C R E A T I N G
O U R
F U T U R E
2010 ANNUAL REPORT
Table Of Contents
Finning at a Glance
Value Proposition
Financial Highlights
Letter to Shareholders
Chairman’s Letter
Finning Operations
Corporate Responsibility
MD&A and Financials
2
3
4
6
9
10
12
14
COVER PHOTO: FINNING’S MILDRED LAkE bRANCH, ALbERTA OIL SANDS
INSIDE FRONT COVER PHOTO: ESCONDIDA COPPER MINE, CHILE
“The strong performance of
Finning’s stock reflected the
general economic recovery
and successful execution of
our strategy to date. Going
forward, we will continue to
aggressively pursue growth,
drive operational excellence
and improve profitability. by
continuing on this strategic
path, we will drive value for
our employees, customers
and shareholders and
create Finning’s future.”
Mike Waites
President and Chief Executive Officer
Monetary amounts in this report are in Canadian dollars unless otherwise noted.
2010 Annual Report Finning International Inc. 1
2010 Annual Report Finning International Inc. 1
FINNING AT A GLANCE
Finning International Inc.
is the world’s largest
Caterpillar equipment
dealer delivering
unrivalled service to
customers since 1933.
CORPORATE PROFILE
Finning sells, rents and provides parts
and service for equipment and engines to
customers in various industries, including
mining, construction, power systems,
petroleum and forestry. Finning delivers
solutions that enable customers to achieve
the lowest owning and operating costs while
maximizing equipment uptime. Headquartered
in Vancouver, british Columbia, Finning
operates in Western Canada (Alberta,
british Columbia, the Northwest Territories
and Yukon), South America (Chile,
Argentina, bolivia and Uruguay) as well
as the United Kingdom and Ireland.
Finning employs 11,900 people worldwide,
including over 5,300 skilled technicians.
Finning | Canada
Mining (including oil sands)
Construction
Power Systems
Petroleum
Pipelines
Forestry
Finning | South America
Mining
Construction
Power Systems
Finning | UK and Ireland
Coal Mining
Construction
Quarrying
Waste Management
Plant Hire
Power Systems
Petroleum
Marine
FINNING’S LOCATIONS AND MARkETS
CANADA
Fort McMurray
Edmonton
Vancouver
UK and
IRELAND
Cannock
CHILE
Antofagasta
Santiago
BOLIVIA
URUGUAY
ARGENTINA
2
2
VALUE PROPOSITION
VALUE PROPOSITION TO INVESTORS
• Exclusive Caterpillar dealer in some of the most resource-rich territories
• Unmatched product support capability and customer relationships
• Well-positioned to capture growth opportunities
• Focused on operational excellence, fiscal discipline and high-performance culture
• Strong cash generating business model
STRATEGIC PLAN
MARGIN ExPANSION
INVESTING IN OUR FUTURE
CAPTURING GROWTH
Improved operating leverage driving
more revenue to the bottom line
• EbIT margin target – 10%
in the medium term
• Gradual progress towards targets
• Sustainable improvement in profitability
and return on invested capital
Streamlined, more efficient
cost structure
• SG&A as a percentage of revenue
target – 20% in the medium term
• Focus on operational excellence: cost
control, productivity and efficiency
Product support growth – truly
differentiated service
• Implementation of new Enterprise
Resource Planning (ERP) system
• Recruitment and technical training
Disciplined capital spending
• Fort Mckay shop in oil sands
• Service infrastructure in South America
Growth within existing markets
• Mining: oil sands, copper and coal
• Heavy construction: infrastructure
• Power systems: demand for energy
Growth with Caterpillar
• New products (e.g. CAT 795F electric
drive truck)
• New businesses (e.g. truck bodies)
• Global power systems
• Technology solutions
ESCONDIDA COPPER MINE, CHILE
2010 Annual Report Finning International Inc. 3
2010 Annual Report Finning International Inc. 3
FINANCIAL HIGHLIGHTS
SeleCTeD FInAnCIAl InFOrMATIOn
From continuing operations unless otherwise stated
Twelve months ended Dec 31 ($ millions, except per share amounts)
revenue
Gross profit
Gross profit margin
Selling, general & administrative expenses (SG&A)
SG&A as a percentage of revenue
Other expenses
earnings Before Interest & Income Taxes (eBIT)
EBIT margin
Income from continuing operations
Loss from discontinued operations, net of tax
net income (loss)
basic earnings (loss) per share (EPS)
from continuing operations
from discontinued operations
Total basic earnings (loss) per share
earnings Before Interest, Income Taxes, Depreciation and
Amortization (eBITDA)
Free Cash Flow
Total assets
Total shareholders’ equity
Net debt to total capital
FrOM COnTInUInG OPerATIOnS
% change
4
8
(6)
(20)
11
9
9
2
(46)
2010
4,641.3
1,385.2
2009
4,479.9
1,288.2
29.8%
28.8%
(1,069.6)
(23.0)%
(1,007.6)
(22.5)%
(40.6)
275.0
5.9%
170.7
(249.1)
(78.4)
1.00
(1.46)
(0.46)
(33.7)
246.9
5.5%
156.7
(25.9)
130.8
0.92
(0.15)
0.77
450.7
264.9
442.4
493.9
Dec 31, 10
3,613.6
1,386.6
Dec 31, 09
3,671.4
1,515.7
33.0%
39.3%
REVENUE
($ billions)
EbIT
($ millions)
NET INCOME
($ millions)
bASIC EPS
($)
6
5
4
3
2
1
0
7
5
.
6
5
.
9
4
.
5
4
.
6
4
.
2006 2007 2008 2009 2010
500
400
300
200
100
0
6
5
4
4
7
3
3
8
3
5
7
7 2
4
2
2006 2007 2008 2009 2010
300
250
200
150
100
50
0
0
8
2
6
3
2
7
3
2
1
7
7 1
5
1
2006 2007 2008 2009 2010
2.00
1.50
1.00
0.50
0.00
7
5
1
.
8
3
1
.
2
3
1
.
0
0
1
.
2
9
0
.
2006 2007 2008 2009 2010
The results of operations of Hewden Stuart Limited have been reclassified as discontinued operations for 2010, 2009 and 2008.
4
“We began to generate improved operating leverage in 2010 as our earnings grew faster than revenue.
We continue to implement productivity and efficiency initiatives and maintain cost discipline in all our
operations. With projected average annual revenue growth of about 10% over the next three years,
we remain focused on achieving sustainable improvement in profitability and return on capital.”
Dave Smith
Executive Vice President and Chief Financial Officer
revenUe PrOFIle
revenue by Operation ($ millions)
Canada
South America
Uk and Ireland
2010 % change from 2009
(3)
12
8
2,323.6
1,668.4
649.3
REVENUE BY OPERATIONS
2010 revenue by Operation
14%
36%
50%
CANADA
SOUTH AMERICA
UK AND IRELAND
revenue by line of Business ($ millions)
New Equipment
Used Equipment
Equipment Rental
Product Support
Other
2010 % change from 2009
(2)
(6)
(3)
12
(11)
1,940.6
272.4
299.9
2,117.7
10.7
REVENUE BY LINE OF BUSINESS
(millions)
2010 revenue by line of Business
46%
42%
NEW EQUIPMENT
USED EQUIPMENT
EQUIPMENT RENTAL
PRODUCT SUPPORT
6% 6%
FrOM COnTInUInG OPerATIOnS
PRODUCT SUPPORT REVENUE
($ millions)
EbITDA
($ millions)
2,250
2,000
1,750
1,500
1,250
1,000
750
500
250
0
8
1
1
,
4 2
8
8
1
,
,
7
8
8
1 1
0
7
1
,
3
8
5
1
,
2006 2007 2008 2009 2010
800
700
600
500
400
300
200
100
0
4
8
7
0
6
6
7
0
6
2
4
4
1
5
4
2006 2007 2008 2009 2010
2010 new equipment Deliveries by
2010 NEW EQUIPMENT DELIVERIES
BY INDUSTRY ($)
Industry ($)
2%
5%
5%
18%
40%
30%
MINING
CONSTRUCTION
POWER SYSTEMS
PETROLEUM
FORESTRY
OTHER
2010 Annual Report Finning International Inc. 5
LETTER TO SHAREHOLDERS
“I have immense confidence in the passion, pride and
performance of our people to capitalize on all of our
significant opportunities for growth. Our employees rose to
our challenges and delivered on our commitments in 2010.”
Mike Waites, President and Chief Executive Officer
Dear fellow shareholders,
In many respects, 2010 was a breakthrough
year for Finning. We repositioned our
business with the disposition of Hewden;
we expanded our geographic footprint into
Ireland; we capitalized on improved market
activity; and, we delivered on our financial
commitments. I firmly believe our actions
in 2010 have made us a stronger, fiercer
competitor and put us on the right track
for more profitable growth. Paving the way
for all of our success is our unique value
proposition – the unbeatable combination
of Finning’s superior service and the quality
of Caterpillar’s broad product range.
DELIVERING UNRIVALLED
SERVICE
Led by our dedication to service
excellence, we continued to
strengthen our competitive
position throughout the year.
buoyed by improving business conditions,
market activity gained momentum late
in the second quarter and we ended
the year strong, with accelerating
demand, improving new equipment
orders, and higher EbIT margins. As
machine utilization increased and we
capitalized on pent-up demand for
machine repairs and considerable large
equipment rebuilds, one particular highlight
for the year was our record product
support revenues of $2.1 billion.
Mining continued to provide solid growth
for Finning. We are proud to have furthered
our reputation as the leading heavy mining
equipment supplier and service partner in
our territories with important wins with
mining customers in Chile and Canada,
including the oil sands. Demand from other
sectors, particularly construction and power
systems, also showed growing momentum.
We also commenced the implementation
of comprehensive plans to sell more core
and building construction products.
Our improved performance in 2010
reflects the increasing demand for our
equipment and services and signals solid
growth in the years ahead. Our annual
results also demonstrate our commitment
to generate improved operating leverage
and we have identified a 10 percent EbIT
margin as a medium-term goal. To achieve
this target, we will aggressively pursue
our many growth opportunities and
continue to drive operational excellence.
STRONG FINANCIAL POSITION
While capitalizing on increased demand,
we maintained our focus on meeting
our company’s financial commitments.
Finning’s sound business model supports
us in meeting these objectives. As a
predominantly working capital business, we
have the capability to generate strong free
cash flow and maintain a strong balance
sheet through the economic cycles.
Demonstrating the strength of our business
model and the progressive execution of
our strategy, we met or exceeded each
of our financial commitments in 2010:
• We further lowered permanent
selling, general and administrative
expenses and have now achieved
$120 million in annual permanent
cost reductions over 2008 levels.
• We generated $265 million of free
cash flow, exceeding our target of
$200 million for the business. Since
the fourth quarter of 2008, when the
recession began, Finning has generated
over $900 million in free cash flow.
• We drove our debt levels down
significantly. Our net debt to capital ratio
was 33 percent at year-end, surpassing
our target of mid-30 percent and well
below 49 percent at the end of 2008.
6
Our focused and successful execution
of these commitments further bolstered
Finning’s financial foundation enabling
us to invest in growth and capabilities
to support our customers.
RESHAPING OUR bUSINESS
FOR THE FUTURE
Throughout 2010, we worked hard
to create the Finning that will allow
us to achieve an ever brighter future.
Our actions focused on the following
three areas: repositioning our business,
driving operational excellence, and
embedding a high-performance
culture as a competitive advantage.
We took the critical step to reposition our
business in the U.k. by selling Hewden,
the equipment rental business. As such,
we will grow the small construction
equipment market by selling directly to the
equipment rental industry. We also seized
the opportunity to expand into Northern
Ireland and the Republic of Ireland at
the bottom of the economic cycle. Our
acquisition of these dealerships provides
Finning with incremental revenue in the
power systems and construction markets
while leveraging existing service capabilities
and infrastructure from our U.k.
operations. With these changes, we are
now completely focused on our dealership
business and our core strengths in the
construction and power systems markets.
We are driving our bottom-line
performance by embedding cost
management discipline, sharing best
practices amongst our operations and
instituting a greater accountability for
results. Operational excellence initiatives
are underway across our company to
realize continued improvements in safety,
service and parts, systems, sales and supply
chain. The productivity and efficiency
initiatives we have implemented have laid
the foundation for sustainable growth. We
refined our customer service approach,
defined new standardized processes and
centralized selected functions. We are
launching a global enterprise resource
planning (ERP) system that will consolidate
our company’s knowledge and data
in one place – an invaluable tool for
strengthening customer relationships and
implementing best practices throughout
our operations. These changes go
beyond just delivering temporary
results by fundamentally changing the
way we operate for the long-term.
I know that the key to our success is a
powerful team and an important aspect
of that is to engage, motivate and provide
the training for individuals to excel.
building on our tremendously talented
people, strong safety culture and high
employee engagement, we launched an
initiative to inspire high-performance
amongst our leaders in 2010. This
represents merely the beginning of our
high-performance journey as we will
continue to raise the bar on Finning’s
performance. I believe that bringing
together our best talent and practices
and creating an extraordinary workplace
is central to achieving our future vision.
TREMENDOUS GROWTH
OPPORTUNITIES
Finning is well-positioned to pursue
tremendous organic growth opportunities
in the years ahead. Our growth in existing
markets will be driven by four main factors
and we will aggressively pursue each of
these. First, we are uniquely positioned
to benefit from economic growth in all
our territories and major investments
in our key sectors. Second, as the total
population of machines working in our
territories expands and fleets continue
to age, the need for our product
support services will expand. Third, our
margin growth will be supported by our
continuing efforts to lower our selling,
general and administrative expenses as a
percentage of revenue, which will drive
more of our top-line revenues to the
bottom-line. Fourth, we will be expanding
beyond our existing portfolio by selling
and supporting new Caterpillar products.
To derive the greatest benefit from
growing equipment needs, Finning
is sharply focused on offering truly
differentiated services. by developing a
deep understanding of our customers’
needs, particularly in areas that play
to our strengths, we will build on our
legendary reputation for service excellence
in a variety of ways. Importantly, we
are selectively investing in our product
support infrastructure. In Canada, we
announced plans to begin construction
of a facility in Fort Mckay, Alberta
in 2011 and in South America we are
deliberately expanding our infrastructure
to meet growth opportunities. We are
building our technicians’ skill sets with
training to support the latest products
and innovations. We are also pursuing
operational improvements that support
our world-class performance and
enhance customer loyalty. Our product
support capabilities are unmatched
in the industry and our focused
investments will ensure we further
strengthen our leadership position.
In partnership with Caterpillar, we will
drive product innovation and expand
our product and services portfolio. The
introduction of new Cat products provides
Finning with important and exciting
opportunities, particularly with our mining,
core and power systems customers.
Some examples of Cat products on
the horizon include, electric drive and
autonomous off-highway trucks; vocational
on-highway trucks; and various equipment
productivity and monitoring technologies.
Our strong balance sheet also allows
us the flexibility to take advantage of
opportunities beyond what we see today.
We will actively evaluate opportunities
that complement our core strengths, serve
to strengthen our dealership business,
and are aligned with our vision to be
Caterpillar’s best global business partner.
STRONG TEAMWORk
I have immense confidence in the passion,
pride and performance of our people
to capitalize on all of our significant
opportunities for growth. Our employees
rose to our challenges and delivered
on our commitments in 2010. With the
safety of our employees our foremost
concern, I am especially pleased with our
record safety performance last year –
this achievement is a testament to our
employees unwavering commitment to
our core values. I am appreciative of
2010 Annual Report Finning International Inc. 7
LETTER TO SHAREHOLDERS continued
relative Price Performance
Finning International Inc. vs. S&P/TSx Composite Index
Dec 31, 2005 to Dec 31, 2010
100%
75%
50%
25%
0%
-25%
-50%
Finning International Inc.
S&P/TSx Composite Index
31-DEC-05
31-DEC-06
31-DEC-07
31-DEC-08
31-DEC-09
31-DEC-10
In 2010, Finning’s stock
provided shareholders with
a capital gain of 62% and
dividends totaling $0.47
per share. Total return to
shareholders was over 65%.
Excluding dividends, share
value has grown at the
following compound annual
growth rates (CAGR):
5 YEARS
8%
10 YEARS
16%
20 YEARS
12%
8
all of our employees for their dedication and
hard work in helping position Finning for a
great future. I would also like to acknowledge
Finning’s board of Directors for their thoughtful
leadership and wise counsel throughout the year.
The strong performance of Finning’s stock
reflected the general economic recovery
and successful execution of our strategy to
date. Going forward, we will continue to
aggressively pursue growth, drive operational
excellence and improve profitability. by
continuing on this strategic path, we will
drive value for our employees, customers and
shareholders and create Finning’s future.
Sincerely,
Mike Waites
President and Chief Executive Officer
CHAIRMAN’S LETTER
LA NEGRA, CHILE
Throughout 2010, the board of Directors
continued to support management in
fulfilling Finning’s strategy. As we work to
create a solid and sustainable future and
build long-term shareholder value, Finning’s
management team took concerted actions
to meet its financial commitments and
generate improved operating leverage.
Consequently, Finning is a stronger
company that is well-positioned to take
full advantage of growth opportunities as
we enter the next phase of the economic
cycle. Underpinning Finning’s success in
2010 was the company’s consistent and
singular vision: Providing unrivalled services
that earn customer loyalty, we will be
Caterpillar’s best business partner.
As Finning’s board of Directors, we are
committed to playing an active role in
supporting the realization of this vision
through upholding the highest standards
of corporate governance and our strong
commitment to fulfilling the duties of
stewardship and accountability. At Finning,
this begins with the company values: We
care, communicate, take responsibility,
empower, trust, and do our best.
these same values unite Finning employees
across its international operations as the
organization continues to grow. On behalf
of the board of Directors, I would like to
thank Finning employees for embodying
these values while working towards our
company’s success throughout 2010.
We believe that dividends are an important
component of total shareholder return.
Accordingly, the board increased the
quarterly dividend to $0.12 per share in
2010. Going forward, we remain committed
to enhancing shareholder value.
I will take this opportunity to thank
my fellow directors for their valuable
contributions last year. In particular, I would
like to recognize two long-serving directors,
Conrad A. Pinette and John M. Willson, who
both retired from the board in May 2010.
Conrad served Finning since 1992, previously
as Chairman of the board and most recently
as a Director. I thank him for his dedication,
wisdom and leadership throughout his 18
years of service. I would also like to express
my appreciation to John for his insight
and commitment to our company over 10
years, most recently as Lead Director.
Since the company’s beginnings, these core
values have guided its employees’ actions
and provided a common foundation. Today,
Adding to the board’s considerable
experience, we welcomed a new
member in October 2010. Christopher
Patterson joined the Finning board of
Directors bringing extensive senior level
operational experience combined with
an in-depth understanding of marketing
and distribution of on-highway trucks.
For more information about our corporate
governance policies, please review the
Finning management proxy circular
and visit the corporate governance
section at www.finning.com.
On behalf of the board of Directors,
Douglas W. G. Whitehead
Chairman of the board
2010 Annual Report Finning International Inc. 9
FINNING OPERATIONS
FINNING | CANADA
2010 Highlights
• Market conditions improved significantly
in the second half of 2010 with a strong
turnaround in mining and increased
activity in construction. Petroleum and
forestry markets also began to recover.
• Increased demand for parts, service and
machine rebuilds drove product support
revenues up 17% to a record $1.1 billion.
New equipment sales were 18% lower due
to weak market conditions in 2009, resulting
in lighter deliveries in the first half of 2010.
• EbIT rose by 34% and EbIT margin
improved to 5.7% from 4.1%, driven by
robust product support, higher gross profit
and a more streamlined cost structure.
FINNING | SOUTH AMERICA
2010 Highlights
• Continued growth in mining and strong
recovery in construction drove revenues
up 24% to a record US$1.6 billion.
• New equipment and product
support revenues grew by 30% and
20% respectively in US dollars.
• EbIT was up 7% in US dollars and reached
a new record. EbIT margin was 8.8%.
In anticipation of strong demand for
product support in mining, the workforce
increased by 19% to 5,900 and drove
higher recruitment and training costs.
FINNING | Uk AND IRELAND
2010 Highlights
• In May, we completed the strategic
realignment of our Uk operations by
selling Hewden. In August, Finning was
appointed the Caterpillar dealer for
Northern Ireland and the Republic of
Ireland. Our dealership is now focused
on selling and supporting equipment to
industries which play to our strengths.
• Stronger new equipment sales and
product support, particularly in coal
mining and quarrying, drove a 21%
increase in revenue (in GbP).
• A very competitive market environment
and revenue mix shift to new
equipment sales impacted gross profit
margins and, consequently, EbIT
declined by 8% to GbP 10 million.
1010
“Canadian operations are
continuing to demonstrate
operating leverage. Our
focus on operational
excellence and cost
discipline is ongoing. With
a solid backlog, committed
people and a clear growth
strategy, we are poised
to deliver superior
results during the current
equipment cycle.”
Dave Parker
President, Finning Canada
Operational excellence
The main operational excellence initiative
underway in Canada is the implementation
of our new erP system, which is
expected to go live in 2011. We also remain
focused on supply chain efficiencies to
optimize working capital and further reduce
the cash-to-cash cycle. As well, service
operations process improvements we
implemented in our oil sands operations
are being transferred and integrated into
other key locations. Operational excellence
remains at the top of our priorities as we
drive towards achieving an eBIT margin
of 9 to 10% in the medium term.
“Growing to Excel captures
our strategy to become
best-in-class in everything
we do. Innovative customer
solutions, operational
excellence and our
exceptional people will
enable us to capture growth
opportunities and deliver
that extra percent of EbIT
to the bottom line.”
Juan Carlos villegas
President, Finning South America
Operational excellence
A strategic approach to supply chain
management is critical to our customer
value proposition in South America, as our
branches are located far from Caterpillar’s
factories and warehouses. To reduce the
cash-to-cash cycle, our focus is on improving
inventory and working capital management.
We are also investing in technology to
monitor equipment performance at remote,
high altitude mines. The ongoing investment
in product support infrastructure,
including recruitment and training, will enhance
our competitive edge. We aim to capture our
growth opportunities and generate a 10 to
11% eBIT margin in the medium term.
“I am excited about
opportunities in the U.k.
and Ireland. We have a
very clear strategy to lever
our core competencies
in the construction and
power systems sectors. Our
new and energized team
is committed to winning
in the key segments and
delivering improved financial
performance.”
neil Dickinson
Managing Director, Finning Uk and Ireland
Operational excellence
We have implemented a segmented
approach to our U.k. customers in
construction and power systems, with
a focus on large equipment and product
support. We are also concentrating on
improving our market share of small
machines. Our distribution, engineering and
consulting capabilities position us for growth
in the U.k.’s challenging environment.
All our operational excellence initiatives
continue to follow a lean cost business
model, including our investments in
supply chain efficiency and talent and
service management. With higher
revenues and a reduced cost base, we
expect the U.k.’s eBIT margin to
improve to 7 to 8% in the medium term.
Capturing Growth
In 2010, we won a number of important
mining deals, including the kearl oil sands
project. We also saw order activity increase
significantly in construction, petroleum and
forestry. Throughout the oil sands and other
mining regions, capital spending on new
projects and expansions are driving demand
for equipment and product support. Activity
at our OEM component remanufacturing and
COE machine rebuild facilities is very strong
and we’ve increased our capacities at each.
We are investing in a new oil sands service
facility in Fort Mckay and expanding our
product support capabilities elsewhere. To
continue delivering truly differentiated service
to customers we are also elevating our focus
on training and high-performance culture.
Capturing Growth
A projected investment of US$50 billion
in mining in Chile over the next five years
supports a strong outlook. In addition,
investments in infrastructure and energy
in Chile and Argentina are driving growth
in construction and power systems. Such
a high-growth environment brings many
challenges, including competitive labour
markets, strong local currencies and rising
inflation. Through our relentless focus on
operational excellence, we are well prepared
to successfully manage these cost pressures
and balance growth with efficiencies.
Capturing Growth
We have a strong market share and customer
relationships in the coal mining, quarrying
and waste & recycling industries. These
sectors continue to represent attractive
growth opportunities. In addition, power
systems segments, including renewables,
marine and oil & gas are expected to
continue to gain momentum. Order
intake has improved, and we expect the
expanding machine population to generate
growing demand for parts and service.
