchange rates
u.s. dollar
u.K. pound sterling
2009
1.0466
1.6918
2009
1.1420
1.7804
2008
1.2246
1.7896
2008
1.0660
1.9617
2009 finning international inc. | 79 |
notes to tHe consoliDateD financial stateMents
19. SUPPLEMENTAL CASH FLOW INFORMATION
non casH WorKing caPital cHanges
for years ended December 31
($ 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
2009
2008
$
$
205,647
372,155
62,635
(482,348)
(779)
157,310
2009
$
$
110,672
87,232
197,904
$
$
$
$
(159,284)
(112,587)
(43,045)
82,560
(69,013)
(301,369)
2008
105,905
3,867
109,772
2009
2008
$
$
(57,714)
(7,763)
$
$
(83,569)
(94,767)
20. 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. effective January 1, 2010, the
defined benefit plan will also be closed to new executive employees, who will be eligible to join a defined contribution plan. Pension benefits
under the registered defined benefit plans’ formula that exceed the maximum taxation limits are provided from a non-registered supplemental
pension plan. Benefits under this plan are partially funded by a retirement compensation arrangement.
finning (uK) provides a defined benefit plan for all employees hired prior to January 2003. final average earnings are based on the highest
3-year period and benefits are indexed annually with inflation subject to limits. effective January 2003, this plan was essentially closed to new
employees and replaced with a defined contribution pension 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.
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 $5.3 million was expensed in 2009 (2008: $4.3 million) for a total obligation at December 31, 2009 of $24.0 million
(2008: $20.3 million).
80
notes to tHe consoliDateD financial stateMents
the expense for the company’s benefit plans, primarily for pension benefits, is as follows:
for years ended December 31
($ 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
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 or loss
on accrued benefit obligation
for year
Difference between
amortization of past service
costs for year and actual
plan amendments for year
amortization of transitional
obligation / (asset)
Defined benefit costs
recognized
total
canada
uK hewden
total
canada
uK
Hewden
total
2009
2008
$ 21,887
$ 1,581
$
112
$ 23,580
$ 21,163
$ 1,104
$
159
$ 22,426
$ 5,494
19,963
$ 2,891
20,345
$
842
9,069
$ 9,227
49,377
$ 7,014
18,474
$ 3,713
24,329
$ 1,436
10,324
$ 12,163
53,127
(31,134)
70,283
(71,177)
146,173
(24,984)
49,128
(127,295)
265,584
42,184
(60,837)
86,407
(99,297)
33,859
(30,120)
162,450
(190,254)
64,606
98,232
34,055
196,893
6,835
15,152
15,499
37,486
13,630
49,791
16,430
79,851
(62,505)
(115,187)
(45,539)
(223,231)
(66,921)
(143,263)
(47,401)
(257,585)
64,060
100,941
30,693
195,694
298
(588)
(137)
(427)
298
(647)
(143)
(492)
(19)
(1,034)
1,143
90
(19)
(1,140)
1,259
100
11,594
$ 33,481
3,138
$ 4,719
4,090
$ 4,202
18,822
$ 42,402
8,669
$ 29,832
(881)
223
1,769
$ 1,928
9,557
$ 31,983
$
total cash payments for employee future benefits for 2009, which is made up of cash contributed by the company to its defined benefit plans and
its defined contribution plans was $42.8 million and $23.6 million, respectively (2008: $49.3 million and $22.4 million, respectively).
