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2011 ANNUAL REPORT
FINNING INTERNATIONAL INC.
Finning International Inc. is the
world’s largest Caterpillar equipment
dealer delivering unrivalled service to
customers since 1933.
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 over 13,500 people worldwide.
Value Proposition
Letter to Shareholders
Chairman’s Letter
Financial Highlights
Finning Operations
Corporate Responsibility
MD&A and Financials
Board of Directors
Executive Officers
1
2
4
6
8
10
12
100
101
Monetary amounts in this report are in Canadian dollars and from continuing operations unless otherwise noted.
Value ProPosition to inVestors
• Largest Caterpillar dealer operating in some of the most resource-rich territories in the world
• Unmatched product support capability and customer relationships
• Focused on operational excellence, fiscal discipline and high-performance culture
• Well-positioned to capture growth opportunities
• Strong cash generation business model
MeetinG our CoMMitMents
MEDIUM-TERM COMMITMENTS (2011-2013)
2011 PROGRESS
REVENUE GROWTH
• 10% per annum over 3 years
REDUCE SG&A PERCENTAGE
• Approximately 20% of revenue
IMPROVE OPERATING LEVERAGE
• 10% EBIT margin
FREE CASH FLOW
• Solid across business cycle
NET DEBT TO TOTAL CAPITAL RATIO
• 35-45%
RETURN ON EQUITy
• Over 18%
strateGiC Plan
MARGIN ExPANSION
• Improved operating leverage (2012 focus on Canada)
• 2013 EBIT margin target 9% – 10%
• Sustainable improvement in profitability and return
on invested capital
BUCYRUS INTEGRATION
• Transaction to close in Q2 2012
• Estimated revenue in the first full year ~$700 million
• Expected to be accretive to EPS within the first full year
• Estimated EBIT margin ~8% within 2 to 3 years
INVESTING IN CAPABILITIES AND CAPACITY
• New ERP system
• Disciplined capital spending on product
support infrastructure
• Ongoing technical training
• 29% revenue growth over 2010
• Record revenue of $5.9 billion
• 21.7%, down from 23.1% in 2010
• 6.4%, up from 6.2% in 2010
• Negative impact of ERP implementation issues
• On track to achieve 9-10% EBIT margin in 2013
• $221 million use of cash
• Higher working capital required to support revenue growth
• 42.0%
• 20.3%
CAPTURING GROWTH
Growth within existing markets
• Mining: oil sands, copper, coal
• Heavy construction: infrastructure projects
• Power Systems: demand for energy
Growth with Caterpillar
• New products: Bucyrus, 795F electric
drive truck, vocational truck
• New businesses: truck bodies, engineering
services capability
• Global power systems
2011 ANNUAL REPORT FinninG international inC. 1
We ended 2011 with tremendous momentum and have
strong organic growth opportunities across all of our
operations. We have genuine competitive advantages,
including the unbeatable combination of a broad range
of outstanding Caterpillar products and Finning’s
customer value proposition. Most importantly, we
have talented and empowered people who are
committed to growing our business.
Mike Waites, President and Chief Executive Officer
Over the past five years, we have made
great strides in evolving our company
to optimize shareholder value. Our
U.K. operations have been completely
repositioned to focus on core markets
through strategic divestments and
acquisitions, which included our expansion
to Ireland. In South America, we have made
focused investments that complement our
core strengths and enable us to provide
turn-key customer solutions to capitalize
on outstanding growth opportunities.
In Canada, we have prudently increased
our capacity to meet growing demand
while putting a great emphasis on lasting
productivity improvements across our
operations.
In 2011, we continued on this trajectory
of transforming our business to drive
greater value for our customers, enhance
our competitive advantages and position
us to deliver on our company’s spectacular
potential.
ADVANCING OUR MOMENTUM
2011 was a year of progress and many
record setting achievements across our
organization. Our revenues grew by
29 percent to $5.9 billion, reflecting
record levels achieved across our regions.
New equipment sales were up 50 percent
and product support revenues grew by
13 percent, setting a new company best
at $2.4 billion. Our annual EBIT (earnings
before interest and income tax) also
improved to a record setting $380 million.
These outstanding numbers reflect the
efforts of a solid team effort. South America
was a standout performer, ending the year
with close to half a billion dollar revenue
increase and highest ever EBIT. The region
is capitalizing on tremendous growth while
remaining diligently focused on expanding
operating leverage.
The UK and Ireland team had a turnaround
year by squarely focusing their energy and
resources on the greatest opportunities.
Against a backdrop of a difficult economic
environment, the team continues to
relentlessly pursue market share and build
the business in core markets.
Following a phenomenal first half of the
year, Canada was tested with the start-up
challenges of our new enterprise resource
planning system (ERP) that launched in the
third quarter of the year. The team has
worked hard to mitigate customer impact
while executing on detailed plans to improve
system functionality. While these challenges
have had a substantial impact on our
Canadian operations, we are on the right
road to recovery and to take advantage of
improved capabilities over the longer term.
Among all of the initiatives we pursued
in 2011, partnering with Caterpillar to
gain the Bucyrus distribution business
will most significantly expand our
business. Throughout the year, key team
members across our operations worked
collaboratively to reach an agreement to
acquire a portion of the former Bucryrus
distribution business from Caterpillar and
build on our leading industry position.Their
efforts set the stage for our acquisition
announcement at the beginning of 2012.
2 LETTER TO SHAREHOLDERS
With the acquisition to close during the
second quarter of 2012, planning is already
well underway to transition the business
and welcome 900 talented new employees
to Finning.
By providing us with an industry-leading
platform and sizeable Bucyrus machine
population, particularly in Chile and
our territories in Western Canada, this
investment adds new equipment and
product support revenue opportunities and
robust, long-term growth potential for our
company and employees.
With demand from Asia continuing to
sustain commodity prices, the outlook
for mining remains robust. As a leading
supplier to mining customers in some
of the most resource-rich areas of the
world, Finning is poised to capitalize on
this spectacular growth opportunity. Our
technical expertise and industry knowledge,
combined with our unmatched distribution
and support infrastructure, position us well
to serve this rapidly growing industry.
The addition of the former Bucyrus
equipment to the existing Caterpillar
portfolio adds to our leadership position
by providing us with the broadest range of
surface and underground mining equipment
in the industry. The strength and breadth
of this mining portfolio is a competitive
advantage that sets us apart in the
marketplace and will deliver greater value
for our customers.
DRIVING GROWTH
As we look forward, the combination of
our trusted expertise, world-class service,
distribution infrastructure and presence in
resource-rich territories provides us with
powerful vehicles for growth. Across our
operations, demand for our products and
services is high. In each of our regions, we
are seeing growth in mining, construction
and power systems. The increasing machine
population is expected to provide us with
solid product support opportunities for
years to come.
Beyond capitalizing on existing demand,
we are also seizing opportunities to grow in
ways that complement our business and
core strengths. Through our stake in
Energyst, we signed an agreement with
Caterpillar that strengthens our growth
opportunities in the international power
projects business. This agreement fits
directly with Finning’s strategic focus on
growing our power systems business.
Early in 2012, our U.K. and Ireland
division acquired Damar Group, which is
an engineering company specializing in the
water utility sector in the U.K. The acquired
business provides opportunities for Finning
to increase market share in the U.K. and
Ireland water industries. It also increases
Finning’s mechanical, electrical and civil
engineering capability to deliver a wide
range of projects within its target power
systems markets, which is a key strategic
objective of the Company’s U.K. and
Ireland operations.
As we continue to invest in our product
support capabilities, growing profitably is
a key priority. We made significant advances
in strengthening our operations to support
this goal. Going forward, we continue
to be focused on improving operating
effectiveness to fuel profitable growth.
SUSTAINABLE ADVANTAGE
We believe a high-performance culture
is essential to deliver on our business
imperatives of safety, unrivalled service
and workplace engagement. We are
proud of our world-class safety record
and are committed to drive ongoing safety
performance improvement across our
operations. Through focused investments
in our capabilities, the Finning name has
become synonymous with service and we
continue to cultivate our reputation for
service excellence. Our engagement surveys
demonstrate progressive improvement
to promote an engaging workplace where
people are able to achieve their personal
and professional aspirations. While our
track record in these areas is excellent,
we are continuously raising the bar to
sustain the competitive advantage our
people provide.
I’d like to sincerely thank Finning employees
for their hard work and dedication
throughout 2011. Our employees are not
only making the company stronger and
safer through their actions, they are also
upholding the core values and commitment
that underpin this great company.
I also acknowledge the support of
Caterpillar, our strategic business partner,
as well as extend my appreciation to our
Board of Directors for their ongoing
guidance in 2011.
2012 PRIORITIES
Reflecting on our performance and our
strengths, it is clear that we are well
equipped for success. We ended 2011
with tremendous momentum and have
strong organic growth opportunities
across all of our operations. We have
genuine competitive advantages, including
the unbeatable combination of a broad
range of outstanding Caterpillar products
and Finning’s customer value proposition.
Most importantly, we have talented and
empowered people who are committed
to growing our business.
Our performance in 2011 demonstrated
that we are on the right strategic path.
We will continue to:
• Build a high-performance culture to drive
world-class safety, unrivalled service and
workplace engagement
• Drive profitability and advance towards
our 9-10 percent EBIT margin target in
2013 through operational excellence
• Capitalize on our tremendous growth
opportunities, particularly with the
successful integration of Bucyrus
• Maintain a strong balance sheet and
generate positive free cash flow
Looking ahead to 2012, our focus now is
on executing our plans with excellence to
achieve our company’s vision of providing
unrivalled services that earn customer
loyalty in order to be Caterpillar’s best
global business partner.
Sincerely,
Mike Waites
President and Chief Executive Officer
2011 ANNUAL REPORT FinninG international inC. 3
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.
In 2011, Finning made continued progress
towards advancing its strategic priorities.
At the same time, the Company capitalized
on robust demand for its products and
services to deliver strong financial results,
including record annual revenue and EBIT.
In good part, we believe Finning’s ongoing
success can be attributed to our strong
culture of accountability, integrity and
excellence in 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.
To that end, 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. Through
continuous evaluation and improvement, the
Board of Directors is focused on ensuring
Finning upholds the highest corporate
governance standards and practices.
Reflecting our belief that dividends are an
important component of total shareholder
return, the Board increased the quarterly
dividend by over 8% to $0.13 per share
in 2011. We look forward to continually
enhancing shareholder value by successfully
advancing our Company’s strategic priorities
and achieving our financial targets.
Doug Whitehead, Chairman of the Board
On behalf of the Board of Directors, I would
like to thank the Company’s employees
across all our operations for their hard
work and contribution towards driving value
for our customers and shareholders.
For a more detailed discussion of our
corporate governance policies and practices,
I encourage you to review Finning’s
management proxy circular and visit the
governance section of www.finning.com.
On behalf of the Board of Directors,
Douglas W.G. Whitehead
Chairman of the Board
4 CHAIRMAN’S LETTER
PHOTO: ESCONDIDA COPPER MINE, CHILE
Doug Whitehead, Chairman of the Board
s
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G
i
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h
G
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i
1
1
0
2
2011 ANNUAL REPORT FinninG international inC. 5
SELECTED FINANCIAL INFORMATION
From continuing operations, reported under IFRS
twelve months ended Dec 31 ($ millions, except per share amounts)
2011
2010
% change
revenue
Gross profit
Gross profit margin
Selling, general & administrative expenses (SG&A)
SG&A as a percentage of revenue
Equity earnings
Other expenses
earnings Before interest & income taxes (eBit)
EBIT margin
Income from continuing operations
Loss from discontinued operations, net of tax
net income
Basic earnings (loss) per share (EPS)
from continuing operations
from discontinued operations
total basic earnings per share
earnings Before interest, income taxes, Depreciation
and amortization (eBitDa)
Free Cash Flow
Total assets
Total shareholders’ equity
Net debt to total capital
29
22
(21)
33
43
42
25
5,894.9
1,679.7
28.5%
(1,279.3)
(21.7)%
4,584.6
1,377.8
30.1%
(1,057.5)
(23.1)%
6.7
(27.4)
379.7
6.4%
259.4
–
259.4
1.51
–
1.51
553.8
(220.8)
5.6
(40.6)
285.3
6.2%
181.1
(125.0)
56.1
1.06
(0.73)
0.33
441.8
262.5
Dec 31, 11
4,085.4
1,345.0
Dec 31, 10
3,429.7
1,203.0
42.0%
35.3%
REVENUE
($ billions)
EBIT
($ millions)
NET INCOME
($ millions)
6
5
4
3
2
1
0
7
5
.
.
6
5
9
5
.
5
4
.
.
6
4
2007 2008 2009 2010 2011
500
400
300
200
100
0
6
5
4
3
8
3
0
8
3
5
8
2
7
4
2
2007 2008 2009 2010 2011
300
250
200
150
100
50
0
0
8
2
7
3
2
9
5
2
1
8
1
7
5
1
2007 2008 2009 2010 2011
The results for 2011 and 2010 are reported under IFRS.
The results of operations of Hewden Stuart Limited have been reclassified as discontinued operations for 2010, 2009 and 2008.
BASIC EPS
($)
2.0
1.5
7
5
1
.
8
3
1
.
1
5
1
.
1.0
0.5
0.0
6
0
1
.
2
9
0
.
2007 2008 2009 2010 2011
6 FINANCIAL HIGHLIGHTS
In 2011, we posted record revenues and achieved 42% growth in earnings
per share. Our focus in 2012 is on improving operating profitability,
particularly in Canada; successfully integrating the Bucyrus distribution
business into each of our regions; and maintaining a strong balance sheet.
Dave Smith, Executive Vice President and Chief Financial Officer
REVENUE PROFILE
revenue by operation ($ millions)
Canada
South America
UK and Ireland
2011
2,943.7
2,120.1
831.1
% change from 2010
30
27
28
14%
36%
2011 REVENUE BY
OPERATION
50%
revenue by line of Business ($ millions)
New Equipment
Used Equipment
Equipment Rental
Product Support
Other
2011
2,889.0
253.4
345.5
2,395.6
11.4
% change from 2010
50
0
26
13
13
2011 REVENUE BY
LINE OF BUSINESS
41%
49%
6%
4%
PRODUCT SUPPORT REVENUE
($ millions)
EBITDA
($ millions)
2,250
2,000
1,750
1,500
1,250
1,000
750
500
250
0
6
9
3
2
,
8
1
1
2
,
7
8
8
1
,
4
8
8
1
,
1
0
7
1
,
2007 2008 2009 2010 2011
800
700
600
500
400
300
200
100
0
4
8
7
7
0
6
4
5
5
2
4
4
2
4
4
2007 2008 2009 2010 2011
2011 NEW EQUIPMENT
DELIVERIES BY
INDUSTRy ($)
4%
2%
8%
19%
36%
31%
2011 ANNUAL REPORT FinninG international inC. 7
A
D
A
N
A
C
I
A
C
R
E
M
A
H
T
U
O
S
D
N
A
L
E
R
I
&
K
U
3,500
3,000
2,500
2,000
2,000
1,500
1,000
500
0
2,500
2,000
1,500
1,000
500
0
1,000
800
600
400
200
0
CANADA REVENUE
($ millions)
7
1
2
3
,
6
3
9
2
,
4
4
9
2
,
6
8
3
2
,
8
6
2
2
,
2011 HIGHLIGHTS
• Strong market conditions in most sectors drove revenues up 30% to $2.9 billion. New equipment
sales jumped 58% with higher deliveries to mining customers and healthy activity in construction,
petroleum and forestry. Product support revenues grew by 13% to a new record of $1.2 billion,
despite a setback in Q3 due to ERP implementation issues.
• Canada’s operating costs increased in the second half of 2011, while we mitigated the impact on
customers following issues resulting from the July ERP implementation. As we continue to improve
the system’s functionality, these additional costs are expected to progressively decline, with the
majority being eliminated by mid 2012.
• EBIT rose by 22%; however, EBIT margin declined to 5.8% from 6.1% reflecting a lower gross profit
margin and incremental ERP costs. We expect gradual and significant improvement in Canada’s
EBIT margin performance in 2012.
“We are focused on two very important near-term priorities in Canada: delivering world-class
product support to our customers, and driving EBIT margin. I am confident in the commitment
of our people to make this happen. We are also excited about capturing tremendous growth
opportunities, particularly with the addition of Bucyrus and completion of our new Fort McKay
service facility in 2012.”
2007 2008 2009 2010 2011
Andy Fraser
President, Finning Canada
SOUTH AMERICA REVENUE
($ millions)
0
2
1
2
,
8
6
6
1,
2
0
5
1
,
0
9
4
1,
6
2
3
1,
2011 HIGHLIGHTS
• 2011 was a very successful year for our South American operations, marked by numerous record
setting achievements. Revenues were at record levels, up 32% from 2010, surpassing US$2.1 billion.
FINSA posted highest-ever new equipment sales and product support revenues in 2011, driven by
the continued strength in the Chilean mining sector and robust heavy construction activity.
• FINSA’s workforce grew by 9% in 2011 to approximately 6,500 people to meet strong demand
for product support. The Company is actively managing cost pressures associated with a highly
competitive labour environment, particularly in Chile.
• Finning South America achieved solid operating leverage in 2011, with EBIT up 35% to a new record
of US$195 million. EBIT margin improved to 9.1% from 8.9% in 2010, reflecting leverage to record
revenues and lower SG&A expense as a percentage of revenue resulting from improved efficiencies.
“We’ve had several years of spectacular growth in South America, which was very demanding on
our people and infrastructure. Looking into 2012, we will continue to drive operational excellence,
become more efficient and produce an improved EBIT margin. We are ready for the Bucyrus
opportunity and are focused on making the 795F electric drive truck a success.”
2007 2008 2009 2010 2011
Juan Carlos Villegas
President, Finning South America
UK & IRELAND REVENUE
($ millions)
7
4
9
0
8
8
1
3
8
9
4
6
4
0
6
2011 HIGHLIGHTS
• 2011 was a turnaround year for our UK and Ireland operations, which delivered strong results in
an uncertain economic environment. Revenues increased by 28% to £524 million, driven by the
equipment sectors, particularly coal mining and plant hire, and strong activity in power systems,
mostly in industrial, oil & gas and electric power generation. In functional currency, both new
equipment sales and product support revenue were at record levels.
• EBIT jumped to £33 million from £10 million in 2010, and EBIT margin improved substantially to
6.2% from 2.4% a year ago. After adjusting for one-time pension items, 2011 EBIT nearly doubled
from last year, and EBIT margin strengthened significantly, reflecting leverage to record revenues
and lower operating costs as a percentage of revenue.
• Our UK and Ireland team consistently delivered solid results in every quarter of 2011, and we are
very pleased with this sustainable turnaround in financial performance.
“We are changing the shape of our business to focus on value added opportunities, product support
growth and delivering tailored solutions to our customers. We are committed to sustain the
significant improvement in our performance and deliver world-class service to our customers.”
2007 2008 2009 2010 2011
Neil Dickinson
Managing Director, Finning UK & Ireland
8 FINNING OPERATIONS
The results for 2011 and 2010 are reported under IFRS.
ExECUTING OUR STRATEGY
Canada’s key strategic focus areas are:
• Leveraging revenue growth into EBIT by
eliminating ERP implementation-related
costs and driving operating efficiencies and
process improvements, such as working capital
optimization and reduction of the cash to
cash cycle.
• Capturing growth opportunities across all
industries while integrating the Bucyrus
distribution business.
• Strengthening our competitive advantage
by investing in product support capabilities,
developing and training people, and nurturing
a high-performance culture.
Canada is committed to achieving 9 to 10% EBIT
margin target in 2013.
CAPTURING GROWTH
The strong commodity cycle is driving continued growth in mining,
which translates into significant opportunity for equipment and
product support in the oil sands and other mining in BC and Alberta.
Capital spending on new projects and mine expansions in the oil sands
is expected to increase the mining equipment population by about
50% in the next five years. We will further strengthen our position as
the leading provider of mining solutions in western Canada with the
addition of the former Bucyrus distribution business, which has over
240 employees and service facilities in Edmonton and Fort McMurray.
The mining activity is driving strong demand for rebuilds at our OEM
component remanufacturing and COE machine rebuild facilities. Our
new 16-bay service facility in Fort McKay will be completed by the
end of 2012, positioning us to capture more product support business
in the oil sands. We also see significant growth in heavy construction
driven by on-going investment in infrastructure; and our power
systems business remains strong with robust compression and drilling
activity. As we capitalize on the strong organic growth across all our
markets, we will continue to provide our customers with world-class
product support.
CAPTURING GROWTH
Significant mining investment in Chile in the coming years supports
a strong outlook. The mining machine population is projected to
increase by over 50% over the next five years. Our mining projects
portfolio in South America will continue to drive product support
growth as we benefit from our investment in service capabilities,
facilities and people. We have several years of experience with
hydraulic shovels and drills in South America, and are excited to take
over the former Bucyrus distribution business in our territory and
welcome approximately 650 former Bucyrus employees. Government
and private sector spending on infrastructure and energy is driving
solid activity in construction and power systems. With a strong
outlook for all segments and territories, our focus remains on driving
efficiencies and operating leverage.
ExECUTING OUR STRATEGY
Our Growing to Excel strategy is focused on
balancing growth with efficiencies and becoming
best-in-class in everything we do:
• Supply chain management is critical to our
customer value proposition and a key driver
of operational excellence. We have a strong
alliance with Caterpillar to improve our supply
chain processes, velocity and working capital
management.
• We continue to invest in our product
support infrastructure, including technical
and leadership training to strengthen our
competitive edge. With mining growth driving
demand for skilled labour, our focus on best-
in-class safety and employee engagement
will serve us well in recruiting and retaining
talented people.
• Our strategic priorities for 2012 include
integration of the Bucyrus distribution business,
introduction of the 795F electric drive truck
and driving operating leverage to achieve a 10
to 11% EBIT margin in 2013.
ExECUTING OUR STRATEGY
We are focused on the following imperatives
of our Trusted by Expert strategy in the UK
and Ireland:
• Pursuing higher margin opportunities in
equipment solutions and value added power
systems segments.
• Accelerating growth in product support.
• Driving operational excellence with a focus
on high-performance culture, supply chain
improvements and technology solutions.