CANADA REVENUE
($ millions)
3,500
3,000
2,500
2,000
2,000
1,500
1,000
500
0
7
1
2
3
,
6
3
9
2
,
3
1
6
2
,
6
8
3
2
,
4
2
3
,
2
2006 2007 2008 2009 2010
SOUTH AMERICA REVENUE
($ millions)
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
8
6
6
0 1
9
4
1
,
,
2
0
5
1
,
6
2
3
1
,
0
1
0
1
,
2006 2007 2008 2009 2010
UK & IRELAND REVENUE
($ millions)
1,000
800
600
400
200
0
7
4
9
0
8
8
6
9
7
9
4
6
4
0
6
2006 2007 2008 2009 2010
Power Systems
Finning offers solutions to power systems
customers in a broad range of applications,
including electric power generation,
marine, industrial and petroleum. We
are applying our recognized engineering,
project management, operation and
maintenance capabilities both within and
beyond our dealership territories. Our
expertise adds considerable value to
power systems projects with demanding
specifications. We see many opportunities
to add new products and services to
grow our power systems business.
Technology Solutions
We work closely with Caterpillar to
introduce new technology solutions that
help customers manage their equipment
fleets, improve machine productivity and
lower the owning and operating cost
of equipment. In power systems, our
engineering solutions include sophisticated
switchgear and control systems, allowing
for remote equipment monitoring of
multiple sites. In construction and mining,
we have the technology to address the
significant demand for job site solutions
to improve machine productivity, provide
better operator safety and monitor
machine conditions from remote
locations. Furthermore, as the demand
for exhaust after-treatment and emission
reduction equipment continues to grow,
Finning has developed the expertise to
produce power with alternative sources
of energy at lower emission levels.
“In partnership with
Caterpillar, we are driving
innovation and expanding
our product and services
portfolio. We are well
positioned to grow and
seize opportunities that
leverage our operational
synergies and capitalize
on our core strengths.”
Andy Fraser,
Executive Vice President, Power Systems
and Global business Development
2010 Annual Report Finning International Inc. 11
2010 Annual Report Finning International Inc. 11
CORPORATE RESPONSIbILITY
“We are building a
high-performance culture
to support our operational
excellence and growth
aspirations. While still
in the early stage of
this exciting journey, I
believe we will create an
extraordinary workplace
that raises the bar on
our performance.”
rebecca Schalm
Senior Vice President, Human Resources
12
At Finning, corporate responsibility is
integrated into our day-to-day operations.
This is evident by our focus on implementing
the best environment, health and safety
practices, the active role we play in our
communities and our commitment to our
employees. Anchored in our core values and
Finning’s Code of Conduct, each of these
areas constitutes an important measure of
our company’s success.
STRIVING FOR SAFETY
ExCELLENCE
Our commitment to health and safety
is embraced by each Finning employee,
embedded in our operations, and
monitored and evaluated by our board
of Directors. Our dedication to maintain
the highest standards of safety includes
benchmarking our safety performance,
ongoing communication of issues and
results, and sharing of best practices.
As a result of our efforts in 2010, we
experienced our lowest ever lost time
incident (LTI) rate, a key indicator of safety
performance. The LTI rate declined from
0.24 to 0.16 incidents per 200,000 hours
worked, a 33% reduction compared to
2009. This achievement is a credit to our
employees’ ongoing pursuit of continuous
improvement in the safety of our operations.
We continue to execute initiatives aimed
at our goal of zero injuries. During 2010,
Finning South America promoted safety at
work and at home as part of their ‘Living’
Safe’ prevention program. Finning Canada
launched the ‘Stop, Think, Prevent’ campaign
to focus attention on hand and finger injury
prevention. This campaign subsequently
received Caterpillar’s award for best internal
safety communication plan. Finning Uk and
Ireland created an awareness promotion to
highlight new hand protection requirements.
These are just a sample of the measures
taken to support us in meeting world-class
safety standards.
COMMITMENT TO OUR
COMMUNITIES AND
ENVIRONMENT
Finning’s tradition of contributing to
the sustainability and strength of our
communities is a source of pride amongst
our employees.
When an 8.8 magnitude earthquake
struck Chile on February 27, 2010,
our employees were quick to respond.
Coordinating efforts with local authorities,
they volunteered to meet basic needs,
providing food, water, medical supplies,
diapers and other necessities. Across
Finning, regional fundraising campaigns
were held to assist affected colleagues.
In addition, the company conducted
meetings with its employees to assess
their needs and provide aid as required.
Finning’s tradition of community support
is also manifested through our employees’
enthusiastic involvement in numerous causes.
In Canada, our employees lead the annual
United Way campaign and various volunteer
efforts, and the company is supportive of
many philanthropic causes. Additionally,
Finning’s community involvement is visible
through our various sports and cultural
sponsorships, from a partnership with the
popular Leicester Tigers Rugby Club in the
U.k. to our backing of the CObRELOA
soccer team in Calama, Chile, a city that is
home to many mining operations.
Our commitment to our communities also
extends to minimizing the impact of our
activities on the environment. This is a
priority every day in each of our operations.
To meet or exceed the environmental
standards of each community where
we work, we have adopted various
management practices. We perform regular
environmental audits to identify, assess and
reduce environmental impacts. Employees
are trained to uphold environmental laws
and regulations. Suppliers and contractors
are evaluated on their adherence to
environmental standards. And we ensure
that the future development of our
business reflects our high standards.
For example, our new facility in Fort Mckay,
Alberta will employ sustainable design
features, including high efficiency lighting
and a water treatment system.
Additionally, we recognize that we have
an important role to play in supporting
our customers to maximize their energy
conservation. We train customers to operate
machines more efficiently and conserve fuel.
Our mechanics evaluate opportunities to
In partnership with Caterpillar, Finning provides products and services that feature innovative design to deliver a smaller environmental footprint, such
as the Cat D7E Tractor. Using an electric drive system that generates 10 to 30% greater fuel economy than conventionally designed crawler tractors of
equal weight and horsepower, this machine meets the demand for powerful, maneuverable dozers while delivering unprecedented sustainability benefits.
extend the life of the equipment we sell and
rebuild machines and components to help
reduce the load on landfills. Our power
systems teams design, engineer and deploy
renewable or alternative energy solutions
that reduce greenhouse gas emissions.
In partnership with Caterpillar, Finning
provides products and services that impart
sustainable environmental benefits. New
Caterpillar product design innovations,
such as the electric drive tractors deliver
demonstrable improvements in fuel efficiency
while still providing powerful performance.
As well, leading-edge technology solutions,
such as automatic machine controls,
have proven to realize up to 25 percent
reductions in fuel consumption. Many
projects with our customers provide Finning
with a significant opportunity to expand our
environmental commitment while delivering
truly differentiated services and solutions.
high-performance culture with the right
people and skills in place to meet our
tremendous opportunities. Our commitment
to our employees is to 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.
The learning and development of our
people is an important component of
providing a personally fulfilling workplace
for our employees while building our
organizational capability. Development
opportunities range from external and
internal training programs and e-learning to
on-the-job-training. These programs vary
to meet the needs of each of our operation
and are targeted to all stages of professional
development from safety and technical
training, to leadership training and coaching.
EMbEDDING A
HIGH-PERFORMANCE CULTURE
With the long-term demand for our
products and services expected to grow,
Finning is investing to ensure we have a
Over the past several years, we have made
a focused effort to measure engagement
through an annual employee opinion survey
(EOS). In 2010, our EOS scores increased in
all 11 indices with learning & development,
executive management, change, and
organizational effectiveness showing the
most marked improvement. In order to drive
continuous improvements in our workplace,
action plans are implemented annually to
address areas of opportunity.
To support us in meeting our business
objectives, we have identified a high-
performance culture as a strategic
priority at Finning. A high-performance
culture is a supportive and collaborative
work environment where we produce
extraordinary results because of the way
in which we work together. Over time, we
plan to embed this culture and shift from
contributing as highly competent individuals
to operating as a high-performing team.
2010 Annual Report Finning International Inc. 13
FINANCIAL REPORT
MANAGEMENT’S DISCUSSION & ANALYSIS
MANAGEMENT’S REPORT TO THE SHAREHOLDERS
AUDITORS’ REPORT
CONSOLIDATED FINANCIAL STATEMENTS
TEN YEAR FINANCIAL SUMMARY
15
46
47
48
84
14
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 its current annual information Form (aiF), can be found on the seDaR (system for electronic Document analysis
and Retrieval) website at www.sedar.com.
Results oF oPeRations
the results from continuing operations described in this Management’s Discussion and analysis (MD&a) include those of acquired businesses
from the date of their purchase and exclude results from operations that have been disposed or are classified as discontinued. Results of
operations from businesses that qualified as discontinued operations have been reclassified to that category for all periods presented unless
otherwise noted.
in august 2010, Finning was appointed the caterpillar inc. (caterpillar) dealer for northern ireland and the Republic of ireland. the company
acquired the business by purchasing certain assets, comprising inventory, a building, and other fixed assets in northern ireland and the Republic
of ireland.
Following an extensive strategic review, on May 5, 2010 the company sold Hewden stuart limited (Hewden), its uK equipment rental business,
for an after-tax loss of $244.1 million or $1.43 per share. the results of operations of Hewden for the periods up to May 5, 2010 have been
reclassified as discontinued operations in the consolidated statements of income and cash flow. the assets and liabilities of Hewden in the balance
sheet for periods prior to the date of disposition have been presented separately.
Please see the section entitled “Discontinued operations – Hewden” for a discussion of these operations.
Fourth Quarter overview
($ Millions)
(% oF Revenue)
Q4 2010
Q4 2009
Q4 2010
Q4 2009
Revenue
gross profit
selling, general & administrative expenses
other expenses
earnings from continuing operations before
interest and income taxes (eBit)(1)
Finance costs
Provision for income taxes
income from continuing operations
loss from discontinued operations, net of tax(3)
net income
Basic earnings (loss) per share (ePs)
from continuing operations
from discontinued operations(3)
total basic earnings per share
earnings from continuing operations before interest,
taxes, depreciation, and amortization (eBitDa)(1)
Free cash Flow(1)(2)
$
$
$
$
$
$
$
$
1,366.3
397.9
(304.4)
(14.4)
79.1
(12.8)
(16.2)
50.1
–
50.1
0.29
–
0.29
128.0
129.0
$
$
$
$
$
$
$
$
1,080.8
297.2
(248.2)
(9.3)
39.7
(16.9)
(1.1)
21.7
(5.4)
16.3
0.13
(0.03)
0.10
84.2
130.4
29.1%
(22.3)%
(1.0)%
5.8%
(0.9)%
(1.2)%
3.7%
–
3.7%
27.5%
(23.0)%
(0.8)%
3.7%
(1.6)%
(0.1)%
2.0%
(0.5)%
1.5%
9.4%
7.8%
(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 provided by (used in) operating activities less net capital expenditures.
(3) on May 5, 2010, the company sold Hewden, its uK equipment rental business. as a consequence, the results of operations of Hewden have been reclassified
as discontinued operations for all periods presented.
Fourth quarter consolidated revenues of $1.4 billion were up 26.4% from the comparable quarter in 2009, with higher revenues contributed
by all operations, but most significantly from the company’s south american and canadian operations.
Foreign exchange had a negative impact on revenues of approximately $67 million (or 5%) due to the 4.1% stronger canadian dollar relative
to the u.s. dollar and the 7.2% stronger canadian dollar relative to the u.K. pound sterling for the three months ended December 31, 2010
compared to the same period last year.
2010 Annual Report Finning International Inc. 15
ManageMent’s Discussion & analysis
Revenues from the company’s canadian operations increased 11.6% in the fourth quarter of 2010 compared with the same period last year,
largely due to significant growth in product support (30.3% higher than the comparative period in 2009). growth in product support revenues
was primarily driven by the mining sector but there was substantial improvement in non-mining sectors as well. the canadian operations’ new
equipment sales were slightly lower than the fourth quarter of 2009, but were slightly higher when adjusting for the negative impact of foreign
exchange, and reflected higher deliveries due to increased demand in the mining and non-mining sectors.
Revenues from the company’s operations in south america increased 50.1% compared to the fourth quarter of 2009. excluding the negative
impact of translating the results of the south american operations with a stronger canadian dollar, revenues for the fourth quarter of 2010 in
functional currency (the u.s. dollar) were at record levels and increased by 56.5% over the fourth quarter of 2009. this was driven mainly by
strong new equipment sales (almost double the sales recorded in the fourth quarter of 2009) with higher mining deliveries and increased demand
from the construction sector in chile and argentina. Product support revenues continued to show solid growth, and were 26.6% higher than the
fourth quarter of 2009, up in all sectors but most significantly in mining.
Revenues from the uK and ireland operations were up 33.1% over the fourth quarter of 2009, and were up 43.6% in local currency. this increase
was largely due to considerably higher new equipment sales (up 83.0% in local currency), up in all sectors but most significantly in construction
and mining. Product support revenues were 15.4% higher (in local currency) than the same quarter last year, most notably in the coal and
quarrying sectors.
overall, new equipment sales were up 34.9% compared with the fourth quarter of 2009, up significantly in the company’s south american and
uK and ireland operations.
Product support revenues in the fourth quarter of 2010 were up 24.3% overall compared with the same quarter last year, with increases
reported in all regions. growth in product support revenues was driven primarily by the mining sectors in canada and south america.
Rental revenues increased by 17.3% (up in the canadian and south american operations) and used equipment sales declined by 7.8%, compared
to the fourth quarter of 2009.
Finning’s global order book or backlog (the retail value of new equipment units ordered by customers for future deliveries) was $1.3 billion at
the end of the fourth quarter of 2010 and was at the highest level since December 2008. the consolidated backlog increased in each consecutive
quarter in 2010, and more than doubled from the end of 2009, driven primarily by mining and continued increase in new orders from the
construction sector. the company’s new order intake in the fourth quarter of 2010 was the highest since the third quarter of 2008, and was
up 2% from the third quarter of 2010.
the company is dependent on caterpillar for the timely supply of equipment to fulfill its deliveries. With global demand increasing, caterpillar
is challenged to meet demand for certain equipment in 2011 and has been taking steps to increase production capacity to meet this demand.
Finning continues to work closely with caterpillar and customers to ensure that equipment demands from the company’s customers can be met.
REVENUE FROM CONTINUING
OPERATIONS
($ millions) 3 months ended December 31
REVENUE BY LINE OF BUSINESS
FROM CONTINUING OPERATIONS
($ millions) 3 months ended December 31
EBIT FROM CONTINUING OPERATIONS*
($ millions) 3 months ended December 31
*excluding other operations –
corporate head office
800
600
400
200
1
7
6
2
0
6
6
0
5
7
3
3
9
8
2 1
4
1
0
CANADA
SOUTH
AMERICA
UK GROUP
2009
2010
16
800
600
400
0
7
4
4
3
6
3
8
5
9
6
4
200
0
60
45
30
15
5
4
0
4
2
3
6
6
1
6
4
2 8
7
NEW
EQUIPMENT
USED
EQUIPMENT
EQUIPMENT
RENTAL
PRODUCT
SUPPORT
2009
2010
4 4
OTHER
0
0
CANADA
6
5
2009
2010
SOUTH
AMERICA
UK & IRELAND
ManageMent’s Discussion & analysis
Earnings from Continuing Operations Before Interest and Taxes (EBIT)
on a consolidated basis, eBit was $79.1 million in the fourth quarter of 2010, almost double the eBit of $39.7 million in the fourth quarter
of 2009, primarily driven by robust revenue growth and a strongly improved eBit margin (eBit divided by revenues) from the company’s
canadian operations.
gross profit of $397.9 million in the fourth quarter of 2010 was up 33.9% compared to the fourth quarter of 2009. Quarterly gross profit margin
(gross profit as a percentage of revenue) of 29.1% was also higher than the prior year’s fourth quarter margin of 27.5%. this was primarily due to an
improvement in margins in most lines of business. new equipment sales made up 46.4% of total revenues in the fourth quarter of 2010, compared
with 43.5% of total revenues in the same period last year. comparatively, product support revenues were approximately the same at 42.7%.
selling, general, and administrative (sg&a) expenses were $304.4 million or 22.6% higher than the fourth quarter of 2009, partly reflecting
increased volume-related costs to support higher revenues and the growing higher margin product support business. the company continued
to realize cost savings from productivity initiatives announced last year. Primarily as a result of these cost reductions and efficiency improvements,
sg&a costs in the fourth quarter of 2010 decreased as a percentage of revenue to 22.3% from 23.0% in the fourth quarter of 2009.
eBit in the fourth quarter of 2010 included $7.1 million of costs (Q4 2009: $6.2 million) related to the implementation of a new information
technology (it) system for the company’s global operations, and restructuring and severance costs of $0.5 million (Q4 2009: $12.1 million).
in addition, in the fourth quarter of 2010 as part of its review of the valuation of investments and long-lived assets, the company recorded an
impairment charge totalling $6.8 million, primarily related to its equity investment in energyst B.v. included in the results for the fourth quarter
of 2009 was a $9.0 million pre-tax gain on the sale of certain properties, primarily in south america.
the company’s eBit margin of 5.8% in the fourth quarter of 2010 improved significantly from 3.7% in the fourth quarter of 2009. the
improvement in the eBit margin was primarily driven by the company’s canadian operations.
Major components of the eBit variance were:
($ Millions)
2009 Q4 eBit
net change in operations
Foreign exchange impact
lower restructuring costs in 2010
impairment of investment and long-lived asset in 2010
Higher it system implementation costs in 2010
Higher gains on sale of certain properties in 2009
2010 Q4 eBit
$
$
39.7
54.3
(9.8)
11.6
(6.8)
(0.9)
(9.0)
79.1
the company’s canadian operations contributed $45.3 million of eBit in the fourth quarter of 2010, compared with an eBit loss of $0.2 million
in the comparable period last year. the fourth quarter results of last year included significantly higher restructuring and severance costs and
lower revenues. eBit margin of 6.7% for the three months ended December 31, 2010 improved significantly from the break-even contribution
in the fourth quarter of 2009, as the canadian operations continued to drive higher eBit margin by focusing on cost containment, productivity
improvements, and supply chain efficiencies.
eBit from the company’s south american operations of $39.6 million was 22.2% higher than the fourth quarter of 2009 (27.7% higher in
functional currency). eBit margin of 7.8% was below the 9.6% experienced in the fourth quarter of 2009 largely due to the shift in revenue mix
to relatively lower margin new equipment sales and higher volume-related costs. the company’s south american operations are incurring higher
employee costs as many technicians are being recruited and trained to meet current and anticipated customer demand.
the uK and ireland operations contributed eBit of $4.6 million in the fourth quarter of 2010, down from eBit of $6.0 million in the comparable
period of 2009. eBit margin was 2.4%, down from the eBit margin of 4.2% in the fourth quarter of 2009. the decline in eBit margin compared
to the prior year’s quarter largely reflected lower gross profit margin resulting from the shift in revenue mix to a higher proportion of new
equipment sales, and lower new equipment and product support margins.
Earnings from Continuing Operations Before Interest, Taxes, Depreciation, and Amortization (EBITDA) and Free Cash Flow
eBitDa, which management views as an indicator of the company’s cash operating performance, was $128.0 million in the fourth quarter of
2010 compared to $84.2 million in the fourth quarter of 2009.
the company’s Free cash Flow generated in the fourth quarter of 2010 of $129.0 million was comparable to the $130.4 million generated in the
comparative period of the prior year. Free cash Flow from Hewden has been included in the reported amounts for periods prior to the sale –
see “Description of non-gaaP Measures”.
2010 Annual Report Finning International Inc. 17
ManageMent’s Discussion & analysis
Finance Costs
Finance costs for the three months ended December 31, 2010 were $12.8 million compared with $16.9 million in the fourth quarter of 2009.
the lower finance costs in the fourth quarter of 2010 was primarily due to lower debt outstanding and the favourable foreign exchange impact
of translating foreign currency denominated finance costs in the fourth quarter of 2010 with a stronger canadian dollar relative to the u.s. dollar
and the u.K. pound sterling.
Provision for Income Taxes
the effective income tax rate for the fourth quarter of 2010 was 24.4% compared to 4.8% in the comparable period of the prior year. the
effective tax rate was higher in the fourth quarter of 2010 due to an increased proportion of earnings from higher tax jurisdictions, partly offset
by the positive impact of tax rate changes in chile. the low effective tax rate in the fourth quarter of 2009 reflected lower capital gains tax rates
applied to the sale of properties in south america, as well as higher income earned in lower tax jurisdictions.
Income from Continuing Operations
Finning’s income from continuing operations was $50.1 million in the fourth quarter of 2010, up 130.9% compared with $21.7 million in the
comparative period in 2009.
Basic ePs from continuing operations was $0.29 in the fourth quarter of 2010 compared with $0.13 in the same period last year. the fourth
quarter 2010 results reflected higher revenues in all operations, improved margins, and the benefits of cost control and process efficiencies.
Fourth quarter 2010 results included $0.03 per share of costs related to the global it system implementation and a $0.04 per share impairment
charge related to an investment and a long-lived asset. comparatively, the fourth quarter of 2009 included $0.05 per share of restructuring and
severance costs and $0.02 per share of costs related to the global it system implementation, partly offset by $0.05 per share gain on sale of
certain property, primarily in south america.
annual overview
($ Millions)
(% oF Revenue)
YtD 2010
ytD 2009
YtD 2010
ytD 2009
Revenue
gross profit
selling, general & administrative expenses
other expenses
earnings from continuing operations before
interest and income taxes (eBit)(1)
Finance costs
Provision for income taxes
income from continuing operations
loss from discontinued operations, net of tax(3)
net income (loss)
Basic earnings (loss) per share (ePs)
from continuing operations
from discontinued operations(3)
total basic earnings (loss) per share
earnings from continuing operations before interest,
taxes, depreciation, and amortization (eBitDa)(1)
Free cash Flow(1)(2)
$
$
$
$
$
$
$
$
4,641.3
1,385.2
(1,069.6)
(40.6)
275.0
(58.7)
(45.6)
170.7
(249.1)
(78.4)
1.00
(1.46)
(0.46)
450.7
264.9
$
$
$
$
$
$
$
$
4,479.9
1,288.2
(1,007.6)
(33.7)
246.9
(61.8)
(28.4)
156.7
(25.9)
130.8
0.92
(0.15)
0.77
442.4
493.9
29.8%
(23.0)%
(0.9)%
5.9%
(1.2)%
(1.0)%
3.7%
(5.4)%
(1.7)%
28.8%
(22.5)%
(0.8)%
5.5%
(1.4)%
(0.6)%
3.5%
(0.6)%
2.9%
9.7%
9.9%
(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 provided by (used in) operating activities less net capital expenditures.
(3) on May 5, 2010, the company sold Hewden, its uK equipment rental business. as a consequence, the results of operations of Hewden have been reclassified
as discontinued operations for all periods presented.
For the year ended December 31, 2010, revenues of $4.6 billion increased 3.6% over the same period last year, reflecting higher revenues from
the company’s south american and uK and ireland operations.
Foreign exchange had a negative impact on revenues of approximately $397 million (or 9%) due to the 9.8% stronger canadian dollar relative
to the u.s. dollar and the 10.6% stronger canadian dollar relative to the u.K. pound sterling for the year ended December 31, 2010 compared
to last year.
18
ManageMent’s Discussion & analysis
annual 2010 revenues from the company’s canadian operations were slightly down from 2009. However, adjusting for the impact of foreign
exchange, revenues in 2010 were 3.7% higher. Product support revenues contributed by the canadian operations reached a record for Finning
(canada), surpassing $1 billion for the first time. new equipment sales in 2010 were lower than 2009, largely due to the negative impact from
foreign exchange as well as lower deliveries in the first half of 2010. the previous year benefited from a significantly higher opening backlog level
which supported equipment deliveries in the first half of 2009.
Revenues from the company’s south american operations were at record levels, reaching $1.7 billion for the year ended December 31, 2010,
up 12.0% over the prior year. in functional currency (the u.s. dollar), annual revenues increased 24.3% over 2009, reflecting strong new equipment
sales, particularly in construction and mining, and continued solid growth in product support revenues, up in all sectors.
the uK and ireland revenues in 2010 were up 7.6% from 2009, and up 20.6% in local currency, largely due to higher new equipment sales
and product support revenues, particularly in the coal and quarrying industries. Revenues, in local currency, were up in most lines of business
compared to 2009, with the exception of equipment rental.
on a consolidated basis, product support revenues were at record levels, 12.4% higher than the prior year, up in all operations, and up 21.6%
when adjusted for the impact of foreign exchange. growth in product support revenues continued to be driven primarily by the mining sectors
in canada and south america, and improved in certain non-mining sectors. new equipment sales were 2.2% lower than the prior year, partly due
to lower volumes in the company’s canadian operations as well as the negative impact of foreign exchange.
used equipment sales and rental revenues declined by 6.1% and 3.3%, respectively, compared to the year ended December 31, 2009.