2009 finning international inc. | 81 |
notes to tHe consoliDateD financial stateMents
20. EMPLOYEE FUTURE BENEFITS (continued)
information about the company’s defined benefit plans is as follows:
for years ended December 31
($ 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
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) (a)
canada
uK hewden
total
canada
uK
Hewden
total
2009
2008
$ 267,253
7,237
19,963
(20,338)
70,283
–
$ 344,398
$ 290,273
4,107
20,345
(19,825)
146,173
(23,367)
$ 417,706
1,200
9,069
(9,550)
$ 131,010 $ 688,536
12,544
49,377
(49,713)
265,584
(33,009)
$ 171,215 $ 933,319
49,128
(9,642)
$ 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
$ 257,629
$ 302,621
$ 117,867 $ 678,117
$ 298,994
$ 407,486
$ 159,086
$ 865,566
31,134
12,454
1,744
(20,338)
–
$ 282,623
71,177
20,428
1,216
(19,825)
(20,170)
$ 355,447
24,984
10,691
358
(9,550)
(7,761)
127,295
43,573
3,318
(49,713)
(27,931)
$ 136,589 $ 774,659
(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
$ (61,775) $ (62,259) $ (34,626) $ (158,660)
$ (9,624) $ 12,348
$ (13,143) $ (10,419)
116,404
156,126
63,179
335,709
63,115
71,196
35,697
170,008
1,472
(5,583)
(1,435)
(5,546)
1,769
(6,496)
(1,655)
(6,382)
2,188
1,663
849
4,700
2,934
1,659
897
5,490
(63)
(3,866)
2,264
(1,665)
(83)
(5,129)
3,543
(1,669)
$ 58,226
$ 86,081
$ 30,231 $ 174,538
$ 58,111
$ 73,578
$ 25,339
$ 157,028
(a) 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
2009
2008
accrued benefit obligation
fair value of plan assets
funded status – plan deficit
$ 342,433
277,522
$ 64,911
$ 417,706
355,447
$ 62,259
$ 171,215
136,589
$ 34,626
$ 931,354
769,558
$ 161,796
$ 219,457
205,180
$ 14,277
$
$
–
–
–
$ 118,702
105,409
$ 13,293
$ 338,159
310,589
$ 27,570
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, 2009 and 2008.
82
notes to tHe consoliDateD financial stateMents
Plan assets are principally invested in the following securities at november 30, 2009:
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
5.50%
7.50%
7.00%
3.50%
9-11
2009
uK
5.50%
7.20%
7.00%
4.00%
14
canada
uK
hewden
54.1%
38.7%
7.2%
60.3%
39.7%
–
61.3%
38.7%
–
2008
hewden
canada
uK
Hewden
5.50%
7.20%
7.25%
4.00%
12
7.50%
5.80%
7.25%
3.50%
8-11
7.20%
6.20%
7.00%
4.00%
14
7.20%
6.20%
7.25%
4.00%
13
Discount rates are determined based on high quality corporate bonds at the measurement date, november 30. Market conditions and the
economic environment resulted in significantly lower corporate bond yields at november 30, 2009 than at november 30, 2008 as corporate
spreads have narrowed significantly over the past year. the accrued defined benefit pension obligations and expense are sensitive to changes in
the discount rate, among other assumptions. as an indication, 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, 2009, the accrued defined benefit pension obligation presented would have increased by approximately $9 million for finning
(canada)’s plans, £11 million for the finning uK plan, and £5 million for the Hewden plans.
Defined benefit pension plans are country and entity specific. the major defined benefit plans and their respective valuation dates are:
Defined Benefit Plan
last actuarial valuation Date
next actuarial valuation Date
canada – Bc regular & executive Plan
canada – executive supplemental income Plan
canada – general supplemental income Plan
canada – alberta Defined Benefit Plan
finning uK Defined Benefit scheme
Hewden stuart Pension scheme
Hewden Pension Plan
December 31, 2006
December 31, 2006
December 31, 2006
December 31, 2008
December 31, 2008
December 31, 2008
January 1, 2008
December 31, 2009
December 31, 2009
December 31, 2009
December 31, 2009
December 31, 2011
December 31, 2011
January 1, 2011
21. ECONOMIC RELATIONSHIPS
the company distributes and services heavy equipment, engines, and related products. the company has dealership agreements with numerous
equipment manufacturers, of which the most significant are with subsidiaries of caterpillar inc. Distribution and servicing of caterpillar products
account for the major portion of the company’s operations. finning has a strong relationship with caterpillar inc. that has been ongoing since 1933.
2009 finning international inc. | 83 |
notes to tHe consoliDateD financial stateMents
22. SEGMENTED INFORMATION
the company and its subsidiaries have operated primarily in one industry during the year, that being the selling, servicing, and renting of heavy
equipment, engines, and related products.
the reportable operating segments are as follows:
•
•
•
•
Canadian operations: British columbia, alberta, the yukon territory, the northwest territories, and a portion of nunavut.
South American operations: chile, argentina, uruguay, and Bolivia.
UK Group operations: england, scotland, Wales, falkland islands, and the channel islands.