• Sustaining our breakthrough financial
performance to achieve a 7+% EBIT margin
in 2013.
• Demonstrating to our customers the wide
range of work we do, the diverse segments we
serve, and the world-class service we deliver
to earn their loyalty.
CAPTURING GROWTH
We have many opportunities to grow our business in the UK and
Ireland, despite the fragile economy and uncertain outlook for
some sectors. The most promising and active markets include the
equipment sectors such as coal mining, quarrying, industrial, re-
handling and plant hire. We are excited about the addition of the
former Bucyrus distribution business, as it will further strengthen
our product and service offering to our mining and quarry customers.
In addition, renewable energy opportunities plus marine, oil and gas
and electric power generation are expected to remain robust and
continue to provide us with exposure to the global power systems
markets. The recent acquisition of Damar is a good strategic fit as
we can provide a broader range of value added engineering services
to power systems customers. We see significant opportunities to
grow our product support business, including machine rebuilds, and
providing innovative solutions to our customers by continuing to
work closely with them and ensure we tailor our support to deliver
maximum value.
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2011 ANNUAL REPORT FinninG international inC. 9
CorPorate
resPonsiBilitY
We believe that our culture,
and the way that we work
together, enables us in
delivering on our strategic
objectives. The goal is
to raise the bar on our
performance so that we
can deliver outstanding
shareholder value.
Rebecca Schalm
Senior Vice President, Human Resources
The principle of corporate social
responsibility is firmly embedded at Finning.
Ensuring the highest environmental, health
and safety standards, actively contributing to
our communities and supporting employees
with an engaging workplace is exemplified
in many ways across our operations. This
commitment is supported by our Code of
Conduct, aligned with our values and it is a
responsibility that we take seriously.
WORLD-CLASS SAFETy
Driving a culture where everyone goes
home safely at the end of every day is an
imperative at Finning. Our safety-focus and
ability to deliver on that focus is driven by
a rigorous company-wide commitment that
starts at the very top. Executive support
for our world-class safety standards is
unequivocal and is further reinforced at
the Board of Directors level through the
environment, health and safety committee.
This commitment to safety cascades
throughout our organization with each and
every person at Finning having accountability
for ensuring we have a safe place to work.
While each of our operations carried out
activities to strengthen our safety culture,
our lost time incidents (LTIs) rate was
above last year. A key indicator of safety
performance, LTIs went from a record
0.15 to 0.20 (lost time injuries per
200,000 hours worked).
10 CORPORATE RESPONSIBILITY
Through continued vigilance in applying
our safety standards, we aim to achieve
our goal of zero injuries. We will continue
to practice safety leadership, enable
effective hazard management and promote
safety in all that we do.
COMMITMENT TO OUR ENVIRONMENT
AND COMMUNITIES
Continually reviewing and improving
our efforts to lessen our impact on the
environment is an important aspect of
conducting our business responsibly. By
performing regular environmental audits to
identify, assess and reduce environmental
impacts, we continue to ensure we meet
or exceed the environmental standards in
all of the areas where we operate.
Finning also plays an important role in
energy conservation. We design, engineer
and deploy renewable or alternative energy
solutions that reduce greenhouse gas
emissions. We work with customers on
emissions reduction initiatives that further
support Caterpillar’s industry-leading
technologies. And, we remanufacture
machine components that keep
nonrenewable resources in circulation
for multiple lifetimes.
Our commitment to community giving
was underscored in 2011 by the single
largest post-secondary education donation
in our company’s history. Finning Canada
and Caterpillar partnered to contribute
cash and course materials, tooling and
equipment, valued at more than
$3.5 million, to Keyano College. The
funds will go towards the college’s new
FINNTech Heavy Equipment Technician
Diploma Program. The FINNTech
program is a 20-month diploma program
that will see approximately 50 students a
year engaged in a rotation of two months
of in-class learning followed by two months
of job-site training. The first cohort of
22 students is to begin classes in early
2012. Importantly, the contribution builds
on our deep roots in the Fort McMurray
community and our longstanding partnership
with Keyano College.
INGRAINING A HIGH-PERFORMANCE
CULTURE
We began our high-performance journey
in 2008 as part of an intentional
transformation to redefine how Finning
operates as a company. We believe that our
culture, and the way that we work together,
enables us in delivering on our strategic
objectives. The goal is to raise the bar on
our performance so that we can deliver
outstanding shareholder value.
While high-performance culture is not a
term unique to Finning, our framework is
tailored to deliver on our specific objectives.
High-performance culture at Finning is
underpinned by three key pillars. First is safety.
As a core value at Finning, we believe safety is
our foremost priority. The second is service.
The company was founded on a commitment
to provide unrivaled service to our customers.
Service is a part of our DNA and an incredible
source of pride to our employees. The third
is an engaged workforce. We live our values
every day. We act like owners and we operate
like a team.
We believe that we are well on our way
towards becoming a high-performance
organization, but there is still work to do.
Building a high-performance culture is a
journey that has no end. Our commitment
to this journey is driven by our belief that
our high-performance culture builds teams
that can make decisions and gain alignment
more quickly which allows us to respond
and react with greater speed. We believe
that it helps us leverage skills, knowledge
and experience across our enterprise and
drive real advantage from the best practices
across our global operations. And, it creates
a unique proposition for our current and
future employees. It helps to make us a really
great place to work. Finally, we believe that
it will better prepare us to create the future,
whatever the future brings.
PHOTO: LA NEGRA, ANTOFAGASTA, CHILE
CorPorate
resPonsiBilitY
2011 ANNUAL REPORT FinninG international inC. 11
FinanCial
rePort
Management’s Discussion & Analysis
Management’s Report To The Shareholders
Independent Auditors’ Report
Consolidated Financial Statements
Ten Year Financial Summary
13
44
45
46
98
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 International
Financial Reporting Standards (IFRS) and are presented in Canadian dollars unless otherwise stated. Prior to January 1, 2011, Finning prepared
its consolidated financial statements in accordance with Canadian generally accepted accounting principles. For more information about the
Company’s conversion to IFRS, please see the ‘Explanation of Transition to IFRS’ section of this Management’s Discussion and Analysis (MD&A),
and Notes 1 and 31 of the annual consolidated financial statements. 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 MD&A include those of acquired businesses from the date of their purchase and exclude
results from operations that have been disposed of 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 January 2012, the Company announced that it had reached an agreement to acquire from Caterpillar the distribution and support business
formerly operated by Bucyrus International Inc. (Bucyrus) in Finning’s dealership territories in South America, Canada, and the U.K. The
transaction is valued at approximately U.S. $465 million. The acquisition is strategically important for Finning as it is expected to expand the
Company’s leadership position in the growing mining sector. Finning will be able to sell and support a comprehensive product line that meets
its customers’ surface and underground mining needs. The Company expects to fund the transaction through the issuance of U.S. and Canadian
dollar denominated term debt. Subject to customary closing conditions, it is anticipated that the transaction will close in two phases: first in
the Company’s operations in South America and UK and Ireland and subsequently in the Canadian operations. Both closings are expected to
occur in the second quarter of 2012.
On February 3, 2012, the Company acquired 100% of the shares of Damar Group Ltd, an engineering company specializing in the water utility
sector in the U.K. The acquired business provides opportunities for Finning to increase market share in the U.K. and Ireland water industries.
It also increases Finning’s mechanical, electrical and civil engineering capability to deliver a wide range of projects within its target power systems
markets which is a key strategic objective of the Company’s U.K. and Ireland operations. Cash consideration of £5.7 million was paid at the time
of acquisition, which may be subject to customary closing adjustments. Further contingent consideration (with a possible range of £nil-£9.5
million) may be paid on an annual basis after acquisition, contingent upon the acquired business’s performance over the next three years.
FOURTH QUARTER OVERVIEW
($ MILLIONS)
(% OF REVENUE)
Q4 2011
Q4 2010
Q4 2011
Q4 2010
Revenue
Gross profit
Selling, general & administrative expenses
Equity earnings of joint venture and associate
Other expenses
Earnings before interest and income taxes (EBIT)(1)
Finance costs
Provision for income taxes
Net income
Basic earnings (loss) per share (EPS)
Earnings before interest, taxes, depreciation,
and amortization (EBITDA)(1)
Free Cash Flow(1)(2)
$
$
$
$
$
1,810.6
474.5
(367.0)
3.0
(3.2)
107.3
(14.4)
(22.3)
70.6
0.41
155.7
281.0
$
$
$
$
$
1,346.5
394.0
(298.8)
3.1
(14.5)
83.8
(12.4)
(15.9)
55.5
0.32
125.9
122.3
26.2%
(20.3)%
0.2%
(0.2)%
5.9%
(0.8)%
(1.2)%
3.9%
29.3%
(22.2)%
0.2%
(1.1)%
6.2%
(0.9)%
(1.2)%
4.1%
8.6%
9.4%
(1) These amounts do not have a standardized meaning under IFRS, which are also referred to herein as generally accepted accounting principles (GAAP). For
a reconciliation of these amounts to net income and cash flow from operating activities, see the heading “Description of Non-GAAP Measures” below.
(2) Free Cash Flow is defined as cash flow provided by (used in) operating activities less net property, plant, and equipment expenditures.
Fourth quarter consolidated revenues of over $1.8 billion were up 34.5% from the comparable quarter in 2010, with higher revenues contributed
by all operations, but most significantly from the Company’s Canadian operations. The increase in revenues reflected the strong demand for new
equipment in all of the Company’s regions.
Revenues from the Company’s Canadian operations increased 52.0% in the fourth quarter of 2011 compared with the same period last year,
largely due to significantly higher new equipment sales. New equipment sales in Canada more than doubled compared with the fourth quarter
of 2010, and were robust across all sectors, but particularly strong in mining. Product support revenues in the fourth quarter of 2011 were
7.2% higher than the comparative quarter in 2010, primarily due to increased demand for parts.
2011 ANNUAL REPORT FINNING INTERNATIONAL INC. 13
MANAGEMENT’S DISCUSSION & ANALYSIS
Fourth quarter revenues from the Company’s operations in South America were at record levels, and increased 17.2% compared to the fourth
Fourth quarter revenues from the Company’s operations in South America were at record levels, and increased 17.2% compared to the fourth
quarter of 2010. Excluding the impact of translating the results of the South American operations with a slightly weaker Canadian dollar, record
quarter of 2010. Excluding the impact of translating the results of the South American operations with a slightly weaker Canadian dollar, record
total revenues for the fourth quarter of 2011 in functional currency (the U.S. dollar) increased by 15.9% over the fourth quarter of 2010. This
total revenues for the fourth quarter of 2011 in functional currency (the U.S. dollar) increased by 15.9% over the fourth quarter of 2010. This
was driven mainly by record new equipment sales which were up 19.0% from the prior year for the same period due to increased demand in all
was driven mainly by record new equipment sales which were up 19.0% from the prior year for the same period due to increased demand in all
market segments. Product support revenues were again at record levels and 13.0% higher in functional currency than the fourth quarter of 2010,
market segments. Product support revenues were again at record levels and 13.0% higher in functional currency than the fourth quarter of 2010,
up particularly in mining.
up particularly in mining.
Revenues from the U.K. and Ireland operations were up 20.3% over the fourth quarter of 2010, and up 19.7% in functional currency (the U.K.
Revenues from the U.K. and Ireland operations were up 20.3% over the fourth quarter of 2010, and up 19.7% in functional currency (the U.K.
pound sterling), reaching a record for quarterly revenues in functional currency. This increase was largely due to record new equipment sales
pound sterling), reaching a record for quarterly revenues in functional currency. This increase was largely due to record new equipment sales
(25.2% higher in functional currency), with increases in both the construction division and power systems, and strong product support revenues
(25.2% higher in functional currency), with increases in both the construction division and power systems, and strong product support revenues
(up 10.5% in functional currency).
(up 10.5% in functional currency).
On a consolidated basis, new equipment sales were up 57.8% compared with the fourth quarter of 2010, an increase in all operating units
On a consolidated basis, new equipment sales were up 57.8% compared with the fourth quarter of 2010, an increase in all operating units
(particularly the Company’s Canadian operations) and supported by continued strength in mining and heavy construction sectors.
(particularly the Company’s Canadian operations) and supported by continued strength in mining and heavy construction sectors.
Product support revenues in the fourth quarter of 2011 were up 10.2% compared with the same quarter last year, with increases reported
Product support revenues in the fourth quarter of 2011 were up 10.2% compared with the same quarter last year, with increases reported
in all regions.
in all regions.
Used equipment revenues were 42.2% higher compared to the prior year’s fourth quarter, primarily due to higher sales in the Company’s
Used equipment revenues were 42.2% higher compared to the prior year’s fourth quarter, primarily due to higher sales in the Company’s
Canadian operations.
Canadian operations.
Rental revenues were 26.0% higher than the fourth quarter of 2010 primarily due to strong customer demand in Canada.
Rental revenues were 26.0% higher than the fourth quarter of 2010 primarily due to strong customer demand in Canada.
Finning’s global order book or backlog (the retail value of new equipment units ordered by customers for future deliveries) was $1.5 billion
Finning’s global order book or backlog (the retail value of new equipment units ordered by customers for future deliveries) was $1.5 billion
at the end of the fourth quarter of 2011, up from $1.3 billion in December 2010. The consolidated backlog had increased in each consecutive
at the end of the fourth quarter of 2011, up from $1.3 billion in December 2010. The consolidated backlog had increased in each consecutive
quarter since September 2009 until September 2011; however record deliveries in the fourth quarter of 2011 reduced consolidated backlog
quarter since September 2009 until September 2011; however record deliveries in the fourth quarter of 2011 reduced consolidated backlog
by 18% compared to September 2011. New order intake remained very robust in the fourth quarter of 2011, up 26% compared to the third
by 18% compared to September 2011. New order intake remained very robust in the fourth quarter of 2011, up 26% compared to the third
quarter of 2011, with no unusual order cancellations in any of the Company’s operations in the quarter.
quarter of 2011, with no unusual order cancellations in any of the Company’s operations in the quarter.
All regions are affected by the pressure on the supply chain resulting from strengthened market conditions. The impact of ongoing longer lead
All regions are affected by the pressure on the supply chain resulting from strengthened market conditions. The impact of ongoing longer lead
times for products from Caterpillar Inc. (Caterpillar), Finning’s key supplier, is being partially mitigated by the Company’s successful efforts in
times for products from Caterpillar Inc. (Caterpillar), Finning’s key supplier, is being partially mitigated by the Company’s successful efforts in
finding alternative solutions to meet customers’ equipment needs. Such solutions include renting equipment, selling used equipment, repairing
finding alternative solutions to meet customers’ equipment needs. Such solutions include renting equipment, selling used equipment, repairing
or rebuilding equipment, and utilizing the entire Caterpillar dealer global network to source equipment. Finning continues to work closely with
or rebuilding equipment, and utilizing the entire Caterpillar dealer global network to source equipment. Finning continues to work closely with
Caterpillar and customers to ensure that equipment demands can be met.
Caterpillar and customers to ensure that equipment demands can be met.
REVENUE BY OPERATION
($ millions) 3 months ended December 31
REVENUE BY LINE OF BUSINESS
($ millions) 3 months ended December 31
1,000
1
9
9
1,000
0
9
9
750
500
250
0
14
2
5
6
3
9
5
6
0
5
7
2
2
9
8
1
2010
2011
CANADA
SOUTH
AMERICA
UK & IRELAND
750
500
250
0
7
2
6
3
4
3 6
8
5
5
5
8
7
8
7
8
9
NEW
EQUIPMENT
USED
EQUIPMENT
EQUIPMENT
RENTAL
PRODUCT
SUPPORT
2010
2011
4 2
OTHER
EBIT BY OPERATION*
($ millions) 3 months ended December 31
*excluding other operations –
corporate head office
60
45
8
4
6
5
3
4
0
4
30
15
0
5
1
6
2010
2011
CANADA
SOUTH
AMERICA
UK & IRELAND
MANAGEMENT’S DISCUSSION & ANALYSIS
Earnings Before Interest and Taxes (EBIT)
On a consolidated basis, EBIT was $107.3 million in the fourth quarter of 2011, compared to EBIT of $83.8 million generated in the fourth quarter
of 2010. The increase was primarily driven by significantly higher new equipment sales and strong product support revenues in all operations.
Gross profit of $474.5 million in the fourth quarter of 2011 was up 20.4% compared to the fourth quarter of 2010. Quarterly gross profit margin
(gross profit as a percentage of revenue) of 26.2% was lower than the prior year’s fourth quarter margin of 29.3%. This decline reflected the
shift in revenue mix to a higher proportion of new equipment sales which are at lower margins than product support revenues. New equipment
sales made up 54.7% of total revenues in the fourth quarter of 2011, compared with 46.6% of total revenues in the same period last year.
Comparatively, product support revenues comprised 35.5% of total revenues in the fourth quarter of 2011, compared with 43.3% in the same
period last year.
Selling, general, and administrative (SG&A) costs were $367.0 million or 22.8% higher than the fourth quarter of 2010. This increase was primarily
due to volume-related costs to support higher revenues and the growing higher margin product support business, in addition to higher system
support costs related to the new Enterprise Resource Planning (ERP) system launched in Canada in July 2011, such as freight, consulting, and
people expenses. The Company however continued to realize cost savings from productivity initiatives. Reflecting both these cost reductions and
efficiency improvements as well as operating leverage to higher sales volumes, and in conjunction with the shift in revenue mix, SG&A costs in the
fourth quarter of 2011 decreased as a percentage of revenue to 20.3% from 22.2% in the fourth quarter of 2010.
EBIT in the fourth quarter of 2011 included $2.2 million of costs associated with the planned acquisition from Caterpillar of the distribution and
support business formerly operated by Bucyrus in Finning’s dealership territories, announced in January 2012. EBIT in the fourth quarter of 2011
also included $1.0 million of support costs (Q4 2010: $7.2 million) related to the new information technology (IT) system to be implemented in
the Company’s South American and UK and Ireland operations. Included in the results for 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. In addition, the Company incurred restructuring and severance costs of $0.5 million in the fourth quarter of 2010.
The Company’s EBIT margin (EBIT divided by revenues) was 5.9% in the fourth quarter of 2011 compared with 6.2% in the fourth quarter of
2010. The decline in EBIT margin was primarily driven by lower gross profit margins, reflecting the shift in revenue mix to a higher proportion of
new equipment sales, and higher costs incurred due to the IT system implementation issues noted above in the Company’s Canadian operations.
The decrease in EBIT margin was partly offset by higher profitability in the Company’s South American and UK and Ireland operations, which
demonstrated improved operating leverage as earnings growth outpaced revenue growth in the fourth quarter of 2011.
Major components of the EBIT variance were:
($ MILLIONS)
2010 Q4 EBIT
Net change in operations
Foreign exchange impact
Lower IT system development and implementation costs in 2011
Higher acquisition and other related costs in 2011
Impairment of investment and long-lived asset in 2010
Restructuring costs in 2010
2011 Q4 EBIT
$
$
83.8
4.4
7.8
6.2
(2.2)
6.8
0.5
107.3
The Company’s Canadian operations contributed $43.4 million of EBIT in the fourth quarter of 2011 compared with $47.6 million in the
comparable period last year. The fourth quarter 2011 results included higher costs incurred due to the system implementation issues noted
above which more than offset the earnings from 52.0% higher revenues. EBIT margin was 4.4% compared with 7.3% last year, reflecting the
shift in revenue mix to a higher proportion of new equipment sales as well as higher IT system recovery costs.
Fourth quarter 2011 EBIT from the Company’s South American operations of $56.3 million was a record, and 41.5% higher than the fourth
quarter of 2010 (40.0% higher in functional currency). EBIT margin of 9.5% was up compared to the 7.9% experienced in the fourth quarter
of 2010, despite the shift in revenue mix to relatively lower margin new equipment sales and higher volume-related costs. The improvement
in EBIT margin reflected operating efficiencies and productivity improvements.
The UK and Ireland operations contributed EBIT of $14.8 million in the fourth quarter of 2011, a record in functional currency and more
than double the EBIT generated in the comparable period last year. EBIT margin was 6.5%, up from the EBIT margin of 3.4% in the fourth
quarter of 2010. The increase in EBIT and EBIT margin reflected, in functional currency, record revenues and gross profit, driven by the benefit
from operating efficiencies and productivity improvements, and a pension curtailment gain recorded in the fourth quarter of 2011 due to the
amendment of the UK defined benefit pension plan to cease future accruals from April 2012.
2011 ANNUAL REPORT FINNING INTERNATIONAL INC. 15
MANAGEMENT’S DISCUSSION & ANALYSIS
Earnings 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 $155.7 million in the fourth quarter of
2011 compared to $125.9 million in the fourth quarter of 2010.
The Company’s Free Cash Flow was $281.0 million compared to $122.3 million in the comparative period of the prior year. The generation of
cash in the fourth quarter was primarily driven by strong sales and collections from customers late in the year. As a result of the continuing
challenges from the ERP system implementation and its impact on inventory levels and collections in Finning (Canada), Free Cash Flow generated
in the fourth quarter of 2011 was slightly lower than previously expected.
Finance Costs
Finance costs for the three months ended December 31, 2011 were $14.4 million compared with $12.4 million in the fourth quarter of 2010,
primarily due to higher local currency borrowings in the Company’s South American operations.
Provision for Income Taxes
The effective income tax rate for the fourth quarter of 2011 was 24.0% compared to 22.3% in the comparable period of the prior year.
Net Income
Finning’s net income was $70.6 million in the fourth quarter of 2011 compared with $55.5 million in the same period in 2010.
Basic EPS in the fourth quarter of 2011 increased 28.1% to $0.41 per share compared to the same period last year. The results for the fourth
quarter 2011 reflected higher revenues in all operations. Fourth quarter 2011 results included approximately $0.12 per share of incremental
costs associated with the ERP implementation in Canada, as well as $0.01 per share of costs related to support costs for the global IT system
to be implemented in the Company’s South American and UK and Ireland operations, and $0.01 per share of costs associated with the
planned acquisition from Caterpillar of the distribution and support business formerly operated by Bucyrus in Finning’s dealership territories.
Comparatively, the fourth quarter of 2010 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.