Earnings from Continuing Operations Before Interest and Taxes (EBIT)
eBit of $275.0 million increased 11.4% compared with the prior year, in spite of the negative impact of foreign exchange. the increase was
primarily due to higher revenues and improved margins.
gross profit of $1,385.2 million in 2010 increased 7.5% over the prior year. gross profit as a percentage of revenue was 29.8%, compared
with 28.8% in 2009, primarily due to the shift in revenue mix to a higher proportion of product support business in the company’s canadian
operations. Product support revenues generate relatively higher margins and made up 45.6% of total revenues in 2010, compared with 42.0%
of total revenues last year.
sg&a costs were 6.2% higher than the year ended December 31, 2009, partly due to an increase in volume related costs to support higher
revenues and the growing product support business. in addition, costs were up due to an increase in the workforce in the company’s south
american operations in 2010 to meet strong customer demand. the increase was partially offset by the benefit of targeted cost reductions and
productivity improvement measures. the company achieved the targeted $120 million of annual permanent cost reductions in 2010 compared
to 2008 and continued to implement productivity and efficiency initiatives.
Results for 2010 included costs of $27.8 million (2009: $18.9 million) related to the ongoing implementation of the new it system for the
company’s global operations and restructuring and severance costs of $4.2 million (2009: $23.9 million). the annual results for 2010 also included
$2.0 million of acquisition and other related costs related to the acquisition of the caterpillar dealerships for northern ireland and the Republic
of ireland, and a $6.8 million impairment charge related to an investment and a long-lived asset. included in the 2009 results was a $9.1 million
pre-tax gain on the sale of certain properties, primarily in south america.
REVENUE FROM CONTINUING
OPERATIONS
($ millions) For years ended December 31
REVENUE BY LINE OF BUSINESS
FROM CONTINUING OPERATIONS
($ millions) For years ended December 31
EBIT FROM CONTINUING OPERATIONS*
($ millions) For years ended December 31
*excluding other operations –
corporate head office
3,000
2,500
2,000
1,500
1,000
500
0
6
8
3
,
2
4
2
3
,
2
8
6
6
1
,
0
9
4
1
,
4
0
6
9
4
6
2009
2010
CANADA
SOUTH
AMERICA
UK & IRELAND
2,500
2,000
1,500
1,000
500
0
4
8
9
,
1
0
4
9
1
,
,
8
1
1
4 2
8
8
1
,
0
9
2
2
7
2
0
1
3
0
0
3
NEW
EQUIPMENT
USED
EQUIPMENT
EQUIPMENT
RENTAL
PRODUCT
SUPPORT
2
1
1
1
OTHER
2009
2010
200
150
100
50
0
4
5
1
7
4
1
2
3
1
8
9
0
2
6
1
2009
2010
CANADA
SOUTH
AMERICA UK & IRELAND
2010 Annual Report Finning International Inc. 19
ManageMent’s Discussion & analysis
the company’s 2010 eBit margin was 5.9% compared with the eBit margin of 5.5% achieved in the prior year.
Major components of the annual eBit variance were:
($ Millions)
2009 eBit
net change in operations
Foreign exchange impact
lower restructuring costs in 2010
impairment of investment and long-lived asset in 2010
Higher it system implementation costs in 2010
acquisition and other related costs in 2010
Higher gains on sale of certain properties in 2009
2010 eBit
$
$
246.9
99.4
(64.2)
19.7
(6.8)
(8.9)
(2.0)
(9.1)
275.0
Earnings from Continuing Operations Before Interest, Taxes, Depreciation, and Amortization (EBITDA) and Free Cash Flow
eBitDa, which management views as an indicator of the company’s cash operating performance, was $450.7 million in 2010 compared to
$442.4 million in 2009.
the company’s Free cash Flow generated in 2010 was $264.9 million compared to $493.9 million in 2009. the 2010 annual Free cash Flow
exceeded management’s target of approximately $200 million due to a higher than expected sales and collections from customers late in the
year. Finning has experienced significant improvement in the generation of Free cash Flow from the fourth quarter of 2008 through to the end of
2010 as management focus has increased in this area. Free cash Flow from Hewden has been included in the reported amounts for periods prior
to the sale – see “Description of non-gaaP Measures”.
Finance Costs
Finance costs for the year ended December 31, 2010 were $58.7 million compared with $61.8 million in the prior year. the lower finance costs
in 2010 were primarily due to lower debt outstanding and the favourable foreign exchange impact of translating foreign currency denominated
finance costs in 2010 with a stronger canadian dollar relative to the u.s. dollar and the u.K. pound sterling. the decrease was partly offset by a
charge related to purchasing a portion of the company’s eurobond notes as described below.
the company’s u.K. pound sterling denominated assets reduced after the sale of Hewden. the company took advantage of favourable market
conditions and exchange rates at that time and used a portion of the sale proceeds to purchase £45 million of its £115 million outstanding
eurobond notes in June 2010. as a result, the company recorded charges of approximately $6.4 million in finance costs, reflecting the premium
paid to purchase the notes, costs associated with the recognition of deferred original financing costs, and related purchase costs. Following the
purchase, £70 million of the 5.625% notes due 2013 remain outstanding.
Provision for Income Taxes
the annual effective income tax rate for 2010 was 21.1% compared to 15.3% last year. the income tax expense in 2009 was lower by $8.5 million
due to a change in the estimated tax rate related to items that had been recorded directly to other comprehensive income in prior periods.
this tax adjustment reduced the company’s tax rate by 4.6% for 2009.
Income from Continuing Operations
Finning’s income from continuing operations of $170.7 million was up 8.9% in 2010 compared with the prior year.
Basic ePs from continuing operations for the twelve months ended December 31, 2010 was $1.00 per share compared with $0.92 per share last
year. Results for 2010 included $0.12 per share of costs related to the company’s global it system implementation, $0.04 per share related to
impairment of an investment and a long-lived asset, $0.02 per share of costs related to the acquisition of the ireland dealerships and restructuring
and severance, as well as $0.03 per share of incremental finance costs incurred on the repurchase of a portion of the company’s eurobond
notes. comparatively, 2009 results included $0.08 per share related to the global it system implementation and $0.10 per share of restructuring
and severance costs, partially offset by an income tax recovery of approximately $0.05 per share related to the change in the estimated tax rate
noted above, and $0.05 per share of gains on sale of certain properties, primarily in south america. Foreign exchange had a negative impact
of approximately $0.27 per share in 2010 compared to the prior year due to the stronger canadian dollar relative to the u.s. dollar and the
u.K. pound sterling.
20
ManageMent’s Discussion & analysis
Discontinued Operations – Hewden
on May 5, 2010, the company sold Hewden, its uK equipment rental business as the company determined that a large, short-term rental
business operating separately from its uK dealership was not aligned with the company’s strategic objectives. gross proceeds on the sale of
Hewden of $171.1 million (£110.2 million) comprised cash of £90.2 million and a £20.0 million interest bearing 5-year note receivable with
a fair value of £16.9 million.
the after-tax loss on sale was $244.1 million or $1.43 per share, which included the realization of $100.8 million of foreign exchange losses
related to the company’s investment in Hewden previously recorded in accumulated other comprehensive loss, and $68.0 million related to
Hewden’s unfunded pension liability, which the buyer assumed. after taking this into account, the balance of $75.3 million can be attributed
to the loss on the company’s net carrying value of Hewden operations, net of tax.
the results of operations of Hewden for the periods up to May 5, 2010 have been reclassified as discontinued operations in the consolidated
statements of income and cash flow. the assets and liabilities of Hewden in the balance sheet for periods prior to the date of disposition have
been presented separately.
the company expects to maintain an ongoing commercial relationship with Hewden. a further discussion regarding the divestiture of Hewden
can be found in note 20 to the annual Financial statements.
Foreign exchange
Translation
the company’s reporting currency is the canadian dollar. However, due to the geographical diversity of the company’s operations, a significant
portion of revenue and operating expenses are in different currencies. the most significant currencies in which the company transacts business
are the u.s. dollar, the canadian dollar, the u.K. pound sterling and the chilean peso (clP). changes in the canadian dollar / u.s. dollar and
canadian dollar / u.K. pound sterling relationship affects reported results on the translation of the financial statements of the company’s south
american and uK operations as well as u.s. dollar based earnings of the company’s canadian operations.
Foreign exchange had a negative impact on consolidated revenues in the fourth quarter of 2010 of $66.5 million due to a 4.1% stronger canadian
dollar relative to the u.s. dollar, and a 7.2% stronger canadian dollar relative to the u.K. pound sterling, all compared to the fourth quarter of
2009. as a result, eBit was negatively impacted by $9.8 million and net income was negatively impacted by $0.03 per share in the fourth quarter
of 2010 compared to the prior year’s fourth quarter.
For the year ended December 31, 2010, foreign exchange had a negative impact on consolidated revenues of $397.0 million due to a 9.8%
stronger canadian dollar relative to the u.s. dollar, and a 10.6% stronger canadian dollar relative to the u.K. pound sterling. as a result, eBit
was negatively impacted by $64.2 million and net income was negatively impacted by $0.27 per share in 2010 compared to the year ended
December 31, 2009.
the canadian dollar has historically correlated to commodity prices. if commodity prices strengthen, the canadian dollar is likely to strengthen.
in this scenario, the company’s resource industry customers may be able to increase production which can result in increased demand for
equipment and services. However, the company is negatively impacted when u.s. dollar based revenues and earnings are translated into lower
canadian dollar reported revenues and earnings due to the stronger canadian dollar, although lags may occur.
the impact of foreign exchange due to the value of the canadian dollar relative to the u.s. dollar and u.K. pound sterling is expected to continue
to affect Finning’s results. the sensitivity of the company’s net earnings to fluctuations in the average annual foreign exchange rates is summarized
in the Risk Management section of this MD&a.
2010 Annual Report Finning International Inc. 21
ManageMent’s Discussion & analysis
the following tables provide details of revenue and eBit from continuing operations and the foreign exchange impact for the three and twelve
months ended December 31, 2010.
three months ended December 31
($ Millions)
Revenues – Q4 2009
Foreign exchange impact
operating revenue increase
revenues – Q4 2010
total revenue increase
– percentage increase
– percentage increase, excluding foreign exchange
For year ended December 31
($ Millions)
Revenues – 2009
Foreign exchange impact
operating revenue increase
revenues – 2010
total revenue increase (decrease)
– percentage increase (decrease)
– percentage increase , excluding foreign exchange
$
$
$
canada
601.8
(20.0)
89.8
671.6
69.8
11.6%
14.9%
canada
$ 2,386.6
(150.4)
87.4
$ 2,323.6
(63.0)
$
(2.6)%
3.7%
three months ended December 31
($ Millions)
canada
south
america
eBit – Q4 2009
Foreign exchange impact
operating eBit increase (decrease)
eBit – Q4 2010
total eBit increase (decrease)
– percentage increase (decrease)
– percentage increase (decrease), excluding foreign exchange
For year ended December 31
($ Millions)
eBit – 2009
Foreign exchange impact
operating eBit increase (decrease)
eBit – 2010
total eBit increase (decrease)
– percentage increase (decrease)
– percentage increase (decrease), excluding foreign exchange
n/m = not meaningful
$
$
$
$
$
$
(0.2)
(5.9)
51.4
45.3
45.5
n/m
n/m
canada
98.3
(40.7)
73.9
131.5
33.2
33.8%
75.2%
$
$
$
$
$
$
32.4
(3.7)
10.9
39.6
7.2
22.2%
33.6%
south
america
153.7
(21.4)
15.2
147.5
(6.2)
(4.0)%
9.9%
south
america
uK &
ireland consolidated
$
$
$
337.0
(30.4)
199.1
505.7
168.7
50.1%
59.1%
south
america
$ 1,489.6
(168.1)
346.9
$ 1,668.4
178.8
$
12.0%
23.3%
uK &
ireland
6.0
(0.2)
(1.2)
4.6
(1.4)
(23.3)%
(20.0)%
uK &
ireland
19.6
(2.1)
(1.5)
16.0
(3.6)
(18.4)%
(7.7)%
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$ 1,080.8
(66.5)
352.0
$ 1,366.3
285.5
$
26.4%
32.6%
142.0
(16.1)
63.1
189.0
47.0
33.1%
44.4%
uK &
ireland consolidated
603.7
(78.5)
124.1
649.3
45.6
7.6%
20.6%
$ 4,479.9
(397.0)
558.4
$ 4,641.3
161.4
$
3.6%
12.5%
other consolidated
1.5
–
(11.9)
(10.4)
(11.9)
n/m
n/m
$
$
$
39.7
(9.8)
49.2
79.1
39.4
99.2%
123.9%
other consolidated
$
$
$
(24.7)
–
4.7
(20.0)
4.7
n/m
n/m
246.9
(64.2)
92.3
275.0
28.1
11.4%
37.4%
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 reporting date compared to
the previous period reporting date. the unrealized currency translation loss of $98.8 million recorded in 2010 resulted from the stronger spot
canadian dollar against the u.s. dollar and the u.K. pound sterling of 5.0% and 8.3%, respectively, at December 31, 2010 compared to December
31, 2009. this was partially offset by $13.7 million (after tax) of unrealized foreign exchange gains on net investment hedges. in addition, the
company realized an after-tax loss of $100.8 million on foreign currency translation, net of realized gain on net investment hedges, reclassified to
earnings on disposal of discontinued operations. For more details, refer to the annual consolidated statements of comprehensive income (loss).
22
ManageMent’s Discussion & analysis
results BY Business segment
the company and its subsidiaries operate primarily in one principal business, that being the selling, servicing, and renting of heavy equipment,
engines, and related products in various markets worldwide as noted below. Finning’s operating units are as follows:
•
•
•
•
Canadian operations: British columbia, alberta, the yukon territory, the northwest territories, and a portion of nunavut.
South American operations: chile, argentina, uruguay, and Bolivia.
UK and Ireland operations: england, scotland, Wales, northern ireland, the Falkland islands, the channel islands, and the Republic of ireland.
Other: corporate head office.
the table below provides details of revenue by operations and lines of business for continuing operations. comparative periods have been
reclassified to conform to the 2010 presentation.
the table below provides selected income statement information from continuing operations by business segment:
For year ended December 31, 2010
($ Millions)
new equipment
used equipment
equipment rental
Product support
other
total
Revenue percentage by operations
For year ended December 31, 2009
($ Millions)
new equipment
used equipment
equipment rental
Product support
other
total
Revenue percentage by operations
canada
$
829.0
175.2
214.7
1,095.9
8.8
$ 2,323.6
50.1%
canada
$ 1,015.8
202.2
224.4
935.2
9.0
$ 2,386.6
53.3%
south
america
$
763.3
41.6
56.3
805.3
1.9
$ 1,668.4
35.9%
south
america
$
656.0
41.9
47.9
740.8
3.0
$ 1,489.6
33.2%
$
$
$
$
For year ended December 31, 2010
($ Millions)
Revenue from external sources
operating costs
Depreciation and amortization
other income (expenses)
it system implementation costs
other
earnings from continuing operations
before interest and income taxes
– percentage of revenue
– percentage by operations
For year ended December 31, 2009
($ Millions)
Revenue from external sources
operating costs
Depreciation and amortization
other income (expenses)
it system implementation costs
other
earnings from continuing operations
before interest and income taxes
– percentage of revenue
– percentage by operations
canada
south
america
$ 2,323.6
(2,053.2)
(119.0)
151.4
$ 1,668.4
(1,475.1)
(36.5)
156.8
(14.7)
(5.2)
(9.3)
–
$
131.5
5.7%
47.8%
$
147.5
8.8%
53.7%
canada
south
america
$ 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
4.1%
39.8%
$
(5.6)
6.5
$
153.7
10.3%
62.3%
$
$
$
$
uK &
ireland consolidated
Revenue
percentage
348.3
55.6
28.9
216.5
–
649.3
14.0%
$ 1,940.6
272.4
299.9
2,117.7
10.7
$ 4,641.3
100.0%
41.8%
5.9%
6.5%
45.6%
0.2%
100.0%
uK consolidated
Revenue
percentage
312.0
46.1
37.9
207.7
–
603.7
13.5%
uK &
ireland
649.3
(608.0)
(20.1)
21.2
(2.6)
(2.6)
$
$
$
1,983.8
290.2
310.2
1,883.7
12.0
4,479.9
100.0%
44.3%
6.5%
6.9%
42.0%
0.3%
100.0%
other consolidated
–
(13.7)
(0.1)
(13.8)
(1.2)
(5.0)
$ 4,641.3
(4,150.0)
(175.7)
315.6
(27.8)
(12.8)
16.0
2.5%
5.8%
$
(20.0)
–
(7.3)%
$
275.0
5.9%
100.0%
uK
other consolidated
$
603.7
(553.4)
(25.3)
25.0
(2.4)
(3.0)
19.6
3.2%
7.9%
–
(25.3)
(0.2)
(25.5)
(0.3)
1.1
$ 4,479.9
(4,003.8)
(195.5)
280.6
(18.9)
(14.8)
$
(24.7)
–
(10.0)%
$
246.9
5.5%
100.0%
2010 Annual Report Finning International Inc. 23
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 and engines
in British columbia, alberta, the yukon territory, the northwest territories, and a portion of nunavut. the company’s end markets comprise
principally mining (including 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 from external sources
operating costs
Depreciation and amortization
other expenses
information technology system implementation costs
Restructuring and other costs
earnings before interest and taxes (eBit)
eBit
– as a percentage of revenue
– as a percentage of consolidated eBit
earnings before interest, taxes, depreciation, and amortization (eBitDa)
2010
2,323.6
(2,053.2)
(119.0)
151.4
(14.7)
(5.2)
131.5
5.7%
47.8%
250.5
$
$
$
2009
2,386.6
(2,125.7)
(132.6)
128.3
(10.6)
(19.4)
98.3
4.1%
39.8%
230.9
$
$
$
2010 revenues decreased 2.6% over 2009 to $2.3 billion. Foreign exchange had a negative impact on revenues of approximately $150 million
in 2010 due to a 9.8% stronger canadian dollar relative to the u.s. dollar compared to last year. adjusting for the impact of foreign exchange,
revenues were 3.7% higher than last year.
Product support revenues for the year grew to record levels, in excess of $1 billion for the first time. Product support revenues were 17.2%
higher than 2009 (up 24.0% when adjusted for the impact of foreign exchange) and benefited from increased customer activity as well as the
growing population of caterpillar equipment in Finning’s canadian territories. Product support revenues from the mining sector were strong and
also increased in non-mining sectors.
new equipment sales in 2010 were 18.4% lower than in 2009, reflecting the negative impact from foreign exchange as well as lower deliveries in
2010. the previous year benefited from a significantly higher opening backlog level which supported equipment deliveries in the first half of 2009.
However, order activity in 2010 has increased from the prior year and Finning (canada)’s current backlog is at its highest level since December
2008, which reflects improving market conditions. the existing backlog reflects future deliveries largely to mining customers scheduled to be
made in 2011. Demand for construction and conventional oil & gas sectors is showing signs of increased activity, but remains soft relative to
historical levels.
CANADA – REVENUE BY LINE OF BUSINESS
($ millions) For years ended December 31
1,500
1,000
500
0
24
6
1
0
1
,
9
2
8
6
9
0
5 1
3
9
,
2
0
2
5
7
1
4
2
2
5
1
2
NEW
EQUIPMENT
USED
EQUIPMENT
EQUIPMENT
RENTAL
PRODUCT
SUPPORT
2009
2010
9 9
OTHER
ManageMent’s Discussion & analysis
in canada, despite overall lower revenues, gross profit in absolute dollars and as a percentage of revenue was higher than in 2009. this was
primarily 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 47.2% of total revenues in 2010, compared with 39.2% in 2009. in addition, gross profit
margins were higher in most lines of business compared with 2009, reflecting the economic recovery seen throughout 2010.
sg&a costs in 2010 were higher in absolute dollars and as a percentage of revenue compared to last year, partly reflecting increased costs in
line with higher product support revenues as well as costs incurred in 2010 to generate future process efficiencies and higher bad debt expense.
Partially offsetting the increase in sg&a were savings resulting from targeted workforce reductions and other actions taken to reduce expenses
and improve efficiencies.
Finning (canada) incurred $14.7 million of costs in 2010 (2009: $10.6 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. system development is now complete and full-scale
testing of the system is underway. Depending on the results of this testing and any remediation, if required, the new system is expected to go live
in 2011 shortly after this stage of the project is completed.
also included in other expenses in 2010 were restructuring and other costs of $5.2 million. included in this balance were restructuring costs of
$3.4 million (2009: $19.4 million) which were incurred primarily as a result of reducing Finning (canada)’s workforce in targeted areas in response
to the downturn in the economy in 2009 in order to align costs with revenue levels.
eBit totalled $131.5 million in 2010 compared with $98.3 million in 2009. eBit margin was 5.7%, up from the eBit margin of 4.1% achieved in
2009. eBit margin improved significantly in the last half of 2010 and reflected the strong growth in product support sales, improved margins in
most lines of business, and the impact of cost saving initiatives.
other Developments
in the third quarter of 2010, Finning (canada) and the international association of Machinists and aerospace Workers (iaM) – local lodge 99
(alberta union) successfully reached a new two-year collective agreement which will expire in 2012.
in the fourth quarter of 2010, the company announced that Finning (canada) will proceed with the construction of a new oil sands service
facility in Fort McKay, alberta. the new 16-bay facility, an investment of approximately $110 million, will further expand the company’s strong
product support capabilities. construction of the new building is expected to commence in the second quarter of 2011, with completion by
the end of 2012.
in early January 2011, the company received a decision from the alberta labour Relations Board relating to the ongoing proceedings with the
iaM – local lodge 99 relating to Finning (canada)’s outsourcing of component repair and rebuilding services to oeM in 2005. the decision
recognized the existing collective agreement with the christian labour association of canada (clac) and found that it should continue to apply
to the oeM bargaining unit to the end of the current contract (December 31, 2011). a vote has been ordered to be held by the oeM employees
(some former Finning (canada) component Rebuild centre employees will also be eligible to vote) within 90 days to determine whether clac
or iaM – local lodge 99 will represent them. Finning and oeM are considering the findings and orders of the Board and assessing next steps.
Regardless of the outcome of the vote, oeM is committed to the collective bargaining process and to concluding a fair contract for its employees
and for oeM.
Finning (canada)’s collective bargaining agreement with the British columbia division of the iaM – local lodge 692 will expire in april 2011.
negotiations with the Bc union are underway. the company is committed to the collective bargaining process and to concluding a fair contract
for its employees and for Finning.
2010 Annual Report Finning International Inc. 25
ManageMent’s Discussion & analysis
South American Operations
Finning’s south american operations sell, service, and rent mainly caterpillar mobile equipment and engines in chile, argentina, uruguay, and
Bolivia. the company’s end markets comprise principally mining, construction, and power systems.
the table below provides details of the results from the south american operations:
For years ended December 31
($ Millions)
Revenue from external sources
operating costs
Depreciation and amortization
other expenses
information technology system implementation costs
Restructuring costs
gain on sale of property
earnings before interest and taxes (eBit)
eBit
– as a percentage of revenue
– as a percentage of consolidated eBit
earnings before interest, taxes, depreciation, and amortization (eBitDa)
2010
1,668.4
(1,475.1)
(36.5)
156.8
(9.3)
–
–
147.5
8.8%
53.7%
184.0
$
$
$
2009
1,489.6
(1,299.4)
(37.4)
152.8
(5.6)
(0.7)
7.2
153.7
10.3%
62.3%
191.1
$
$
$
Finning south america’s 2010 revenues were at record levels, reaching $1.7 billion, up 12.0% over 2009, and increased 24.3% in functional
currency (the u.s. dollar). compared to 2009, foreign exchange had an approximately $168 million negative impact on the translation of revenues,
due to the 9.8% strengthening of the canadian dollar relative to the u.s. dollar.