Other: corporate head office.
for year ended December 31, 2009
($ tHousanDs)
canada
south
america
uK group
other
impairment consolidated
goodwill
revenue from external sources
operating costs
Depreciation and amortization
other income (expenses)
it system implementation costs
other
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
$ 2,386,642
(2,125,706)
(132,614)
128,322
$ 1,489,600
(1,299,386)
(37,405)
152,809
$ 861,299
(774,788)
(97,480)
(10,969)
$
–
(25,446)
(182)
(25,628)
$
(10,574)
(19,421)
$ 98,327
(5,616)
6,532
$ 153,725
(2,388)
(6,780)
(279)
1,012
$
(20,137) $
(24,895) $
$ 1,651,206
$ 307,627
$ 55,129
$ 118,071
$ 1,034,074
$ 123,791
$ 45,265
$ 20,549
$ 924,567
91,509
$
8,534
$
35,559
$
$
$
$
$
61,588
1,319
–
–
$
$
$
$
–
–
–
–
–
–
–
–
–
–
–
$ 4,737,541
(4,225,326)
(267,681)
244,534
(18,857)
(18,657)
$ 207,020
(67,608)
(8,589)
$ 130,823
$ 3,671,435
$ 524,246
$ 108,928
$ 174,179
for year ended December 31, 2008
($ tHousanDs)
canada
south
america
uK group
other
impairment consolidated
goodwill
$ 3,216,946
(2,801,877)
(164,489)
250,580
$ 1,501,633
(1,313,753)
(34,217)
153,663
$ 1,272,842
(1,099,805)
(125,447)
47,590
(7,921)
(8,181)
–
$ 234,478
(4,388)
(1,040)
–
$ 148,235
$
(2,581)
8,617
–
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)
(46,913)
(1,307)
–
–
(48,220) $
139,908
595
–
–
$
$
$
$
–
–
–
–
$ 5,991,425
(5,262,144)
(324,361)
404,920
(16,197)
–
(604)
–
(151,373)
(151,373)
(151,373) $ 236,746
(83,636)
(57,114)
$
95,996
$ 4,720,375
$ 509,203
$ 206,443
$ 534,684
–
–
–
–
revenue from external sources
operating costs
Depreciation and amortization
other income (expenses)
it system implementation costs
other
goodwill impairment (note 16)
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
(1) includes capital leases
84
notes to tHe consoliDateD financial stateMents
23. CONTRACTUAL OBLIGATIONS
future minimum lease payments due under capital lease contracts and payments due under various operating lease contracts are as follows:
for years ended December 31
($ tHousanDs)
2010
2011
2012
2013
2014
thereafter
less imputed interest
less current portion of capital lease obligation
total long-term capital lease obligation
operating
leases
71,064
56,614
39,377
28,457
20,218
137,916
353,646
$
$
capital
leases
8,118
2,156
1,230
1,065
1,065
13,731
27,365
(8,103)
19,262
(7,176)
12,086
$
$
$
24. 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 $11 million over the next year for consulting and implementation support for a new
information technology system solution for its global operations.
25. GUARANTEES AND INDEMNIFICATIONS
the company enters into contracts with rights of return, in certain circumstances, for the repurchase of equipment sold to customers for an
amount based on an estimate of the future value of the fair market price at that time. as at December 31, 2009, the total estimated value of these
contracts outstanding is $164.4 million coming due at periods ranging from 2010 to 2016. 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 $0.8 million.
the company has issued certain guarantees to caterpillar finance to guarantee, on a pro-rata basis, certain borrowers’ obligations. the
guarantees would be enforceable in the event that the borrowers defaulted on their obligations to caterpillar finance, to the extent that any net
proceeds from the recovery and sale of collateral securing repayment of the borrowers’ obligations is insufficient to meet those obligations. as
at December 31, 2009, the maximum potential amount of future payments that the company could be required to make under the guarantees,
before any amounts that may possibly be recovered under recourse or collateralization provisions in the guarantees, is $12.6 million, covering
various periods up to 2014. as at December 31, 2009, the company had no liability recorded for these guarantees.
as part of the tool Hire Division’s Purchase and sale agreement, finning had provided indemnifications to the 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 the agreement for various periods of time depending on the nature of the claim. the maximum potential exposure of
finning under these indemnifications is 50% of the purchase price. as at December 31, 2009, 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 $1.0 million to
the end of the lease term in 2020. as at December 31, 2009, the company had no liability recorded for this guarantee.
in the normal course of operations, the company has several long-term maintenance and repair contracts with various customers which contain
cost per hour guarantees. During the year, the company entered into various other commercial letters of credit in the normal course of operations.