Foreign exchange had a positive impact of approximately $0.03 per share in the fourth quarter of 2011 compared to the comparable period last
year primarily due to the weaker Canadian dollar relative to the U.S. dollar.
ANNUAL OVERVIEW
($ MILLIONS)
(% OF REVENUE)
YTD 2011
YTD 2010
YTD 2011
YTD 2010
Revenue
Gross profit
Selling, general & administrative expenses
Equity earnings of joint venture and associate
Other expenses
Earnings from continuing operations before
interest and income taxes (EBIT)
Finance costs
Provision for income taxes
Income from continuing operations
Loss from discontinued operations, net of tax(1)
Net income
Basic earnings (loss) per share (EPS)
from continuing operations
from discontinued operations
Total basic earnings per share
Earnings from continuing operations before interest,
taxes, depreciation, and amortization (EBITDA)
Free cash flow [(use) source]
$
$
$
$
$
$
$
5,894.9
1,679.7
(1,279.3)
6.7
(27.4)
379.7
(53.2)
(67.1)
259.4
–
259.4
1.51
–
1.51
553.8
(220.8)
$
$
$
$
$
$
$
4,584.6
1,377.8
(1,057.5)
5.6
(40.6)
285.3
(57.6)
(46.6)
181.1
(125.0)
56.1
1.06
(0.73)
0.33
441.8
262.5
28.5%
(21.7)%
0.1%
(0.5)%
6.4%
(0.9)%
(1.1)%
4.4%
–
4.4%
30.1%
(23.1)%
0.1%
(0.9)%
6.2%
(1.3)%
(1.0)%
3.9%
(2.7)%
1.2%
9.4%
9.6%
(1) On May 5, 2010, the Company sold Hewden Stuart Limited (Hewden), its UK equipment rental business, for an after-tax loss of $120.8 million. 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, 2011, consolidated revenues of $5.9 billion reached record levels, and increased 28.6% over the comparative
year, up in all operations.
16
MANAGEMENT’S DISCUSSION & ANALYSIS
Foreign exchange had a negative impact on revenues of approximately $118 million (or 2%), primarily due to the 4.0% stronger Canadian dollar
relative to the U.S. dollar for the year ended December 31, 2011 compared to last year.
New equipment sales and product support revenues from the Company’s Canadian operations were up 58.4% and 13.3%, respectively, compared
to the prior year primarily due to an increase in market demand. The increase in product support revenues occurred despite the ERP implementation
issues in Canada, which reduced the Company’s ability to efficiently distribute parts and perform service work in the last half of 2011.
In functional currency, record annual revenues from the Company’s South American operations (up 32.0%) reflected record new equipment sales,
strong in mining and construction, and record product support revenues, up in all sectors.
The Company’s UK and Ireland operations also posted record annual revenues, in functional currency, and were up 28.3% compared to 2010.
The increase was largely due to higher new equipment sales in the construction division and power systems, and record product support
revenues. 2011 results also benefited from a full year of revenues from Northern Ireland and Republic of Ireland dealerships, compared with
partial revenues in the prior year.
On a consolidated basis, new equipment sales were 49.8% higher than in 2010, with higher volumes in all operations reflecting strong market
conditions. Product support revenues were at record levels, and 13.1% higher than the prior year, up in all operations servicing a growing installed
equipment base. Used equipment sales were comparable to 2010. Rental revenues increased by 25.8% compared to 2010, reflecting strong
customer demand in Canada.
Earnings from Continuing Operations Before Interest and Taxes (EBIT)
On a consolidated basis, annual 2011 EBIT of $379.7 million was the highest ever for the Company, 33.1% higher than EBIT of $285.3 million
in 2010. The increase was primarily driven by record product support revenues and very strong new equipment sales.
Gross profit of $1,679.7 million reached record levels, and increased 21.9% over the same period in 2010. Gross profit as a percentage of revenue
was 28.5%, down compared with 30.1% in 2010. The decline was primarily due to a higher percentage of new equipment sales in all operations,
which generate lower margins. New equipment sales made up 49.0% of total revenues in 2011, compared with 42.1% of total revenues last year.
Comparatively, product support comprised 40.6% of total revenues in 2011, compared with 46.2% in 2010.
SG&A costs were $1,279.3 million or 21.0% higher than in 2010. This increase was primarily due to volume-related costs to support higher revenues
and the growing higher margin product support business, in addition to higher system support costs such as freight, consulting, and people expenses
related to the new ERP system in Canada. However, the Company continued to realize cost savings from productivity initiatives and efficiency
improvements, as well as operating leverage to higher sales volumes, which in conjunction with the shift in revenue mix to a higher proportion
of new equipment sales contributed to lower SG&A costs as a percentage of revenue of 21.7%, down from 23.1% in the same period last year.
REVENUE FROM CONTINUING
OPERATIONS
($ 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
4
4
9
,
2
8
6
2
,
2
0
2
1
2
,
8
6
6
1,
3,000
2,500
2,000
1,500
1,000
500
0
1
3
8
9
4
6
2010
2011
9
8
8
,
2
9
2
9
1
,
3,000
2,500
2,000
1,500
1,000
500
0
3
5
2
3
5
2
6
4
3
5
7
2
6
9
3
8 2
1
1
2
,
,
CANADA
SOUTH
AMERICA
UK & IRELAND
NEW
EQUIPMENT
USED
EQUIPMENT
EQUIPMENT
RENTAL
PRODUCT
SUPPORT
200
150
100
50
0
0
1
1
1
OTHER
2010
2011
3
9
1
0
7
1
9
3
1
9
4
1
2
5
6
1
UK & IRELAND
2010
2011
CANADA
SOUTH
AMERICA
2011 ANNUAL REPORT FINNING INTERNATIONAL INC. 17
MANAGEMENT’S DISCUSSION & ANALYSIS
Other expenses in 2011 included costs of $22.4 million (2010: $27.8 million) related to the global IT system which was implemented in the
Company’s Canadian operations on July 4, 2011. These costs included additional system support expenses incurred in the third quarter of 2011
as well as costs associated with application changes to improve the functionality of the system. EBIT in 2011 also included $5.0 million of costs
associated with the acquisition announced in January 2012 from Caterpillar of the distribution and support business formerly operated by
Bucyrus in Finning’s dealership territories later this year. The annual results for 2010 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 $4.0 million of restructuring and
severance costs. In addition, the Company recorded a $6.8 million impairment charge related to an investment and a long-lived asset in the fourth
quarter of 2010. The Company’s EBIT margin was 6.4% in 2011, up from 6.2% in 2010 primarily due to the factors noted above.
Major components of the EBIT variance were:
($ MILLIONS)
2010 Annual EBIT
Net change in operations
Foreign exchange impact
Higher acquisition and other related costs in 2011
Lower IT system development and implementation costs in 2011
Impairment of investment and long-lived asset in 2010
Restructuring costs in 2010
2011 Annual EBIT
$
$
285.3
99.7
(18.5)
(3.0)
5.4
6.8
4.0
379.7
Earnings from Continuing Operations Before Interest, Taxes, Depreciation, and Amortization (EBITDA) and Free Cash Flow
EBITDA, which management views as an indicator of a company’s operating performance and generation of operating cash flow, was
$553.8 million in 2011 compared to $441.8 million in 2010.
The Company’s Free Cash Flow in 2011 was a $220.8 million use of cash compared to a $262.5 million generation of cash in the prior year. With
stronger customer demand in 2011 for equipment and parts, the Company experienced increased requirements for working capital, in particular
higher inventory and accounts receivable levels. Free Cash Flow in 2011 was also negatively impacted by the ERP system implementation, affecting
parts inventory and service work in progress levels. Free Cash Flow from Hewden has been included in the reported amounts for periods prior
to its sale – see “Description of Non-GAAP Measures”.
Finance Costs
Finance costs in 2011 were $53.2 million compared with $57.6 million in 2010.
Following the May 2010 sale of Hewden that reduced the Company’s U.K. pound sterling denominated assets, the Company 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 2010, reflecting the premium paid to purchase the Eurobond Notes, costs associated with the recognition of
deferred original financing costs, and related purchase costs.
Provision for Income Taxes
The effective income tax rate for 2011 was 20.6% comparable to 20.5% in the prior year.
18
MANAGEMENT’S DISCUSSION & ANALYSIS
Income from Continuing Operations
Finning’s income from continuing operations was $259.4 million in 2011, up significantly compared to $181.1 million of income from continuing
operations in 2010.
Basic EPS from continuing operations in 2011 was $1.51 per share compared with $1.06 per share last year. The results of 2011 reflected
higher revenues in all operations reflecting strong market demand and the benefits of cost control and process efficiencies. The ERP system
implementation and the five-week BC union strike in the third quarter of 2011 resulted in lower revenues and additional system support costs
were incurred in the Company’s Canadian operations, reducing earnings in the second half of the year by approximately $0.37 per share. Results
of 2011 also included $0.06 per share of costs related to the global IT system implementation, and $0.02 per share of acquisition and other
related costs. 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.
Foreign exchange had a negative impact of approximately $0.09 per share in 2011 compared to the prior year primarily due to the stronger
Canadian dollar relative to the U.S. dollar.
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. Transaction costs of $7.2 million were incurred and paid on the transaction.
The loss on sale was $120.8 million, which included the realization of $21.2 million of foreign exchange losses related to the Company’s
investment in Hewden which was previously recorded in accumulated other comprehensive loss. The loss on disposal differs from that reported
under Canadian GAAP, primarily due to the reclassification of the cumulative translation adjustment and associated net investment hedging gains
and losses from accumulated other comprehensive income to retained earnings, and the recognition of unamortized actuarial losses on Hewden’s
defined benefit pension plan in retained earnings in the IFRS opening consolidated statement of financial position. 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 results of Hewden had previously been reported in the Finning (UK) Group segment.
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. 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 and Ireland operations as well as U.S. dollar based earnings of the Company’s Canadian operations.
Foreign exchange had a positive impact on consolidated revenues in the fourth quarter of 2011 of $17.1 million primarily due to a 1.0% weaker
Canadian dollar relative to the U.S. dollar, compared to the fourth quarter of 2010. As a result, EBIT was positively impacted by $7.8 million and
earnings were positively impacted by approximately $0.03 per share in the fourth quarter of 2011 compared to the prior year’s fourth quarter.
For the full year (2011), foreign exchange had a negative impact on consolidated revenues of $118.3 million primarily due to a 4.0% stronger
Canadian dollar relative to the U.S. dollar. As a result, EBIT was negatively impacted by $18.5 million and earnings were negatively impacted by
approximately $0.09 per share in 2011 compared to last year.
The Canadian dollar has historically correlated fairly well to commodity prices. If commodity prices strengthen, the Canadian dollar is likely
to strengthen. In this scenario, the Company’s resource industry customers may be able to increase production which can result in increased
demand for equipment and services. However, the Company is negatively impacted when U.S. dollar based revenues and earnings are translated
into lower Canadian dollar reported revenues and earnings due to the stronger Canadian dollar, although lags may occur.
The impact of foreign exchange due to the value of the Canadian dollar relative to the U.S. dollar and U.K. pound sterling is expected to continue
to affect Finning’s results. The sensitivity of the Company’s net earnings to fluctuations in the average annual foreign exchange rates is summarized
in the Risk Management section of this MD&A.
2011 ANNUAL REPORT FINNING INTERNATIONAL INC. 19
MANAGEMENT’S DISCUSSION & ANALYSIS
The following tables provide details of revenue and EBIT from continuing operations and the foreign exchange impact for the three and twelve
months ended December 31, 2011.
Three months ended December 31
($ MILLIONS)
Revenues – Q4 2010
Foreign exchange impact
Operating revenue increase
Revenues – Q4 2011
Total revenue increase
– percentage increase
– percentage increase, excluding foreign exchange
For year ended December 31
($ MILLIONS)
Revenues – 2010
Foreign exchange impact
Operating revenue increase
Revenues – 2011
Total revenue increase
– percentage increase
– percentage increase, excluding foreign exchange
Three months ended December 31
($ MILLIONS)
EBIT – Q4 2010
Foreign exchange impact
Operating EBIT increase (decrease)
EBIT – Q4 2011
Total EBIT increase (decrease)
– percentage increase (decrease)
– percentage increase (decrease), excluding foreign exchange
For year ended December 31
($ MILLIONS)
EBIT – 2010
Foreign exchange impact
Operating EBIT increase (decrease)
EBIT – 2011
Total EBIT increase (decrease)
– percentage increase
– percentage increase, excluding foreign exchange
$
$
$
Canada
652.1
8.1
330.7
990.9
338.8
52.0%
50.7%
Canada
$ 2,267.8
(35.8)
711.7
$ 2,943.7
675.9
$
29.8%
31.4%
South
America
$
$
$
$
$
$
39.8
4.4
12.1
56.3
16.5
41.5%
30.4%
South
America
148.8
(11.2)
55.6
193.2
44.4
29.9%
37.4%
South
America
UK &
Ireland Consolidated
$
$
$
505.6
8.2
78.9
592.7
87.1
17.2%
15.6%
South
America
$ 1,668.4
(81.5)
533.2
$ 2,120.1
451.7
$
27.1%
32.0%
UK &
Ireland
6.4
2.0
6.4
14.8
8.4
131.2%
100.0%
UK &
Ireland
15.7
0.5
35.6
51.8
36.1
230.3%
226.8%
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$ 1,346.5
17.1
447.0
$ 1,810.6
464.1
$
34.5%
33.2%
188.8
0.8
37.4
227.0
38.2
20.3%
19.8%
UK &
Ireland Consolidated
648.4
(1.0)
183.7
831.1
182.7
28.2%
28.3%
$ 4,584.6
(118.3)
1,428.6
$ 5,894.9
$ 1,310.3
28.6%
31.2%
Other Consolidated
$
$
$
(10.0)
–
2.8
(7.2)
2.8
n/m
n/m
83.8
7.8
15.7
107.3
23.5
28.1%
18.7%
Other Consolidated
$
$
$
(18.4)
–
(17.0)
(35.4)
(17.0)
n/m
n/m
285.3
(18.5)
112.9
379.7
94.4
33.1%
39.6%
$
$
$
$
$
$
Canada
47.6
1.4
(5.6)
43.4
(4.2)
(8.8)%
(11.8)%
Canada
139.2
(7.8)
38.7
170.1
30.9
22.1%
27.8%
n/m = not meaningful as percentage change is significantly large or not applicable
20
MANAGEMENT’S DISCUSSION & ANALYSIS
Investment in Foreign Operations
Assets and liabilities of the Company’s foreign operations which have functional currencies other than the Canadian dollar are translated into
Canadian dollars using the exchange rates in effect at the statement of financial position 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 gain of $24.7 million recorded in 2011 resulted primarily from the weaker
spot Canadian dollar against the U.S. dollar and the U.K. pound sterling of 2.3% and 1.8%, respectively, at December 31, 2011 compared to
December 31, 2010. For more details, refer to the Company’s Consolidated Statements of Comprehensive Income (Loss).
RESULTS BY BUSINESS SEGMENT
The Company and its subsidiaries operate primarily in one principal business, that being the selling, servicing, and renting of heavy equipment,
engines, and related products in various markets worldwide as noted below. Finning’s operating units are as follows:
•
•
•
•
Canadian operations: British Columbia, Alberta, Yukon, Northwest Territories, and a portion of Nunavut.
South American operations: Chile, Argentina, Uruguay, and Bolivia.
UK and Ireland operations: England, Scotland, Wales, Northern Ireland, the Republic of Ireland, the Falkland Islands, and the Channel Islands.
Other: corporate head office.
The table below provides details of revenue by operations and lines of business for continuing operations.
For year ended December 31, 2011
($ MILLIONS)
New equipment
Used equipment
Equipment rental
Product support
Other
Total
Revenue percentage by operations
For year ended December 31, 2010
($ MILLIONS)
New equipment
Used equipment
Equipment rental
Product support
Other
Total
Revenue percentage by operations
Canada
$ 1,296.0
147.5
250.1
1,242.2
7.9
$ 2,943.7
49.9%
Canada
$
817.9
156.3
189.5
1,095.9
8.2
$ 2,267.8
49.5%
South
America
UK &
Ireland Consolidated
Revenue
percentage
$ 1,097.0
43.6
69.4
906.6
3.5
$ 2,120.1
36.0%
South
America
$
763.3
41.6
56.3
805.3
1.9
$ 1,668.4
36.4%
$
$
$
$
496.0
62.3
26.0
246.8
–
831.1
14.1%
$ 2,889.0
253.4
345.5
2,395.6
11.4
$ 5,894.9
100.0%
49.0%
4.3%
5.9%
40.6%
0.2%
100.0%
UK Consolidated
Revenue
percentage
347.4
55.6
28.9
216.5
–
648.4
14.1%
$
$
1,928.6
253.5
274.7
2,117.7
10.1
4,584.6
100.0%
42.1%
5.5%
6.0%
46.2%
0.2%
100.0%
2011 ANNUAL REPORT FINNING INTERNATIONAL INC. 21
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, Yukon, Northwest Territories, and a portion of Nunavut. The Company’s end markets include mining (including the oil
sands), construction, conventional oil and gas, forestry, and power systems.
The table below provides details of the results from the Canadian operating segment:
For years ended December 31
($ MILLIONS)
Revenue from external sources
Operating costs
Depreciation and amortization
Equity earnings of joint venture
Other expenses
Information technology system implementation costs
Acquisition 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)
2011
2,943.7
(2,654.1)
(110.7)
178.9
8.0
(16.5)
(0.3)
–
170.1
5.8%
44.8%
280.8
$
$
$
2010
2,267.8
(2,016.9)
(98.8)
152.1
7.0
(14.7)
–
(5.2)
139.2
6.1%
48.8%
238.0
$
$
$
2011 revenues increased 29.8% over 2010 to $2.9 billion, largely due to higher new equipment sales.
New equipment sales, 58.4% higher than in 2010, were robust across all sectors and particularly strong in mining. Record deliveries in the fourth
quarter of 2011 reduced Finning (Canada)’s backlog by 27% at the end of the year as compared to September 2011. Order activity in 2011 was
strong, 16% higher than 2010.
Product support revenues for the year grew to record levels, 13.3% higher than 2010. This increase, especially in the first half of 2011, reflected
increased demand for parts, component repairs, and machine rebuilds, driven by change-out cycles for the large population of mining equipment
in Finning (Canada)’s territory as well as higher utilization of heavy construction fleets.
As previously disclosed, following the launch of its new ERP system in Canada on July 4, the Company experienced implementation issues
affecting parts supply, warehousing, and distribution operations, which negatively impacted the Company’s ability to efficiently distribute parts and
perform service work in the third and fourth quarters of 2011. The Canadian operations have since tested and successfully implemented a series
of application changes and system performance enhancements to improve the functionality and reliability of the system to process and distribute
parts to customers. Improvements to the new ERP system and resulting processes will continue to be deployed with a focus on efficiency,
reducing costs, and improving working capital levels.
CANADA – REVENUE BY LINE OF BUSINESS
($ millions) For years ended December 31
1,500
1,000
500
0
22
6
9
2
1
,
8
1
8
2
4
2
6 1
9
0
1
,
,
0
5
2
0
9
1
6
5
1
8
4
1
NEW
EQUIPMENT
USED
EQUIPMENT
EQUIPMENT
RENTAL
PRODUCT
SUPPORT
2010
2011
8 8
OTHER
MANAGEMENT’S DISCUSSION & ANALYSIS
In Canada, gross profit in absolute dollars was higher than 2010, driven primarily by record product support revenues and the significant increase
in customer demand for new equipment. Gross profit as a percentage of revenue was lower than in 2010, primarily due to the shift in revenue
mix to a higher proportion of new equipment sales, which typically return lower margins than product support revenues. New equipment sales
made up 44.0% of total revenues in 2011, compared with 36.1% in 2010. Comparatively, product support revenues comprised 42.2% in 2011
compared with 48.3% last year. In addition, the Canadian operations experienced lower gross margins in product support compared with the
prior year primarily due to ERP system implementation issues.
SG&A costs in 2011 were higher compared to 2010 primarily due to volume related costs related to higher new equipment sales and to support
growing customer demand, as well as system implementation costs. In 2011 the number of employees in the Company’s Canadian operations
increased by 23% to approximately 5,400 to meet current and anticipated demand. The increase in workforce in 2011 was in customer support
areas as well as temporary labour necessary to provide support and resolve the ERP implementation issues encountered. In addition, the ERP
system implementation on July 4, 2011 increased costs related to freight, consulting, and people expenses, and other support costs. However,
SG&A as a percentage of revenue was lower than the prior year, reflecting actions taken to reduce, where feasible, discretionary expenses and
improve productivity and efficiencies, and operating leverage to higher sales volumes, in addition to the impact of the shift in revenue mix.
The equity earnings of joint venture of $8.0 million in 2011 relate to the Company’s investment in PLM, and were comparable to the equity
income of $7.0 million in 2010.
Included in other expenses was $16.5 million (2010: $14.7 million) of costs in 2011, representing Finning (Canada)’s share of the costs related to
the implementation of the new IT system for the Company’s global dealership operations incurred in the first half of 2011, and additional system
support costs in the third quarter of 2011 related to this ERP implementation, which was launched in Canada on July 4, 2011. Other expenses
in 2011 also included $0.3 million of costs associated with the acquisition announced in January from Caterpillar of the distribution and support
business formerly operated by Bucyrus in Finning (Canada)’s territory. In 2010, restructuring and other costs of $5.2 million were also incurred;
included in this balance were restructuring costs of $3.4 million, incurred in response to market conditions.
In 2011 the Canadian operations generated EBIT of $170.1 million, compared with EBIT of $139.2 million in 2010, primarily due to higher new
equipment sales and record product support revenues. EBIT margin was 5.8%, slightly lower than the EBIT margin of 6.1% achieved in 2010,
reflecting the shift in revenue mix to a higher proportion of new equipment sales and higher costs incurred due to the IT system implementation
issues noted above.
OTHER DEVELOPMENTS
•
On October 18, 2011, the Company announced the appointment of Andy Fraser as president of the Company’s Canadian operations.