2010 revenues, in functional currency, reflected strong new equipment sales, up 29.7% compared to 2009, with increased demand in construction
and mining sectors. new equipment backlog, in functional currency, was slightly below the level at september 2010, but continues to be near its
highest level since september 2008. the existing backlog reflects future deliveries largely to mining customers scheduled to be made in 2011.
Product support revenues continued to show solid growth, and were 20.1% higher in functional currency than in 2009, up in all sectors.
in functional currency, gross profit increased in 2010 in absolute terms and was up slightly as a percentage of revenue. this occurred despite a
shift in revenue mix to a higher proportion of new equipment sales, which typically return lower margins than product support revenues. Product
support revenues made up 48.2% of total revenues in 2010, compared with 49.9% of total revenues in the same period last year. gross profit
margins were higher in most lines of business.
sg&a costs, in functional currency, have increased both in absolute dollars and as a percentage of revenue, partly due to an increase in the
workforce and other volume related costs to support higher revenues and the growing product support business. From December 31, 2009 to
December 31, 2010, the number of employees in the company’s south american operations increased by 19% to 5,900 to meet current and
anticipated customer demand for product support. there is significant demand and competition for highly skilled workers which the company
is actively managing. sg&a costs were also higher in 2010 compared to 2009 primarily due to costs incurred as a result of the earthquake that
struck chile in February 2010. the earthquake had minimal impact on the company’s south american operations.
SOUTH AMERICA – REVENUE BY LINE OF BUSINESS
($ millions) For years ended December 31
1,000
750
500
250
0
26
3
6
7
6
5
6
5
0
1 8
4
7
2
4
2
4
8
4
6
5
NEW
EQUIPMENT
USED
EQUIPMENT
EQUIPMENT
RENTAL
PRODUCT
SUPPORT
2009
2010
3 2
OTHER
ManageMent’s Discussion & analysis
included in other expenses was $9.3 million (2009: $5.6 million) of costs representing the south american operations’ share of costs related to
the implementation of a new it system for the company’s global dealership operations. other income in 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.
eBit from the company’s south american operations of $147.5 million in 2010 was 4.0% lower than in 2009. in functional currency, eBit
increased 6.7% over the prior year largely due to strong growth in new equipment and product support revenues, partly offset by higher sg&a
(growth related) and higher it implementation costs. eBit as a percentage of revenue for Finning south america was 8.8%, compared with the
eBit margin of 10.3% achieved in 2009. the company’s south american operations are incurring higher employee costs as many technicians are
being recruited and trained to meet current and anticipated customer demand.
United Kingdom (UK) and Ireland Operations
the company’s uK and ireland operations sell, service, and rent mainly caterpillar mobile equipment and engines in england, scotland, Wales,
northern ireland, the Falkland islands, the channel islands, and the Republic of ireland. the company’s markets comprise principally mining,
quarrying, construction, power systems, and rental services. in august 2010, Finning was appointed the caterpillar dealer for northern ireland and
the Republic of ireland. the results of these operations have been included in the consolidated financial statements since the acquisition date.
the table below provides details of the results of the continuing operations from the uK and ireland:
For years ended December 31
($ Millions)
Revenue from external sources
operating costs
Depreciation and amortization
other expenses
information technology system implementation costs
acquisition and other related costs
Restructuring costs
earnings before interest and taxes (eBit)
eBit
– as a percentage of revenue
– as a percentage of consolidated eBit
earnings before interest, taxes, depreciation, and amortization (eBitDa)
2010
649.3
(608.0)
(20.1)
21.2
(2.6)
(2.0)
(0.6)
16.0
2.5%
5.8%
36.1
$
$
$
2009
603.7
(553.4)
(25.3)
25.0
(2.4)
–
(3.0)
19.6
3.2%
7.9%
44.9
$
$
$
the uK and ireland revenues in 2010 of $649.3 million were up 7.6% from the same period last year, and were up 20.6% in local currency, largely
due to higher new equipment sales and product support revenues, particularly in the coal and quarrying industries.
Revenues, in local currency, from most lines of business were higher compared to 2009, with the exception of equipment rental. in local currency,
new equipment sales were up 25.3%, and revenues from product support and used equipment were 16.5% and 35.8% higher, respectively, in 2010
compared to 2009.
UK AND IRELAND – REVENUE BY LINE OF BUSINESS
FROM CONTINUING OPERATIONS
($ millions) For years ended December 31
400
8
4
3
300
2
1
3
200
100
0
7
1
2
8
0
2
5
6 5
4
8
3
9
2
2009
2010
NEW
EQUIPMENT
USED
EQUIPMENT
EQUIPMENT
RENTAL
PRODUCT
SUPPORT
2010 Annual Report Finning International Inc. 27
ManageMent’s Discussion & analysis
compared to 2009, foreign exchange had an approximately $79 million negative impact on the translation of revenues, due to the 10.6%
strengthening of the canadian dollar relative to the u.K. pound sterling.
gross profit, in local currency, in 2010 was higher compared with the same period last year in absolute terms. However, gross profit as a
percentage of revenue was lower in 2009, reflecting a shift in revenue mix to a higher proportion of new equipment sales, which typically return
lower margins than product support revenues. in addition, there were lower gross margins in new equipment and product support compared
with the prior year, resulting from a very competitive market environment, particularly in power systems.
sg&a costs, in local currency, were higher in 2010 compared to 2009, partly due to increased volume-related costs to support higher revenues,
higher pension expense, and higher long-term incentive plan (ltiP) costs allocated to the uK operations due to the appreciation of the
company’s share price in 2010. However, sg&a as a percentage of revenue was lower than in 2009, reflecting the benefit of management’s
initiatives to reduce operating cost levels and improve operating efficiencies.
other expenses in 2010 included costs of $2.6 million representing the uK dealership’s share of the costs related to the implementation of a
new it system for the company’s global dealership operations (2009: $2.4 million).
in august 2010, Finning was appointed the caterpillar dealer for northern ireland and the Republic of ireland and acquired certain assets, comprising
inventory, a building, and other fixed assets. the acquisition was recorded as a purchase of a business and the total purchase price was approximately
$6 million (£3.7 million). acquisition and other related costs of $2.0 million were incurred on the transaction, and were included in other expenses.
in 2010, the uK and ireland operations generated eBit of $16.0 million, compared with eBit of $19.6 million in 2009. the lower eBit in 2010
was primarily the result of higher sg&a, and the negative impact of foreign exchange. the uK’s eBit margin (eBit as a percentage of revenue) in
2010 was 2.5% compared with 3.2% in 2009, primarily the result of lower gross margins due to the shift in revenue mix to new equipment sales.
other Developments
Finning uK’s contract with the unite trade union expired January 1, 2011. negotiations with the unite trade union are underway. the company
is committed to the collective bargaining process and to concluding a fair contract for its employees and for Finning.
Corporate and Other Operations
For years ended December 31
($ Millions)
operating costs – corporate
loss from equity investment
ltiP mark-to-market
Depreciation and amortization
other expenses (income)
information technology system implementation costs
impairment of equity investment
gain on sale of property, offset by restructuring costs
earnings (loss) before interest and taxes
2010
(22.1)
(1.4)
9.8
(0.1)
(13.8)
(1.2)
(5.0)
–
(20.0)
$
$
$
$
2009
(22.8)
(2.4)
(0.1)
(0.2)
(25.5)
(0.3)
–
1.1
(24.7)
For year ended December 31, 2010, operating costs of $22.1 million were comparable to the prior year.
the loss from equity investment for the year ended December 31, 2010 relates to the company’s investment in energyst B.v. the loss of
$1.4 million reflected reduced rental activity and tighter margins in power systems as a result of the continued weak economic conditions in
europe. in conjunction with the appointment of Finning as the caterpillar dealer for northern ireland and the Republic of ireland, the company
increased its interest in energyst by committing to purchase 11,230 shares for cash of $1.4 million (euR 1.0 million). as a result, the company’s
equity interest in energyst increased to 27.0% from 25.4% in the first quarter of 2011. in the fourth quarter of 2010, the company reviewed the
valuation of its investments. as a result of this review and the continued weak economic conditions in europe and poor operating performance
from energyst, combined with a very competitive market environment, the company recorded a $5 million impairment of its investment.
the company entered into a compensation hedge at the end of 2007 in order to offset the mark-to-market impact relating to certain
stock-based compensation plans. the ltiP expense or income recorded at the corporate level primarily reflects the fair value change of the
compensation hedge in total. this amount primarily offsets the ltiP mark-to-market gains or losses allocated to the operating divisions.
also included in other expenses in 2010 was corporate’s share of costs related to the ongoing implementation of a new information technology
system for the company’s global operations.
28
ManageMent’s Discussion & analysis
Discontinued Operations – Hewden
Following an extensive strategic review, in May 2010, the company sold Hewden, its uK equipment rental business.
the results of operations of Hewden for the periods up to May 5, 2010 have been reclassified as discontinued operations in the consolidated
statements of income and cash flow. the assets and liabilities of Hewden in the balance sheet for periods prior to the date of disposition have
been presented separately. approximately 1,300 employees were transferred to the buyer with the sale of Hewden.
the table below provides details of the discontinued operations of Hewden:
($ Millions)
Revenue from external sources
operating costs
Depreciation and amortization
other income (expenses)
loss on sale of Hewden
gain on sale of properties
Restructuring costs
earnings (loss) before interest and taxes (eBit)
January 1 -
may 5,
2010
For year ended
December 31
2009
$
$
65.3
(52.4)
(18.9)
(6.0)
(238.0)
2.4
(2.0)
(243.6)
$
$
257.6
(221.4)
(72.2)
(36.0)
–
9.3
(13.0)
(39.7)
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.
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. cash provided by continuing operations 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
financing activities, 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, 2010, cash provided by continuing operations after working capital changes was $451.6 million, compared
with $511.2 million provided in 2009. throughout all operations, management has been focusing on improving cash cycle times and operating
efficiencies while ensuring appropriate levels of working capital to support activity levels.
in 2010, the company invested $122.9 million in rental assets, net of disposals (2009: generated proceeds on the disposal of rental assets in
excess of additions in the amount of $14.4 million) in continuing operations. as a result of lower demand and a focus on a more selective rental
strategy, rental investment moderated in 2009, and underutilized rental assets were sold. net rental spend in 2010 was within management’s
target range of $100 million to $150 million.
as a result of these items, cash provided by operating activities was $322.5 million in 2010, compared to $562.4 million in 2009.
eBitDa was $450.7 million in 2010 compared to $442.4 million in 2009.
2010 Annual Report Finning International Inc. 29
ManageMent’s Discussion & analysis
Cash Used For Investing Activities
net cash provided by investing activities for continuing operations in 2010 totalled $75.6 million compared with net cash used by investing
activities of $65.3 million in 2009. the primary source of cash in 2010 related to the sale of Hewden for net proceeds of $117.8 million, net of
transaction costs and cash sold. the primary use of cash in 2010 related to capital asset additions as well as the purchase price for certain assets
and acquisition and other related costs of $6.7 million paid on the acquisition of the ireland dealerships.
gross capital additions from continuing operations for the year ended December 31, 2010 were $66.5 million which is lower compared with
the $104.9 million invested in 2009. capital additions in 2010 and 2009 generally reflected capital spending related to growing product support
demand. in addition, capital additions in 2010 included capitalized costs of $17.5 million (2009: $11.8 million) related to the company’s new
global it system.
in 2010, the company received proceeds of $26.0 million on the settlement of a cross currency interest rate swap that was part of a hedge
against foreign subsidiary investments. 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 partially hedged the company’s investment
in a foreign subsidiary.
the company’s planned net capital expenditures for 2011 are projected to be in the range of $75 million to $100 million, excluding the
investment in Fort McKay, alberta. net rental additions for 2011 are projected to be at the higher end of management’s target range of
$100 million to $150 million.
the company believes that internally generated cash flow, supplemented by net borrowing from existing financing sources, if necessary, will be
sufficient to meet anticipated capital expenditures and other cash requirements in 2011. Management believes that the 2011 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 expect any presently known trend or uncertainty to affect its ability to access its historical sources
of cash.
Financing Activities
as at December 31, 2010 the company’s short and long-term borrowings totalled $1.0 billion, a decrease of 12.4% from December 31, 2009.
the decrease reflected the early purchase of £45 million in June 2010 of the then outstanding £115 million eurobond notes using a portion of
the proceeds received from the sale of Hewden.
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 $1.0 billion with various canadian, u.s.,
and south american financial institutions. the largest of these facilities, an $800 million global credit facility, matures in December 2011. as at
December 31, 2010 over $800 million was available under these committed facilities and no long-term debt matures until December 2011.
the company expects to negotiate a revised global credit facility prior to December 2011. Based upon the availability of these facilities, the
company’s business operating plans, and the discretionary nature of some of the outflows such as rental and capital expenditures, the company
believes it has sufficient liquidity to meet operational needs.
longer-term capital resources are provided by direct access to capital markets. the company is rated by both standard and Poor’s (s&P) and
Dominion Bond Rating service (DBRs). in 2010, 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 2010 were $80.4 million, up 7.2% compared to 2009, reflecting the $0.01 per common share increase to a
quarterly dividend of $0.12 per common share announced in May 2010.
the company’s Debt Ratio (net debt to total capitalization ratio) at December 31, 2010 was 33.0%, compared with 39.3% at the end of 2009. the
ratio is lower than the prior year due to the strong Free cash Flow generation which contributed to the reduction in overall net debt levels, with
significant cash on hand at the end of 2010 due to collections from customers late in the year.
30
ManageMent’s Discussion & analysis
Contractual Obligations
Payments on contractual obligations in each of the next five years and thereafter are as follows:
($ Millions)
2011
2012
2013
2014
2015
thereafter
total
long-term debt
– principal repayment
– interest
operating leases
capital leases
total contractual obligations
$
$
203.1
48.1
63.0
2.4
316.6
$
$
0.5
40.6
46.5
1.3
88.9
$
$
383.1
40.5
34.1
1.1
458.8
$
$
0.6
21.3
18.4
1.1
41.4
$
$
0.2
21.3
15.2
1.1
37.8
$
$
351.6
53.7
127.3
12.7
545.3
$
939.1
225.5
304.5
19.7
$ 1,488.8
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. in respect of 2010,
approximately $44 million was contributed by the company towards the defined benefit pension plans for continuing operations. currently,
the company is expecting a similar level of required defined benefit plan contributions for 2011.
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, 2010, 65% 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). under the terms of this plan, employees may contribute up to 10% of their salary to a maximum
of £125.00 per month. effective January 1, 2010, the company suspended the matching share element of the employee share Purchase ownership
Plan in Finning (uK), but re-introduced the plan effective october 1, 2010, contributing 1 share for each 3 purchased by the employee. at
December 31, 2010, 26% of eligible employees in Finning (uK) were contributing to this plan. these plans may be cancelled by Finning at any time.
accounting estiMates anD contingencies
accounting, valuation, anD reporting
changes in the rules or standards governing accounting can impact Finning’s 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.
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 judgments to be made as they relate to matters that are inherently uncertain and because there is a 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 and other asset 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 capital assets and related residual values, revenues and costs associated with maintenance and repair
contracts, asset retirement obligations, reserves for legal claims, 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, 2010 or 2009.
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.
2010 Annual Report Finning International Inc. 31
ManageMent’s Discussion & analysis
income taxes
the company exercises judgment in estimating the provision for income taxes. Provisions for federal, provincial, and foreign taxes are based
on the respective laws and regulations in each jurisdiction within which the company operates. income tax laws and regulations can be complex
and 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.
DescRiPtion oF non-gaaP MeasuRes
eBit is defined herein as earnings from continuing operations before interest expense, interest income, and income taxes. eBitDa is defined
as earnings from continuing operations 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 from continuing operations is as follows:
($ Millions)
earnings from continuing operations before interest,
taxes, depreciation, and amortization (eBitDa)
Depreciation and amortization
earnings from continuing operations before interest
and income taxes (eBit)
Finance costs
Provision for income taxes
net income from continuing operations
a reconciliation of Free cash Flow is as follows:
($ Millions)
cash flow provided by operating activities
additions to capital assets
Proceeds on disposal of capital assets
net capital expenditures of discontinued operations
Free cash Flow
three months ended
December 31
2010
128.0
(48.9)
79.1
(12.8)
(16.2)
50.1
$
$
three months ended
December 31
2010
148.0
(19.3)
0.3
–
129.0
$
$
2009
84.2
(44.5)
39.7
(16.9)
(1.1)
21.7
2009
128.4
(18.6)
14.9
5.7
130.4
$
$
$
$
twelve months ended
December 31
2010
2009
450.7
(175.7)
275.0
(58.7)
(45.6)
170.7
$
$
twelve months ended
December 31
2010
322.5
(66.5)
5.0
3.9
264.9
$
$
442.4
(195.5)
246.9
(61.8)
(28.4)
156.7
2009
562.4
(104.9)
19.5
16.9
493.9
$
$
$
$
Free cash Flow from Hewden has been included in the figures for periods prior to the sale – see note 20 to the annual consolidated
Financial statements.
32
ManageMent’s Discussion & analysis
RisK ManageMent
Finning and its subsidiaries are exposed to market, financial, and other risks in the normal course of their business activities. the company has
adopted an enterprise Risk Management (eRM) approach in identifying, prioritizing, and evaluating risks. this eRM framework assists the company
in managing business activities and risks across the organization in order to achieve the company’s strategic objectives.
the company is dedicated to a strong risk management culture to protect and enhance shareholder value. the processes within Finning’s risk
management function are designed to ensure that risks are properly identified, managed, and reported. the company discloses all of its key risks
in its most recent annual information Form (aiF) with key financial risks also included herein. on a quarterly basis, the company assesses all of its
key risks and any changes to key financial or business risks are disclosed in the company’s quarterly MD&a. 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.
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 for continuing operations at December 31,
2010 were $1,039 million (2009: $987 million), of which approximately $815 million (2009: $725 million) is committed credit facility capacity. 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 operations is not sufficient to fund future capital and debt repayment 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
the level of 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 the market, 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 Foreign exchange Risk Management Policy approved by
the audit committee.
2010 Annual Report Finning International Inc. 33
ManageMent’s Discussion & analysis
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, which is the company’s reporting currency. 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 results of the company’s canadian operations are impacted by the translation of its u.s. dollar based earnings. the company
does not hedge its exposure to foreign currency risk with regard to foreign currency earnings.
the company’s uK and south american operations have functional currencies other than the canadian dollar, and as a result foreign currency
gains and losses arise in the cumulative translation adjustment account from the translation of the company’s net investment in these
operations. to the extent practical, it is the company’s objective to manage this exposure. the company has hedged a portion of its foreign
investments through foreign currency denominated loans and, periodically, through other derivative contracts. For those derivatives and loans
where hedge accounting has been elected, 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.
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, 2010 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, 2010 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.
caD/usD
caD/gBP
caD/clP
December 31, 2010
month end rates
0.9946
1.5513
0.0021
net income
($ tHousanDs)
$
$
(23,700)
(600)
2,200
other
comprehensive
income
($ tHousanDs)
$
$
(40,400)
(11,100)
–
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.
34
ManageMent’s Discussion & analysis
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 and instalment
and other notes receivable. 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 and other 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 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 fifteen 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 may utilize derivative instruments such as interest rate swaps to adjust the balance of fixed and
floating rate debt.
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 metals, coal, petroleum, and forestry sectors can have an impact on customers’ demands
for equipment and product support. in chile and argentina, 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 these commodities. 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. in addition, product support growth has been, and is expected to
continue to be, important in mitigating the effects of downturns in the business cycle. alternatively, if commodity prices rapidly increase, customer
demand for Finning’s products and services could increase and apply pressure on the company’s ability to supply the products or skilled
technicians on a timely and cost efficient basis. to assist in mitigating the impacts of fluctuations in demand for its products, Finning management
works closely with caterpillar to ensure an adequate and timely supply of product or offers customers alternative solutions and has implemented
human resources recruiting strategies to ensure adequate staffing levels are achieved.
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 in respect of 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.
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, 2010, all other variables remaining constant, would have increased net
income by approximately $1.4 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.
2010 Annual Report Finning International Inc. 35
ManageMent’s Discussion & analysis
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 which is generally based on a discount from the estimated future fair value of that equipment. as at December 31, 2010, the total
estimated value of these contracts outstanding is $146.0 million coming due at periods ranging from 2011 to 2016. the company’s experience
to date has been that the equipment at the exercise date of the contract is generally worth more than the repurchase amount. the total amount
recognized as a provision against these contracts is $0.6 million.
For further information on the company’s contingencies, commitments, guarantees, and indemnifications, refer to notes 25 and 26 of the notes
to the consolidated Financial statements.
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 has 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, 2010, that would materially affect, or is reasonably likely to materially affect, the company’s
internal control over financial reporting.
Regular involvement of the company’s internal audit function and quarterly reporting to the audit committee and the company’s external
auditors assist in providing reasonable assurance that the objectives of the control system are met. While the officers of the company have
designed the company’s disclosure controls and procedures and internal control over financial reporting, they expect that these controls and
procedures may not prevent all errors and fraud. a control system, no matter how well conceived or operated, can only provide reasonable, not
absolute, assurance that the objectives of the control system are met.
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, 2010, 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, 2010.
36
ManageMent’s Discussion & analysis
selecteD QuaRteRly inFoRMation
($ Millions, excePt FoR
sHaRe anD oPtion Data)
Q4
2010
Q3
Q2
Q1
Q4
2009
Q3
Q2
Q1
$
Revenue from continuing
operations(1)(2)
canada
south america
uK & ireland
total revenue
net income (loss)(1)(2)
from continuing operations $
from discontinued operations
total net income
Basic earnings (loss)
per share(1)(2)
from continuing operations $
from discontinued operations
total basic ePs
Diluted earnings (loss)
per share(1)(2)
from continuing operations $
from discontinued operations
total diluted ePs
total assets(1)(2)
long-term debt
current
non-current
total long-term debt(3)
cash dividends paid
per common share
common shares
outstanding (000’s)
options outstanding (000’s)
$
$
$ 671.6
505.7
189.0
$ 1,366.3
$ 600.2
462.2
157.7
$ 1,220.1
$ 561.9
352.7
160.6
$ 1,075.2
$ 489.9
347.8
142.0
$ 979.7
$ 601.8
337.0
142.0
$ 1,080.8
$ 489.9
376.9
145.5
$ 1,012.3
$ 582.0
363.0
152.4
$ 1,097.4
$ 712.9
412.7
163.8
$1,289.4
50.1
–
50.1
0.29
–
0.29
$
$
$
$
61.5
–
61.5
0.36
–
0.36
$
36.0
(246.1)
$ (210.1)
$
$
0.21
(1.44)
(1.23)
$
$
$
$
23.1
(3.0)
20.1
0.14
(0.02)
0.12
$
$
$
$
21.7
(5.4)
16.3
0.13
(0.03)
0.10
$
$
$
$
25.6
(3.9)
21.7
0.15
(0.02)
0.13
$
$
$
$
56.5
(8.7)
47.8
0.33
(0.05)
0.28
$
$
$
$
52.9
(7.9)
45.0
0.31
(0.05)
0.26
0.29
–
$
0.29
$ 3,613.6
$ 203.1
736.0
$ 939.1
$
0.36
–
$
0.36
$ 3,533.5
$
0.21
(1.44)
$
(1.23)
$ 3,401.5
$
0.14
(0.02)
$
0.12
$ 3,492.2
$
0.13
(0.03)
$
0.10
$ 3,671.4
$
0.15
(0.02)
$
0.13
$ 3,892.4
$
0.33
(0.05)
$
0.28
$ 4,357.3
$
0.31
(0.05)
$
0.26
$ 4,639.6
$
37.9
891.1
$ 929.0
$
32.4
899.9
$ 932.3
$
23.7
973.7
$ 997.4
$
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
0.12
$
0.12
$
0.12
$
0.11
$
0.11
$
0.11
$
0.11
$
0.11
171,431
5,603
171,177
6,095
171,009
6,455
170,907
6,058
170,747
6,299
170,661
6,537
170,631
6,606
170,545
5,807
(1) in august 2010, the company was appointed the caterpillar dealer for northern ireland and the Republic of ireland. the results of operations and financial
position of these dealers have been included in the figures above since the date of acquisition.
(2) on May 5, 2010, the company sold Hewden, its uK equipment rental business. Results from Hewden are presented as discontinued operations and have been
reclassified to that category for all periods presented. included in the loss from discontinued operations in the second quarter of 2010 is the after-tax loss
on the disposition of Hewden of $244.1 million or $1.43 per share. Revenues from Hewden have been excluded from the revenue figures above. assets from
Hewden have been included in the total assets figures for periods prior to the sale.