2009 finning international inc. | 85 |
ten year financial suMMary
for years ended December 31
($ tHousanDs excePt Per sHare Data)
revenue(1)
canadian operations
south american operations
uK operations
Hewden
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
DiviDenDs
total common share
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(3)
Debt to equity(3)
liabilities to equity(3)
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
Hewden
uK group
international
total
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
$ 2,386,642
$ 1,489,600
603,678
$
257,621
$
861,299
$
–
$
$ 4,737,541
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
207,020
4.4%
130,823
2.8%
0.77
0.77
74,970
0.44
546,394
3.20
108,928
1.13
39%
0.78:1
8.88
8.3%
19.06
10.15
16.68
170,747
396,414
10,947
4,144
4,954
1,472
1,311
2,783
70
11,951
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
3,216,946
1,501,633
879,777
393,065
1,272,842
4
5,991,425
236,746
4.0%
95,996
1.6%
0.56
0.55
73,997
0.43
278,133
1.63
206,443
1.35
49%
1.03:1
9.19
5.8%
31.15
12.09
14.25
170,445
439,899
7,048
5,061
4,988
1,647
1,859
3,506
65
13,620
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2,936,229
1,325,582
946,938
453,489
1,400,427
6
5,662,244
455,847
8.0%
280,107
4.9%
1.57
1.55
64,446
0.36
404,427
2.30
77,819
1.36
41%
0.73:1
9.19
16.8%
33.50
23.10
28.66
176,132
440,642
21,798
4,618
4,638
1,445
2,098
3,543
51
12,850
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2,612,597
1,009,906
796,080
434,650
1,230,730
6
4,853,239
373,708
7.7%
236,187
4.9%
1.32
1.31
49,159
0.275
460,210
2.57
89,370
1.22
40%
0.72:1
9.07
15.8%
23.90
18.05
23.90
179,090
392,605
18,726
4,106
3,865
1,354
3,487
4,841
44
12,856
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2,049,675
1,007,341
830,412
440,852
1,271,264
–
4,328,280
257,955
6.0%
161,672
3.7%
0.91
0.90
39,097
0.22
478,757
2.68
81,111
1.15
46%
0.87:1
7.92
11.8%
20.70
16.13
18.57
178,404
377,554
12,810
3,316
3,377
2,471
3,603
6,074
38
12,805
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,562,584
869,893
717,877
685,930
1,403,807
15
3,836,299
271,933
7.1%
114,946
3.0%
0.73
0.72
31,181
0.20
247,422
1.40
106,202
1.15
50%
1.03:1
1.48:1
7.50
11.0%
17.70
14.43
17.50
176,780
338,918
9,360
2,936
3,203
2,373
3,724
6,097
44
12,280
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,456,357
561,964
934,193
640,757
1,574,950
24
3,593,295
255,168
7.1%
131,951
3.7%
0.86
0.84
27,816
0.18
384,210
2.47
89,657
1.09
42%
0.79:1
1.48:1
6.16
14.3%
16.60
11.50
15.00
155,510
314,953
11,566
2,717
2,456
2,387
3,804
6,191
45
11,409
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,269,275
444,644
828,246
665,266
1,493,512
55
3,207,486
277,783
8.7%
132,253
4.1%
0.86
0.84
23,100
0.15
472,804
3.05
47,426
1.05
37%
0.60:1
1.33:1
6.00
15.7%
14.43
9.83
12.78
155,160
327,462
13,502
2,548
1,817
1,578
3,813
5,391
39
9,795
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,398,623
448,005
804,084
587,482
1,391,566
8,849
3,247,043
241,601
7.4%
103,917
3.2%
0.69
0.67
15,155
0.10
445,623
2.94
51,180
1.25
47%
0.87:1
1.53:1
5.12
14.1%
10.18
6.05
10.00
151,632
331,230
10,601
2,629
1,516
1,553
4,066
5,619
39
9,803
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,214,516
474,145
682,162
–
682,162
89,209
2,460,032
165,263
6.7%
73,391
3.0%
0.48
0.47
15,452
0.10
357,780
2.36
15,284
1.18
57%
1.04:1
1.75:1
4.51
10.5%
6.93
4.93
6.35
151,580
477,120
14,234
2,326
1,390
1,404
–
1,404
36
5,156
certain comparative figures have been reclassified to conform to the 2009 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 operationss
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 ($0.88 basic and diluted loss per share)
for Hewden in the fourth quarter of 2008.