Mr. Fraser has held a variety of senior roles across the Company’s global operations, including his most recent role as executive vice president,
power systems and global business development for Finning International. Mr. Fraser replaces Dave Parker, who stepped down from his role
with the Company.
On July 29, 2011, following a five-week work stoppage, Finning (Canada) and the International Association of Machinists and Aerospace
Workers (IAM) – Local Lodge 692, representing approximately 700 employees in B.C. and Yukon, reached agreement on a four-year collective
agreement which expires on April 14, 2015. The new agreement provides for a wage increase of 4% in year one, 3% in years two and three,
and 4% in year four.
In early January 2011, the Company received a decision from the Alberta Labour Relations Board (ALRB) 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 ALRB 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 was ordered to be held by
the OEM employees (some former Finning (Canada) Component Rebuild Centre (CRC) employees were also eligible to vote) to determine
whether the CLAC or IAM – Local Lodge 99 will represent them going forward. These OEM and CRC employees voted in early June 2011 for
the CLAC to continue to represent them under the existing collective agreement.
As noted above, OEM’s collective bargaining agreement with CLAC expired at the end of December 2011. Negotiations with the union
are underway. OEM is committed to the collective bargaining process and to concluding a fair contract for its employees and for OEM.
On February 9, 2012, Finning (Canada) and the IAM – Local Lodge 99 representing approximately 1,700 hourly employees in Alberta and
the Northwest Territories have reached a memorandum of agreement on a one-year extension to the current collective agreement. The
agreement is subject to a ratification vote by the Union membership, which is expected to be concluded within one month. The Union
Committee is recommending that its members accept the agreement. The current collective agreement is set to expire on April 30, 2012.
•
•
•
2011 ANNUAL REPORT FINNING INTERNATIONAL INC. 23
MANAGEMENT’S DISCUSSION & ANALYSIS
South American Operations
Finning’s South American operation sells, services, and rents mainly Caterpillar mobile equipment and engines in Chile, Argentina, Uruguay, and
Bolivia. The Company’s end markets primarily consist of mining, construction, and power systems.
The table below provides details of the results from the South American operations:
For years ended December 31
($ MILLIONS)
Revenue from external sources
Operating costs
Depreciation and amortization
Other expenses
Information technology system implementation costs
Acquisition 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)
2011
2,120.1
(1,880.7)
(41.2)
198.2
(4.5)
(0.5)
193.2
9.1%
50.9%
234.4
$
$
$
2010
1,668.4
(1,472.7)
(37.6)
158.1
(9.3)
–
148.8
8.9%
52.2%
186.4
$
$
$
Finning South America’s 2011 revenues were at record levels, surpassing $2.1 billion. Revenues in 2011 increased 27.1% over 2010, and were up
32.0% in functional currency (the US dollar), reflecting both record new equipment sales and product support revenues.
In functional currency, new equipment sales were up 49.1% compared with last year, with increased demand in all market sectors. New equipment
backlog, in functional currency, was slightly lower than the September and June 2011 levels but continues to be near its highest level since
September 2008. Order activity in 2011 was strong, 29% higher than 2010.
Product support revenues were 17.0% higher, in functional currency, compared to 2010, up in all sectors but particularly in mining and construction.
In functional currency, gross profit in 2011 in absolute terms was at record levels, driven primarily by the record new equipment and product
support revenues. Gross profit as a percentage of revenue was lower compared with the prior year, primarily due to a shift in revenue mix to
a higher proportion of new equipment sales, which typically return lower margins than product support revenues. New equipment sales made
up 51.7% of total revenues in 2011, compared with 45.8% last year. Comparatively, product support revenues comprised 42.8% of total revenues
in 2011, compared with 48.2% in 2010. The South American operations experienced slightly lower or comparable gross margins in all lines of
business compared with 2010.
SOUTH AMERICA – REVENUE BY LINE OF BUSINESS
($ millions) For years ended December 31
1,200
900
600
300
0
24
7
9
0
1
,
3
6
7
7
0
9
5
0
8
2
4
3
4
0
6 7
5
NEW
EQUIPMENT
USED
EQUIPMENT
EQUIPMENT
RENTAL
PRODUCT
SUPPORT
2010
2011
2 3
OTHER
MANAGEMENT’S DISCUSSION & ANALYSIS
SG&A costs, in functional currency, increased in absolute dollars primarily due to volume-related costs and partly due to an increase in workforce
costs to support higher revenues and the growing product support business. In 2011, the number of employees in the Company’s South American
operations increased by 9% to approximately 6,500 to meet current and anticipated customer demand for product support. There is significant
demand and competition for highly skilled workers, particularly in Chile, which the Company is actively managing. SG&A as a percentage of
revenue was lower than 2010, primarily reflecting management’s initiatives to reduce operating cost levels and improve operating efficiencies, as
well as operating leverage to higher sales volumes.
Included in other expenses was $4.5 million (2010: $9.3 million) of costs representing the South American operations’ share of the costs related
to the implementation of a new IT system for the Company’s global dealership operations. Other expenses in 2011 also included $0.5 million
of costs associated with the acquisition announced in January from Caterpillar of the distribution and support business formerly operated by
Bucyrus in the dealership territories of the Company’s South American operations.
EBIT from the Company’s South American operations of $193.2 million in 2011 was at record levels, and 29.9% higher than the prior year. In
functional currency, record EBIT in 2011 increased 34.8% over last year, largely due to record new equipment sales and product support revenues,
partly offset by higher SG&A costs related to growth. EBIT as a percentage of revenue for Finning South America was 9.1%, slightly higher than
the EBIT margin of 8.9% achieved in 2010, reflecting operating efficiencies and productivity improvements which more than offset the impact of
a higher proportion of new equipment sales in revenue.
United Kingdom (UK) and Ireland Operations
The Company’s UK and Ireland operations sell, service, and rent mainly Caterpillar mobile equipment and engines in England, Scotland, Wales,
Northern Ireland, the Republic of Ireland, the Falkland Islands, and the Channel Islands. The Company’s markets include mining, quarrying,
construction, power systems, and rental services. In August 2010, Finning was appointed the Caterpillar dealer for Northern Ireland and the
Republic of Ireland. The results of these operations have been included in the consolidated financial statements since their acquisition date.
The table below provides details of the results of the continuing operations from the UK and Ireland:
For years ended December 31
($ 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)
UK AND IRELAND – REVENUE BY LINE OF BUSINESS
FROM CONTINUING OPERATIONS
($ millions) For years ended December 31
600
450
6
9
4
300
8
4
3
150
0
7
4
7 2
1
2
9
2 2
5 6
5
6
2
2010
2011
NEW
EQUIPMENT
USED
EQUIPMENT
EQUIPMENT
RENTAL
PRODUCT
SUPPORT
2011
831.1
(755.5)
(21.9)
53.7
(1.9)
–
–
51.8
6.2%
13.6%
73.7
$
$
$
2010
648.4
(607.5)
(20.0)
20.9
(2.6)
(2.0)
(0.6)
15.7
2.4%
5.5%
35.7
$
$
$
2011 ANNUAL REPORT FINNING INTERNATIONAL INC. 25
MANAGEMENT’S DISCUSSION & ANALYSIS
The UK and Ireland revenues in 2011 of $831.1 million were up 28.2% from the same period last year, (up 28.3% in functional currency, the
U.K. pound sterling). The increase was largely due to higher new equipment sales in the construction division (particularly in the coal and plant
hire sectors) and power systems, and record product support revenues. 2011 results also benefited from a full year of revenues from Northern
Ireland and Republic of Ireland dealerships, compared with partial revenues in the prior year. New equipment backlog, in functional currency, was
up slightly compared to December 2010 and was at its highest level since March 2008. Order activity in 2011 was strong, 14% higher than 2010.
Revenues, in functional currency, from all lines of business were higher compared to 2010, with the exception of equipment rental. In functional
currency, both new equipment sales and product support revenues were at record levels; new equipment sales were up 42.8%, and revenues from
product support were 14.4% higher in 2011 compared to 2010.
Gross profit, in functional currency, in 2011 was higher compared with the prior year in absolute terms. However, gross profit as a percentage
of revenue was lower than 2010, reflecting a shift in revenue mix to a higher proportion of new equipment sales, which typically return lower
margins than product support revenues. New equipment sales made up 59.7% of total revenues in 2011, compared with 53.6% of total revenues
last year. Comparatively, product support revenues comprised 29.7% of total revenues in 2011, compared with 33.3% in 2010. The UK operations
experienced higher or comparable gross margins in all lines of business compared with 2010.
SG&A costs, in functional currency, were higher in absolute dollars in 2011 compared to 2010, primarily due to increased volume-related costs to
support higher revenues. This increase was partly offset by a pension curtailment gain of $6.4 million due to the amendment of the UK defined
benefit pension plan to cease future accruals from April 2012. Comparatively, in 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, and as a result recorded past
service costs of $7.8 million. SG&A as a percentage of revenue was lower than 2010, reflecting the benefit of management’s initiatives to reduce
operating cost levels and improve operating efficiencies as well as operating leverage to higher sales volumes.
Other expenses in 2011 included costs of $1.9 million representing the UK dealership’s share of costs related to the implementation of a new
IT system for the Company’s global dealership operations (2010: $2.6 million). In the third quarter of 2010, Finning was appointed the Caterpillar
dealer for Northern Ireland and the Republic of Ireland. Acquisition and other related costs of $2.0 million were incurred on the transaction, and
were included in other expenses. In response to market conditions, Finning (UK) also incurred some restructuring and severance costs in 2010.
In 2011, the UK and Ireland operations generated EBIT of $51.8 million, a significant improvement compared with EBIT of $15.7 million in 2010.
The higher EBIT in 2011 was primarily the result of significantly higher new equipment sales and lower operating cost levels. The UK’s EBIT
margin (EBIT as a percentage of revenue) in 2011 was 6.2%, significantly improved compared with 2.4% in 2010, primarily due to higher volumes
and reduced SG&A costs as a percentage of revenue.
Corporate and Other Operations
For years ended December 31
($ MILLIONS)
Operating costs – corporate
Long-term incentive plan (LTIP)
Depreciation and amortization
Equity loss of associate
Other income (expenses)
Acquisition and other related costs
Information technology system implementation recovery (costs)
Impairment of equity investment
Earnings before interest and taxes
In 2011 corporate operating costs of $21.5 million were up 14% compared with 2010.
2011
(21.5)
(8.6)
(0.3)
(30.4)
(1.3)
(4.2)
0.5
–
(35.4)
$
$
$
$
2010
(18.8)
8.1
(0.1)
(10.8)
(1.4)
–
(1.2)
(5.0)
(18.4)
The Company entered into a compensation hedge at the end of 2007 in order to offset the mark-to-market impact relating to certain share-
based compensation plans. In 2011, the compensation hedge expense recorded at the corporate level as a result of a lower market price for the
Company’s shares was partially offset by the fair value change of the LTIP. In 2010, the Company’s share price increased and the LTIP expense was
more than offset by the positive fair value change of the LTIP hedge.
26
MANAGEMENT’S DISCUSSION & ANALYSIS
The equity loss of associate in 2011 and 2010 relates to the Company’s investment in Energyst B.V. 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.
Other expenses in 2011 included $4.2 million of costs associated with the planned acquisition from Caterpillar of the distribution and support
business formerly operated by Bucyrus in Finning’s dealership territories.
Discontinued Operations – Hewden
Following an extensive strategic review, in May 2010, the Company sold Hewden, its UK equipment rental business.
The results of operations of Hewden for the periods up to May 5, 2010 have been reclassified as discontinued operations in the consolidated
statements of income and cash flow. Approximately 1,300 employees were transferred to the buyer with the sale of Hewden.
Loss from discontinued operations to the date of disposition is summarized as follows:
($ THOUSANDS)
Revenue
Loss before provision for income taxes
Loss on sale of discontinued operation, pre tax
Provision for income taxes:
Tax recovery on operating loss
Tax recovery on loss on sale of discontinued operations
Loss from discontinued operations
January 1 - May 5,
2010
$
$
65,259
(6,891)
(130,836)
2,702
10,002
(125,023)
LIQUIDITY AND CAPITAL RESOURCES
Management 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 property, plant, and equipment 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, 2011, cash provided after working capital changes was $75.5 million compared with $399.9 million during
the same period in 2010.
The decrease in the generation of cash in 2011 reflected an increase in customer demand for equipment, parts, and service, primarily for mining
and construction, with a corresponding increase in working capital requirements, driven by higher accounts receivable levels related to higher
sales and increased inventories. Working capital in 2011 was also negatively impacted by the ERP system implementation, affecting parts inventory
and service work in progress levels. Throughout all operations, management continues to focus on improving cash cycle times and operating
efficiencies while ensuring appropriate levels of working capital are in place to support activity levels.
In 2011 the Company invested $150.0 million in rental assets, net of disposals. In 2010 the Company invested $75.0 million in rental assets for
continuing operations, net of disposals. Rental investment had moderated in 2010 as a result of lower demand and a focus on a more selective
rental strategy. Rental demand has increased in 2011 in response to improved market conditions and spending was on plan.
As a result of these items, cash flow used in operating activities was $80.9 million in 2011 compared to cash flow provided by operating activities
of $319.7 million in 2010.
EBITDA was $553.8 million in 2011 compared to $441.8 million in 2010.
2011 ANNUAL REPORT FINNING INTERNATIONAL INC. 27
MANAGEMENT’S DISCUSSION & ANALYSIS
Cash Used For Investing Activities
Net cash used in investing activities in 2011 totalled $139.4 million compared with net cash provided by investing activities from continuing
operations of $48.8 million in 2010. The primary use of cash in 2011 and 2010 related to capital asset additions. The primary source of cash in
2010 related to net proceeds of $117.8 million received on the sale of Hewden, net of transaction costs and cash sold. In 2011, the Company
received $6.3 million as partial payment of the £20 million 5-year note receivable from the purchaser of Hewden.
Gross capital additions from continuing operations in 2011 were $149.2 million compared with the $70.8 million invested in 2010. Capital additions
in 2011 and 2010 generally reflected capital spending related to infrastructure investments to support the growing product support demand. In
addition, capital additions in 2011 included capitalized costs of $10.5 million (2010: $17.5 million) related to the Company’s new global IT system.
In 2011, the Company acquired certain assets and operations which include the rights to sell and service machine control and monitoring
products in the Company’s Canadian and South American dealership territories, and paid cash of approximately $2.5 million. The Company also
spent $0.7 million in costs associated with the plan to acquire from Caterpillar the distribution and support business formerly operated by
Bucyrus in Finning’s dealership territories. In addition, in 2011, the Company increased its investment in Energyst B.V. by $1.4 million.
In 2010, the Company paid $6.7 million for certain assets and acquisition and other related costs on the acquisition of the Ireland dealerships;
in 2011, the Company paid the remaining $1.3 million of acquisition and other related costs. In addition, the Company received proceeds of
$26.0 million in 2010 on the settlement of a cross currency interest rate swap that was part of a hedge against foreign subsidiary investments.
The Company’s net capital expenditures for 2012 are expected to be approximately $160 million, including approximately $60 million for the
Fort McKay, Alberta truck shop facility. The spend rate is expected to temporarily run above management’s annual long-term target to capture
product support growth. Net rental additions for 2012 are projected to be at the higher end of management’s target range of $100 million to
$150 million due to strong market conditions.
The Company believes that internally generated cash flow, supplemented by net borrowings from existing financing sources, if necessary, will be
sufficient to meet anticipated capital expenditures and other cash requirements in 2012. Management believes that the 2012 results will generate
strong operating cash flows as working capital requirements moderate and 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 affects its ability to access its historical
sources of cash.
Financing Activities
As at December 31, 2011, the Company’s short and long-term borrowings totalled $1.1 billion, up 9.3% from December 31, 2010. The increase
reflected borrowings to support the Company’s higher working capital requirements. In the fourth quarter of 2011, the Company repaid its 4.64%
$150 million medium term notes. Repayment of the notes was funded by the issuance of commercial paper under the Company’s commercial
paper program.
Subsequent to year end, in January 2012, the Company issued unsecured senior notes in the U.S. private placement market of U.S. $200 million.
The Company issued the notes in two series of U.S. $100 million each: the 3.98% Senior Notes, Series A, due January 19, 2022 and the 4.08%
Senior Notes, Series B, due January 19, 2024. Proceeds from the notes were used to repay commercial paper borrowings and for general
corporate purposes. In addition, in connection with the Bucyrus announcement, the Company is committed, subject to certain closing conditions,
to pay U.S. $465 million on closing in the first half of 2012, to be funded through the issuance of U.S. and Canadian dollar denominated term debt.
In September 2011, the Company entered into a $1.0 billion committed unsecured syndicated global operating credit facility. This facility replaces
the previous $800 million global credit facility, which was set to mature in December 2011. The new facility can be accessed in multiple borrowing
jurisdictions, in multiple currencies, at various floating rates of interest, and may be drawn by a number of the Company’s principal operating
subsidiaries. The facility is also used as a back stop for the Company’s commercial paper program and, as such, availability under the facility is
reduced by the amount of commercial paper Finning has outstanding at any given time. The new committed facility matures in September 2015
and contains annual options to extend the maturity date on terms reflecting market conditions at the time of the extension.
Following the sale of Hewden, the Company’s UK equipment rental business in May 2010, the Company used a portion of the proceeds to
purchase £45 million of the then outstanding £115 million Eurobond notes.
To complement the internally generated funds from operating and investing activities, the Company has over $1.5 billion in unsecured credit
facilities. Included in this amount, Finning has committed bank facilities totalling approximately $1.1 billion with various Canadian, U.S., and South
American financial institutions. The largest of these facilities, the $1.0 billion global credit facility, matures in September 2015 as noted above.
As at December 31, 2011 approximately $727 million was available under these committed facilities. Based upon the availability of these facilities,
the Company’s business operating plans, and the discretionary nature of some of the cash outflows such as rental and capital expenditures, the
Company believes it has sufficient liquidity to meet operational needs.
28
MANAGEMENT’S DISCUSSION & ANALYSIS
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 2011, the Company’s long-term debt ratings were confirmed at A (low) by DBRS and BBB+ by S&P. The
Company’s short-term debt rating was also confirmed by DBRS at R-1 (low). Subsequent to the January 2012 announcement that the Company
agreed to acquire the former Bucyrus distribution business for all of its dealership territories from Caterpillar, S&P and DBRS reconfirmed the
Company’s current debt ratings. 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 maximum authorized limit of the Company’s commercial paper program is $600 million.
Dividends paid to shareholders in 2011 were $87.5 million, up almost 9% compared to 2010, reflecting the $0.01 per common share increase to
a quarterly dividend of $0.13 per common share announced in May 2011.
The Company’s Debt Ratio (net debt to total capitalization ratio) at December 31, 2011 was 42.0% compared with 35.3% at December 31, 2010.
The increase in the Debt Ratio reflected cash used to fund working capital requirements.
Contractual Obligations
Payments on contractual obligations in each of the next five years and thereafter are as follows:
($ MILLIONS)
2012
2013
2014
2015
2016
Thereafter
Total
Long-term debt
– principal repayment
– interest
Operating leases
Capital leases
Total contractual obligations
$
$
0.5
41.5
64.5
3.1
109.6
$
$
360.5
41.4
51.8
2.5
456.2
$
$
0.6
22.3
42.3
1.5
66.7
$
$
49.7
22.3
25.7
1.3
99.0
$
$
0.3
21.3
21.0
1.3
43.9
$
$
351.5
32.4
104.2
17.2
505.3
$
763.1
181.2
309.5
26.9
$ 1,280.7
The above table does not include obligations to fund pension benefits, although the Company is making regular contributions to its registered
defined benefit pension plans in Canada and the UK in order to fund the pension plans as required. Contribution requirements are based
on periodic (at least triennial) actuarial funding valuations performed by the Company’s (or plan Trustees’) actuaries. In 2011, approximately
$44 million was contributed by the Company towards the defined benefit pension plans. Defined benefit plan contributions currently expected
to be paid during the financial year ended December 31, 2012 amount to approximately $35 million.
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, 2011, 62% and 2% of eligible employees in the Company’s
Canadian and South American operations, respectively, were contributing to these plans. The Company also 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. The Company will provide one common share, purchased in the open market, for every three shares the
employee purchases. At December 31, 2011, 24% of eligible employees in Finning (UK) were contributing to this plan. These plans may be
cancelled by Finning at any time.
2011 ANNUAL REPORT FINNING INTERNATIONAL INC. 29
MANAGEMENT’S DISCUSSION & ANALYSIS
OUTLOOK
Strong demand for new equipment and robust quotation activity continues in all the Company’s regions. In mining, the outlook for commodity
prices remains positive, and is expected to continue to support producers’ investment plans. Low-hour used equipment remains in short supply,
and demand for rental equipment continues to be solid. The Company also continues to experience strong demand for parts and service,
including equipment rebuild work for mining and construction customers.
As a result of strong market conditions, all regions are experiencing long lead times from Caterpillar for new equipment. The Company constantly
assesses its inventory requirements in response to strong demand and is utilizing the entire Caterpillar dealer global network to source new and
used equipment. The Company continues to work closely with customers to find solutions for their equipment needs, include renting, repairing
or rebuilding equipment.
In Canada, the Company is experiencing significant demand for new, used and rental equipment. In mining, including the oil sands, new machine
sales and quoting activity for projects remains strong. The heavy construction, conventional oil, and forestry sectors are very active, driving
increased demand for equipment. The gas sector is showing signs of weakness due to slowing activity in response to low gas prices. Product
support business is strong in all sectors; and large equipment overhaul and component remanufacturing remain solid.
Following the implementation issues of its new ERP system in Canada which went live in July 2011, the Company’s parts activity levels are back
to near normal. The system is reliable and user proficiency has improved. The Company’s focus has been on mitigating the impact on customers
which has temporarily increased SG&A expenses. These additional costs are expected to progressively decline with the majority being eliminated
by mid-year. The Company will continue to improve the system’s functionality and efficiency by implementing selective solution enhancements
and process improvements which will remove manual workarounds and other incremental costs as well as improve working capital levels.