(3) in the second quarter of 2010, the company utilized funds from the sale of Hewden to redeem £45 million of its £115 million eurobond notes.
the company’s $800 million global credit facility matures in December 2011; therefore drawings on the credit facility at December 31, 2010 were classified
as current. the company expects to negotiate a revised global credit facility prior to December 2011.
2010 Annual Report Finning International Inc. 37
ManageMent’s Discussion & analysis
neW accounting PRonounceMents
changes in accounting policY in 2010
Business Combinations
in January 2009, the canadian institute of chartered accountants (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, although early
adoption was permitted as long as all three sections were adopted at once.
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 did not have a material impact on the company’s consolidated financial statements. in august 2010, the company was
appointed the caterpillar dealer for northern ireland and the Republic of ireland. these acquisitions have been accounted for in accordance with
the new standard on business combinations; however, the company was not materially affected as a result of adopting the new recommendations
of section 1582 for these transactions.
Future accounting pronouncements
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. Finning
must also present an opening iFRs statement of financial position as at January 1, 2010, its date of transition to iFRs (transition Date) which will
form part of its interim financial report for the quarter ending March 31, 2011.
the company’s consolidated financial statements for the year ending December 31, 2011 will be its first annual financial statements that comply
with iFRs. as this will be Finning’s first year of reporting under iFRs, iFRs 1 First-time Adoption of IFRS will be applicable.
in accordance with iFRs 1, Finning will apply iFRs retrospectively as of January 1, 2010, for comparative purposes as if iFRs had always been in
effect, subject to certain mandatory exceptions and optional exemptions applicable to us, discussed below.
senior management and the audit committee have approved the company’s iFRs accounting policies, but iFRs standards are evolving and may
be different at the time of transition. the international accounting standards Board (iasB) has several projects underway that could affect the
differences currently identified between canadian gaaP and iFRs.
proJect management
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. the company is currently in the implementation phase. While a number of differences were identified, the areas of
highest potential impact to the company are employee benefits, income taxes, share-based payment, presentation, and disclosure, as well as the
initial selection of applicable transitional exemptions under the provisions of iFRs 1 First Time Adoption of IFRS. the company has not identified any
further areas subject to significant change during subsequent phases of the transition project.
the company’s iFRs transition project is on schedule. the following table indicates key milestones in the project. it is based on management’s
current expectations and is hence subject to change as a result of new iasB iFRs projects and standards, and management’s experiences as its
project progresses:
38
ManageMent’s Discussion & analysis
activity
milestone
status
technical analysis
initial scoping and
risk assessment
technical review
of each standard
transitional election
choice and approval
High level review, using external expert advisor,
to determine most significant gaaP differences
applicable to the company.
completed 2008.
analysis of iFRs standards, identifying specific changes
to the company’s accounting processes and policies.
completed 2009.
identification, analysis, and selection of appropriate
iFRs 1 transitional provisions to be used by
the company.
Presentation of transitional choices to
audit committee.
transitional choices presented to audit committee
in December 2009 and approved February 2010.
go-forward accounting
policy choices
identification, analysis, and selection of accounting
policy choices available under iFRs.
accounting policy selections approved by audit
committee in February, May, and august 2010.
Financial statement preparation
Preparation of
opening statement
of financial position
Quarterly comparatives
preparation
Preparation of opening statement of financial position
and associated reconciliation from canadian gaaP
to iFRs.
a condensed statement of financial position is
provided on the following page with a description
of key impacts.
Preparation of quarterly comparative financials,
including reconciliation from canadian gaaP to
iFRs balances.
the comparatives preparation process for
Q1-Q3 is largely complete. the preparation of
Q4 comparatives is expected to be completed
in March 2011.
Financial statement
template
completion of iFRs-compliant financial statement
template and associated note disclosures.
completed in Q1 2010. template will be refreshed
as additional disclosure requirements are released.
training
Design and implementation
of iFRs training plan
Design training plan.
Provide overview training.
communication
Design and implementation
of communication plan
Design communication plan for internal and
external stakeholders.
implement awareness-building and communication
activities.
iFRs ‘overview’ training provided to finance
personnel in all geographic regions in 2009.
comprehensive training session provided to Board
of Directors in December 2009. additional training
on the impact of transition to iFRs was provided to
senior management in all regions in november 2010.
Detailed topic-specific training sessions have been
provided to all finance personnel.
communication provided through internal
newsletters, forums, and intranet-based media.
investor relations team have been involved in
development of the external communication plan.
an investor call was held December 8, 2010 to
discuss the company’s transition to iFRs and the
key adjustments to Finning’s financial statements
arising from conversion to iFRs.
systems
Dual reporting and
additional data gathering
ensure successful systems transition from dual
reporting to pure iFRs reporting.
Rollover of core reporting systems into 2011 iFRs
environment is underway.
controls
internal control over
financial reporting and
disclosure controls and
procedures
Perform review of controls to ensure adequacy
of existing controls, or implementation of new
controls where required.
Relevant controls are being assessed as each work
stream progresses.
Regional compliance managers have been briefed on
iFRs impacts to enable timely assessment of controls.
2010 Annual Report Finning International Inc. 39
ManageMent’s Discussion & analysis
transitional elections (unDer iFrs 1)
the following summary provides details of the opening statement of financial position transitional provisions to be adopted effective January 1, 2010.
•
•
•
Employee 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. not taking this exemption would require retrospective application
of ias 19 Employee Benefits from the inception of all defined benefit plans. this is anticipated to be the company’s most significant adjustment
to our opening statement of financial position.
Share-based payment: iFRs 2, share-based Payment, 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 prior to January 1, 2010.
Property, plant, and equipment (PP&E): 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.
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 incurred 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. not taking this election would require retrospective
application of ias 21 The Effect of Changes in Foreign Exchange Rates from the date the foreign operations were formed or acquired.
iFrs opening statement oF Financial position
the following table summarizes the expected quantitative impact on the consolidated statement of financial position of the company’s transition
to iFRs at January 1, 2010. these differences have been identified with reference to iFRs effective at the time of publishing this MD&a. in the
event that new or amended accounting standards or interpretations become effective prior to the inclusion of the company’s financial statement
of position in its first annual audited iFRs financial statements (December 2011 year end), or if other changes are determined to be appropriate,
the differences currently identified between canadian gaaP and iFRs may change.
January 1, 2010
($ Millions)
current assets
non-current assets
total assets
current liabilities
non-current liabilities
total liabilities
shareholders’ equity
total liabilities and
shareholders’ equity
canadian
gaaP
$ 2,083.6
1,587.8
3,671.4
945.0
1,210.7
2,155.7
1,515.7
employee share-based
benefits(1)
payment(2)
leases(3)
income
taxes(4)
iFRs
reclassifi-
other(5)
cations(6)
iFRs
$
$
$
–
(152.7)
(152.7)
–
73.0
73.0
(225.7)
$
–
(0.4)
(0.4)
–
0.6
0.6
(1.0)
–
4.2
4.2
0.6
(1.7)
(1.1)
5.3
–
(0.8)
(0.8)
–
4.5
4.5
(5.3)
$
–
(1.8)
(1.8)
–
(0.7)
(0.7)
(1.1)
$
(80.1)
(12.9)
(93.0)
(24.3)
(68.7)
(93.0)
–
$ 2,003.5
1,423.4
3,426.9
921.3
1,217.7
2,139.0
1,287.9
$ 3,671.4
$ (152.7)
$
(0.4)
$
4.2
$
(0.8)
$
(1.8)
$
(93.0)
$ 3,426.9
under iFRs, the company anticipates that its net debt to total capitalization ratio will continue to be within the company’s target range of
35-45%. the transition to iFRs is not expected to significantly impact the company’s current bank covenants.
the following notes explain the significant adjustments to the company’s canadian gaaP statement of financial position at January 1, 2010, as
a result of the company’s transition to iFRs:
1. emploYee BeneFits
under canadian gaaP, actuarial gains and losses were deferred and amortized in accordance with the “corridor” method. 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 was
amortized on a straight-line basis over the expected average remaining service life of the active employees covered by the plans.
40
ManageMent’s Discussion & analysis
as described above in the iFRs transitional elections section, the company elected to recognize its unamortized cumulative actuarial loss of
$225.7 million (after-tax) that existed at the transition date in opening retained earnings for all employee benefit plans.
in addition, iFRs requires that the company measures the assets and liabilities of the defined benefit plan at the end of the reporting period,
whereas canadian gaaP allows the valuation to occur up to 3 months prior to the reporting date. the company’s measurement date prior
to adopting iFRs was november 30. Plans that were previously measured on november 30, 2009 will be re-valued as at December 31, 2009
under iFRs.
there is ongoing debate as to the applicability of international Financial Reporting interpretations committee (iFRic) 14 in the canadian
regulatory environment. the quantifications provided above assume that no iFRic 14 liability for minimum defined benefit pension plan funding
requirements is required to be recognized in the company’s opening statement of financial position. Developments in the interpretation of
iFRic 14 in a canadian context could result in an adjustment to the opening statement of financial position defined benefit pension liability.
2. share-BaseD paYment
CASh SETTlED PlANS
under canadian gaaP, cash settled share-based payments are measured at intrinsic value, with changes in intrinsic value taken to the income
statement immediately. iFRs requires such cash settled plans to be valued at fair value and valuation movements will continue to be taken to
the income statement. the additional liability of $0.6 million arising from the fair valuation under iFRs of the company’s cash settled deferred
share units and share appreciation rights plans at December 31, 2009 will be recognized in the opening statement of financial position.
EqUITy SETTlED PlANS
under canadian gaaP, the company values share options that vest in tranches as a single grant. iFRs requires that each share option tranche
be valued as a separate grant with a separate vesting date. in addition, under iFRs, the initial valuation is based upon the amount of awards
estimated to vest, whereas under canadian gaaP the company only recognizes forfeitures of awards as and when they arise. the company
will record a charge to contributed surplus of $1.4 million for unvested share options in its iFRs opening statement of financial position to
reflect these changes in the valuation process.
the method of computation of deferred tax on share-based payments also differs under iFRs, as compared to canadian gaaP. the canadian
gaaP deferred tax balances will therefore be recalculated in the statement of financial position to reflect these differences in deferred
tax methodology.
3. leases
A. ACCElERATED RECOgNITION OF SAlE AND lEASEBACK gAINS
under canadian gaaP, sale and leaseback gains relating to operating leases are deferred and amortized over the term of the operating
lease. under iFRs, such gains may be recognized upfront if the sale and leaseback results in an operating lease, and is undertaken at fair
value. as certain sale and leaseback transactions of the company meet these criteria, the unamortized portion of the gains of $5.4 million
(after-tax) will be recognized in retained earnings and the deferred gain derecognized in the opening iFRs statement of financial position.
B. REClASSIFICATION OF CERTAIN lEASES FROm OPERATINg TO FINANCE lEASE
While the concepts of operating and finance leases are very similar between canadian gaaP and iFRs, iFRs provides more qualitative
indicators to apply in the classification of the lease, and does not specify quantitative thresholds to be applied in the lease classification
test. certain leases which were classified as operating under canadian gaaP are now classified as financing under iFRs. leased assets of
$4.9 million will be capitalized on the opening statement of financial position, with the corresponding payable recognized as a liability.
4. income taxes
ias 12 requires that deferred tax be recognized on foreign exchange differences where the currency of the tax basis of non monetary assets
is different to the functional currency for accounting purposes, whereas no such deferred taxation was recognized under canadian gaaP. this
difference gives rise to an additional deferred tax asset of $1.5 million under iFRs. in addition, under iFRs deferred taxes are recognized on
temporary differences arising from intra-company transfers, which will result in an additional $2.1 million deferred tax asset, whereas this is
not required under canadian gaaP.
there are also differences between iFRs and canadian gaaP with respect to the calculation of the tax basis of certain assets in the uK and
chile. in chile, inflation adjustments on assets that are subject to income tax will be included in the tax basis of the asset for deferred tax
computation purposes under iFRs. in the uK, the determination of the tax basis for certain buildings is impacted by the different approaches
of canadian gaaP and iFRs with regard to circumstances where the tax deductible amount of a building differs dependent on whether it
is used or sold. the differences in the computation of the uK buildings tax basis will result in the recognition of an additional $8.9 million
deferred tax liability under iFRs.
2010 Annual Report Finning International Inc. 41
ManageMent’s Discussion & analysis
5. other miscellaneous aDJustments
these are immaterial adjustments in relation to the componentization of rental assets and differences in the accounting treatment of asset
retirement obligations.
6. opening statement oF Financial position presentation reclassiFications
the following notes explain each statement of financial position reclassification arising from the company’s transition to iFRs:
JOINT VENTURE ACCOUNTINg
canadian gaaP prescribes the use of the proportionate consolidation method for joint ventures. under iFRs, the company may use either
proportionate consolidation or equity method accounting. in anticipation of proposed amendments to ias 31, Joint Ventures, which would
mandate the use of the equity method accounting for Joint ventures, the company has elected to adopt the iFRs option to use equity
accounting for its existing joint ventures. this has no overall impact on net assets, but alters the presentation of the joint venture; the joint
venture will be presented as a separate line item on the statement of financial position under iFRs, ‘investment in joint ventures and associate’.
the company’s investment in an associate, which was always accounted for using the equity method under canadian gaaP, will be re-
classified under iFRs from ‘other assets’ into ‘investment in joint ventures and associate’ on the statement of financial position.
INCOmE TAxES
canadian gaaP requires deferred taxation balances to be split between current and non-current assets and liabilities. in contrast, ias 12
requires that all deferred tax be presented as non-current. current deferred tax balances will be re-classified to non-current assets and
liabilities under iFRs.
accounting policY changes
in addition to the transitional impacts described above, there are several accounting policy differences which will impact the company on a
go-forward basis. except for changes to the employee benefits and income taxes accounting policies, the changes to the accounting policies
described below are not anticipated to have a significant impact on the company’s income statement. this is not an exhaustive list, but it provides
an indication of the main accounting policy changes which will apply to the company under iFRs effective January 1, 2011 with comparatives
presented for 2010:
Employee benefits: under canadian gaaP, the company applies the ‘corridor’ method of accounting, whereby actuarial gains and losses are
deferred and amortized over time. under iFRs, the company has elected to record actuarial gains and losses arising from its defined benefit
pension plans in other comprehensive income. as the company will no longer defer and amortize actuarial gains and losses occurring after
January 1, 2011, iFRs will likely increase variability in other comprehensive income and accumulated other comprehensive income.
the company’s pension expense under iFRs will be lower than that recorded under canadian gaaP as actuarial losses will no longer be
amortized. the amortization of actuarial losses in 2010 under canadian gaaP was approximately $14 million, pre tax.
Income taxes: although the basis of computation of future income taxes is largely consistent between canadian gaaP and iFRs, there are some
specific differences relating to the recognition of future income taxes in relation to intra-group transfers, share-based payment (in jurisdictions
where such compensation is tax deductible) and foreign exchange differences on non-monetary assets. the future income statement impact of
these differences is not determinable as it is dependent on, among other factors, exchange rate movements and the volume of non-monetary
assets transferred between the consolidated group. in addition, all deferred taxes are classified as long term for iFRs purposes.
Share-based payment: all share-based payment will be valued at fair value under iFRs using an option pricing model. the company has selected
the Black scholes option pricing model. this represents an accounting policy difference for the company’s cash settled plans, as these are
currently valued at intrinsic value (being the difference between the current share price and the grant price of the award). in addition, the
valuation of stock options under iFRs requires individual ‘tranche based’ valuations for those option plans with graded vesting, whilst canadian
gaaP allows a single valuation for all tranches. the impact of these changes on the income statement is not anticipated to be significant.
PP&E: under iFRs, PP&e may be accounted for using either a cost or revaluation model. the company has elected to use the cost model for
all classes of property, plant, and equipment. this is consistent with the company’s current accounting policy and hence will not impact the
company’s PP&e balances.
Borrowing costs: Borrowing costs for all qualifying assets incurred after January 1, 2010 will be capitalized. this will reduce finance costs and
increase PP&e balances and associated depreciation for those assets constructed after January 1, 2010; the impact of this policy change will be
dependent on the magnitude of capital spend on qualifying assets in the future.
Investment property: iFRs provides separate guidance on the accounting for properties held primarily for rental or resale. the company has
certain land and buildings which meet the iFRs definition of investment property, and intends to account for these using the cost model; this is
consistent with the current accounting for these assets and hence will not impact the company’s PP&e balances.
•
•
•
•
•
•
42
ManageMent’s Discussion & analysis
•
•
Impairment: iFRs requires property, plant, equipment, intangibles and goodwill to be assessed for impairment at the ‘cash generating unit’ level,
rather than the reporting unit level considered by canadian gaaP. the company has identified more cash generating units than the reporting
units currently used to assess for impairment under canadian gaaP. Whether the company will be materially impacted by this change will
depend upon the facts at the time of each impairment test.
Joint ventures: under iFRs, reporters may currently choose between proportionate consolidation and equity accounting for jointly controlled
entities. under the proposals for the revised joint venture standard, the proportionate consolidation option would be eliminated. in
anticipation of this change to iFRs, the company intends to adopt the equity accounting method for its joint ventures, which are currently
proportionately consolidated under canadian gaaP. this has no overall impact on net income or net assets of the company, but alters the
presentation of the joint venture entities in the financial statements.
Management continues to monitor standards to be issued by the iasB, but it remains 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 during 2011. their projects on
employee benefits, leases, revenue, financial instruments, and provisions are especially relevant to the company.
outstanDing sHaRe Data
as at February 11, 2011
common shares outstanding
options outstanding
outlooK
171,511,069
5,423,885
Finning’s consolidated order backlog continued to increase and is at its highest level since the fourth quarter of 2008. this reflects increased
demand for new equipment and strong quotation activity in all sectors, particularly in mining. in all markets, low hour, used equipment is in short
supply and customer demand for rental equipment is robust. in all regions, mining product support remains strong and there is an increase in
equipment rebuild work for large mining producers and contractors. Product support continues to improve in non-mining sectors as well.
as market conditions have strengthened, all regions are experiencing increased lead times from caterpillar for new equipment. the company is
working closely with its customers and caterpillar to plan for future equipment needs and is leveraging the entire dealer network to source equipment.
in canada, the company is experiencing increased demand for equipment and product support in all sectors. in mining, including the oil sands,
quoting and new machine sales activity is very strong. in non-mining sectors, particularly heavy construction, forestry, and oil and gas, demand
for equipment continues to improve. Product support revenues are growing in all sectors and large equipment overhaul and component
remanufacturing activity is solid.
in south america, the company is actively quoting to mining customers and receiving new orders for large equipment. at current copper and
gold prices, investments in mining projects are at record levels and expected to remain very strong. Mining contracts are expected to continue
to drive product support growth. in chile, construction and power systems sales activity is projected to remain strong, as a result of significant
investment in infrastructure and energy. the growing installed base of equipment will continue to contribute to ongoing product support growth
in south america.
in the uK, the company sees opportunities with coal mining, quarrying, waste, and plant hire customers for new equipment sales and product
support. in power systems, order intake is improving as marine, oil and gas, and power and energy sectors are strengthening. the implications of
recent announcements by the government to cut public spending while committing to significant investments in infrastructure are still being assessed.
consolidated revenues are projected to grow, on average, at 10 percent per annum over the next three years. in 2011, mining deliveries are
scheduled more towards the latter part of the year, which will drive stronger results in the second half. the revenue mix is expected to remain
similar to 2010.
in addition to an ongoing focus on cost containment, the company will continue to implement efficiency and productivity improvements to
achieve operating leverage and drive higher profitability. sg&a as a percentage of revenue is projected to decline in the medium term towards
the sg&a target of approximately 20%. the company expects to make ongoing progress towards achieving a 10% consolidated eBit margin in
the medium term.
the company anticipates higher net investments in capital expenditures and rental over the next three years to support its growth strategies,
while continuing to generate solid free cash flow and maintain a strong balance sheet.
February 16, 2011
2010 Annual Report Finning International Inc. 43
ManageMent’s Discussion & analysis
selecteD annual inFoRMation
($ Millions, excePt FoR sHaRe Data)
total revenue from continuing operations(1)(2)
net income (loss)(1)(2)(4)
from continuing operations
from discontinued operations
total net income
Basic earnings (loss) per share(1)(2)(4)
from continuing operations
from discontinued operations
total basic ePs
Diluted earnings (loss) per share(1)(2)(4)
from continuing operations
from discontinued operations
total diluted ePs
total assets(1)(2)
long-term debt(3)
current
non-current
cash dividends declared per common share
2010
4,641.3
170.7
(249.1)
(78.4)
1.00
(1.46)
(0.46)
0.99
(1.45)
(0.46)
3,613.6
203.1
736.0
939.1
0.47
$
$
$
$
$
$
$
$
$
$
$
2009
4,479.9
156.7
(25.9)
130.8
0.92
(0.15)
0.77
0.92
(0.15)
0.77
3,671.4
24.2
991.7
1,015.9
0.44
$
$
$
$
$
$
$
$
$
$
$
2008
5,598.3
236.9
(140.9)
96.0
1.38
(0.82)
0.56
1.37
(0.82)
0.55
4,720.4
2.6
1,410.7
1,413.3
0.43
$
$
$
$
$
$
$
$
$
$
$
(1) in august 2010, the company was appointed the caterpillar dealer for northern ireland and the Republic of ireland. the results of operations and financial
position of these dealers have been included in the figures above since the date of acquisition.
(2) in May 2010, the company sold Hewden, its u.K. equipment rental business. Results from Hewden are presented as discontinued operations and have been
reclassified to that category for all periods presented. included in the loss from discontinued operations in 2010 is the after-tax loss on the disposition of
Hewden of $244.1 million or $1.43 per share. Revenues from Hewden have been excluded from the revenue figures above. assets from Hewden have been
included in the total assets figures for periods prior to the sale.
(3) in 2010, the company utilized funds from the sale of Hewden to redeem gBP45 million of its gBP115 million eurobond notes. the company’s $800 million
global credit facility matures in December 2011; therefore drawings on the credit facility at December 31, 2010 were classified as current. the company expects
to negotiate a revised global credit facility prior to December 2011.
(4) the company performed its annual goodwill impairment review and determined that goodwill was not impaired at December 31, 2010 or 2009. During the
2008 annual goodwill impairment review, the company 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.
44
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;
expected revenue and eBit growth; anticipated generation of free cash flow (including projected net capital and rental expenditures), and its
expected use; anticipated defined benefit plan contributions; expected target range of Debt Ratio; and the expected quantitative impact on the
consolidated statement of financial position of the company’s transition to iFRs at January 1, 2010. 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 16, 2011. 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; our ability to
control cost pressures as growth in revenues occur; our ability to attract sufficient skilled labour resources to meet growing product support
demand; 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;
new or amended iFRs or interpretations that become effective prior to the inclusion of the company’s financial statement of position in its first
annual audited iFRs financial statements. 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.
2010 Annual Report Finning International Inc. 45
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 2010.