(3) in 2008, the net debt to total capitalization calculation was changed to include cash and cash equivalents in the definition of net debt; accordingly, net debt to
total capitalization for years 1999 - 2007 has been restated. equity ratio for years 2001 to 2003 included non-controlling interest that was treated as equity.
equity ratio for 2000 year does not include investment in Hewden.
86
for years ended December 31
($ tHousanDs excePt Per sHare Data)
revenue(1)
canadian operations
south american operations
uK operations
Hewden
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
DiviDenDs
total common share
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(3)
Debt to equity(3)
liabilities to equity(3)
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
Hewden
uK group
international
total
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
ten year financial suMMary
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$ 2,386,642
$ 1,489,600
$ 4,737,541
603,678
257,621
861,299
–
207,020
4.4%
130,823
2.8%
0.77
0.77
74,970
0.44
546,394
3.20
108,928
1.13
39%
0.78:1
8.88
8.3%
19.06
10.15
16.68
170,747
396,414
10,947
4,144
4,954
1,472
1,311
2,783
70
11,951
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
3,216,946
1,501,633
879,777
393,065
1,272,842
4
5,991,425
236,746
4.0%
95,996
1.6%
0.56
0.55
73,997
0.43
278,133
1.63
206,443
1.35
49%
1.03:1
9.19
5.8%
31.15
12.09
14.25
170,445
439,899
7,048
5,061
4,988
1,647
1,859
3,506
65
13,620
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2,936,229
1,325,582
946,938
453,489
1,400,427
6
5,662,244
455,847
8.0%
280,107
4.9%
1.57
1.55
64,446
0.36
404,427
2.30
77,819
1.36
41%
0.73:1
9.19
16.8%
33.50
23.10
28.66
176,132
440,642
21,798
4,618
4,638
1,445
2,098
3,543
51
12,850
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2,612,597
1,009,906
796,080
434,650
1,230,730
6
4,853,239
373,708
7.7%
236,187
4.9%
1.32
1.31
49,159
0.275
460,210
2.57
89,370
1.22
40%
0.72:1
9.07
15.8%
23.90
18.05
23.90
179,090
392,605
18,726
4,106
3,865
1,354
3,487
4,841
44
12,856
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2,049,675
1,007,341
830,412
440,852
1,271,264
–
4,328,280
257,955
6.0%
161,672
3.7%
0.91
0.90
39,097
0.22
478,757
2.68
81,111
1.15
46%
0.87:1
7.92
11.8%
20.70
16.13
18.57
178,404
377,554
12,810
3,316
3,377
2,471
3,603
6,074
38
12,805
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,562,584
869,893
717,877
685,930
1,403,807
15
3,836,299
271,933
7.1%
114,946
3.0%
0.73
0.72
31,181
0.20
247,422
1.40
106,202
1.15
50%
1.03:1
1.48:1
7.50
11.0%
17.70
14.43
17.50
176,780
338,918
9,360
2,936
3,203
2,373
3,724
6,097
44
12,280
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,456,357
561,964
934,193
640,757
1,574,950
24
3,593,295
255,168
7.1%
131,951
3.7%
0.86
0.84
27,816
0.18
384,210
2.47
89,657
1.09
42%
0.79:1
1.48:1
6.16
14.3%
16.60
11.50
15.00
155,510
314,953
11,566
2,717
2,456
2,387
3,804
6,191
45
11,409
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,269,275
444,644
828,246
665,266
1,493,512
55
3,207,486
277,783
8.7%
132,253
4.1%
0.86
0.84
23,100
0.15
472,804
3.05
47,426
1.05
37%
0.60:1
1.33:1
6.00
15.7%
14.43
9.83
12.78
155,160
327,462
13,502
2,548
1,817
1,578
3,813
5,391
39
9,795
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,398,623
448,005
804,084
587,482
1,391,566
8,849
3,247,043
241,601
7.4%
103,917
3.2%
0.69
0.67
15,155
0.10
445,623
2.94
51,180
1.25
47%
0.87:1
1.53:1
5.12
14.1%
10.18
6.05
10.00
151,632
331,230
10,601
2,629
1,516
1,553
4,066
5,619
39
9,803
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,214,516
474,145
682,162
–
682,162
89,209
2,460,032
165,263
6.7%
73,391
3.0%
0.48
0.47
15,452
0.10
357,780
2.36
15,284
1.18
57%
1.04:1
1.75:1
4.51
10.5%
6.93
4.93
6.35
151,580
477,120
14,234
2,326
1,390
1,404
–
1,404
36
5,156
certain comparative figures have been reclassified to conform to the 2009 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 operationss
(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 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 - 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.