In South America, new order intake in all sectors is robust. Demand for mining equipment is strong and projected to continue for the foreseeable
future. Long-term fundamentals are expected to remain positive. The Company is actively quoting on new equipment and receiving new
orders from mining customers. Construction and power systems sectors are projected to remain active as a result of significant investment in
infrastructure and energy. The growing installed base of equipment in mining, construction and power systems is expected to continue to drive
ongoing product support growth in South America. In Argentina, over the past 12 months the government has introduced certain restrictions on
imported goods and limitations on foreign exchange. To date we have not seen any material impacts on our business in Argentina. We continue
to monitor the situation and are developing plans to minimize any potential impacts.
In the U.K., the outlook remains encouraging despite the uncertainties in the U.K. and European economies. Sales opportunities to coal mining,
quarrying and re-handling customers remain positive. Product support activities, including equipment rebuild work for large accounts, are
expected to remain at healthy levels. The Company continues to execute well on its distribution strategy for smaller new equipment. In power
systems, order intake for engines and projects has strengthened, particularly in the pleasure craft, industrial, oil and gas, and power and energy
sectors. The outlook for Ireland looks positive, mainly in the power systems business.
On January 18, 2012, the Company announced that it had reached an agreement to acquire the former Bucyrus distribution business for all
of its dealership territories from Caterpillar in an asset based transaction valued at U.S. $465 million. The acquisition is strategically important
for Finning as it is expected to expand the Company’s leadership position in the growing mining sector. Finning will be able to sell and support a
comprehensive product line that meets its customers’ surface and underground mining needs. It is anticipated that the transaction will close in
two phases: first in the Company’s operations in South America and UK and Ireland, and subsequently in the Canadian operations. Both closings
are expected to occur in the second quarter of 2012. The acquisition will be financed with debt, and is expected to be accretive to 2012 earnings
per share, excluding transaction costs.
The Company’s priorities are to improve operating profitability, particularly in the Canadian operations, successfully integrate the former Bucyrus
business, and maintain a strong balance sheet.
30
MANAGEMENT’S DISCUSSION & ANALYSIS
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 IFRS. The Company’s significant accounting policies are contained in Note
1 to the consolidated financial statements. Certain policies require management to make judgments, estimates, and assumptions in respect of
the application of accounting policies and 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, revenues and costs associated with the sale of assets with either repurchase commitments or
rental purchase options, and reserves for legal claims.
The Company performs impairment tests on its goodwill balances at the appropriate level (cash generating unit or group of cash generating
units) at least annually or as warranted by events or circumstances. Any potential goodwill impairment is identified by comparing the fair value
(value in use) of the unit to its carrying value. If the fair value of the unit exceeds its carrying value, goodwill is considered not to be impaired.
If the fair value of the unit is less than the carrying amount, then the impairment loss is allocated first to reduce the carrying amount of any
goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. Any
impairment is recognized immediately in the consolidated statement of income. Impairment losses recognized for goodwill are never reversed.
The Company determines the fair value of a unit using a discounted cash flow model corroborated by other valuation techniques such as market
multiples. The process of determining these fair values requires management to make estimates and assumptions including, but not limited to,
projected future sales, earnings and capital investment, discount rates, and terminal growth rates. Projected future sales, earnings, and capital
investment are consistent with strategic plans presented to the Company’s Board of Directors. Discount rates are based on the Company’s
weighted average cost of capital. These estimates are subject to change due to uncertain competitive and economic market conditions or changes
in business strategies.
During the year, the Company performed its assessment of goodwill and determined that goodwill was not impaired at December 31, 2011
and 2010.
Due to the size, complexity, and nature of the Company’s operations, various legal and tax matters are pending. In the opinion of management,
none of these matters are expected to have a material effect on the Company’s consolidated financial position or results of operations.
INCOME TAXES
The Company exercises judgment in estimating the provision for income taxes. Provisions for federal, provincial, and foreign taxes are based
on the respective laws and regulations in each jurisdiction within which the Company operates. 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.
Deferred 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 deferred 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 deferred tax assets and liabilities is reasonably likely to change from period to period due to
the uncertainties surrounding these assumptions.
2011 ANNUAL REPORT FINNING INTERNATIONAL INC. 31
MANAGEMENT’S DISCUSSION & ANALYSIS
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 property, plant, and equipment 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 IFRS (also referred to as generally accepted accounting principles, or 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 (used in) operating activities
Additions to property, plant, and equipment
Proceeds on disposal of property, plant, and equipment
Net capital expenditures of discontinued operations
Free Cash Flow
Three months ended
December 31
Twelve months ended
December 31
2011
2010
2011
2010
$
$
$
$
155.7
(48.4)
107.3
(14.4)
(22.3)
70.6
$
$
Three months ended
December 31
2011
336.3
(57.2)
1.9
–
281.0
$
$
125.9
(42.1)
83.8
(12.4)
(15.9)
55.5
2010
141.6
(19.6)
0.3
–
122.3
$
$
$
$
553.8
(174.1)
379.7
(53.2)
(67.1)
259.4
$
$
Twelve months ended
December 31
2011
(80.9)
(149.2)
9.3
–
(220.8)
$
$
441.8
(156.5)
285.3
(57.6)
(46.6)
181.1
2010
319.7
(70.8)
9.8
3.8
262.5
Free Cash Flow from Hewden has been included in the figures for periods prior to the sale.
RISK MANAGEMENT
Finning and its subsidiaries are exposed to market, financial, and other risks in the normal course of their business activities. The Company’s
Enterprise Risk Management (ERM) process is designed to ensure that such risks are identified, managed, and reported. 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 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.
32
MANAGEMENT’S DISCUSSION & ANALYSIS
FINANCIAL DERIVATIVES
The Company uses, or may use, various financial instruments such as forward and swap foreign exchange contracts, interest rate swaps, and
equity hedges, as well as non-derivative foreign currency debt to manage its foreign exchange exposures, interest rate exposures, and share-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, 2011
were $1,192 million (2010: $1,027 million), of which approximately $727 million (2010: $803 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. Subsequent to year
end, in January 2012, the Company issued unsecured senior notes in the U.S. private placement market of U.S. $200 million. Proceeds from the
notes were used to repay commercial paper borrowings and for general corporate purposes.
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. Subsequent to the January 2012 announcement
that the Company agreed to acquire the former Bucyrus distribution business for all of its dealership territories from Caterpillar, S&P and DBRS
reconfirmed the Company’s current debt ratings. The Company plans to fund the purchase with U.S. and Canadian dollar denominated term debt.
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 utilizes 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 and approved by the Audit Committee.
Foreign Exchange Risk
The Company is geographically diversified, with significant investments in several different countries. The Company transacts business in multiple
currencies, the most significant of which are the U.S. dollar (USD), the Canadian dollar (CAD), the U.K. pound sterling (GBP), and the Chilean
peso (CLP). As a result, the Company has foreign currency exposure with respect to items denominated in foreign currencies. The main types
of foreign exchange risk of the Company can be categorized as follows:
TRANSLATION EXPOSURE
The most significant foreign exchange impact on the Company’s net income is the translation of foreign currency based earnings into Canadian
dollars, which is the Company’s reporting currency. All of the Company’s foreign subsidiaries report their operating results in currencies other
than the Canadian dollar. Therefore, exchange rate movements in the U.S. dollar and U.K. pound sterling relative to the Canadian dollar will
impact the consolidated results of the South American and UK and Ireland 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.
2011 ANNUAL REPORT FINNING INTERNATIONAL INC. 33
MANAGEMENT’S DISCUSSION & ANALYSIS
The Company’s South American and UK and Ireland 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 upon disposal of a 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, 2011 month end rates would
increase / (decrease) net income and 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, 2011
month end rates
Net Income
($ MILLIONS)
Other
Comprehensive
Income
($ MILLIONS)
1.0170
1.5799
0.0020
$
$
(26)
(2)
1
$
$
(44)
(7)
–
The sensitivities noted above ignore the impact of exchange rate movements on other macroeconomic variables, including overall levels
of demand and relative competitive advantages. If it were possible to quantify these impacts, the results would likely be different from the
sensitivities shown above.
Interest Rate Risk
Changes in market interest rates will cause fluctuations in the fair value or future cash flows of financial instruments.
The Company is exposed to changes in interest rates on its interest bearing financial assets including cash and cash equivalents 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 twelve 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.
34
MANAGEMENT’S DISCUSSION & ANALYSIS
Commodity Prices
The Company’s revenues can be indirectly affected by fluctuations in commodity prices; in particular, changes in expectations of longer-term
prices. In Canada, commodity price movements in the 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 and suppliers, instalment and
other notes receivable, advances to associates, 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 primarily with major financial institutions that have a credit rating of at least A from S&P.
SHARE-BASED PAYMENT RISK
Share-based payment 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. Share-based payment plans are accounted for at fair value, and the associated expense
can therefore vary as the Company’s share price, share price volatility, and employee exercise behaviour change. 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, 2011, all other variables remaining constant, would have increased net
income by approximately $1.6 million as a result of revaluing the Company’s VRSF, with a 5% weakening having the opposite effect. This fair value
impact partially mitigates changes in the fair value of the Company’s cash-settled share-based payment liability.
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, 2011, the total
estimated value of these contracts outstanding is $131.0 million coming due at periods ranging from 2012 to 2018. 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 $0.3 million.
For further information on the Company’s contingencies, commitments, guarantees, and indemnifications, refer to Notes 29 and 30 of the Notes
to the Consolidated Financial Statements.
2011 ANNUAL REPORT FINNING INTERNATIONAL INC. 35
MANAGEMENT’S DISCUSSION & ANALYSIS
CONTROLS AND PROCEDURES CERTIFICATION
DISCLOSURE CONTROLS AND PROCEDURES
Management is responsible for establishing and maintaining a system of controls and procedures over the public disclosure of financial and
non-financial information regarding the Company. Such controls and procedures are designed to provide reasonable assurance that all relevant
information is gathered and reported to senior management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO),
on a timely basis so that appropriate decisions can be made regarding public disclosure.
The CEO and the CFO, together with other members of management, have designed the Company’s disclosure controls and procedures in order
to provide reasonable assurance that material information relating to the Company and its consolidated subsidiaries would have been known to
them, and by others, within those entities.
The Company has a Disclosure Policy and a Disclosure Committee in place to mitigate risks associated with the disclosure of inaccurate or
incomplete information, or failure to disclose required information.
•
•
The Disclosure Policy sets out accountabilities, authorized spokespersons, and Finning’s approach to the determination, preparation, and
dissemination of material information. The policy also defines restrictions on insider trading and the handling of confidential information.
A Disclosure Committee, consisting of senior management and external legal counsel, review all financial information prepared for
communication to the public to ensure it meets all regulatory requirements and is responsible for raising all outstanding issues it believes
require the attention of the Audit Committee prior to recommending disclosure for that Committee’s approval.
INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Management 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 IFRS. There has been no change in the design of the Company’s internal control over financial reporting during
the year ended December 31, 2011, that would materially affect, or is reasonably likely to materially affect, the Company’s internal control over
financial reporting. In the third and fourth quarters of 2011, management did employ additional procedures to ensure key financial internal
controls remained in place during and after the conversion to a new ERP system in the Company’s Canadian operations. Management also
performed additional account reconciliations and other analytical and substantive procedures to mitigate any financial risks from the introduction
of the new system.
Regular involvement of the Company’s internal audit function and quarterly reporting to the Audit Committee 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 are aware 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, 2011, 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, 2011.
36
MANAGEMENT’S DISCUSSION & ANALYSIS
SELECTED QUARTERLY INFORMATION
($ MILLIONS, EXCEPT FOR
SHARE AND OPTION DATA)
Q4
2011
Q3
Q2
Q1
Q4
2010
Q3
Q2
Q1
$
Revenue from continuing
operations(1)(2)
Canada
South America
UK & Ireland
Total revenue
Net income (loss)(1)(2)(3)
from continuing operations $
from discontinued operations
Total net income
Basic earnings (loss)
per share(1)(2)(3)
from continuing operations $
from discontinued operations
Total basic EPS
Diluted earnings (loss)
per share(1)(2)(3)
from continuing operations $
from discontinued operations
Total diluted EPS
Total assets(1)(2)
Long-term debt
Current
Non-current
Total long-term debt(4)
Cash dividends paid
per common share
Common shares
outstanding (000’s)
Options outstanding (000’s)
$
$
$ 990.9
592.7
227.0
$ 1,810.6
$ 607.7
528.1
193.3
$ 1,329.1
$ 733.0
532.7
214.9
$ 1,480.6
$ 612.1
466.6
195.9
$ 1,274.6
$ 652.1
505.6
188.8
$ 1,346.5
$ 586.6
462.2
157.4
$ 1,206.2
$ 551.7
352.8
160.5
$ 1,065.0
$ 477.4
347.8
141.7
$ 966.9
70.6
–
70.6
0.41
–
0.41
$
$
$
$
35.4
–
35.4
0.21
–
0.21
$
$
$
$
81.9
–
81.9
0.48
–
0.48
$
$
$
$
71.5
–
71.5
0.42
–
0.42
$
$
$
$
55.5
–
55.5
0.32
–
0.32
$
$
$
$
63.4
–
63.4
0.37
–
0.37
$
$
$
$
35.7
(123.2)
(87.5)
0.21
(0.72)
(0.51)
$
$
$
$
26.5
(1.8)
24.7
0.16
(0.01)
0.15
0.41
–
$
0.41
$ 4,085.4
$
0.5
762.6
$ 763.1
$
0.21
–
$
0.21
$ 4,086.8
$
0.47
–
$
0.47
$ 3,645.0
$
0.41
–
$
0.41
$ 3,511.0
$
0.32
_
$
0.32
$ 3,429.7
$
0.37
–
$
0.37
$ 3,356.0
$
0.21
(0.72)
$
(0.51)
$ 3,231.5
$
0.15
(0.01)
$
0.14
$ 3,273.0
$ 262.3
778.5
$ 1,040.8
$ 263.2
710.9
$ 974.1
$ 209.0
711.7
$ 920.7
$ 203.1
711.1
$ 914.2
$
37.9
861.4
$ 899.3
$
32.4
867.4
$ 899.8
$
23.7
940.5
$ 964.2
0.13
$
0.13
$
0.13
$
0.12
$
0.12
$
0.12
$
0.12
$
0.11
171,574
5,411
171,571
5,411
171,570
5,462
171,528
5,371
171,431
5,603
171,177
6,095
171,009
6,455
170,907
6,058
(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 $120.8 million. 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) The results for the third and fourth quarters of 2011 were negatively impacted by the system implementation issues experienced in the Company’s Canadian
operations. The ERP system implementation and the five-week B.C. union strike in the third quarter of 2011 reduced earnings by approximately $0.25 per share;
the fourth quarter of 2011 included costs associated with the ERP system issues of $0.12 per share.
(4) 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.
In September 2011, the Company entered into a $1.0 billion committed unsecured syndicated operating credit facility. This facility replaces the previous
$800 million global credit facility, which was set to expire in December 2011. The new committed facility matures in September 2015.
In December 2011, the Company repaid its 4.64% $150 million medium term notes on maturity. Repayment of the notes was funded by the issuance of
commercial paper under the Company’s commercial paper program.
2011 ANNUAL REPORT FINNING INTERNATIONAL INC. 37
MANAGEMENT’S DISCUSSION & ANALYSIS
NEW ACCOUNTING PRONOUNCEMENTS
CHANGES IN ACCOUNTING POLICY IN 2011
Explanation of Transition To IFRS
These annual consolidated financial statements represent the Company’s first annual consolidated financial statements prepared in accordance
with IFRS. As such, the Company’s transition activities with respect to IFRS technical analysis, preparation of IFRS compliant comparatives
for 2010, transition training, and systems and controls reviews are complete. It should be noted that the transition to IFRS did not impact the
Company’s underlying business activities or strategy; the changes arising from the adoption of IFRS relate to accounting differences only.
TRANSITION ADJUSTMENTS
The Company’s transitional elections, accounting policy choices, and their impact on the financial statements are described in Note 31 to the
annual consolidated financial statements. Reconciliations of shareholders’ equity at the transition date (January 1, 2010) and at December 31,
2010, and of total comprehensive income for the year ended December 31, 2010 are also provided in Note 31 to the annual consolidated
financial statements. Where an accounting policy choice or transitional election was available, the Company considered, amongst other factors,
expected developments in International Accounting Standards Board (IASB) standard setting, practice amongst existing IFRS reporters, and the
implementation effort required in making the policy choice or election.
KEY PERFORMANCE INDICATORS
The impact of IFRS on the Company’s key performance indicators has been summarized below:
NET DEBT TO TOTAL CAPITALIZATION
As a result of the reduction to equity arising in the Company’s opening statement of financial position (primarily due to the transitional election
taken to write off previously unrecognized actuarial losses to retained earnings), the net debt to total capitalization ratio at December 31, 2010
increased from 33.0% (Canadian GAAP) to 35.3% (IFRS). The Company expects increased variability in this metric under IFRS, as the immediate
recognition of actuarial gains and losses in other comprehensive income will increase volatility in shareholders’ equity. The Company’s underlying
financing strategy is not impacted by this accounting change.
FREE CASH FLOW
The revised presentation of the Company’s joint venture using the equity method had an insignificant impact on comparative free cash flow, which
reduced to $262.5 million (IFRS) from $264.9 million (Canadian GAAP) for the year ended December 31, 2010. Cash and cash equivalents of the
Company’s joint venture are now disclosed in the ‘Investment in and advances to joint venture and associate’ line on the statement of financial
position and are consequently not included in the calculation of free cash flow.
EBIT MARGIN (EBIT AS A PERCENTAGE OF REVENUE)
The increase in comparative period EBIT margin from 5.9% (Canadian GAAP) to 6.2% (IFRS) for the year ended December 31, 2010 was
primarily attributable to lower defined benefit pension expense under IFRS in the Canadian and UK operations due to the fact that actuarial
losses have been recognized in equity on January 1, 2010 and are therefore no longer amortized through SG&A, as well as lower share based
payment expense in all operations.
EARNINGS PER SHARE
Earnings per share from continuing operations increased to $1.06 (IFRS) from $1.00 (Canadian GAAP) for the year ended December 31, 2010.
Improvements to net income under IFRS were primarily driven by reduced share based payment expense arising from the change to a fair value
measurement for cash settled share based payment plans (in all operations) and lower defined benefit pension expense in Canada and the UK. In
addition, the improvement reflected a reduction in tax expense due to differences in the computation of deferred tax balances (primarily in the
Company’s South American operations).
CONTROL ACTIVITIES
The Company has assessed the impact of IFRS on internal control over financial reporting. Changes to the Company’s control processes were
minimal, mainly related to some additional processes to identify the actuarial gains and losses relating to the defined benefit pension plans on a
quarterly basis. While IFRS requires substantial additional disclosures in the financial statements, the Company assessed its existing disclosure
control framework to be adequate to support these new disclosure requirements. Appropriate training has been delivered to all key finance
personnel, as well as senior management and the Company’s Board of Directors.
38
MANAGEMENT’S DISCUSSION & ANALYSIS
SYSTEMS IMPLICATIONS
The Company’s existing systems infrastructure did not require significant adaptation to record the comparative IFRS data or to handle any new
accounting policies. The Company’s new global IT system supports IFRS reporting, and there was frequent liaison between the IT system and IFRS
project teams to ensure alignment of the system design and IFRS reporting requirements.
POST IMPLEMENTATION PLAN
Going forward, the Company will continue to monitor IASB standard setting developments. Current IASB projects relating to financial
instruments, revenue, and leases are especially relevant to the Company. Ongoing technical training will be provided to relevant personnel where
required as these new and revised standards are issued.
FUTURE ACCOUNTING PRONOUNCEMENTS
The Company has not applied the following new and revised IFRS that have been issued but are not yet effective:
•
Amendments to IAS 19, Employee Benefits (effective January 1, 2013) provide new requirements for the accounting for defined benefit pension
plans. Most notably, the amendments mandate the immediate recognition of actuarial gains and losses, and require companies to use the
same discount rate for both the defined benefit obligation and the expected asset return when calculating the interest component of pension
expense. The Company already recognizes all actuarial gains and losses immediately through other comprehensive income, consequently this
element of the amendments will not impact the Company. The Company is currently evaluating the impact of other amendments to IAS 19.
The following new or amended accounting standards are not expected to have a significant effect on the Company’s accounting policies or
financial statements:
•
•
•
•
•
Amendments to IFRS 7, Financial Instruments: Disclosures are effective for annual periods beginning on or after July 1, 2011 and introduce
enhanced disclosure around transfer of financial assets and associated risks.
Amendments to IAS 1, Presentation of Financial Statements (effective for annual periods beginning on or after July 1, 2012) require that elements
of other comprehensive income that may subsequently be reclassified through profit and loss be differentiated from those items that will not
be reclassified.
IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IFRS 12 Disclosure of Interests in Other Entities, and consequential revisions
to IAS 27 Separate Financial Statements and IAS 28 Investments in Associates and Joint Ventures (all effective January 1, 2013) provide revised
guidance on the accounting treatment and associated disclosure requirements for joint arrangements and associates, and a revised definition
of ‘control’ for identifying entities which are to be consolidated.
IFRS 13 Fair Value Measurement (effective January 1, 2013) provides new guidance on fair value measurement and disclosure requirements.
IFRS 9, Financial Instruments (effective January 1, 2015) introduces new requirements for the classification and measurement of financial assets
and financial liabilities.
OUTSTANDING SHARE DATA
As at February 10, 2012
Common shares outstanding
Options outstanding
171,592,480
5,337,670
2011 ANNUAL REPORT FINNING INTERNATIONAL INC. 39
MANAGEMENT’S DISCUSSION & ANALYSIS
SELECTED ANNUAL INFORMATION
($ MILLIONS, EXCEPT FOR SHARE DATA)
Total revenue from continuing operations(1)(2)
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(3)
Current
Non-current
Cash dividends declared per common share
2011
5,894.9
259.4
–
259.4
1.51
–
1.51
1.51
–
1.51
4,085.4
0.5
762.6
763.1
0.51
$
$
$
$
$
$
$
$
$
$
$
(IFRS)
2010
4,584.6
181.1
(125.0)
56.1
1.06
(0.73)
0.33
1.06
(0.73)
0.33
3,429.7
203.1
711.1
914.2
0.47
(CANADIAN GAAP)
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
$
$
$
$
$
$
$
$
$
$
$
(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 $120.8 million. 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.