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 16, 2011
vancouver, Bc, canada
D.s. smith
executive vice President and chief Financial officer
46
auDitoRs’ RePoRt
We have audited the accompanying consolidated financial statements of Finning international inc., which comprise the consolidated balance sheets
as at December 31, 2010 and 2009 and the consolidated statements of income (loss), changes in shareholders’ equity, comprehensive income
(loss) and cash flows for the years then ended, and a summary of significant accounting policies and other explanatory information.
management’s responsiBilitY For the consoliDateD Financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with canadian
generally accepted accounting principles, and for such internal control as management determines is necessary to enable the preparation of
consolidated financial statements that are free from material misstatement, whether due to fraud or error.
auDitor’s responsiBilitY
our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance
with canadian generally accepted auditing standards. those standards require that we comply with ethical requirements and plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
an audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements.
the procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated
financial statements, whether due to fraud or error. in making those risk assessments, the auditor considers internal control relevant to the
entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. an audit also includes
evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as
evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
opinion
in our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Finning international inc. as at
December 31, 2010 and 2009 and the results of its operations and its cash flows for the years then ended in accordance with canadian generally
accepted accounting principles.
chartered accountants
February 16, 2011
vancouver, B.c., canada
2010 Annual Report Finning International Inc. 47
consoliDateD stateMents oF incoMe (loss)
For years ended December 31
(canaDian $ tHousanDs, excePt sHaRe anD PeR sHaRe aMounts)
Revenue
new equipment
used equipment
equipment rental
Product support
other
total revenue
cost of sales
gross profit
2010
2009
$ 1,940,648
272,388
299,911
2,117,663
10,692
4,641,302
3,256,098
1,385,204
$
1,983,827
290,227
310,187
1,883,681
11,998
4,479,920
3,191,719
1,288,201
selling, general, and administrative expenses
1,069,593
1,007,566
other expenses (note 2)
earnings from continuing operations before interest and income taxes
Finance costs (notes 3 and 4)
income from continuing operations before provision for income taxes
Provision for income taxes (note 6)
income from continuing operations
loss from discontinued operations, net of tax (note 20)
net income (loss)
earnings (loss) per share – basic
From continuing operations (note 9)
From discontinued operations
earnings (loss) per share – diluted
From continuing operations (note 9)
From discontinued operations
Weighted average number of shares outstanding
Basic
Diluted
40,648
274,963
58,701
216,262
45,546
170,716
(249,089)
(78,373)
1.00
(1.46)
(0.46)
0.99
(1.45)
(0.46)
$
$
$
$
$
33,739
246,896
61,793
185,103
28,396
156,707
(25,884)
130,823
0.92
(0.15)
0.77
0.92
(0.15)
0.77
$
$
$
$
$
171,029,585
171,718,261
170,607,892
170,993,485
the accompanying notes to the consolidated Financial statements are an integral part of these statements.
48
December 31
(canaDian $ tHousanDs)
assets
current assets
cash and cash equivalents (note 18)
accounts receivable
service work in progress
inventories (note 10)
other assets (note 11)
assets of discontinued operations (note 20)
total current assets
Finance assets (note 12)
Rental equipment (note 13)
land, buildings, and equipment (note 14)
intangible assets (note 14)
goodwill (note 15)
other assets (note 11)
assets of discontinued operations (note 20)
liaBilities
current liabilities
short-term debt (note 3)
accounts payable and accruals
income tax payable
current portion of long-term debt (note 3)
liabilities of discontinued operations (note 20)
total current liabilities
long-term debt (note 3)
long-term obligations (note 16)
Future income taxes (note 6)
liabilities of discontinued operations (note 20)
total liabilities
commitments and contingencies (notes 24 and 25)
shareholDers’ eQuitY
share capital (note 7)
contributed surplus
accumulated other comprehensive loss
Retained earnings
total shareholders’ equity
approved by the Directors:
consoliDateD Balance sHeets
2010
2009
$
349,857
669,192
73,602
1,086,924
198,941
–
2,378,516
30,158
417,140
440,864
45,752
91,114
210,097
–
$ 3,613,641
$
92,739
1,004,148
8,127
203,087
–
1,308,101
736,056
106,477
76,420
–
2,227,054
$
$
$
146,055
584,203
62,563
992,075
197,275
101,490
2,083,661
32,604
440,809
439,712
32,450
94,254
212,905
335,040
3,671,435
162,238
697,260
8,429
24,179
52,876
944,982
991,732
105,878
80,388
32,769
2,155,749
564,973
35,735
(274,346)
1,060,225
1,386,587
$ 3,613,641
557,052
33,509
(293,869)
1,218,994
1,515,686
3,671,435
$
K.M. o’neill, Director
D.W.g. Whitehead, Director
the accompanying notes to the consolidated Financial statements are an integral part of these statements.
2010 Annual Report Finning International Inc. 49
consoliDateD stateMents oF coMPReHensive incoMe (loss)
For years ended December 31
(canaDian $ tHousanDs)
net income (loss)
other comprehensive income (loss), net of income tax
currency translation adjustments
unrealized gain on net investment hedges
Realized loss on foreign currency translation, net of realized gain on net investment hedges,
reclassified to earnings on disposal of discontinued operations
tax recovery (expense) on net investment hedges
Foreign currency translation and gain (loss) on net investment hedges
unrealized gain (loss) on cash flow hedges
Realized loss (gain) on cash flow hedges, reclassified to earnings
tax recovery (expense) on cash flow hedges
gains (loss) on cash flow hedges
2010
2009
$
(78,373)
$
130,823
(98,793)
16,768
82,833
14,938
15,746
3,817
1,127
(1,167)
3,777
(165,606)
55,594
–
(18,040)
(128,052)
10,318
2,657
(2,348)
10,627
comprehensive income (loss)
$
(58,850)
$
13,398
consoliDateD stateMents oF sHaReHolDeRs’ eQuity
accumulated other
comprehensive income (loss)
($ canaDian tHousanDs,
excePt sHaRe aMounts)
Foreign
currency
translation and
gain/(loss)
on net
investment
Hedges
share capital
shares
amount
contributed
surplus
gain/
(loss) on
cash Flow
Hedges
Retained
earnings
total
Balance, January 1, 2009
comprehensive income (loss)
issued on exercise of stock options
stock option expense
Dividends on common shares
170,445,067
–
301,733
–
–
Balance, December 31, 2009
comprehensive income (loss)
issued on exercise of stock options
stock option expense
Dividends on common shares
Balance, December 31, 2010
170,746,800
–
684,549
–
–
171,431,349
$ 554,966
–
2,086
–
–
$ 557,052
–
7,921
–
–
$ 564,973
$
25,441
–
(121)
8,189
–
$ (160,971) $
(128,052)
–
–
–
(15,473) $ 1,163,141 $ 1,567,104
13,398
130,823
10,627
1,965
–
–
8,189
–
–
(74,970)
(74,970)
–
$ 33,509
–
(3,084)
5,310
–
$ 35,735
$ (289,023) $
15,746
–
–
–
$ (273,277) $
(4,846) $ 1,218,994 $ 1,515,686
(58,850)
(78,373)
3,777
4,837
–
–
5,310
–
–
(80,396)
(80,396)
–
(1,069) $ 1,060,225 $ 1,386,587
the accompanying notes to the consolidated Financial statements are an integral part of these statements.
50
consoliDateD stateMents oF casH FloW
For years ended December 31
(canaDian $ tHousanDs)
operating activities
net income
add (deduct) items not affecting cash of continuing operations
Depreciation and amortization
Future income taxes
stock-based compensation
gain on disposal of capital assets (note 2)
impairment of investment and long-lived asset (note 2)
loss from discontinued operations (note 20)
other
changes in working capital items (note 18)
cash provided after changes in working capital items
Rental equipment, net of disposals
equipment leased to customers, net of disposals
cash provided by continuing operations
cash provided by discontinued operations
cash flow provided by operating activities
investing activities
additions to capital assets
Proceeds on disposal of capital assets
net proceeds paid on acquisition (note 19)
net proceeds from sale of discontinued operations (note 20)
Proceeds on settlement of derivatives
cash provided by (used in) continuing operations
cash provided by (used in) discontinued operations
cash provided by (used in) investing activities
Financing activities
increase (decrease) in short-term debt
increase (decrease) in long-term debt
Purchase of eurobond notes and premium paid (note 3)
issue of common shares on exercise of stock options
Dividends paid
cash used in continuing operations
cash used in discontinued operations
cash 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 18
2010
2009
$
(78,373)
$
130,823
179,754
(4,104)
5,974
(106)
6,788
249,089
6,784
365,806
85,814
451,620
(122,944)
(3,469)
325,207
(2,664)
322,543
(66,475)
5,003
(6,725)
117,829
25,983
75,615
(27,206)
48,409
(67,139)
17,034
(73,156)
4,837
(80,396)
(198,820)
–
(198,820)
(20,179)
151,953
197,904
349,857
$
198,946
6,551
11,142
(9,061)
–
25,884
1,632
365,917
145,282
511,199
14,377
(27,203)
498,373
63,984
562,357
(104,914)
19,546
–
–
20,020
(65,348)
16,902
(48,446)
28,040
(344,477)
–
1,965
(74,970)
(389,442)
(20,377)
(409,819)
(15,960)
88,132
109,772
197,904
$
the accompanying notes to the consolidated Financial statements are an integral part of these statements.
2010 Annual Report Finning International Inc. 51
notes to tHe consoliDateD Financial stateMents
December 31, 2010 and 2009
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., 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 and
other asset 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 capital assets and related residual values, revenues and costs
associated with maintenance and repair contracts, asset retirement obligations, reserves for legal claims, 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 item.
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.
52
notes to tHe consoliDateD Financial stateMents
(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. in
2010, continued weak economic conditions in europe and poor operating performance from the company’s equity investment in energyst B.v.,
combined with a very competitive market environment, triggered the requirement for an impairment analysis on the company’s investment –
see note 2. as at December 31, 2009, the company determined that there were no triggering events requiring an impairment analysis.
goodwill and intangible assets with indefinite lives are subject to an annual assessment for impairment unless events or changes in circumstances
indicate that the value may not be fully recoverable, in which case the assessment is done at that time. goodwill and intangible assets with
indefinite lives are assessed primarily by applying a fair value-based test at the reporting unit level. the fair value is estimated using the present
value of expected future cash flows. the company also considers projected future operating results, trends, and other circumstances in making
such evaluations. an impairment loss would be recognized to the extent the carrying amount of goodwill or intangible assets exceeds their fair
value. there was no goodwill impairment identified in 2010 and 2009 following the company’s annual impairment review.
2010 Annual Report Finning International Inc. 53
notes to tHe consoliDateD Financial stateMents
1. SIGNIFICANT ACCOUNTING POLICIES (continued)
(m) lEASES
leases entered into by the company as lessee are classified as either capital or operating leases. leases where substantially 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 and rewards 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.
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. 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.
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.
54
notes to tHe consoliDateD Financial stateMents
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) 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, 2010 and 2009, the recorded amount approximates fair value.
Short-term and long-term debt and accounts payable and accruals are classified as “Other Financial Liabilities”. They are measured at amortized
cost using the effective interest method. at December 31, 2010 and 2009, 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, 2010 and 2009 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 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.
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.
2010 Annual Report Finning International Inc. 55
notes to tHe consoliDateD Financial stateMents
1. SIGNIFICANT ACCOUNTING POLICIES (continued)
hedges (ContInued)
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, at times, options to hedge the currency risk associated with certain foreign currency
purchase commitments, payroll, and associated accounts payable and accounts receivable for periods up to two years 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 the same income statement caption as the underlying item 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, 2010, approximately $2.1 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 foreign currency debt and, at times, foreign exchange forward contracts 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.
(S) ChANgE IN ACCOUNTINg POlICIES
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, although early adoption was permitted as long as all
three sections were adopted at once.
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 did not have a material impact on the company’s consolidated financial statements. in august 2010, the company was
appointed the caterpillar dealer for northern ireland and the Republic of ireland (see note 19). these acquisitions have been accounted for in
accordance with the new standard on business combinations; however, the company was not materially affected as a result of adopting the new
recommendations of section 1582 for these transactions.
56
notes to tHe consoliDateD Financial stateMents
(T) COmPARATIVE FIgURES
certain comparative figures have been reclassified to conform to the 2010 presentation.
(U) FUTURE ACCOUNTINg PRONOUNCEmENTS
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
other expenses (income) include the following items:
For years ended December 31
($ tHousanDs)
Restructuring (a)
Project costs (b)
acquisition and other related costs (note 19)
impairment of investment and long-lived asset (c)
gain on sale of properties (d)
2010
4,179
27,820
1,967
6,788
(106)
40,648
$
$
2009
23,943
18,857
–
–
(9,061)
33,739
$
$
the tax recovery on other expenses for the year ended December 31, 2010 was $9.0 million (2009: $12.1 million).
(a) During 2010 and 2009, the company incurred restructuring and severance costs of $4.2 million and $23.9 million, respectively. these costs
related primarily to severance and were higher in 2009 in response to market conditions, primarily in the company’s canadian operations.
(b) Project costs incurred in 2010 and 2009 relate to the implementation of a new information technology system for the company’s
global operations.
(c) in 2010, as a result of continued weak economic conditions in europe and poor operating performance from the company’s equity investment
in energyst B.v., combined with a very competitive market environment, the company recorded a $5.0 million impairment of its investment.
in addition, as part of its review of the valuation of long-lived assets, the company recorded a $1.8 million impairment of an intangible asset.
(d) 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 $7.2 million.
3. SHORT-TERM AND LONG-TERM DEBT
December 31
($ 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%, £70 million (2009: £115 million) eurobond, due May 30, 2013
other term loans (a)
less current portion of long-term debt
total long-term debt
2010
2009
$
92,739
$
162,238
149,909
249,460
348,614
108,172
82,988
939,143
(203,087)
736,056
$
149,813
249,258
348,427
193,495
74,918
1,015,911
(24,179)
991,732
$
(a) other term loans include u.s. $60.6 million and £13.4 million (2009: u.s. $66.6 million and £nil 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 £0.5 million (2009: £1.7 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 in 2011.
2010 Annual Report Finning International Inc. 57
notes to tHe consoliDateD Financial stateMents
3. SHORT-TERM AND LONG-TERM DEBT (continued)
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, 2010, the company had approximately $1,232 million (2009: $1,215 million) of unsecured credit facilities, and including all
bank and commercial paper borrowings drawn against these facilities, approximately $1,039 million (2009: $987 million) of capacity remained
available, of which approximately $815 million (2009: $725 million) is committed credit facility capacity.
included in short-term debt is foreign currency denominated debt of u.s. $59.1 million (2009: u.s. $150.7 million).
the average interest rate applicable to the consolidated short-term debt for 2010 was 3.9% (2009: 1.5%).
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 £70 million (2009: £115.0 million) 5.625% eurobond is unsecured, and interest is payable annually with principal due
on maturity.
Following the sale of Hewden, the company’s uK equipment rental business in May 2010 (see note 20), the company used a portion of the proceeds
to purchase £45 million of the 5.625% eurobond at a price of £107.055. the company recorded charges of approximately $6.4 million, reflecting
the premium paid to purchase the eurobond, the early recognition of deferred financing costs, and other costs associated with this purchase.
the company has an $800 million unsecured syndicated revolving credit facility, maturing in December 2011. Drawings on the credit facility
at December 31, 2010 were classified as current. 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, 2010, $62.8 million (2009: $142.5 million) was drawn on this facility, including commercial paper issuances.
long-teRM DeBt RePayMents
Principal repayments of long-term debt (book value) in each of the next five years and thereafter are as follows:
($ tHousanDs)
2011
2012
2013
2014
2015
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
costs associated with eurobond debt purchase
interest income on tax reassessment
other finance related expenses, net of sundry interest earned
less: interest expense related to discontinued operations
Finance costs of continuing operations
58
$
$
203,087
498
383,153
566
231
351,608
939,143
2010
2009
$
$
1,548
50,364
51,912
1,663
6,441
(2,941)
3,678
60,753
(2,052)
58,701
$
$
4,347
55,499
59,846
2,232
–
(3,529)
9,059
67,608
(5,815)
61,793
notes to tHe consoliDateD Financial stateMents
4. FINANCIAL INSTRUMENTS
oveRvieW
Finning and its subsidiaries are exposed to market, credit, liquidity, and other risks in the normal course of their business activities. 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 in respect of 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 – trade
accounts receivable – other
service work in progress
supplier claims receivable
instalment notes receivable
note receivable
Derivative assets
2010
$
349,857
624,420
44,772
73,602
50,093
26,760
28,078
7,420
$ 1,205,002
2009
146,055
553,158
31,045
62,563
40,121
32,126
–
29,499
894,567
$
$
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.
2010 Annual Report Finning International Inc. 59
notes to tHe consoliDateD Financial stateMents
4. FINANCIAL INSTRUMENTS (continued)
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 estimates of potential losses in respect of trade and other receivables. the main
components of these allowances are a specific loss component that relates to individually significant exposures, and a collective loss component
established for groups of similar receivables 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 receivables, 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
chile
u.K.
argentina
Bolivia
uruguay
europe
u.s.
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
2010
331,339
147,746
71,504
49,885
4,911
2,992
6,821
6,473
2,749
624,420
$
$
2009
310,172
109,193
84,713
37,125
4,782
1,484
2,832
2,332
525
553,158
$
$
2010
2009
gross
allowance
gross
allowance
$
$
456,557
112,343
29,126
8,092
32,111
638,229
$
$
–
–
586
355
12,868
13,809
$
$
390,162
109,112
30,855
5,564
36,891
572,584
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
2010
19,426
9,114
(14,503)
(228)
13,809
$
$
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 the financial asset is written off.
60
$
$
$
$
–
–
210
252
18,964
19,426
2009
17,053
12,584
(8,223)
(1,988)
19,426
notes to tHe consoliDateD Financial stateMents
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.
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 for continuing operations at December 31,
2010 were $1,039 million (2009: $987 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 financial liabilities and derivative financial assets and 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.
carrying amount
December 31,
2010
2011
2012-2013
2014-2015
thereafter
contractual cash flows
$
(92,739)
(747,983)
(108,172)
(75,810)
(7,178)
(12,495)
$
(92,957)
(190,930)
(6,108)
(51,453)
(2,752)
(2,422)
$
–
(317,940)
(120,807)
(25,392)
(1,610)
(2,426)
$
–
(42,140)
–
–
(1,248)
(2,161)
$
–
(402,646)
–
–
(4,023)
(12,667)
(997,730)
(997,730)
–
–
–
(2,042,107)
(1,344,352)
(468,175)
(45,549)
(419,336)
(395)
–
(3,937)
–
–
2,843
(484)
–
–
4,577
(8,672)
–
(6,068)
$
(231)
23
(127,574)
123,478
(99,460)
102,438
(45,238)
44,757
(38,789)
43,929
(252)
75
(8,282)
7,952
–
–
–
–
–
–
(720)
–
2,613
(9,892)
–
(10,399)
$
$
$
–
–
–
–
–
–
–
–
–
–
–
–
–
$
–
–
–
–
–
–
–
–
–
–
–
–
–
($ 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
and current portion of capital
lease obligations)
total non-derivative financial
liabilities
Derivatives
interest rate swaps
Pay usD (fixed)
Receive usD (floating)
Forward foreign currency
contracts and swaps
sell caD
Buy usD
sell usD
Buy caD
sell clP
Buy usD
sell usD
Buy clP
share forward
sell
Buy
total derivatives
canadian dollar (caD)
united states dollar (usD)
chilean peso (clP)
2010 Annual Report Finning International Inc. 61
notes to tHe consoliDateD Financial stateMents
4. FINANCIAL INSTRUMENTS (continued)
MaRKet RisK
Market risk is the risk that changes in the market, 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 Foreign exchange Risk Management 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, which is the company’s reporting currency. 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 uK operations in canadian dollar terms. in
addition, the results of the company’s canadian operations are impacted by the translation of its u.s. dollar based earnings. the company does
not hedge its exposure to foreign exchange risk with regard to foreign currency earnings.
the company’s uK and south american operations have functional currencies other than the canadian dollar, and as a result foreign currency
gains and losses arise in the cumulative translation adjustment account from the translation of the company’s net investment in these operations.
to the extent practical, it is the company’s objective to manage this exposure. the company has hedged a portion of its foreign investments
through foreign currency denominated loans and, periodically, through other derivative contracts. For those derivatives and loans where hedge
accounting has been elected, 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.
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
2010
cash and cash equivalents
accounts receivable
short-term and long-term debt
accounts payable and accruals
net balance sheet exposure
Foreign forward exchange contracts and swaps
11,762
309,314
(783,033)
(343,151)
(805,108)
(33,418)
258,847
100,826
(119,675)
(382,946)
(142,948)
38,144
15,559
48,093
(83,685)
(92,047)
(112,080)
–
21,418,441
63,119,600
–
(50,203,235)
34,334,806
(625,800)
62
notes to tHe consoliDateD Financial stateMents
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 swap
Foreign forward exchange contracts and collars
caD
usD
gBP
clP
2009
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
9,045
49,417
(116,061)
(75,148)
(132,747)
(60,000)
(9,281)
7,950,752
49,970,186
–
(32,303,749)
25,617,189
–
(6,166,140)
sensItIvIty AnAlysIs
a 5% strengthening of the canadian dollar against the following currencies for a full year relative to the December 31, 2010 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, 2010 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
($ tHousanDs)
caD/usD
caD/gBP
caD/clP
2010
other
comprehensive
income
2009
other
comprehensive
allowance
net income
net income
$
$
$
(23,700)
(600)
2,200
$
$
$
(40,400)
(11,100)
–
$
$
$
(17,000)
1,000
1,700
$
$
$
(22,100)
(17,000)
–
a 5% weakening of the canadian dollar against the above currencies relative to the December 31, 2010 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 and instalment
and other notes receivable. 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 and other 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 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 fifteen 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 may utilize derivative instruments such as interest rate swaps to adjust the balance of fixed and
floating rate debt.
2010 Annual Report Finning International Inc. 63
notes to tHe consoliDateD Financial stateMents
4. FINANCIAL INSTRUMENTS (continued)
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
2010
2009
$
$
$
$
54,838
(868,650)
(813,812)
349,857
(184,399)
165,458
$
$
$
$
58,205
(960,255)
(902,050)
146,055
(263,300)
(117,245)
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 $nil (2009: $1.6 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 increased net
income by approximately $1.7 million (2009: decrease to net income of $1.0 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 metals, coal, petroleum, and forestry sectors can have an impact on customers’ demands for
equipment and product support. in chile and argentina, 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 these commodities. 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 the contractual 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, 2010 the vRsF relates to 1.5 million common shares (2009:1.7 million shares) at a price of $28.71 per share plus interest
maturing in 2012. a 5% strengthening in the company’s share price as at December 31, 2010, all other variables remaining constant, would have
increased net income by approximately $1.4 million (2009: $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.
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.
64
notes to tHe consoliDateD Financial stateMents
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
as of December 31, 2010 and 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, 2010 and
2009. the company did not move any instruments between levels of the fair value hierarchy during the years ended December 31, 2010 and 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:
(tHousanDs)
Balance sheet classification
notional
value
term to
Maturity
Fair value
Receive (Pay)
December 31, 2010
Foreign exchange
Forwards and swaps buy
usD / sell caD
Forwards sell usD / buy caD
Forwards buy usD / sell clP
Forwards sell usD / buy clP
interest rates
interest Rate swaps
long-term incentive plans
variable Rate share Forward
December 31, 2009
Foreign exchange
cross currency interest Rate swap
Pay gBP fixed/receive caD fixed
Forwards and swaps buy usD /
sell caD
Forwards buy usD / sell clP
Forward sell usD / buy clP
Forwards buy usD / sell gBP
interest rates
interest Rate swaps
long-term incentive plans
variable Rate share Forward
accounts payable and accruals
other assets – current
accounts payable and accruals
other assets – current
usD 132,144
usD 100,000
usD 45,000
usD 39,000
1-18 months
2 months
1 month
1-12 months
accounts payable and accruals
usD
6,250
long-term obligations
caD 43,065
2013
2012
other assets – long-term
gBP
60,000
December 2020
accounts payable and accruals
other assets – current
other assets – current
other assets – current
usD
usD
usD
usD
88,530
39,000
24,000
15,309
1-8 months
1-2 months
1-12 months
1-3 months
accounts payable and accruals
usD
11,250
1-2 years
$
$
$
$
$
$
$
$
$
$
$
$
(3,937)
2,843
(484)
4,577
(395)
(8,672)
26,079
(5,669)
747
2,348
325
(600)
long-term obligations
caD
48,809
2012
$
(26,144)
long-teRM DeBt
the fair value of the company’s long-term debt is estimated as follows:
December 31
($ tHousanDs)
long-term debt
2010
2009
Book value
Fair value
Book value
Fair value
$
939,143
$ 1,006,991
$
1,015,911
$
1,058,466
2010 Annual Report Finning International Inc. 65
notes to tHe consoliDateD Financial stateMents
4. FINANCIAL INSTRUMENTS (continued)
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.
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 derivative instrument is an asset and based on Finning’s credit risk
when the derivative 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 and interest rate swaps 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
cash and cash equivalents from discontinued operations
net debt
shareholders’ equity
net debt to total capitalization
Dividend payout ratio
66
2010
2009
$
(349,857)
92,739
203,087
736,056
–
$
682,025
$ 1,386,587
$
$
$
(146,055)
162,238
24,179
991,732
(51,849)
980,245
1,515,686
company targets
35 - 45%
25 - 30%
2010
33.0%
48.0%
2009
39.3%
47.8%
notes to tHe consoliDateD Financial stateMents
the net debt to total capitalization ratio is below the company’s target due to significant cash at the end of 2010, the result of collections
from customers late in the year. this ratio is lower than the prior year due to cash flow generated by operations in 2010 which was utilized to
reduce overall debt levels, in addition to the early purchase of £45 million of the outstanding £115 million eurobond notes with a portion of the
proceeds received from the sale of Hewden.
the dividend payout ratio in 2010 and 2009 exceeded the company’s target levels; however, management believes that with the overall economic
and business conditions improving the payout ratio will be back on target within the next two years. the company believes the higher payout was
acceptable given the strong cash flow generated in the year, among other considerations.