2009 finning international inc. | 87 |
BoarD of Directors
ricarDo Bacarreza
santiago, chile
President of Proinvest s.a.
Director since 1999
Member of audit committee and Pension committee
James e.c. carter
edmonton, alberta, canada
Director of ePcor utilities inc., clark Builders,
the climate change emissions Management corporation
and careers: the next generation
Director since 2007
Member of audit committee and environment,
Health and safety committee
hon. DaviD l. emerson, p.c.
vancouver, British columbia, canada
Director of stantec inc., timberWest forest corporation
chair of the alberta Premier’s council for economic strategy,
chair of the energy Policy institute of canada,
co chair of the Prime Minister’s advisory council
for Public service renewal
Director since 2008
Member of audit committee and Pension committee
Kathleen m. o’neill
toronto, ontario, canada
Director of tMx group inc., arc energy trust,
invesco trimark funds and canadian tire Bank,
a subsidiary of canadian tire corporation
Director since 2007
chair of Pension committee and a member of, and the designated
‘financial expert’ for audit committee and a member of 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 corporate governance committee and a member
of Human resources committee and Pension committee
John m. reiD
vancouver, British columbia, canada
Director of Methanex corporation
Director since 2006
chair of audit committee and a member
of corporate governance committee
anDrew h. simon, oBe
Bougy-villars, switzerland
Director of exova group plc, sgl carbon se supervisory Board,
travis Perkins plc and Management consulting group plc
Director since 1999
Member of audit committee and environment,
Health and safety committee
Bruce l.turner
santiago, chile
President and chief executive officer of apoquindo Minerals inc.
and turner Minerals s.a.
Director since 2006
chair of environment, Health and safety committee
and a member of Human resources committee and
corporate governance committee
michael t. waites
vancouver, British columbia, canada
President and chief executive officer, finning international inc.
Director since 2008
Member of environment, Health and safety committee
Douglas w.g. whiteheaD
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. and garaventa (canada) ltd.
Director since 2000
lead Director, chair of Human resources committee
and member of corporate governance committee
Please refer to the corporation’s management proxy circular for detailed biographies of finning directors.
88
corPorate officers
michael t. waites
PresiDent anD cHief executive officer
finning international inc.
DaviD e. parKer
PresiDent
finning (canaDa)
anDrew s. Fraser
Managing Director
finning grouP (uK)
anna p. marKs
senior vice PresiDent,
corPorate controller
finning international inc.
thomas m. merinsKy
vice PresiDent, treasurer
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
2009 finning international inc. | 89 |
corPorate governance
the corporation’s Board of Directors and management are committed to the highest standards of good corporate governance and understand
that such standards are central to the efficient and effective operation of the corporation in a manner that ultimately enhances shareholder value.
BoarD manDate anD composition
the Board of Directors has overall responsibility for the corporation’s business conduct. the Board fulfills this responsibility both directly and
by delegating certain authority to Board committees and to the corporation’s senior management.
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 and chief executive officer. to ensure objectivity, the Board has appointed an independent lead Director, John M. Willson, and the
Board further ensures its independence by convening independent director-only in camera sessions at every Board Meeting.
finally, each year the Board, facilitated by 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: financial statements; financial reporting process; systems of internal and disclosure controls; internal audit function; external
audit function; financial arrangements and liquidity; and 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 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 corporate governance committee provides assistance to the Board by providing focus on corporate governance programs and in
establishing and monitoring corporate governance principles that will enhance corporate performance. the committee has oversight for the
corporation’s code of conduct. in addition, the committee manages the evaluation process to monitor the effectiveness of the Board, its
committees and individual directors and has responsibility for establishing a process for identifying, recruiting, appointing and re-appointing
directors and succession planning for the chairman of the Board. the committee also has responsibility for providing on-going development
of current Board members.
the environment, health and safety committee
the environment, Health & safety committee provides assistance and counsel to the Board and 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 corporation management, that the corporation’s employees and contractors enjoy a safe and healthy workplace.
the pension committee
the Pension committee provides assistance to the Board in overseeing 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.
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, succession planning, 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 2010 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.