In September 2011, the Company entered into a $1.0 billion committed unsecured syndicated operating credit facility. This facility replaces the previous
$800 million global credit facility, which was set to expire in December 2011. The new committed facility matures in September 2015.
In December 2011, the Company repaid its 4.64% $150 million medium term notes on maturity. Repayment of the notes was funded by the issuance of
commercial paper under the Company’s commercial paper program.
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 Finning makes is forward-looking when it uses what the Company knows and expects 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; expected revenue and SG&A 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; the expected target range of Debt Ratio; the impact of new
and revised IFRS that have been issued but are not yet effective; the expected timetable for completion of the proposed transaction between the
Company and Caterpillar to acquire the distribution and support business formerly operated by Bucyrus in Finning’s dealership territories (the
Bucyrus transaction); growth prospects for the former Bucyrus business being acquired by the Company and the competitive advantages of the
business being acquired; expected future financial and operating results generated from the Bucyrus transaction; anticipated benefits and synergies
of the Bucyrus transaction; the expected financing structure for the Bucyrus transaction; and the expected impact of the Bucyrus transaction on
Finning’s earnings. 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 Finning’s expectations at February 15, 2012. Except as may
be required by Canadian securities laws, Finning does not undertake any obligation to update or revise any forward-looking statement, whether
as a result of new information, future events, or otherwise.
40
MANAGEMENT’S DISCUSSION & ANALYSIS
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 the expectations expressed in or implied by such forward-looking
statements and that Finning’s business outlook, objectives, plans, strategic priorities and other statements that are not historical facts may not
be achieved. As a result, Finning 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 these forward-looking statements include: general economic and market
conditions; foreign exchange rates; commodity prices; the level of customer confidence and spending, and the demand for, and prices of, Finning’s
products and services; Finning’s dependence on the continued market acceptance of Caterpillar’s products and Caterpillar’s timely supply of parts
and equipment; Finning’s ability to continue to improve productivity and operational efficiencies while continuing to maintain customer service;
Finning’s ability to manage cost pressures as growth in revenues occur; Finning’s ability to attract sufficient skilled labour resources to meet
growing product support demand; Finning’s ability to negotiate and renew collective bargaining agreements with satisfactory terms for Finning’s
employees and the Company; the intensity of competitive activity; Finning’s ability to successfully integrate the distribution and support business
formerly operated by Bucyrus after that transaction closes; Finning’s ability to raise the capital needed to implement its business plan; regulatory
initiatives or proceedings, litigation and changes in laws or regulations; stock market volatility; changes in political and economic environments for
operations; the integrity, reliability, and availability of information technology and the data processed by that technology; operational benefits from
the new ERP system. 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 Finning’s 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 Finning believed were reasonable on the day
the Company made the forward-looking statements. Refer in particular to the 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.
Finning cautions readers that the risks described in the AIF are not the only ones that could impact the Company. Additional risks and
uncertainties not currently known to the Company or that are currently deemed to be immaterial may also have a material adverse effect
on Finning’s business, financial condition, or results of operations.
Except as otherwise indicated, 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. Finning therefore cannot describe the expected impact in a meaningful way or in the same way Finning presents
known risks affecting its business.
ATTACHMENT 1: SUPPLEMENTARY INFORMATION
QUARTERLY SEGMENTED REVENUE INFORMATION
Three months ended December 31, 2011
($ MILLIONS)
New equipment
Used equipment
Equipment rental
Product support
Other
Total
Revenue percentage by operations
Three months ended December 31, 2010
($ MILLIONS)
New equipment
Used equipment
Equipment rental
Product support
Other
Total
Revenue percentage by operations
Canada
535.8
51.3
73.7
328.9
1.2
990.9
54.7%
Canada
255.1
32.9
54.3
306.6
3.2
652.1
48.4%
$
$
$
$
South
America
UK &
Ireland Consolidated
Revenue
percentage
$
$
$
$
309.3
11.1
18.1
253.4
0.8
592.7
32.7%
South
America
257.0
10.1
16.1
222.1
0.3
505.6
37.6%
$
$
$
$
144.9
16.1
5.7
60.3
–
227.0
12.6%
$
990.0
78.5
97.5
642.6
2.0
$ 1,810.6
100.0%
54.7%
4.3%
5.4%
35.5%
0.1%
100.0%
UK Consolidated
Revenue
percentage
115.2
12.2
7.0
54.4
–
188.8
14.0%
$
$
627.3
55.2
77.4
583.1
3.5
1,346.5
100.0%
46.6%
4.1%
5.7%
43.3%
0.3%
100.0%
2011 ANNUAL REPORT FINNING INTERNATIONAL INC. 41
MANAGEMENT’S DISCUSSION & ANALYSIS
QUARTERLY SEGMENTED EBIT INFORMATION
Three months ended December 31, 2011
($ MILLIONS)
Revenue from external sources
Operating costs
Depreciation and amortization
Equity earnings (loss)
Other income (expenses)
IT system support costs
Other
Earnings before interest and taxes (EBIT)
EBIT
– percentage of revenue
– percentage by operations
Three months ended December 31, 2010
($ MILLIONS)
Revenue from external sources
Operating costs
Depreciation and amortization
Equity earnings (loss)
Other income (expenses)
IT system implementation costs
Other
Earnings from continuing operations
before interest and taxes (EBIT)
EBIT
– percentage of revenue
– percentage by operations
$
$
$
$
$
$
Canada
990.9
(920.1)
(30.5)
40.3
3.4
–
(0.3)
43.4
4.4%
40.5%
Canada
652.1
(575.5)
(27.0)
49.6
3.5
(3.5)
(2.0)
$
$
$
South
America
592.7
(523.9)
(11.6)
57.2
–
(0.4)
(0.5)
56.3
9.5%
52.5%
South
America
505.6
(453.1)
(9.9)
42.6
–
(2.8)
–
$
UK &
Ireland
227.0
(205.3)
(6.2)
15.5
–
(0.7)
–
14.8
$
6.5%
13.7%
UK &
Ireland
188.8
(176.7)
(5.2)
6.9
–
(0.2)
(0.3)
Other Consolidated
–
(5.4)
(0.1)
(5.5)
(0.4)
0.1
(1.4)
(7.2)
$ 1,810.6
(1,654.7)
(48.4)
107.5
3.0
(1.0)
(2.2)
107.3
$
–
(6.7)%
5.9%
100.0%
$
Other Consolidated
–
(3.9)
–
(3.9)
(0.4)
(0.7)
(5.0)
$ 1,346.5
(1,209.2)
(42.1)
95.2
3.1
(7.2)
(7.3)
$
47.6
$
39.8
$
6.4
$
(10.0)
$
83.8
7.3%
56.8%
7.9%
47.5%
3.4%
7.6%
–
(11.9)%
6.2%
100.0%
QUARTERLY CONSOLIDATED STATEMENTS OF INCOME
Three months 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
Selling, general, and administrative expenses
Equity earnings of joint venture and associate
Other expenses
Earnings before interest and income taxes
Finance costs
Income before provision for income taxes
Provision for income taxes
Net income
Earnings per share
Basic
Diluted
Weighted average number of shares outstanding
Basic
Diluted
42
2011
UNAUDITED
990,021
78,544
97,516
642,604
1,934
1,810,619
(1,336,110)
474,509
(366,952)
3,009
(3,252)
107,314
(14,480)
92,834
(22,309)
70,525
0.41
0.41
$
$
$
$
2010
UNAUDITED
627,342
55,232
77,370
583,100
3,487
1,346,531
(952,499)
394,032
(298,805)
3,045
(14,497)
83,775
(12,424)
71,351
(15,875)
55,476
0.32
0.32
$
$
$
$
171,572,073
172,075,588
171,247,563
172,224,467
MANAGEMENT’S DISCUSSION & ANALYSIS
QUARTERLY CONSOLIDATED STATEMENTS OF CASH FLOW
Three months ended December 31
(CANADIAN $ THOUSANDS)
OPERATING ACTIVITIES
Net income
Add (deduct) items not affecting cash
Depreciation and amortization
Deferred taxes
Gain on sale of property, plant, and equipment and rental equipment
Share-based compensation
Impairment of investment and long-lived asset
Other
Changes in working capital items
Interest paid
Income tax paid
Cash provided after changes in working capital items
Additions to rental equipment
Proceeds on disposal of rental equipment
Equipment leased to customers, net of disposals
Cash flow provided by operating activities
INVESTING ACTIVITIES
Additions to property, plant, and equipment
Proceeds on disposal of property, plant, and equipment
Net proceeds paid on acquisition
Cash used in investing activities
FINANCING ACTIVITIES
Increase in short-term debt
Increase (decrease) long-term debt
Repayment of 4.64% medium term note
Issue of common shares on exercise of stock options
Dividends paid
Cash provided by (used in) financing activities
Effect of currency translation on cash balances
Increase in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
2011
UNAUDITED
2010
UNAUDITED
$
70,525
$
55,476
49,042
6,676
(4,119)
705
–
(2,410)
120,419
296,691
(15,664)
(9,232)
392,214
(106,543)
50,511
159
336,341
(57,223)
1,867
(2,750)
(58,106)
30,293
(118,318)
(150,000)
–
(22,304)
(260,329)
(483)
17,423
105,322
122,745
$
42,697
5,494
(9,688)
1,335
6,788
461
102,563
119,143
(12,929)
(22,889)
185,888
(85,400)
42,630
(1,565)
141,553
(19,554)
318
(3,381)
(22,617)
26,114
21,975
–
1,415
(20,551)
28,953
(8,464)
139,425
206,962
346,387
$
2011 ANNUAL REPORT FINNING INTERNATIONAL INC. 43
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 International Financial Reporting
Standards 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 2011.
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 consolidated 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
D.S. Smith
Executive Vice President and Chief Financial Officer
February 15, 2012
1000 – 666 Burrard Street,
Vancouver, B.C., V6C 2X8
Canada
44
INDEPENDENT AUDITORS’ REPORT
To the Shareholders of
Finning International Inc.
We have audited the accompanying consolidated financial statements of Finning International Inc., which comprise the consolidated statements
of financial position as at December 31, 2011, December 31, 2010 and January 1, 2010, and the consolidated statements of income, comprehensive
income (loss), shareholders’ equity and cash flows for the years ended December 31, 2011 and December 31, 2010, 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 International
Financial Reporting Standards, 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, 2011, December 31, 2010 and January 1, 2010 and its financial performance and its cash flows for the years ended December 31,
2011 and December 31, 2010 in accordance with International Financial Reporting Standards.
Chartered Accountants
February 15, 2012
Vancouver, B.C., Canada
2011 ANNUAL REPORT FINNING INTERNATIONAL INC. 45
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(CANADIAN $ THOUSANDS)
ASSETS
Current assets
Cash and cash equivalents (Note 21)
Accounts receivable
Service work in progress
Inventories (Note 10)
Income taxes recoverable
Derivative assets (Note 4)
Other assets (Note 12)
Total current assets
Rental equipment (Note 15)
Property, plant, and equipment (Note 15)
Intangible assets (Note 16)
Goodwill (Note 17)
Investment in and advances to joint venture and associate (Note 13)
Finance assets (Note 14)
Derivative assets (Note 4)
Deferred tax assets (Note 6)
Other assets (Note 12)
LIABILITIES
Current liabilities
Short-term debt (Note 3)
Accounts payable and accruals
Income tax payable
Provisions (Note 18)
Deferred revenue
Derivative liabilities (Note 4)
Current portion of long-term debt (Note 3)
Total current liabilities
Long-term debt (Note 3)
Long-term obligations (Note 19)
Derivative liabilities (Note 4)
Provisions (Note 18)
Deferred revenue
Deferred tax liabilities (Note 6)
Total liabilities
Commitments and contingencies (Notes 28 and 29)
SHAREHOLDERS’ EQUITY
Share capital (Note 7)
Contributed surplus
Accumulated other comprehensive loss
Retained earnings
Total shareholders’ equity
Approved by the Directors February 15, 2012
December 31
2011
December 31
2010
January 1
2010
$
122,745
862,698
171,214
1,442,829
20,880
2,287
154,803
2,777,456
402,114
550,524
52,032
92,501
61,600
33,820
–
81,029
34,284
$ 4,085,360
$
334,525
965,981
12,511
88,146
317,299
23,515
508
1,742,485
762,571
192,410
–
2,897
22,320
17,723
2,740,406
$
$
$
346,387
663,920
73,602
1,075,824
24,444
7,420
114,096
2,305,693
343,766
463,225
45,285
91,114
53,008
30,158
–
59,542
37,907
3,429,698
89,965
611,051
8,225
57,365
318,657
4,421
203,087
1,292,771
711,067
180,725
8,672
1,078
18,876
13,524
2,226,713
$
$
$
194,910
620,151
62,563
968,538
35,826
3,420
118,120
2,003,528
600,257
520,448
41,457
94,254
60,355
32,604
26,079
33,535
13,735
3,426,252
162,238
486,495
9,274
63,667
170,034
5,669
24,179
921,556
959,157
189,692
26,144
4,949
20,500
15,187
2,137,185
566,452
35,812
(38,193)
780,883
1,344,954
$ 4,085,360
564,973
33,128
(53,385)
658,269
1,202,985
3,429,698
$
557,052
32,069
(4,846)
704,792
1,289,067
3,426,252
$
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.
46
CONSOLIDATED STATEMENTS OF INCOME
For years ended December 31
(CANADIAN $ THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
2011
2010
Revenue
New equipment
Used equipment
Equipment rental
Product support
Other
Total revenue
Cost of sales
Gross profit
Selling, general, and administrative expenses
Equity earnings of joint venture and associate
Other expenses (Note 2)
Earnings from continuing operations before interest and income taxes
Finance costs (Note 3)
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 23)
Net income
Earnings per share – basic
From continuing operations (Note 9)
From discontinued operations
Earnings per share – diluted
From continuing operations (Note 9)
From discontinued operations
Weighted average number of shares outstanding
Basic
Diluted
$ 2,889,020
253,407
345,486
2,395,653
11,344
5,894,910
(4,215,195)
1,679,715
(1,279,240)
6,674
(27,412)
379,737
(53,242)
326,495
(67,130)
259,365
–
259,365
1.51
–
1.51
1.51
–
1.51
$
$
$
$
$
$
$
$
$
$
$
1,928,642
253,553
274,688
2,117,663
10,059
4,584,605
(3,206,796)
1,377,809
(1,057,497)
5,590
(40,648)
285,254
(57,616)
227,638
(46,555)
181,083
(125,023)
56,060
1.06
(0.73)
0.33
1.06
(0.73)
0.33
171,546,035
172,286,925
171,029,585
171,718,261
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
2011 ANNUAL REPORT FINNING INTERNATIONAL INC. 47
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For years ended December 31
(CANADIAN $ THOUSANDS)
Net income
Other comprehensive income (loss), net of income tax
Currency translation adjustments
Unrealized gain (loss) 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, net of income tax
Unrealized gain (loss) on cash flow hedges
Realized loss (gain) on cash flow hedges, reclassified to earnings
Tax recovery (expense) on cash flow hedges
Gain (loss) on cash flow hedges, net of income tax
Actuarial loss (Note 24)
Tax recovery on actuarial loss
Actuarial loss, net of income tax
Comprehensive income (loss)
2011
2010
$
259,365
$
56,060
24,713
(1,702)
–
547
23,558
(8,005)
(1,994)
1,633
(8,366)
(65,194)
15,935
(49,259)
(87,178)
16,864
19,142
(1,144)
(52,316)
3,817
1,127
(1,167)
3,777
(29,865)
7,678
(22,187)
$
225,298
$
(14,666)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Accumulated Other
Comprehensive Income (Loss)
(CANADIAN $ THOUSANDS,
EXCEPT SHARE AMOUNTS)
Balance, January 1, 2010
Net income
Other comprehensive income (loss)
Total comprehensive income (loss)
Issued on exercise of share options
Stock option expense
Dividends on common shares
Balance, December 31, 2010
Shares
170,746,800
–
–
–
684,549
–
–
171,431,349
Net income
Other comprehensive income (loss)
Total comprehensive income (loss)
Issued on exercise of share options
Stock option expense
Dividends on common shares
Balance, December 31, 2011
–
–
–
142,403
–
–
171,573,752
Share Capital
Contributed
Surplus
Amount
Gain/
(Loss) on
Cash Flow
Hedges
Retained
Earnings
Total
Foreign
Currency
Translation and
Gain/(Loss)
on Net
Investment
Hedges
$ 557,052
–
–
–
7,921
–
–
$ 564,973
–
–
–
1,479
–
–
$ 566,452
$
$
32,069
–
–
–
(3,084)
4,143
–
33,128
$
$
$
–
–
(52,316)
(52,316)
–
–
–
(52,316) $
(4,846) $ 704,792 $ 1,289,067
56,060
56,060
(70,726)
(22,187)
(14,666)
33,873
4,837
–
4,143
–
(80,396)
(80,396)
(1,069) $ 658,269 $ 1,202,985
–
3,777
3,777
–
–
–
–
–
–
(779)
3,463
–
$ 35,812
–
23,558
23,558
–
–
–
$ (28,758) $
–
(8,366)
(8,366)
–
–
–
259,365
259,365
(34,067)
(49,259)
225,298
210,106
700
–
3,463
–
(87,492)
(87,492)
(9,435) $ 780,883 $ 1,344,954
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
48
CONSOLIDATED STATEMENTS OF CASH FLOW
For years ended December 31
(CANADIAN $ THOUSANDS)
OPERATING ACTIVITIES
Net income
Add (deduct) items not affecting cash:
Depreciation and amortization
Deferred taxes
Gain on sale of property, plant, and equipment and rental equipment
Share-based payments
Loss from discontinued operations (Note 23)
Impairment of investment and long-lived asset
Other
Changes in working capital items (Note 21)
Interest paid
Income tax paid
Cash provided after changes in working capital items
Additions to rental equipment
Proceeds on disposal of rental equipment
Equipment leased to customers, net of disposals
Cash provided by (used in) continuing operations
Cash used in discontinued operations
Cash flow provided by (used in) operating activities
INVESTING ACTIVITIES
Additions to property, plant, and equipment
Proceeds on disposal of property, plant, and equipment
Net proceeds paid on acquisition (Note 22)
Net proceeds from sale of discontinued operations (Note 23)
Investment in equity investment (Note 22)
Proceeds on settlement of derivatives
Cash provided by (used in) continuing operations
Cash 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
Repayment of 4.64% medium term note
Purchase of Eurobond 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 (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year (Note 21)
2011
2010
$
259,365
$
56,060
176,350
4,792
(18,827)
13,743
–
–
(3,509)
431,914
(271,961)
(45,736)
(38,679)
75,538
(311,871)
161,914
(6,498)
(80,917)
–
(80,917)
(149,160)
9,281
(4,450)
6,332
(1,375)
–
(139,372)
–
(139,372)
245,728
(11,745)
(150,000)
–
700
(87,492)
(2,809)
–
(2,809)
(544)
(223,642)
346,387
122,745
$
160,576
(2,744)
(27,291)
3,273
125,023
6,788
3,111
324,796
143,306
(49,052)
(19,174)
399,876
(195,460)
120,477
(3,528)
321,365
(1,647)
319,718
(70,788)
9,819
(6,725)
117,829
–
25,983
76,118
(27,361)
48,757
(70,011)
19,003
–
(73,156)
4,837
(80,396)
(199,723)
–
(199,723)
(17,275)
151,477
194,910
346,387
$
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
2011 ANNUAL REPORT FINNING INTERNATIONAL INC. 49
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements represent the first annual financial statements of the Company and its subsidiaries prepared in
accordance with International Financial Reporting Standards (IFRS), as issued by the International Accounting Standard Board (IASB). IFRS 1,
First-time Adoption of IFRS has therefore been applied in preparing these consolidated financial statements.
These consolidated financial statements have been prepared in accordance with the accounting policies presented below and are based on
the IFRS and International Financial Reporting Interpretations Committee (IFRIC) interpretations issued and effective as of December 31, 2011.
The policies set out below were consistently applied to all the periods presented unless otherwise noted.
The Company’s consolidated financial statements were previously prepared in accordance with Canadian generally accepted accounting principles
(GAAP), which differs in some areas from IFRS. In preparing these consolidated financial statements, management has amended certain accounting
methods previously applied in the Canadian GAAP consolidated financial statements to comply with IFRS. The comparative figures for 2010 were
restated to reflect these amendments. Reconciliations and descriptions of the effect of the transition from Canadian GAAP to IFRS on equity,
earnings, and comprehensive income are provided in Note 31.
These consolidated financial statements were prepared under the historical cost basis except for derivative financial instruments and liabilities
for share-based payment arrangements, which have been measured at fair value. The preparation of financial statements in accordance with IFRS
requires the use of certain accounting estimates and requires management to exercise judgment in applying the Company’s accounting policies.
The areas where assumptions, estimates and judgments are significant to the consolidated financial statements are disclosed at (b) below.
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 and Finning’s wholly owned subsidiaries. Subsidiaries are those entities over which the Company has the power to govern
the financial and operating policies so as to obtain benefits from the investee’s activities, generally accompanying a shareholding that confers
more than half of the voting rights. Principal operating subsidiaries include Finning (UK) Ltd., Finning Chile S.A., Finning Argentina S.A., Finning
Soluciones Mineras S.A., Finning Uruguay S.A., Moncouver S.A. Finning Bolivia S.A., and OEM Remanufacturing Company (OEM). The Company
has a 25% interest in PipeLine Machinery International (PLM), its joint venture, and a 27% interest in an associate, Energyst B.V. (Energyst). For
subsidiaries 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.
JOINT VENTURES AND ASSOCIATES
A joint venture is a contractual arrangement whereby the Company and other parties undertake an economic activity that is subject to joint
control (i.e. when the strategic, financial and operating policy decisions relating to the activities of the joint venture require the unanimous
consent of the parties sharing control). An associate is an entity over which the Company has significant influence and that is neither a subsidiary
nor an interest in a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee
but is not control or joint control over those policies.