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, 2010 and 2009, 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 from continuing operations are as follows:
For years ended December 31
($ tHousanDs)
Provision for income taxes
current
canada
international
Future
canada
international
2010
2009
$
$
15,921
33,729
49,650
6,409
(10,513)
(4,104)
45,546
$
$
(9,627)
31,320
21,693
5,279
1,424
6,703
28,396
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
income not subject to tax
non-taxable capital gain
non-deductible stock-based compensation
Recovery related to items previously charged
to other comprehensive income
other
Provision for income taxes
2010
2009
$
60,986
28.20%
$
54,327
29.35%
(11,667)
(6,687)
(613)
880
–
2,647
45,546
$
(5.39)%
(3.09)%
(0.28)%
0.41%
–
1.21%
21.06%
(13,884)
(4,084)
(1,758)
1,461
(8,534)
868
28,396
$
(7.50)%
(2.21)%
(0.95)%
0.79%
(4.61)%
0.47%
15.34%
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
$52.7 million (2009: $48.2 million) and $1.6 million (2009: $0.8 million), respectively.
2010 Annual Report Finning International Inc. 67
notes to tHe consoliDateD Financial stateMents
6. INCOME TAXES (continued)
temporary differences and tax loss carry-forwards that give rise to future income tax assets and liabilities are as follows:
December 31
($ tHousanDs)
Future income tax assets:
accounting provisions not currently deductible for tax purposes
loss carry-forwards
other stock-based compensation
Derivative financial instruments
goodwill of foreign subsidiaries
Future income tax liabilities:
Derivative financial instruments
capital, rental, and leased assets
employee benefits
other
net future income tax liability
2010
2009
$
$
60,722
3,443
2,306
1,898
–
68,369
–
(46,388)
(41,220)
(2,889)
(90,497)
(22,128)
$
$
52,862
3,563
7,373
–
1,004
64,802
(6,272)
(47,281)
(38,901)
(3,812)
(96,266)
(31,464)
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 ($3.6 million):
December 31
($ tHousanDs)
canada
international
2010
–
10,551
10,551
$
$
2009
1,700
10,638
12,338
$
$
as at December 31, 2010, the company has unrecognized net operating losses and capital loss carry-forwards of $1.3 million and $257.3 million,
respectively, to reduce future taxable income. these amounts do not expire.
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, 2010 and 2009.
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 2010 and 2009.
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 company will be seeking
shareholder approval at its 2011 annual Meeting to extend the rights plan for three years such that it will automatically terminate at the end of
the company’s annual Meeting in 2014.
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.
68
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 compensation 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, 2010,
1.6 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(1)
cancelled
options outstanding, end of year
exercisable at year end
2010
weighted
average
exercise price
$
$
$
$
$
$
22.94
17.43
13.42
26.06
24.16
25.85
options
6,299,454
548,990
(1,086,873)
(158,959)
5,602,612
3,934,913
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
(1) stock options exercised in 2010 comprised both cash and cashless exercises, based on the terms of the particular stock option plan. there were 520,201
options exercised under the pre-2005 stock option Plan and utilized a cash method of exercise resulting in the same number (520,201) of common shares
issued. under the 2005 stock option Plan, exercises generally utilize the cashless method, whereby the actual number of shares issued is represented by the
premium between the fair market value at exercise time and the grant value, and the equivalent value of the number of options up to the grant value is withheld.
an additional 566,672 options were exercised in 2010 under the 2005 stock option Plan resulting in 164,348 common shares issued and 402,324 options were
withheld and returned to the option pool for future issues/grants.
in 2010 and 2009, long term incentives for executives and senior management were a combination of both stock options and performance
share units. in the second quarter of 2010, the company granted 548,990 common share options to senior executives and management of the
company (2009: 978,703 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 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
2010 grant
2009 grant
1.75%
33.41%
2.66%
5.8 years
1.78%
38.45%
3.66%
5.5 years
the weighted average grant date fair value of options granted during the year was $5.20 (2009: $5.07). total stock option expense recognized
in 2010 was $5.3 million (2009: $8.0 million).
the following table summarizes information about stock options outstanding at December 31, 2010:
Range of exercise prices
$6.23 - $8.50
$14.64 - $17.43
$19.75 - $19.82
$25.85 - $31.67
options outstanding
options exercisable
number
outstanding
56,700
1,624,146
1,006,466
2,915,300
5,602,612
weighted
average
remaining
life
weighted
average
exercise
price
0.1 years
5.2 years
2.4 years
3.9 years
4.0 years
$
$
$
$
$
6.69
15.77
19.75
30.70
24.16
number
outstanding
weighted
average
exercise
price
56,700
465,746
1,006,466
2,406,001
3,934,913
$
$
$
$
$
6.69
15.30
19.75
30.89
25.85
2010 Annual Report Finning International Inc. 69
notes to tHe consoliDateD Financial stateMents
8. STOCK-BASED COMPENSATION PLANS (continued)
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 34,430 deferred share units in 2010 (2009: 21,690 share units), which
were granted to the Directors and expensed over the calendar year as the units are issued. an additional 11,464 Dsus were issued in lieu of cash
compensation payable for service as a director. a further 7,770 Dsus were granted to present directors during 2010 as payment for notional
dividends.
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)
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 236,390 performance share units in 2010, based on 100% vesting (2009: 341,253).
70
notes to tHe consoliDateD Financial stateMents
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)
2009 Plan
2010 Plan
Proportion of Psus vesting
< 12%
12%
15%
17% or more
< 12%
12%
14%
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
cancelled
outstanding, end of year
liaBility
($ tHousanDs)
Balance, beginning of year
expense (income)
exercised
cancelled
Balance, end of year
For year ended December 31
units
outstanding, beginning of year
additions
exercised
outstanding, end of year
liaBility
($ tHousanDs)
Dsu-a
Dsu-B
17,433
78
(17,511)
–
–
570,490
10,776
(208,014)
–
373,252
$
$
290
161
(451)
–
–
Dsu-a
25,212
684
(8,463)
17,433
$
$
9,516
4,932
(4,336)
–
10,112
Dsu-B
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
2010
DDsu
307,506
53,908
–
–
361,414
5,130
4,660
–
–
9,790
2009
DDsu
264,442
43,064
–
307,506
3,768
1,362
–
5,130
$
$
$
$
psu
total
–
510,303
–
(12,065)
498,238
895,429
575,065
(225,525)
(12,065)
1,232,904
$
$
$
$
–
5,198
–
(7)
5,191
$
$
14,936
14,951
(4,787)
(7)
25,093
Psu
total
–
–
–
–
–
–
–
–
1,005,865
62,969
(173,405)
895,429
$
$
14,333
3,363
(2,760)
14,936
as at December 31, 2010 and 2009, all outstanding deferred share units (Dsu-a, Dsu-B, DDsu) have vested. as at December 31, 2010 and 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.
2010 Annual Report Finning International Inc. 71
notes to tHe consoliDateD Financial stateMents
8. STOCK-BASED COMPENSATION PLANS (continued)
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 and vested, beginning of year
exercised
cancelled
outstanding and vested, end of year
liaBility
($ tHousanDs)
Balance, beginning of year
expense
exercised
Balance, end of year
strike price ranges:
2010
474,664
(225,224)
(7,000)
242,440
2009
645,604
(81,754)
(89,186)
474,664
$
$
717
3,232
(1,344)
2,605
$13.03 - $16.22
$
$
216
699
(198)
717
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 $7.0 million in 2010 (2009: $11.1 million).
9. EARNINGS PER SHARE
Basic earnings per share (ePs) is calculated by dividing net income available to common shareholders by the weighted average number of
common shares outstanding during the period. Diluted earnings per share is calculated to reflect the dilutive effect of exercising outstanding
stock options by applying the treasury stock method.
earnings used in determining earnings per share from continuing operations are presented below. earnings used in determining earnings per share
from discontinued operations are the earnings from discontinued operations as reported within the consolidated statements of income.
For years ended December 31
($ tHousanDs, excePt sHaRe anD PeR sHaRe aMounts)
2010
Basic eps from continuing operations:
net income from continuing operations
effect of dilutive securities: stock options
Diluted eps from continuing operations:
net income from continuing operations and assumed conversions
2009
Basic eps from continuing operations:
net income from continuing operations
effect of dilutive securities: stock options
Diluted eps from continuing operations
net income from continuing operations and assumed conversions
income
shares
Per share
$
170,716
–
171,029,585
688,676
$
170,716
171,718,261
$
156,707
–
170,607,892
385,593
$
156,707
170,993,485
$
$
$
$
1.00
–
0.99
0.92
–
0.92
72
notes to tHe consoliDateD Financial stateMents
10. INVENTORIES
December 31
($ tHousanDs)
on-hand equipment
Parts and supplies
internal service work in progress
inventories
2010
$
578,185
393,146
115,593
$ 1,086,924
2009
589,983
325,033
77,059
992,075
$
$
For the year ended December 31, 2010, on-hand equipment, parts, supplies, and internal service work in progress from continuing operations
recognized as an expense amounted to $2,992.0 million (2009: $2,933.2 million). For the year ended December 31, 2010, the write-down of
inventories to net realizable value, included in cost of sales from continuing operations, amounted to $35.2 million (2009: $29.4 million).
11. OTHER ASSETS
December 31
($ 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 21)
investment in energyst B.v. (note 2)
note receivable (note 20)
Derivative assets (note 4)
Future income taxes (note 6)
other
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
2010
2009
$
$
$
$
$
$
52,741
50,093
24,444
25,486
19,444
7,821
7,420
11,492
198,941
152,213
18,013
28,078
–
1,551
10,242
210,097
2010
26,760
32,253
(9,411)
22,842
49,602
(19,444)
30,158
$
$
$
$
$
$
48,167
40,121
31,301
25,147
23,479
12,400
3,420
13,240
197,275
144,307
27,687
–
26,079
757
14,075
212,905
2009
32,126
29,253
(5,296)
23,957
56,083
(23,479)
32,604
Depreciation of equipment leased to customers for the year ended December 31, 2010 was $4.0 million (2009: $5.0 million).
2010 Annual Report Finning International Inc. 73
notes to tHe consoliDateD Financial stateMents
13. RENTAL EQUIPMENT
December 31
($ tHousanDs)
cost
less accumulated depreciation
2010
2009
$
$
735,070
(317,930)
417,140
$
$
735,231
(294,422)
440,809
Rental equipment under capital leases of $5.3 million (2009: $19.6 million), which is net of accumulated depreciation of $8.6 million (2009:
$10.2 million), are included above, of which $nil (2009: $6.8 million) was acquired during the year. Depreciation of rental equipment for the year
ended December 31, 2010 was $132.4 million (2009: $151.0 million).
14. CAPITAL ASSETS
lanD, BuilDings, anD eQuiPMent
December 31
($ tHousanDs)
land
Buildings and equipment
2010
accumulated
depreciation
cost
net book
value
2009
accumulated
depreciation
cost
net book
value
$
51,788
584,358
$ 636,146
$
–
(195,282)
$ (195,282)
$
51,788
389,076
$ 440,864
$
$
51,226
564,896
616,122
$
$
–
(176,410)
(176,410)
$
$
51,226
388,486
439,712
land, buildings, and equipment under capital leases of $10.7 million (2009: $11.8 million), which is net of accumulated depreciation of $3.4 million
(2009: $3.0 million), are included above, of which $0.5 million (2009: $1.2 million) was acquired during the year. Depreciation of buildings and
equipment for the year ended December 31, 2010 was $35.6 million (2009: $34.9 million).
intangiBle assets
December 31
($ tHousanDs)
subject to amortization
customer contracts and related
customer relationships
software
indefinite lives
Distribution rights
2010
accumulated
cost amortization
net book
value
2009
accumulated
amortization
cost
net book
value
$
$
10,599
54,169
64,768
$
(8,402)
(11,260)
(19,662)
$
2,197
42,909
45,106
646
65,414
–
(19,662)
$
$
646
45,752
$
$
$
13,349
35,683
49,032
(6,766)
(10,462)
(17,228)
$
646
49,678
$
–
(17,228)
$
6,583
25,221
31,804
646
32,450
the company acquired intangible assets subject to amortization of $19.6 million in 2010 (2009: $14.4 million). the additions in 2010 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, 2010 was $3.7 million (2009: $4.6 million).
certain intangible assets are considered to have indefinite lives because they are expected to generate cash flows indefinitely.
74
notes to tHe consoliDateD Financial stateMents
15. GOODWILL
the change in the carrying amount of goodwill is as follows:
December 31, 2010
($ tHousanDs)
goodwill, beginning of year
Foreign exchange translation adjustment
goodwill, end of year
December 31, 2009
($ tHousanDs)
goodwill, beginning of year
acquired (a)
Foreign exchange translation adjustment
goodwill, end of year
canada
south america
uK & ireland
consolidated
$
$
$
$
43,811
–
43,811
$
$
31,451
(1,562)
29,889
canada
south america
43,811
–
–
43,811
$
$
35,377
1,276
(5,202)
31,451
$
$
$
$
18,992
(1,578)
17,414
$
$
94,254
(3,140)
91,114
uK
consolidated
20,090
–
(1,098)
18,992
$
$
99,278
1,276
(6,300)
94,254
(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 $3 million. as a result, the company now holds 100% of the
issued and outstanding common shares.
16. LONG-TERM OBLIGATIONS
December 31
($ tHousanDs)
stock-based compensation (notes 4 and 8)
leasing obligations (a) (note 24)
employee future benefit obligations (note 21)
sale leaseback deferred gain
asset retirement obligations (b)
other
2010
36,370
10,893
31,714
6,381
1,264
19,855
106,477
$
$
2009
41,797
12,086
23,974
6,990
1,201
19,830
105,878
$
$
(a) capital leases issued at varying rates of interest from 0.7% - 6.8% and maturing on various dates up to 2026.
(b) asset retirement obligations relate to estimated future remediation and decommissioning 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
4.13%. should changes occur in estimated future dilapidation costs, revisions to the liability could be made. the total undiscounted amount of
estimated cash flows is $4.0 million, and the expected timing of payment of the cash flows is estimated to be over the next 70 years.
2010 Annual Report Finning International Inc. 75
notes to tHe consoliDateD Financial stateMents
17. CUMULATIVE CURRENCY TRANSLATION ADJUSTMENTS
the company’s principal subsidiaries operate in three functional currencies: canadian dollars, u.s. dollars, and the u.K. pound sterling. the
company experiences foreign currency translation gains or losses as a result of consolidating the financial statements of self-sustaining foreign
operations. these unrealized foreign currency translation gains or losses are recorded in the accumulated other comprehensive income/loss
account on the consolidated Balance sheet. currency translation adjustments arise as a result of fluctuations in foreign currency exchange rates
between period ends. the cumulative currency translation adjustment for 2010 mainly resulted from the stronger canadian dollar relative to the
u.s. dollar (5.0% stronger), and the u.K. pound sterling (8.3% stronger), at December 31, 2010 compared to December 31, 2009.
the exchange rates of the canadian dollar against the following foreign currencies were as follows:
December 31
exchange rate
u.s. dollar
u.K. pound sterling
For years ended December 31
average exchange rates
u.s. dollar
u.K. pound sterling
18. SUPPLEMENTAL CASH FLOW INFORMATION
non casH WoRKing caPital cHanges
For years ended December 31
($ 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
comprised:
cash and cash equivalents of continuing operations
cash and cash equivalents of discontinued operations
inteRest anD tax PayMents
For years ended December 31
($ tHousanDs)
interest paid
income taxes paid
76
2010
0.9946
1.5513
2010
1.0299
1.5918
2009
1.0466
1.6918
2009
1.1420
1.7804
2010
2009
$
$
$
$
$
$
(132,170)
(9,097)
(131,567)
347,626
11,022
85,814
2010
109,358
240,499
349,857
349,857
–
349,857
$
$
$
$
$
$
190,627
372,155
62,418
(466,534)
(13,384)
145,282
2009
110,672
87,232
197,904
146,055
51,849
197,904
2010
2009
$
$
(55,618)
(12,858)
$
$
(57,714)
(7,763)
notes to tHe consoliDateD Financial stateMents
19. ACQUISITION
in august 2010, Finning was appointed the caterpillar dealer for northern ireland and the Republic of ireland. the purchase is accounted for under
the purchase method of accounting. the results of these operations have been included in the consolidated financial statements since that date.
the company acquired certain assets, comprising inventory, a building, and other fixed assets, from the administrator or Receiver of the
previous caterpillar dealers in northern ireland and the Republic of ireland. the total purchase price for the assets is approximately $6 million
(gBP 3.7 million), representing the fair value of the assets acquired. acquisition and other related costs of $2.0 million were incurred on the
transaction, and are recorded in other expenses on the consolidated statement of income. the total purchase price will be paid in cash; in 2010,
$6.7 million was paid with the remaining $1.3 million to be paid in 2011.
in conjunction with these acquisitions, the company increased its interest in energyst B.v. by committing to purchase, at fair value, 11,230 shares
for cash of $1.4 million (euR 1.0 million). as a result, the company’s equity interest in energyst increased to 27.0% from 25.4% in the first
quarter of 2011.
20. DISPOSITION OF DISCONTINUED OPERATION
Following an extensive strategic review, on May 5, 2010, the company sold its u.K. equipment rental subsidiary, Hewden stuart limited (Hewden).
the company determined that a large, short-term rental business operating separately from its uK dealership was not aligned with the company’s
strategic objectives. gross proceeds on the sale of Hewden of $171.1 million (£110.2 million) comprised cash of £90.2 million and a £20.0 million
interest bearing 5-year note receivable with a fair value of £16.9 million. transaction costs of $7.2 million were incurred and paid on the transaction.
the loss on sale was $244.1 million or $1.43 per share, which included the realization of $100.8 million of foreign exchange losses related to
the company’s investment in Hewden which was previously recorded in accumulated other comprehensive loss, and $68.0 million related to
Hewden’s unfunded pension liability, which the buyer assumed.
the results of operations of Hewden for the periods up to May 5, 2010 have been reclassified as discontinued operations in the consolidated
statements of income and cash flow. the assets and liabilities in the balance sheet for periods prior to the date of disposition have been presented
separately. the results of Hewden had previously been reported in the Finning uK group segment.
loss from discontinued operations to the date of disposition is summarized as follows:
($ tHousanDs)
Revenue
loss before provision for income taxes
loss on sale of discontinued operation, pre tax
Provision for income taxes – recovery (expense)
loss from discontinued operations
January 1 -
may 5,
2010
year ended
December 31,
2009
$
$
65,259
(7,596)
(238,013)
(3,480)
(249,089)
$
$
257,621
(45,691)
–
19,807
(25,884)
2010 Annual Report Finning International Inc. 77
notes to tHe consoliDateD Financial stateMents
20. DISPOSITION OF DISCONTINUED OPERATION (continued)
the carrying amounts of assets and liabilities related to discontinued operations as at the date of disposition, and for the comparative period
presented, are as follows:
($ tHousanDs)
assets
current assets
cash
accounts receivable
inventories
other assets
total current assets
Rental equipment
land, building and equipment
intangible assets
other assets
total assets
liaBilities
current liabilities
accounts payable and accruals
income tax payable
total current liabilities
long-term obligations
Future income taxes
total liabilities
May 5, 2010
(date of
disposition)
December 31,
2009
$
$
$
$
15,403
41,584
1,385
12,985
71,357
214,645
36,246
7,174
62,159
391,581
47,342
160
47,502
3,638
24,112
75,252
$
$
$
$
51,849
38,438
1,448
9,755
101,490
250,311
43,065
9,019
32,645
436,530
52,681
195
52,876
4,269
28,500
85,645
21. EMPLOYEE FUTURE BENEFITS
the company and its subsidiaries in canada and the u.K. have defined benefit pension plans and defined contribution pension plans providing
retirement benefits for most of their permanent employees. the company’s irish subsidiary has a defined contribution plan.
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 was closed to new executive employees, who are 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.
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 non-executive 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 defined
contribution pension plan in ireland offers a matched level of employee and company contributions of 5% of salary.
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 $5.7 million was expensed in 2010 (2009: $5.3 million) for a total obligation at December 31, 2010 of $31.7 million
(2009: $24.0 million).
78
notes to tHe consoliDateD Financial stateMents
the expense for the company’s benefit plans for continuing operations, primarily for pension benefits, is as follows:
For years ended December 31
($ tHousanDs)
Defined contribution plans
net benefit plan expense
Defined benefit plans
current service cost, net of
employee contributions
interest cost
actual return on plan assets
actuarial (gains) losses
Plan amendments(1)
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 asset
Defined benefit costs recognized
total
2010
2009
canada uK & ireland
total
canada
uK
total
$
21,684
$
1,796
$
23,480
$
21,887
$
1,581
$
23,468
$
6,081
18,852
(22,808)
33,951
–
$
5,140
21,457
(30,278)
(16,324)
7,800
$
11,221
40,309
(53,086)
17,627
7,800
$
$
5,494
19,963
(31,134)
70,283
–
2,891
20,345
(71,177)
146,173
–
$
8,385
40,308
(102,311)
216,456
–
36,076
(12,205)
23,871
64,606
98,232
162,838
4,245
6,838
11,083
13,630
49,791
63,421
(26,443)
24,009
(2,434)
(66,921)
(143,263)
(210,184)
298
(19)
14,157
35,841
$
(7,795)
(925)
9,922
11,718
$
(7,497)
(944)
24,079
47,559
$
298
(19)
11,594
33,481
$
(588)
(1,034)
3,138
4,719
$
(290)
(1,053)
14,732
38,200
$
(1) in april 2010, the Finning uK defined benefit pension plan was amended to reverse a previous decision to move to a career average Re-valued earnings
(caRe) basis of benefit accrual. as a result, past service costs arose in that plan during the year. these past service costs will be amortized over the average
future working lifetime of the affected plan members.
total cash payments for employee future benefits for 2010, which is made up of cash contributed by the company to its defined benefit plans and
its defined contribution plans, was $39.2 million and $23.5 million, respectively (2009: $32.1 million and $23.5 million, respectively).
2010 Annual Report Finning International Inc. 79
notes to tHe consoliDateD Financial stateMents
21. EMPLOYEE FUTURE BENEFITS (continued)
information about the company’s defined benefit plans for continuing operations is as follows:
For years ended December 31
($ tHousanDs)
accrued benefit obligation
Balance at beginning of year
current service cost
interest cost
Benefits paid
actuarial (gains) losses
Past service cost
Foreign exchange rate changes
Balance at end of year
plan assets
Fair value at beginning of year
actual return on plan assets
employer contributions
employees’ contributions
Benefits paid
Foreign exchange rate changes
Fair value at end of year
Funded status – deficit
unamortized net actuarial loss
unamortized past service costs
contributions remitted
after valuation date
unamortized transitional asset
accrued benefit asset (a)
2010
2009
canada
uK
total
canada
uK
total
$ 344,398
7,253
18,852
(20,941)
33,951
–
–
$ 383,513
$ 417,706
5,372
21,457
(15,759)
(16,324)
7,800
(34,754)
$ 385,498
$ 762,104
12,625
40,309
(36,700)
17,627
7,800
(34,754)
$ 769,011
$ 282,623
22,808
17,815
1,211
(20,941)
–
$ 303,516
$ 355,447
30,278
18,358
232
(15,759)
(30,361)
$ 358,195
$ 638,070
53,086
36,173
1,443
(36,700)
(30,361)
$ 661,711
$
(79,997)
138,562
1,175
$
(27,303)
113,098
2,477
$ (107,300)
251,660
3,652
5,419
(44)
65,115
$
1,469
(2,643)
87,098
6,888
(2,687)
$ 152,213
$
$
$
$
$
$
$
267,253
7,237
19,963
(20,338)
70,283
–
–
344,398
257,629
31,134
12,454
1,744
(20,338)
–
282,623
$
$
$
$
(61,775) $
116,404
1,472
2,188
(63)
58,226
$
290,273
4,107
20,345
(19,825)
146,173
–
(23,367)
417,706
302,621
71,177
20,428
1,216
(19,825)
(20,170)
355,447
(62,259)
156,126
(5,583)
1,663
(3,866)
86,081
$
$
$
$
$
$
557,526
11,344
40,308
(40,163)
216,456
–
(23,367)
762,104
560,250
102,311
32,882
2,960
(40,163)
(20,170)
638,070
(124,034)
272,530
(4,111)
3,851
(3,929)
144,307
(a) the accrued benefit asset is classified in long term other assets 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)
2010
2009
canada
uK
total
canada
uK
total
accrued benefit obligation
Fair value of plan assets
Funded status – plan deficit
$ 381,180
298,323
82,857
$
$ 385,498
358,195
27,303
$
$ 766,678
656,518
$ 110,160
$
$
342,433
277,522
64,911
$
$
417,706
355,447
62,259
$
$
760,139
632,969
127,170
For measurement purposes, assets and liabilities of the plans are valued as at november 30. Plan assets do not include a direct investment in
common shares of the company at December 31, 2010 and 2009.