90
StoCK exCHangeS
the common shares of Finning international inc. are listed
on the toronto Stock exchange. Symbol: Ftt
auditorS
deloitte & touche llp
vancouver, Canada
SoliCitorS
borden ladner gervais llp
vancouver, Canada
Corporate Head oFFiCe
Suite 1000-666 burrard Street
vancouver, british Columbia
Canada v6C 2x8
telephone: 604-691-6444
aNNUaL GeNeRaL MeeTING
May 13, 2010
2:00 pm pacific time
the Fairmont Hotel vancouver
900 West georgia Street
vancouver, british Columbia
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 Mauk breukels, director, investor relations and
Corporate affairs. telephone 604-331-4934
email: investor_relations@finning.ca
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
SHareHolder inForMation
ForWard-looKing diSClaiMer
this report contains statements about the Company’s business outlook, objectives, plans,
strategic priorities and other statements that are not historical facts. a statement we make
is forward-looking when it uses what we know and expect today to make a statement
about the future. Forward-looking statements may include words such as aim, anticipate,
assumption, believe, could, expect, goal, guidance, intend, may, objective, outlook, plan,
project, seek, should, strategy, strive, target, and will. Forward-looking statements in this
report include, but are not limited to, statements with respect to: expectations with respect
to the economy and associated impact on the Company’s financial results; the estimated
annualized cost savings and anticipated restructuring charges related to actions taken by the
Company in response to the economic downturn; the potential outcome of the Company’s
strategic review of Hewden; expected revenue and ebit growth; anticipated effective tax
rate; anticipated generation of free cash flow (including projected net capital and rental
expenditures), and its expected use; anticipated defined benefit plan contributions; and
expected target range of debt ratio. all such forward-looking statements are made pursuant
to the ‘safe harbour’ provisions of applicable Canadian securities laws.
unless otherwise indicated by us, forward-looking statements in this report describe our
expectations at February 23, 2010. except as may be required by Canadian securities laws,
we do not undertake any obligation to update or revise any forward-looking statement,
whether as a result of new information, future events, or otherwise.
Forward-looking statements, by their very nature, are subject to numerous risks and
uncertainties and are based on several assumptions which give rise to the possibility that
actual results could differ materially from our expectations expressed in or implied by
such forward-looking statements and that our business outlook, objectives, plans, strategic
priorities and other statements that are not historical facts may not be achieved. as a
result, we cannot guarantee that any forward-looking statement will materialize. Factors
that could cause actual results or events to differ materially from those expressed in or
implied by our forward-looking statements include: general economic and credit market
conditions; foreign exchange rates; commodity prices; the level of customer confidence and
spending, and the demand for, and prices of, our products and services; our dependence on
the continued market acceptance of Caterpillar’s products and Caterpillar’s timely supply
of parts and equipment; our ability to continue to implement our cost reduction initiatives
while continuing to maintain customer service; the intensity of competitive activity; our
ability to raise the capital we need to implement our business plan; regulatory initiatives or
proceedings, litigation and changes in laws or regulations; stock market volatility; changes
in political and economic environments for operations outside Canada; with respect to
Hewden, not being successful in generating the expected improvements in the underlying
business performance or not being able to successfully negotiate and complete a transaction
on terms acceptable to the Company or at all. Forward-looking statements are provided in
this report for the purpose of giving information about management’s current expectations
and plans and allowing investors and others to get a better understanding of our operating
environment. However, readers are cautioned that it may not be appropriate to use such
forward-looking statements for any other purpose.
Forward-looking statements made in this report are based on a number of assumptions that
we believed were reasonable on the day we made the forward-looking statements. refer
in particular to the Market outlook section of the Md&a. Some of the assumptions, risks,
and other factors which could cause results to differ materially from those expressed in the
forward-looking statements contained in this report are discussed in the Company’s current
annual information Form (aiF) in Section 4.
We caution readers that the risks described in the aiF are not the only ones that could
impact us. additional risks and uncertainties not currently known to us or that we currently
deem to be immaterial may also have a material adverse effect on our business, financial
condition, or results of operations.
except as otherwise indicated by us, forward-looking statements do not reflect the potential
impact of any non-recurring or other unusual items or of any dispositions, mergers,
acquisitions, other business combinations or other transactions that may be announced or
that may occur after the date hereof. the financial impact of these transactions and non-
recurring and other unusual items can be complex and depends on the facts particular to
each of them. We therefore cannot describe the expected impact in a meaningful way or in
the same way we present known risks affecting our business.
By using paper made from post-consumer recycled content,
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www.finning.com