The Company accounts for joint ventures and associates in which the Company has an interest using the equity method. The joint ventures and
associates follow accounting policies that are materially consistent with the Company’s accounting policies. Where the Company transacts with a
jointly controlled entity or associate, unrealized profits and losses are eliminated to the extent of the Company’s interest in the jointly controlled
entity or associate.
(B) KEY ASSUMPTIONS AND SIGNIFICANT JUDGMENTS
The preparation of financial statements in conformity with IFRS requires management to make judgments, estimates, and assumptions in respect
of the application of accounting policies and the reported amounts of assets, liabilities, income, and expenses. Actual results may differ from those
judgments, estimates, and assumptions.
AREAS OF ESTIMATION UNCERTAINTY
Information about areas of estimation uncertainty in applying accounting policies that have the most significant effect on the amounts recognized
in the consolidated statements are as follows:
ASSET LIVES AND RESIDUAL VALUES
Rental fleet is depreciated to its estimated residual value over its estimated useful life. Depreciation expense is sensitive to the estimated service
lives determined for each type of rental asset. Actual lives and residual values may vary depending on a number of factors including technological
innovation, product life cycles and physical condition of the asset, prospective use, and maintenance programs.
50
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets with indefinite lives are tested for impairment at least annually. The impairment calculations require the use
of estimates related to the future operating results, viability, and cash generating ability of the assets. Judgment is also used in identifying an
appropriate discount rate for these calculations.
REVENUE RECOGNITION – LONG-TERM CONTRACTS
Where the outcome of a long-term contract (primarily power systems and maintenance and repair contracts) can be estimated reliably, revenue
and costs are recognized by reference to the stage of completion of the contract activity at the statement of financial position date, measured
primarily based on the proportion of contract costs incurred for work performed to date relative to the estimated total contract costs. Variations
in contract work, claims and incentive payments are included to the extent that they have been agreed with the customer. Where the outcome of
a long-term contract cannot be estimated reliably, contract revenue is recognized to the extent of contract costs incurred that it is probable will
be recoverable. Contract costs are recognized as expenses in the period in which they are incurred. When it is probable that total contract costs
will exceed total contract revenue, the expected loss is recognized as an expense immediately.
REVENUE RECOGNITION – REPURCHASE GUARANTEES
Guaranteed residual values are periodically given on repurchase commitments with customers. The likelihood of the repurchase commitments
being exercised is assessed at the inception of the contract to determine whether significant risks and rewards have been transferred to the
customer and if revenue should be recognized. The likelihood of the repurchase guarantees being exercised, and quantification of the possible loss,
if any, on resale of the equipment is assessed at the inception of the contract and at each reporting period thereafter. Significant assumptions are
made in estimating residual values. These are assessed based on past experience and take into account expected future market conditions and
projected disposal values.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company and its subsidiaries make estimates for allowances that represent its estimate of potential losses in respect of trade and
other receivables. The main components of this allowance are a specific loss component that relates to individually significant exposures, and
a collective loss component established for groups of similar assets in respect of losses that may have been incurred but not yet specifically
identified. The collective loss allowance is estimated based on historical data of payment statistics for similar financial assets, adjusted for current
economic conditions.
PROVISION FOR INVENTORY OBSOLESCENCE
The Company makes estimates of the provision required to reflect obsolescence of inventory. These provisions are determined on a specific item
basis for equipment, and on the basis of age, redundancy, and stock levels for parts and supplies.
CURRENT AND DEFERRED TAXATION
Estimations of the tax asset or liability require assessments to be made based on the potential tax treatment of certain items that will only be
resolved once finally agreed with the relevant tax authorities.
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.
Assumptions underlying the composition of deferred 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.
AREAS OF SIGNIFICANT JUDGMENT
The significant judgments that management has made in the process of applying the Company’s accounting policies are as follows:
DEFINED BENEFIT PENSION PLANS
The Company and its subsidiaries have defined benefit pension plans that provide pension and other benefits to its employees. Actuarial
valuations are based on assumptions which include employee turnover, salary escalation rates, mortality rates, discount rates, and expected
rate of return on retirement plan assets. Judgment is exercised in setting these assumptions. These assumptions impact the measurement
of the defined benefit obligation, the pension expense and the actuarial gains and losses recognized in other comprehensive income.
WARRANTY CLAIMS
Warranties are provided on certain equipment, spare parts, and service supplied to customers. Management exercises judgment in establishing
warranty provisions on the basis of past experience.
2011 ANNUAL REPORT FINNING INTERNATIONAL INC. 51
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (continued)
RENTAL PURCHASE OPTIONS
Rental purchase options (RPOs) are rental agreements with customers which include an option to purchase the equipment at the end of the
rental term. The Company periodically sells portfolios of RPOs to financial institutions, and is required to make judgments as to whether the
risks and rewards of ownership of the underlying assets have been transferred in such circumstances. The level of residual value risk retained by
the Company, the continuing managerial involvement of the Company in the assets, and the transfer of title to the assets are all considered when
assessing whether the risks and rewards of ownership have been transferred to third parties and hence whether revenue should be recognized
on the sale of the assets and associated rental contracts.
OTHER JUDGMENTS
In addition to the significant judgments described above, management has also made judgments with regard to the determination of cash
generating units, the determination of the functional currency of the principal operations of the Company, and the determination of the
classification of financial instruments.
(C) FOREIGN CURRENCY TRANSLATION
These consolidated financial statements are presented in Canadian dollars, which is the functional currency of the parent company. 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 statement of financial position dates and non-monetary items
are translated at historical exchange rates; and
Foreign 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 recorded as a component of other comprehensive income and recognized in
earnings on the same basis as the hedged item.
Financial statements of foreign operations 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 statement of financial position dates;
Revenue and expense items are translated at average exchange rates prevailing during the period that the transactions occurred; and
Unrealized translation gains and losses are recorded in foreign currency translation and gain / (loss) on net investment hedges within other
comprehensive income. Cumulative currency translation adjustments are recognized in net income upon the disposal of a foreign operation
(i.e. a disposal of the Company’s entire interest in a foreign operation, or a disposal that involves loss of control of a subsidiary that includes
a foreign operation, loss of joint control over a jointly controlled entity that includes a foreign operation, or loss of significant influence over
an associate that includes a foreign operation).
The Company has hedged some of its investments in foreign subsidiaries using derivatives and foreign currency denominated borrowings.
Foreign exchange gains or losses arising from the translation of these hedging instruments are accounted for as items of other comprehensive
income and presented on the consolidated statement of financial position. Foreign exchange gains or losses arising from net investment hedging
instruments are recognized in net income upon the disposal of a foreign operation. See Note 1 (u) for further details on the Company’s hedge
accounting policy.
(D) CASH AND CASH EQUIVALENTS
Cash and cash equivalents comprise cash on hand together with short-term investments, consisting of highly rated and liquid money market
instruments with original maturities of three months or less, 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.
(F) INVESTMENT IN ASSOCIATE
Investments over which the Company exercises significant influence, but not control or joint control, are accounted for using the equity method.
If there is an indicator that the investment may be impaired, the carrying amount of the associate is tested for impairment as a single asset by
comparing its recoverable amount with its carrying amount.
52
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(G) INCOME TAXES
The balance sheet method of tax allocation is used in accounting for income taxes. Under this method, the carry forward of unused tax losses
and unused tax credits and the temporary differences arising from the difference between the tax basis of an asset and a liability and its carrying
amount on the statement of financial position are used to calculate deferred tax assets or liabilities. Deferred tax liabilities are recognized for all
taxable temporary differences and deferred tax assets are recognized to the extent that it is probable that taxable profits will be available against
which the carry forward of unused tax losses, unused tax credits, and the deductible temporary differences can be utilized. Such deferred tax
assets and liabilities are not recognized if the temporary difference arises from the initial recognition of goodwill or from the initial recognition
(other than in a business combination) of other assets and liabilities in a transaction that affects neither taxable profit nor the accounting profit.
Deferred tax liabilities are recognized for taxable temporary differences associated with investments in subsidiaries and associates, and interests
in joint ventures, except where the Company is able to control the reversal of the temporary difference and it is probable that the temporary
difference will not reverse in the foreseeable future. Deferred tax assets or liabilities are calculated using tax rates anticipated to be in effect
in the periods that the asset is expected to be realized or the liability is expected to be settled based on the laws that have been enacted or
substantively enacted by the reporting date. The effect of a change in income tax rates on deferred tax assets and liabilities is recognized in
income and/or equity in the period that the change becomes substantively enacted.
Current and deferred tax are recognized in profit or loss, except when they relate to items that are recognized in other comprehensive income
or directly in equity, in which case, the current and deferred tax are also recognized in other comprehensive income or directly in equity,
respectively. Where current tax or deferred tax arises from the initial accounting for a business combination, the tax effect is included in the
accounting for the business combination.
The charge for current tax is based on the results for the year as adjusted for items which are non-assessable or disallowed using tax rates
enacted or substantively enacted by the statement of financial position date.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and
when they relate to income taxes levied by the same taxation authority and the Company intends to settle its tax assets and liabilities on a net basis.
(H) INSTALMENT NOTES RECEIVABLE AND EQUIPMENT LEASED TO CUSTOMERS
Finance assets on the consolidated statement of financial position include instalment notes receivable, which represent amounts due from
customers relating to financing of equipment sold and parts and service sales. These receivables are recorded net of unearned finance charges and
include initial direct costs. Finance assets also include equipment leased to customers on long-term financing leases. Depreciation of equipment
leased to customers is provided in equal monthly amounts over the terms of the individual leases after identifying 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 and any impairment
losses. 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 basis which is generally over a period of 2-5 years. Rental assets that become available for sale after being removed from rental
fleets are transferred to inventory. Depreciation is recorded in cost of sales in the consolidated statement of income.
(J) PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are recorded at cost, net of accumulated depreciation and any impairment losses. Depreciation of property, plant,
and equipment is recorded in selling, general, and administrative expenses for all assets except standby equipment, which is recorded in cost of
sales, in the consolidated statement of income. Depreciation commences when the asset becomes available for use, and ceases when the asset is
derecognized or classified as held for sale. Where significant components of an asset have different useful lives, depreciation is calculated on each
separate part.
All classes of property, plant, and equipment are depreciated over their estimated useful lives to their estimated residual value on a straight-line
basis using the following annual rates:
Buildings (including investment property)
Equipment and vehicles
2% - 5%
10% - 33%
Property, plant, and equipment held under finance lease are depreciated over the term of the relevant lease.
(K) INVESTMENT PROPERTY
Investment properties are defined as land or buildings held to earn rentals or for capital appreciation or both. While investment in property
is not a core part of the Company’s activities, properties held by the Company for which the future use is undetermined, or which are rented
to third parties pending determination of future use, are classified as investment property and are included in property, plant, and equipment
on the consolidated statement of financial position. Such properties are carried at cost less accumulated depreciation and any impairment losses.
2011 ANNUAL REPORT FINNING INTERNATIONAL INC. 53
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (continued)
(L) INTANGIBLE ASSETS
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. Intangible assets, such as software, customer lists, and similar assets, are amortized over the periods during which they
are expected to generate benefits, which do not exceed ten years. Amortization is recorded in selling, general, and administrative expenses
in the consolidated statement of income.
(M) BORROWING COST CAPITALIZATION
Borrowing costs are capitalized in relation to the construction of qualifying property, plant, and equipment and intangible assets. As the Company
manages the financing of all operations centrally, and the construction of qualifying assets is financed through general borrowings, a weighted
average borrowing rate is used in calculating interest to be capitalized on eligible assets under construction. All other borrowing costs are
expensed as incurred.
(N) GOODWILL
Goodwill represents the excess of the acquisition date fair value of consideration transferred over the fair value of the identifiable net assets
acquired. Goodwill is not amortized but is reviewed for impairment at least annually.
(O) ASSET IMPAIRMENT
Goodwill and intangible assets with indefinite lives or those which are not yet available for use are subject to an annual assessment for
impairment unless events or changes in circumstances indicate that their value may not be fully recoverable, in which case the assessment is
done at that time. Tangible assets and intangible assets with finite lives are allocated to cash generating units and are subject to assessment
for impairment whenever there is an indication they may be impaired. For the purpose of impairment testing, goodwill is allocated to each of
the Company’s cash generating units or group of cash generating units expected to benefit from the acquisition. The level at which goodwill
is allocated represents the lowest level at which goodwill is monitored for internal management purposes and is not higher than an operating
segment. If the value in use of the unit is less than the carrying amount, then the impairment loss is allocated first to reduce the carrying amount
of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the
unit. Any impairment is recognized immediately in the consolidated statement of income. Impairment reversals are recognized immediately in net
income when the recoverable amount of an asset increases above the impaired net book value, not to exceed the carrying amount that would
have been determined (net of depreciation) had no impairment loss been recognized for the asset in prior years. Impairment losses recognized
for goodwill are never reversed.
(P) LEASES
Leases are classified as either finance or operating leases. Leases where substantially all of the benefits and risks of ownership of property rest
with the lessee are accounted for as finance leases; all other leases are classified as operating leases.
THE COMPANY AS LESSOR
Amounts due from lessees under finance leases are recorded as receivables at the amount of the Company’s net investment in the leases. Finance
lease income is allocated to accounting periods so as to reflect a constant periodic rate of return on the Company’s net investment outstanding
in respect of the leases.
Rental income from operating leases is recognized on a straight-line basis over the term of the relevant lease. Initial direct costs incurred in
negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognized on a straight-line basis over
the lease term.
THE COMPANY AS LESSEE
Assets held under finance leases are initially recognized as assets of the Company at their fair value at the inception of the lease or, if lower, at
the present value of the minimum lease payments. The corresponding liability to the lessor is included in the statement of financial position as
a finance lease obligation. Finance lease equipment is depreciated over the term of the relevant lease. Lease payments are apportioned between
finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance
charges are charged directly to profit or loss unless they are directly attributable to qualifying assets, in which case they are capitalized in
accordance with the Company’s general policy on borrowing costs. Contingent rental payments are recognized as expenses in the periods in
which they are triggered.
Operating lease payments are recognized as an expense on a straight-line basis over the lease term, except where another systematic basis is
more representative of the time pattern in which economic benefits from the leased asset are consumed. In the event that lease incentives are
received to enter into operating leases, such incentives are recognized as a liability. The aggregate benefit of incentives is recognized as a reduction
of rental expense on a straight-line basis over the term of the lease, except where another systematic basis is more representative of the time
pattern in which economic benefits from the leased asset are consumed.
54
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SALE AND LEASEBACK TRANSACTIONS
Sale and leaseback transactions are assessed to determine whether they are finance or operating leases.
SALE AND LEASEBACK RESULTING IN A FINANCE LEASE
If a sale and leaseback transaction results in a finance lease, any excess of sale proceeds over the carrying amount is deferred and amortized
over the lease term.
SALE AND LEASEBACK RESULTING IN AN OPERATING LEASE
If a sale and leaseback transaction results in an operating lease, and it is clear that the transaction is established at fair value, any profit or loss is
recognized immediately. If the sale price is below fair value, any profit or loss is recognized immediately except that, if the loss is compensated for
by future lease payments at below market price, it is deferred and amortized in proportion to the lease payments over the period for which the
asset is expected to be used. If the sale price is above fair value, the excess over fair value is deferred and amortized over the period for which
the leased asset is expected to be used.
(Q) DECOMMISSIONING LIABILITIES
The Company recognizes its legal and constructive obligation for the decommissioning of certain tangible long-lived assets. The provision is
measured based on the net present value of management’s best estimate of the expenditures that will be made. The discount rate used to
discount the decommissioning liability is determined with reference to the specific risks associated with the underlying assets. The associated
decommissioning costs are capitalized as part of the carrying amount of the long-lived asset and then amortized over the estimated useful life.
The increase in the net present value of the provision for the expected decommissioning cost is included in finance costs. Subsequent changes
in the estimate of costs relating to the decommissioning of long-lived assets are capitalized as part of the cost of the item and depreciated
prospectively over the remaining life of the item to which the costs relate. A gain or loss may be incurred upon settlement of the liability.
(R) REVENUE RECOGNITION
Revenue recognition occurs when there is an arrangement with a customer, primarily in the form of a contract or purchase order, a fixed
or determinable sales price is established with the customer, performance requirements are achieved, and it is probable that economic benefits
associated with the transaction will flow to the Company. Revenue is measured at fair value of the consideration received or receivable net of
any discounts offered. 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 can include 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, except where this would not be representative of the stage of completion (when
revenue is recognized in accordance with the specific acts outlined in the contract);
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 a long-term maintenance and repair contract are recognized when identified.
Periodically, amounts are received from customers under long-term contracts in advance of the associated contract work being performed.
These amounts are recorded on the consolidated statement of financial position as deferred revenue.
If an arrangement involves the provision of multiple elements, the total arrangement value is allocated to each element as a separate unit of
accounting based on their fair values if:
a. The delivered item has value to the customer on a stand-alone basis;
b. There is objective and reliable evidence of the fair value of the undelivered item; and
c. The arrangement includes a general right of return relative to the delivered item and delivery or performance of the undelivered item
is considered probable and substantially in the control of the Company.
2011 ANNUAL REPORT FINNING INTERNATIONAL INC. 55
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (continued)
(S) SHARE-BASED PAYMENTS
The Company has share option plans and other share-based compensation plans for directors and certain eligible employees. Share-based awards
are measured at fair value using the Black-Scholes model.
For equity settled share-based payments, fair value is determined on the grant date of the share option and recorded over the vesting period,
based on the Company’s estimate of options that will vest, with a corresponding increase to contributed surplus. When share options are
exercised, the proceeds received by the Company, together with any related amount recorded in contributed surplus, are credited to share
capital. Contributed surplus is made up of the fair value of share options.
Cash settled share-based compensation plans are recognized as a liability. Compensation expense which arises from fluctuations in the fair value
of the Company’s cash settled share-based compensation plans (net of hedging instruments) is recognized in selling, general, and administrative
expense in the consolidated statement of income with the corresponding liability recorded on the consolidated statement of financial position
in long-term obligations.
(T) 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,
the U.K. and the Republic of Ireland. 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 unit credit
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 based on high quality corporate bond yields. For the purpose of calculating the expected return on
plan assets, those assets are valued at fair value.
Past service costs from plan amendments are amortized on a straight-line basis over the expected average period until the amended benefits
become vested. Past service costs are recognized immediately to the extent that the benefits are already vested.
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. Actuarial gains and losses are recognized in full directly
in other comprehensive income in the period in which they occur.
The amount recognized in the consolidated statement of financial position represents the present value of the defined benefit obligation as
adjusted for unrecognized past service costs and reduced by the fair value of plan assets. Any asset is limited to the unrecognized past service
costs, plus the present value of available refunds and reductions in future contributions to the plan.
Defined contribution plans: The cost of pension benefits includes the current service cost, which comprise the actual contributions made and
accrued by the Company during the year. These contributions are based on a fixed percentage of member earnings for the year and are charged
to the consolidated statement of income as they become due.
(U) 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 foreign operations and related hedging gains and losses, actuarial gains and losses relating to the Company’s defined benefit pension
plans, and hedging gains and losses on cash flow hedges.
FINANCIAL ASSETS AND FINANCIAL LIABILITIES
CLASSIFICATION
The Company has made the following classification of its financial assets and financial liabilities:
Cash and cash equivalents are classified as Fair Value Through Profit or Loss (FVTPL).
56
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Accounts receivable, instalment and other notes receivable, and supplier claims receivable are classified as Loans and Receivables. They are
measured at amortized cost using the effective interest method. Short-term and long-term debt and accounts payable are classified as Other
Financial Liabilities. They are measured at amortized cost using the effective interest method. Transaction costs directly attributable to the
acquisition or issue of a financial asset or financial liability (except those classified as FVTPL) are included in the carrying amount of the financial
asset or financial liability, and are amortized to income using the effective interest method.
Financial assets that are measured at amortized cost are assessed for impairment at the end of each reporting period. Financial assets are
considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition
of the financial assets, the estimated future cash flows of the asset have been affected. For certain categories of financial assets, such as trade
receivables, assets that are assessed not to be impaired individually are, in addition, assessed for impairment on a collective basis. Objective
evidence of impairment for a portfolio of receivables could include the Company’s past experience of collecting payments, an increase in
the number of delayed payments in the portfolio past the average credit period, as well as observable changes in national or local economic
conditions that correlate with default on receivables. The carrying amount of the financial asset is reduced by the impairment loss directly for
all financial assets with the exception of trade receivables, where the carrying amount is reduced through the use of an allowance account.
When a trade receivable is considered uncollectible, it is written off against the allowance account. Changes in the carrying amount of the
allowance account are recognized in profit or loss.
DERIVATIVES
All derivative instruments are recorded on the consolidated statement of financial position 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 FVTPL. These embedded derivatives are measured at fair
value 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 share-based compensation expenses. The Company uses derivative financial instruments only in connection with managing related
risk positions and does not use them for trading or speculative purposes.
The Company determines whether or not to formally designate, for accounting purposes, eligible hedging relationships between hedging
instruments and hedged items. This process includes linking derivatives to specific risks from assets or liabilities on the statement of financial
position or specific firm commitments or forecasted transactions. For hedges designated as such for accounting purposes, the Company
documents and 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 statement of income caption as the underlying item when the hedged
item affects income. The gain or loss relating to any ineffective portion is recognized immediately in the consolidated statement of 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 accumulated 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 consolidated statement of income.
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.
2011 ANNUAL REPORT FINNING INTERNATIONAL INC. 57
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (continued)
FAIR VALUE HEDGES
Changes in the fair value of derivatives designated and qualifying as fair value hedging instruments are recorded in income immediately along with
changes in the fair value of the hedged item attributable to the hedged risk.
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 consolidated statement of income.
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 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 are recognized in net income upon the disposal of a foreign
operation (i.e. a disposal of the Company’s entire interest in a foreign operation, or a disposal that involves loss of control of a subsidiary that
includes a foreign operation, loss of joint control over a jointly controlled entity that includes a foreign operation, or loss of significant influence
over an associate that includes a foreign operation).