80
notes to tHe consoliDateD Financial stateMents
Plan assets are principally invested in the following securities at november 30, 2010:
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)
2010
canada
5.1%
5.5%
7.0%
3.5%
9-11
uK
5.5%
5.5%
7.0%
3.9%
14
canada
59.1%
34.3%
6.6%
2009
canada
5.5%
7.5%
7.0%
3.5%
9-11
uK
50.4%
40.5%
9.1%
uK
5.5%
7.2%
7.0%
4.0%
14
Discount rates are determined based on high quality corporate bonds at the measurement date, november 30. the accrued defined benefit
pension obligations and expense are sensitive to changes in the discount rate, among other assumptions. For example, 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, 2010, the accrued defined benefit pension obligation
presented would have increased by approximately $11 million for Finning (canada)’s plans and £12 million for the Finning uK plan.
Defined benefit pension plans are country and entity specific. the major defined benefit plans and their respective valuation dates are:
Defined Benefit Plan
last actuarial valuation Date
next actuarial valuation Date
canada – Bc Regular & executive Plan
canada – executive supplemental income Plan
canada – general supplemental income Plan
canada – alberta Defined Benefit Plan
Finning uK Defined Benefit scheme
December 31, 2009
December 31, 2009
December 31, 2009
December 31, 2009
December 31, 2008
December 31, 2012
December 31, 2012
December 31, 2012
December 31, 2010
December 31, 2011
22. ECONOMIC RELATIONSHIPS
the company distributes and services heavy equipment, engines, and related products. the company has dealership agreements with numerous
equipment manufacturers, of which the most significant are with subsidiaries of caterpillar inc. Distribution and servicing of caterpillar products
account for the major portion of the company’s operations. Finning has a strong relationship with caterpillar inc. that has been ongoing since 1933.
2010 Annual Report Finning International Inc. 81
notes to tHe consoliDateD Financial stateMents
23. SEGMENTED INFORMATION
the company and its subsidiaries have operated primarily in one industry during the year, that being the selling, servicing, and renting of heavy
equipment, engines, and related products.
the reportable operating segments are as follows:
•
•
•
•
Canadian operations: British columbia, alberta, the yukon territory, the northwest territories, and a portion of nunavut.
South American operations: chile, argentina, uruguay, and Bolivia.
UK and Ireland operations: england, scotland, Wales, northern ireland, the Republic of ireland, Falkland islands, and the channel islands.
Other: corporate head office.
For year ended December 31, 2010
($ tHousanDs)
canada
south
america
uK &
ireland
other consolidated
$ 2,323,567
(2,053,156)
(119,027)
151,384
$ 1,668,438
(1,475,108)
(36,503)
156,827
$ 649,297
(608,004)
(20,051)
21,242
$
–
(13,674)
(168)
(13,842)
$ 4,641,302
(4,149,942)
(175,749)
315,611
(14,663)
(5,201)
(9,311)
–
(2,637)
(2,627)
(1,209)
(5,000)
(27,820)
(12,828)
$ 131,520
$ 147,516
$
15,978
$
$ 1,587,769
$ 313,118
$ 33,180
$ 154,079
$ 1,435,025
$ 131,248
27,852
$
47,292
$
$ 518,190
41,631
$
9,576
$
21,205
$
$
$
$
$
(20,051) $ 274,963
(58,701)
(45,546)
170,716
(249,089)
(78,373)
$
$ 3,613,641
$ 486,616
$
70,608
$ 222,576
72,657
619
–
–
canada
south
america
uK
other consolidated
$ 2,386,642
(2,125,706)
(132,614)
128,322
$ 1,489,600
(1,299,386)
(37,405)
152,809
$ 603,678
(553,350)
(25,319)
25,009
$
–
(25,323)
(182)
(25,505)
$ 4,479,920
(4,003,765)
(195,520)
280,635
(10,574)
(19,421)
(5,616)
6,532
(2,388)
(3,005)
(279)
1,012
(18,857)
(14,882)
$
98,327
$ 153,725
$
19,616
$
(24,772)
$ 1,651,206
$ 307,627
$
55,129
$ 118,071
$ 1,034,074
$ 123,791
45,265
$
20,549
$
$ 489,111
39,425
$
5,639
$
25,316
$
$
$
$
$
60,514
1,319
–
–
$ 246,896
(61,793)
(28,396)
156,707
(25,884)
$ 130,823
$ 3,234,905
$ 472,162
$ 106,033
$ 163,936
Revenue from external sources
operating costs
Depreciation and amortization
other income (expenses)
it system implementation costs
other
earnings from continuing operations
before interest and taxes
Finance costs
Provision for income taxes
net income from continuing operations
loss from discontinued operations, net of tax
net income
identifiable assets
capital assets
gross capital expenditures(1)
gross rental asset expenditures
For year ended December 31, 2009
($ tHousanDs)
Revenue from external sources
operating costs
Depreciation and amortization
other income (expenses)
it system implementation costs
other
earnings from continuing operations
before interest and taxes
Finance costs
Provision for income taxes
net income from continuing operations
loss from discontinued operations, net of tax
net income
identifiable assets from continuing operations
capital assets
gross capital expenditures(1)
gross rental asset expenditures
(1) includes capital leases
82
notes to tHe consoliDateD Financial stateMents
24. CONTRACTUAL OBLIGATIONS
Future minimum lease payments due under capital lease contracts and payments due under various operating lease contracts are as follows:
For years ended December 31
($ tHousanDs)
2011
2012
2013
2014
2015
thereafter
less imputed interest
less current portion of capital lease obligation
total long-term capital lease obligation
operating
leases
63,039
46,523
34,121
18,349
15,235
127,289
304,556
$
$
capital
leases
2,422
1,279
1,147
1,096
1,065
12,667
19,676
7,181
12,495
1,602
10,893
$
$
$
25. COMMITMENTS AND CONTINGENCIES
(a) Due to the size, complexity, and nature of the company’s operations, various legal and tax matters are pending. in the opinion of management,
these matters will not have a material effect on the company’s consolidated financial position or results of operations.
(b) the company is proceeding with the construction of a new oil sands service facility in Fort McKay, alberta. construction of the new building
is anticipated to cost approximately $110 million, with completion by the end of 2012.
26. GUARANTEES AND INDEMNIFICATIONS
the company enters into contracts with rights of return, in certain circumstances, for the repurchase of equipment sold to customers for
an amount which is generally based on a discount from the estimated future fair value of that equipment. as at December 31, 2010, the total
estimated value of these contracts outstanding is $146.0 million coming due at periods ranging from 2011 to 2016. the company’s experience
to date has been that the equipment at the exercise date of the contract is generally worth more than the repurchase amount. the total amount
recognized as a provision against these contracts is $0.6 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, 2010, 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 $10.3 million, covering
various periods up to 2016. as at December 31, 2010, the company had no liability recorded for these guarantees.
as part of the Hewden Purchase and sale agreement in 2010, Finning 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, up to six years. the maximum potential exposure of
Finning under these indemnifications is 100% of the purchase price. as at December 31, 2010, 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, 2010, 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. the total issued and
outstanding letters of credit at December 31, 2010 was $86.5 million, of which $84.7 million relates to letters of credit issued in chile, principally
related to performance guarantees on delivery for prepaid equipment and other operational commitments.
2010 Annual Report Finning International Inc. 83
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
ten yeaR Financial suMMaRy
For years ended December 31
($ tHousanDs excePt PeR sHaRe Data)
oPeRating Results
Revenue from continuing operations(1)(2)
canadian operations
south american operations
uK & ireland
other
total consoliDateD
earnings from continuing operations
before interest and tax (eBit)(1)(2)
as a percent of revenue
income from continuing operations(1)(2)
as a percent of revenue
$ 2,323,567
1,668,438
649,297
–
$ 4,641,302
$
$
274,963
5.9%
170,716
3.7%
$
$
$
$
2,386,642
1,489,600
603,678
–
4,479,920
246,896
5.5%
156,707
3.5%
Free cash flow(3)
$
264,931
$
493,891
Ratios
asset turnover ratio
net debt to total capitalization
Book value per common share
Return on average shareholders’ equity(1)(2)
sHaRe anD PeR sHaRe Data
earnings per common share from
continuing operations(1)(2)
Basic
Diluted
Dividends per common share
common share Price
High
low
year end
$
$
$
$
$
$
$
$
1.27
33.0%
8.09
12.0%
1.00
0.99
0.47
27.40
16.54
27.09
$
$
$
$
$
$
$
$
1.07
39.3%
8.88
10.0%
0.92
0.92
0.44
19.06
10.15
16.68
$
$
$
$
$
$
$
$
$
$
$
$
$
3,216,946
1,501,633
879,777
–
5,598,356
383,354
6.8%
236,948
4.2%
$
$
$
$
2,936,229
1,325,582
1,400,427
6
5,662,244
455,847
8.0%
280,107
4.9%
23,218
$
(110,704)
98,169
$
(193,984)
59,054
$
160,210
$
111,663
1.26
48.9%
9.19
13.4%
1.38
1.37
0.43
31.15
12.09
14.25
$
$
$
$
$
$
$
$
1.36
40.8%
9.19
16.8%
1.57
1.55
0.36
33.50
23.10
28.66
2,612,597
1,009,906
1,230,730
6
2,049,675
1,007,341
1,271,264
–
$
1,562,584
$
1,456,357
$
1,269,275
$
1,398,623
869,893
1,403,807
15
561,964
1,574,950
24
444,644
1,493,512
55
448,005
1,391,566
8,849
$
4,853,239
$
4,328,280
$
3,836,299
$
3,593,295
$
3,207,486
$
3,247,043
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
373,708
7.7%
236,187
4.9%
55,253
1.22
40.0%
9.07
15.8%
1.32
1.31
0.28
23.90
18.05
23.90
4,106
3,865
4,841
44
12,856
257,955
6.0%
161,672
3.7%
271,933
7.1%
114,946
3.0%
255,168
7.1%
131,951
3.7%
277,783
8.7%
132,253
4.1%
241,601
7.4%
103,917
3.2%
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1.15
50.5%
7.50
11.0%
0.73
0.72
0.20
17.70
14.43
17.50
2,936
3,203
6,097
44
12,280
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1.09
42.5%
6.16
14.3%
0.86
0.84
0.18
16.60
11.50
15.00
2,717
2,456
6,191
45
11,409
1.05
36.5%
6.00
15.7%
0.86
0.84
0.15
14.43
9.83
12.78
2,548
1,817
5,391
39
9,795
1.25
46.6%
5.12
14.1%
0.69
0.67
0.10
10.18
6.05
10.00
2,629
1,516
5,619
39
9,803
1.15
46.0%
7.92
11.8%
0.91
0.90
0.22
20.70
16.13
18.57
3,316
3,377
6,074
38
12,805
common shares outstanding (thousands)
171,431
170,747
170,445
176,132
179,090
178,404
176,780
155,510
155,160
151,632
nuMBeR oF eMPloyees(4)
canada
south america
uK and ireland
international
total
4,408
5,907
1,533
73
11,921
4,144
4,954
2,783
70
11,951
5,061
4,988
3,506
65
13,620
4,618
4,638
3,543
51
12,850
Revenue from continuing operations per employee(1)(2)
income from continuing operations per employee(1)(2)
$
$
389,338
14,321
$
$
421,045
14,728
$
$
476,010
20,147
$
$
440,642
21,798
$
$
392,605
18,726
$
$
377,554
12,810
$
$
338,918
9,360
$
$
314,953
11,566
$
$
327,462
13,502
$
$
331,230
10,601
certain comparative figures have been reclassified to conform to the 2010 presentation. in addition, financial data has been restated to
incorporate common share subdivision occurring during the ten year period.
(1) in august 2010, the company was appointed the caterpillar dealer for northern ireland and the Republic of ireland. the results of operations and financial
position of these dealers have been included in the figures above since the date of acquisition.
(2) on May 5, 2010, the company sold Hewden stuart limited (Hewden), its uK equipment rental business. Results from that operation have been reclassified to
discontinued operations for the years ended December 31, 2010, 2009, and 2008. on July 31, 2007, the company’s u.K. subsidiary, Hewden sold its tool Hire
Division. Results from that operation have been reclassified to discontinued operations for the years ended December 31, 2007, 2006, and 2005. on september
29, 2006, the company’s u.K. subsidiary, Finning (uK) sold its Materials Handling Division. Results from that operation have been reclassified to discontinued
operations for the years ended December 31, 2006, 2005, and 2004. therefore, revenue, eBit, net income, earnings per common share, and return on average
shareholders’ equity reflect results from continuing operations for those years.
(3) Free cash flow is defined as cash provided by (used in) operating activities less net capital expenditures.
(4) number of employees includes all employees up to the point of sale.
84
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
ten yeaR Financial suMMaRy
$
$
$
$
$
$
$
$
$
$
$
$
$
2,612,597
1,009,906
1,230,730
6
4,853,239
373,708
7.7%
236,187
4.9%
55,253
1.22
40.0%
9.07
15.8%
1.32
1.31
0.28
23.90
18.05
23.90
$
$
$
$
$
$
$
$
$
$
$
$
$
2,049,675
1,007,341
1,271,264
–
4,328,280
257,955
6.0%
161,672
3.7%
$
$
$
$
1,562,584
869,893
1,403,807
15
3,836,299
271,933
7.1%
114,946
3.0%
98,169
$
(193,984)
1.15
46.0%
7.92
11.8%
0.91
0.90
0.22
20.70
16.13
18.57
$
$
$
$
$
$
$
$
1.15
50.5%
7.50
11.0%
0.73
0.72
0.20
17.70
14.43
17.50
$
$
$
$
$
$
$
$
$
$
$
$
$
1,456,357
561,964
1,574,950
24
3,593,295
255,168
7.1%
131,951
3.7%
$
$
$
$
1,269,275
444,644
1,493,512
55
3,207,486
277,783
8.7%
132,253
4.1%
$
$
$
$
1,398,623
448,005
1,391,566
8,849
3,247,043
241,601
7.4%
103,917
3.2%
59,054
$
160,210
$
111,663
1.09
42.5%
6.16
14.3%
0.86
0.84
0.18
16.60
11.50
15.00
$
$
$
$
$
$
$
$
1.05
36.5%
6.00
15.7%
0.86
0.84
0.15
14.43
9.83
12.78
$
$
$
$
$
$
$
$
1.25
46.6%
5.12
14.1%
0.69
0.67
0.10
10.18
6.05
10.00
common shares outstanding (thousands)
171,431
170,747
170,445
176,132
179,090
178,404
176,780
155,510
155,160
151,632
Revenue from continuing operations per employee(1)(2)
income from continuing operations per employee(1)(2)
$
$
389,338
14,321
$
$
421,045
14,728
$
$
476,010
20,147
$
$
440,642
21,798
$
$
392,605
18,726
$
$
377,554
12,810
$
$
338,918
9,360
$
$
314,953
11,566
$
$
327,462
13,502
$
$
331,230
10,601
4,106
3,865
4,841
44
12,856
3,316
3,377
6,074
38
12,805
2,936
3,203
6,097
44
12,280
2,717
2,456
6,191
45
11,409
2,548
1,817
5,391
39
9,795
2,629
1,516
5,619
39
9,803
total consoliDateD
$ 4,641,302
$
4,479,920
$
5,598,356
$
5,662,244
For years ended December 31
($ tHousanDs excePt PeR sHaRe Data)
oPeRating Results
Revenue from continuing operations(1)(2)
canadian operations
south american operations
uK & ireland
other
earnings from continuing operations
before interest and tax (eBit)(1)(2)
as a percent of revenue
income from continuing operations(1)(2)
as a percent of revenue
Free cash flow(3)
Ratios
asset turnover ratio
net debt to total capitalization
Book value per common share
Return on average shareholders’ equity(1)(2)
sHaRe anD PeR sHaRe Data
earnings per common share from
continuing operations(1)(2)
Basic
Diluted
Dividends per common share
common share Price
High
low
year end
nuMBeR oF eMPloyees(4)
canada
south america
uK and ireland
international
total
$ 2,323,567
$
$
264,931
$
493,891
23,218
$
(110,704)
$
$
$
$
$
$
$
$
$
$
1,668,438
649,297
–
274,963
5.9%
170,716
3.7%
1.27
33.0%
8.09
12.0%
1.00
0.99
0.47
27.40
16.54
27.09
4,408
5,907
1,533
73
11,921
$
$
$
$
$
$
$
$
$
$
2,386,642
1,489,600
603,678
–
246,896
5.5%
156,707
3.5%
1.07
39.3%
8.88
10.0%
0.92
0.92
0.44
19.06
10.15
16.68
4,144
4,954
2,783
70
11,951
$
$
$
$
$
$
$
$
$
$
$
$
3,216,946
1,501,633
879,777
–
383,354
6.8%
236,948
4.2%
1.26
48.9%
9.19
13.4%
1.38
1.37
0.43
31.15
12.09
14.25
5,061
4,988
3,506
65
13,620
$
$
$
$
$
$
$
$
$
$
$
2,936,229
1,325,582
1,400,427
6
455,847
8.0%
280,107
4.9%
1.36
40.8%
9.19
16.8%
1.57
1.55
0.36
33.50
23.10
28.66
4,618
4,638
3,543
51
12,850
certain comparative figures have been reclassified to conform to the 2010 presentation. in addition, financial data has been restated to
incorporate common share subdivision occurring during the ten year period.
(1) in august 2010, the company was appointed the caterpillar dealer for northern ireland and the Republic of ireland. the results of operations and financial
position of these dealers have been included in the figures above since the date of acquisition.
(2) on May 5, 2010, the company sold Hewden stuart limited (Hewden), its uK equipment rental business. Results from that operation have been reclassified to
discontinued operations for the years ended December 31, 2010, 2009, and 2008. on July 31, 2007, the company’s u.K. subsidiary, Hewden sold its tool Hire
Division. Results from that operation have been reclassified to discontinued operations for the years ended December 31, 2007, 2006, and 2005. on september
29, 2006, the company’s u.K. subsidiary, Finning (uK) sold its Materials Handling Division. Results from that operation have been reclassified to discontinued
operations for the years ended December 31, 2006, 2005, and 2004. therefore, revenue, eBit, net income, earnings per common share, and return on average
shareholders’ equity reflect results from continuing operations for those years.
(3) Free cash flow is defined as cash provided by (used in) operating activities less net capital expenditures.
(4) number of employees includes all employees up to the point of sale.
2010 Annual Report Finning International Inc. 85
BoaRD oF DiRectoRs
ricarDo Bacarreza
santiago, chile
Director since 1999
Member of audit committee, environment, Health and
safety committee and Human Resources committee
James e.c. carter
edmonton, alberta, canada
Director since 2007
chair of Pension committee and a member of corporate
governance committee and Human Resources committee
hon. DaviD l. emerson p.c.
vancouver, British columbia, canada
Director since 2008
chair of corporate governance committee and a member
of audit committee and Pension committee
Kathleen m. o’neill
toronto, ontario, canada
chair of audit committee and the designated ‘financial expert’
for audit committee and a member of corporate governance
committee, Human Resources committee and Pension committee
christopher w. patterson
greensboro, north carolina, united states
Director since 2010
Member of audit committee and environment,
Health and safety committee
John m. reiD
vancouver, British columbia, canada
Director since 2006
lead Director, chair of Human Resources committee
and a member of audit committee and corporate
governance committee
anDrew h. simon, oBe
Bougy-villars, switzerland
Director since 1999
Member of audit committee, environment, Health and
safety committee and Pension committee
Bruce l. turner
santiago, chile
Director since 2006
chair of environment, Health and safety committee
and a member of corporate governance committee
and Human Resources committee
michael t. waites
vancouver, British columbia, canada
Director since 2008
Member of environment, Health and safety committee
Douglas w.g. whiteheaD
vancouver, British columbia, canada
Director since 1999
chairman of the Board of Directors
Please refer to the Finning’s management proxy circular for detailed biographies of Finning directors.
86
coRPoRate oFFiceRs (1)
michael t. waites
PResiDent anD cHieF executive oFFiceR
Finning inteRnational inc.
DaviD e. parKer
PResiDent
Finning (canaDa)
neil DicKinson
Managing DiRectoR
Finning u.K.
anDrew s. Fraser
executive vice PResiDent, PoWeR
systeMs anD gloBal Business
DeveloPMent
Finning inteRnational inc.
anna p. marKs
senioR vice PResiDent,
coRPoRate contRolleR
Finning inteRnational inc.
tom m. merinsKY
vice PResiDent, tReasuReR
Finning inteRnational inc.
(1) as at February 16, 2011
reBecca l. schalm
senioR vice PResiDent,
HuMan ResouRces
Finning inteRnational inc.
J. gail sexsmith
coRPoRate secRetaRy
Finning inteRnational inc.
DaviD s. smith
executive vice PResiDent
anD cHieF Financial oFFiceR
Finning inteRnational inc.
Juan carlos villegas
PResiDent
Finning soutH aMeRica
2010 Annual Report Finning International Inc. 87
coRPoRate goveRnance
Finning’s Board of Directors and management are committed to the highest corporate governance standards and understand that such standards
are central to the efficient and effective operation of Finning in a manner that ultimately enhances shareholder value.
BoarD manDate anD composition
the Board of Directors has overall responsibility for Finning’s business conduct. the Board fulfills this responsibility both directly and by
delegating certain authority to Board committees and to Finning’s senior management.
the Board of Directors is currently made up of ten members. all directors, other than Michael t. Waites (who is the President and chief
executive officer of Finning) and Douglas W.g. Whitehead (who was formerly President and chief executive officer) are independent.
in addition, in order to ensure that the Board can function independently from management, Finning 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. Reid, and the Board
further ensures its independence by convening independent director-only sessions at every Board Meeting.
Finally, each year the Board, facilitated by the corporate governance committee, formally reviews its own performance, the performances
of each committee of the Board, the committee chairs, the chairman of the Board, and 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 Human Resources committee, the corporate
governance committee, the environment, Health and safety committee and the Pension 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 Finning’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 Finning.
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 Finning. it is also empowered to retain outside counsel or other experts as required.
the human resources committee
the Human Resources committee provides oversight of the design of Finning’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 Finning’s executive
compensation program that the committee considers to be necessary from time to time.
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 Finning’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 ongoing development of current Board members.
the environment, health and safety committee
the environment, Health and safety committee provides assistance and counsel to the Board and management of Finning 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 Finning’s employees and contractors enjoy a safe and healthy workplace.
the pension committee
the Pension committee provides assistance to the Board in overseeing Finning’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 Finning’s performance with respect to meeting its fiduciary obligations as they relate to Finning’s pension plans.
Finning’s management proxy circular issued in connection with the 2011 Annual meeting of Shareholders and the corporate governance section of Finning’s
website provide a full discussion of Finning’s corporate governance policies and practices.
88
SHAREHOLDER INFORMATION
STOCk ExCHANGE
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 11, 2011
2:00 pm Pacific Time
Terminal City Club
837 West Hastings 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,
Vice President, 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
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; expected revenue levels and EbIT growth; 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;
and the expected quantitative impact on the consolidated statement of financial position of
the Company’s transition to IFRS at January 1, 2010. 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 16, 2011. 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; our ability to control cost pressures as growth in revenues occur; our ability to attract
sufficient skilled labour resources to meet growing product support demand; 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; new or amended
IFRS or interpretations that become effective prior to the inclusion of the Company’s
financial statement of position in its first annual audited IFRS financial statements. 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.
www.finning.com