(V) ADOPTION OF NEW AND REVISED IFRS AND IFRS NOT YET EFFECTIVE
The Company has not applied the following new and revised IFRS that have been issued but are not yet effective:
•
Amendments to IAS 19, Employee Benefits (effective January 1, 2013) provide new requirements for the accounting for defined benefit pension
plans. Most notably, the amendments mandate the immediate recognition of actuarial gains and losses, and require companies to use the
same discount rate for both the defined benefit obligation and the expected asset return when calculating the interest component of pension
expense. The Company already recognizes all actuarial gains and losses immediately through other comprehensive income, consequently this
element of the amendments will not impact the Company. The Company is currently evaluating the impact of other amendments to IAS 19.
The following accounting standards are not expected to have a significant effect on the Company’s accounting policies or financial statements:
•
•
•
•
•
Amendments to IFRS 7 Financial Instruments: Disclosures are effective for annual periods beginning on or after July 1, 2011 and introduce
enhanced disclosure around transfer of financial assets and associated risks.
Amendments to IAS 1 Presentation of Financial Statements (effective for annual periods beginning on or after July 1, 2012) require that elements
of other comprehensive income that may subsequently be reclassified through profit and loss be differentiated from those items that will not
be reclassified.
IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IFRS 12 Disclosure of Interests in Other Entities, and consequential revisions
to IAS 27 Separate Financial Statements and IAS 28 Investments in Associates and Joint Ventures (all effective January 1, 2013) provide revised
guidance on the accounting treatment and associated disclosure requirements for joint arrangements and associates, and a revised definition
of ‘control’ for identifying entities which are to be consolidated.
IFRS 13 Fair Value Measurement (effective January 1, 2013) provides new guidance on fair value measurement and disclosure requirements.
IFRS 9 Financial Instruments (effective January 1, 2015) introduces new requirements for the classification and measurement of financial assets
and financial liabilities.
(W) COMPARATIVE FIGURES
Certain comparative figures have been reclassified to conform to the 2011 presentation. Standby equipment has been reclassified from rental
equipment to property, plant, and equipment as this presentation is thought to provide more useful information to users of the consolidated
financial statements. The net book value of standby equipment reclassified was $39.7 million at December 31, 2011 (December 31, 2010:
$22.9 million; January 1, 2010: $33.3 million).
58
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2. OTHER EXPENSES
Other expenses (income) include the following items:
For years ended December 31
($ THOUSANDS)
Project costs (a)
Acquisition and other related costs (b)
Restructuring (c)
Impairment of investment and long-lived asset (d)
Gain on sale of properties
2011
22,412
5,000
–
–
–
27,412
$
$
2010
27,820
1,967
4,179
6,788
(106)
40,648
$
$
(a) Project costs incurred in 2011 and 2010 relate to the implementation of a new information technology (IT) system for the Company’s global
operations. The new IT system was implemented in Finning (Canada) on July 4, 2011 and costs in the second half of 2011 included additional
support costs for Finning (Canada)’s implementation. Subsequent implementations are planned for the U.K. and then South American
operations.
(b) Acquisition and other related costs incurred in 2011 relate to the acquisition from Caterpillar of the distribution and support business
formerly operated by Bucyrus International, Inc (Bucyrus) in Finning’s dealership territories in South America, Canada, and the U.K.,
anticipated to be completed in 2012 (Note 32). Acquisition costs incurred during 2010 relate to the acquisition of the Caterpillar dealerships
in Northern Ireland and the Republic of Ireland (Note 22).
(c) During 2010, the Company incurred restructuring and severance costs of $4.2 million. These costs related primarily to severance in the
Company’s Canadian operations, in response to market conditions.
(d) 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 $1.8 million impairment
of an intangible asset.
3. SHORT-TERM AND LONG-TERM DEBT
($ 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 (January 1, 2010: £115 million) Eurobond, due May 30, 2013
Other term loans (a)
Less current portion of long-term debt
Total long-term debt
December 31
2011
December 31
2010
January 1
2010
$
334,525
$
89,965
$
162,238
–
249,662
348,800
110,343
54,274
763,079
(508)
762,571
$
149,909
249,460
348,614
108,172
57,999
914,154
(203,087)
711,067
$
149,813
249,258
348,427
193,495
42,343
983,336
(24,179)
959,157
$
(a) Other term loans include U.S. $10.0 million, £21.5 million, and EUR 4.0 million (2010: U.S. $35.5 million, £10.0 million, and EUR nil) 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 term loans also include £3.1 million (2010: £3.4 million) of unsecured uncommitted loans. In 2010,
other loans also included £0.5 million of rental equipment financing secured by the related equipment, with varying rates of interest from
5.8% – 6.8%, which matured in 2011.
SHORT-TERM DEBT
Short-term debt primarily consists of commercial paper borrowings and other short-term bank indebtedness that matures within one year. 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 a $1.0 billion 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, 2011, the Company had approximately $1,563 million (2010: $1,194 million) of unsecured credit facilities, and including all
bank and commercial paper borrowings drawn against these facilities, approximately $1,192 million (2010: $1,027 million) of capacity remained
available, of which approximately $727 million (2010: $803 million) is committed credit facility capacity.
2011 ANNUAL REPORT FINNING INTERNATIONAL INC. 59
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3. SHORT-TERM AND LONG-TERM DEBT (continued)
SHORT-TERM DEBT (CONTINUED)
Included in short-term debt is foreign currency denominated debt of U.S. $181.8 million and Argentine Peso (ARS) 62.0 million (2010: U.S.
$59.1 million, ARS nil).
The average interest rate applicable to the consolidated short-term debt for 2011 was 1.6% (2010: 3.9%).
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 5.625% Eurobond is unsecured, and interest is payable annually with principal due on maturity.
In the fourth quarter of 2011, the Company repaid its 4.64% $150 million medium term note. Repayment of the note was funded by the issuance
of commercial paper under the Company’s commercial paper program.
In September 2011, the Company entered into a new unsecured syndicated operating credit facility of up to $1.0 billion. This new facility replaces
the previous $800 million global credit facility, which was set to expire in December 2011. The new 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. The new committed facility matures in September 2015 and contains annual options
to extend the maturity date on terms reflecting market conditions at the time of the extension. At December 31, 2011, $273 million (2010:
$63 million) was drawn on the global credit facility, including commercial paper issuances.
Subsequent to year end, in January 2012, the Company issued unsecured senior notes in the U.S. private placement market of U.S. $200 million.
The Company issued the notes in two series of U.S. $100 million each: the 3.98% Senior Notes, Series A, due January 19, 2022 and the 4.08%
Senior Notes, Series B, due January 19, 2024. Proceeds from the notes were used to repay commercial paper borrowings and for general
corporate purposes.
LONG-TERM DEBT REPAYMENTS
Principal repayments of long-term debt (book value) in each of the next five years and thereafter are as follows:
($ THOUSANDS)
2012
2013
2014
2015
2016
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 (a)
Interest income on tax reassessment
Other finance related expenses
Less:
Borrowing costs capitalized to property, plant, and equipment
Interest expense related to discontinued operations
Finance costs of continuing operations
60
$
$
508
360,546
577
49,650
251
351,547
763,079
2011
2010
$
$
2,663
48,090
50,753
1,486
–
(2,411)
4,875
54,703
(1,461)
–
53,242
$
$
1,548
50,364
51,912
1,663
6,441
(2,941)
3,322
60,397
(672)
(2,109)
57,616
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(a) Following the May 2010 sale of Hewden, the Company’s UK equipment rental business (see Note 23), the Company used a portion of
the proceeds to purchase £45 million of its £115 million 5.625% Eurobond, due 2013. The Company recorded charges of approximately
$6.4 million, reflecting the premium paid to purchase the Eurobond, the early recognition of deferred financing costs, and other costs
associated with this purchase.
4. FINANCIAL INSTRUMENTS
OVERVIEW
Finning and its subsidiaries are exposed to market, credit, liquidity, and other risks in the normal course of their business activities. The Company’s
Enterprise Risk Management process is designed to ensure that such risks are identified, managed, and reported. On a quarterly basis, the Audit
Committee reviews the Company’s process with respect to risk assessment and management of key risks, including the Company’s major financial
risks and exposures and the steps taken to monitor and control such exposures. Changes to the key risks are reviewed by the Audit Committee.
The Audit Committee also reviews the adequacy of disclosures of key risks in the Company’s Annual Information Form, Management’s Discussion
and Analysis, and Consolidated Financial Statements.
This note presents information about the Company’s exposure to credit, liquidity, and market risks and the Company’s objectives, policies, and
processes for managing these risks.
CREDIT RISK
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual
obligations, and arises principally in respect of the Company’s cash and cash equivalents, receivables from customers and suppliers, instalment
and other notes receivable, advances to associates, and derivative assets.
EXPOSURE TO CREDIT RISK
The carrying amount of financial assets and service work in progress represents the maximum credit exposure. The exposure to credit risk at
the reporting date was:
($ THOUSANDS)
Cash and cash equivalents(1)
Accounts receivable – trade(1)
Accounts receivable – other
Service work in progress
Supplier claims receivable
Instalment notes receivable
Note receivable
Derivative assets
Advance to associate
December 31
2011
December 31
2010
January 1
2010
$
122,745
819,066
43,632
171,214
83,452
32,767
24,924
2,287
2,250
$ 1,302,337
$
$
346,387
619,148
44,772
73,602
50,093
26,760
28,078
7,420
–
1,196,260
$
$
194,910
589,106
31,045
62,563
40,121
32,126
–
29,499
–
979,370
(1) The January 1, 2010 opening balances disclosed in this note include the cash and trade receivables of discontinued operations of $51.5 million and $38.4 million,
respectively.
CASH AND CASH EQUIVALENTS
Credit risk associated with cash and cash equivalents is managed by ensuring that these financial assets are held with major financial institutions
with strong investment grade ratings and by maintaining limits on exposures with any single institution. An ongoing review is performed to
evaluate the changes in the credit rating of counterparties.
2011 ANNUAL REPORT FINNING INTERNATIONAL INC. 61
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4. FINANCIAL INSTRUMENTS (continued)
ACCOUNTS RECEIVABLE, SERVICE WORK IN PROGRESS, AND OTHER RECEIVABLES
Accounts receivable comprises trade accounts and non-trade accounts. Service work in progress relates to unbilled work in progress for external
customers and represents the costs incurred plus recognized profits, net of any recognized losses and progress billings.
The Company has a large diversified customer base, and is not dependent on any single customer or group of customers. Credit risk is minimized
because of the diversification of the Company’s operations as well as its large customer base and its geographical dispersion.
The Company makes estimates for allowances that represent estimates of potential losses in respect of trade and other receivables. The main
components of these allowances are a specific loss component that relates to individually significant exposures, and a collective loss component
established for groups of similar receivables in respect of losses that may have been incurred but not yet specifically identified. The collective loss
allowance is estimated based on historical data of payment statistics for similar receivables, adjusted for current economic conditions.
The maximum exposure to credit risk for trade receivables at the reporting date by geographic location of customer was:
($ THOUSANDS)
Canada
Chile
U.K.
Argentina
Bolivia
Europe
Uruguay
U.S.
Other
December 31
2011
December 31
2010
January 1
2010(1)
$
$
475,205
170,953
96,011
54,801
10,664
5,363
3,980
1,439
650
819,066
$
$
331,141
147,746
71,504
49,885
4,911
6,788
2,992
1,432
2,749
619,148
$
$
310,006
109,193
123,151
37,125
4,782
2,072
1,484
768
525
589,106
(1) The January 1, 2010 opening balances disclosed in this note include the receivables of discontinued operations of $38.4 million.
IMPAIRMENT LOSSES
The aging of trade receivables at the reporting date was:
($ 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
December 31, 2011
Gross Allowance
December 31, 2010
Gross
Allowance
January 1, 2010(1)
Gross
Allowance
$ 576,332
149,190
47,725
22,613
43,943
$ 839,803
$
–
–
475
407
19,855
$ 20,737
$ 452,558
111,336
28,860
8,092
32,111
$ 632,957
$
$
–
–
586
355
12,868
13,809
$ 409,991
122,382
36,610
6,094
38,229
$ 613,306
$
$
804
1,223
1,153
745
20,275
24,200
(1) The January 1, 2010 opening balances disclosed in this note include the gross receivables and allowance for doubtful accounts of discontinued operations of
$43.2 million and $4.8 million, respectively.
The movement in the allowance for doubtful accounts in respect of trade receivables during the period was as follows:
For years ended December 31
($ THOUSANDS)
Balance, beginning of year(1)
Additional allowance
Receivables written off
Foreign exchange translation adjustment
Balance, end of year
2011
13,809
11,930
(4,819)
(183)
20,737
$
$
2010
19,426
9,114
(14,503)
(228)
13,809
$
$
(1) The January 1, 2010 opening balance disclosed in this note excludes the allowance for doubtful accounts of discontinued operations of $4.8 million.
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.
62
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 primarily 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, 2011
were $1,192 million (2010: $1,027 million). The Company believes that it has reasonable access to capital markets which is supported by its
investment grade credit ratings.
The following are the contractual maturities of non-derivative financial liabilities and derivative financial assets and liabilities. The amounts
presented represent the future undiscounted principal and interest cash flows and therefore do not equate to the carrying amount on the
consolidated statement of financial position.
($ THOUSANDS)
Non-derivative financial
liabilities
Short-term debt
Unsecured MTNs
Eurobond
Unsecured bank facilities
Other term loans
Finance lease obligations
Accounts payable and accruals
(excluding current portion
of finance lease obligations)
Total non-derivative financial
liabilities
Derivatives
Forward foreign currency
contracts and swaps
Sell CAD
Buy USD
Sell USD
Buy CAD
Sell CLP
Buy USD
Sell USD
Buy CLP
Sell EUR
Buy USD
Sell GBP
Buy USD
Share forward
Sell
Buy
Total derivatives
Carrying amount
December 31,
2011
2012
2013-2014
2015-2016
Thereafter
Contractual cash flows
$
(334,525)
(598,462)
(110,343)
(49,415)
(4,859)
(14,891)
$
(337,236)
(33,970)
(6,221)
(967)
(820)
(3,087)
$
–
(305,040)
(116,814)
(1,934)
(1,640)
(3,972)
$
–
(42,140)
–
(50,382)
(902)
(2,617)
$
–
(381,576)
–
–
(3,646)
(17,234)
(963,787)
(963,787)
–
–
–
$ (2,076,282)
$
(1,346,088)
$
(429,400)
$
(96,041)
$
(402,456)
$
$
–
696
–
1,099
–
371
(7,022)
–
–
96
–
25
(16,493)
–
(21,228)
$
$
(82,062)
82,578
(146,448)
147,613
(73,220)
73,224
(122,040)
116,286
(3,760)
3,857
(2,524)
2,543
(16,493)
–
(20,446)
$
$
–
–
–
–
–
–
(33,561)
35,470
–
–
–
–
–
–
1,909
$
$
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
$
$
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Canadian dollar (CAD), United States dollar (USD), Chilean peso (CLP), Euro (EUR), U.K. pound sterling (GBP)
2011 ANNUAL REPORT FINNING INTERNATIONAL INC. 63
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 utilizes 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 and 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 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
exchange risk with regard to foreign currency earnings.
The Company’s South American, U.K. and Ireland 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 upon disposal of a 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
2011
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
6,344
382,517
(733,440)
(268,035)
(612,614)
65,551
44,270
170,149
(191,789)
(435,423)
(412,793)
(150,096)
22,502
59,546
(94,450)
(74,622)
(87,024)
(1,598)
6,971,539
83,281,988
–
(53,384,927)
36,868,600
40,274,715
64
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
Foreign forward exchange contracts and collars
January 1
(THOUSANDS)
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 collars
CAD
USD
2010
11,760
309,158
(780,259)
(155,469)
(614,810)
(33,418)
255,418
95,683
(94,550)
(216,344)
40,207
38,144
GBP
15,559
48,093
(83,685)
(71,126)
(91,159)
–
CLP
21,418,441
63,119,600
–
(47,380,918)
37,157,123
(625,800)
CAD
USD
GBP
CLP
2010
9,530
310,568
(754,355)
(108,204)
(542,461)
(98,347)
84,307
44,640
(186,190)
(154,869)
(212,112)
118,838
8,892
49,417
(116,061)
(54,493)
(112,245)
(9,281)
7,950,752
49,970,186
–
(29,608,930)
28,312,008
(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, 2011 month end rates
would increase / (decrease) net income and 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
2011
Other
Comprehensive
Income
2010
Other
Comprehensive
Income
Net Income
Net Income
$
$
$
(26,000)
(2,000)
400
$
$
$
(44,000)
(7,000)
–
$
$
$
(24,000)
(1,000)
2,000
$
$
$
(40,000)
(11,000)
–
A 5% weakening of the Canadian dollar against the above currencies relative to the December 31, 2011 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 twelve 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.
2011 ANNUAL REPORT FINNING INTERNATIONAL INC. 65
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:
($ THOUSANDS)
Fixed rate instruments
Financial assets
Financial liabilities
Variable rate instruments
Financial assets
Financial liabilities
December 31
2011
December 31
2010
January 1
2010
$
$
$
$
57,691
(723,696)
(666,005)
124,995
(405,292)
(280,297)
$
$
$
$
54,838
(872,285)
(817,447)
346,387
(156,636)
189,751
$
$
$
$
58,205
(964,980)
(906,775)
194,910
(230,725)
(35,815)
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, or any derivative interest rate
instruments for which fair value changes are recognized in other comprehensive income. Therefore a change in interest rates at the reporting date
would not affect net income or other comprehensive income.
NET INCOME SENSITIVITY ANALYSIS FOR VARIABLE RATE INSTRUMENTS
An increase of 1.0% in short-term interest rates for a full year relative to the interest rates at the reporting date would have decreased net
income by approximately $2.0 million (2010: increase to net income of $2.0 million) with a 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.
SHARE-BASED PAYMENT RISK
Share-based payment 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. Share-based payment plans are accounted for at fair value, and the expense associated with
these plans can therefore vary as the Company’s share price, share price volatility and employee exercise behavior change. 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, 2011 and 2010, the VRSF relates to 1.5 million common 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, 2011, all other variables remaining constant, would have increased net
income by approximately $1.6 million (2010: $1.4 million) as a result of revaluing the Company’s VRSF with a 5% weakening having the opposite
effect. This fair value impact partially mitigates changes in the fair value of the Company’s cash-settled share-based payment liability.
FAIR VALUES
The following fair value information is provided solely to comply with financial instrument disclosure requirements. 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
66
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2011 and 2010, 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, 2011 and
2010. The Company did not move any instruments between levels of the fair value hierarchy during the years ended December 31, 2011 and 2010.
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, 2011
Foreign Exchange
Forwards and swaps buy
USD / sell CAD
Forwards sell USD / buy CAD
Forwards buy USD / sell CLP
Forwards sell USD / buy CLP
Forwards sell EUR / buy USD
Forwards sell GBP / buy USD
Long-Term Incentive Plans
Variable Rate Share Forward
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
Long-Term Incentive Plans
Variable Rate Share Forward
January 1, 2010
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
Forwards sell USD / buy CLP
Forwards buy USD / sell GBP
Long-Term Incentive Plans
Variable Rate Share Forward
Derivative assets – current
Derivative assets – current
Derivative assets – current
Derivative liabilities – current
Derivative assets – current
Derivative assets – current
USD 81,198
USD 144,000
USD 72,000
USD 153,000
2,850
EUR
1,567
GBP
1-12 months
1 month
1-2 months
1-23 months
1 month
6-8 months
$
$
$
$
$
$
696
1,099
371
(7,022)
96
25
Derivative liabilities – current
CAD 43,065
11 months
$
(16,493)
Derivative liabilities – current
Derivative assets – current
Derivative liabilities – current
Derivative assets – current
USD 132,144
USD 100,000
45,000
USD
39,000
USD
1-18 months
2 months
1 month
1-12 months
Derivative liabilities – long term
CAD
43,065
2012
Derivative assets – long term
GBP
60,000
December 2020
Derivative liabilities – current
Derivative assets – current
Derivative assets – current
Derivative 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
$
$
$
$
$
$
$
$
$
$
(3,937)
2,843
(484)
4,577
(8,672)
26,079
(5,669)
747
2,348
325
Derivative liabilities – long term
CAD
48,809
November 2012
$
(26,144)
LONG-TERM DEBT
The fair value of the Company’s long-term debt is estimated as follows:
($ THOUSANDS)
Long-term debt
December 31, 2011
December 31, 2010
January 1, 2010
Book Value
Fair Value
Book Value
Fair Value
Book Value
Fair Value
$ 763,079
$ 838,548
$ 914,154
$ 982,002
$ 983,336
$ 1,025,891
2011 ANNUAL REPORT FINNING INTERNATIONAL INC. 67
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 statement of financial position:
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 debt 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 last 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
($ THOUSANDS, EXCEPT AS NOTED)
Company Targets
December 31
2011
December 31
2010
January 1
2010
Components of Debt Ratio
Cash and cash equivalents
Short-term debt
Current portion of long-term debt
Long-term debt
Net debt
Shareholders’ equity
Net debt to total capitalization
Dividend payout ratio
$
(122,745)
334,525
508
762,571
$
974,859
$ 1,344,954
$
$
$
(346,387)
89,965
203,087
711,067
657,732
1,202,985
$
$
$
(194,910)
162,238
24,179
959,157
950,664
1,289,067
35 - 45%
25 - 30%
42.0%
34.4%
35.3%
45.3%
42.4%
n/a
The dividend payout ratio in 2011 and 2010 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 year.
68
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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, 2011 and 2010, 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 year ended December 31, 2011
($ thousands)
Provision for income taxes
Current
Adjustment for prior periods recognized in the current year
Deferred
Origination and reversal of timing differences
Adjustment for prior periods recognized in the current year
Change in unrecognized timing differences
Provision for income taxes
For year ended December 31, 2010
($ thousands)
Provision for income taxes
Current
Adjustment for prior periods recognized in the current year
Deferred
Origination and reversal of timing differences
Adjustment for prior periods recognized in the current year
Increase (decrease) due to tax rate changes
Provision for income taxes
Canada
International
Total
$
$
$
$
24,395
(2,548)
21,847
2,673
(591)
290
2,372
24,219
$
$
40,758
(267)
40,491
1,626
(951)
1,745
2,420
42,911
Canada
International
18,709
(3,017)
15,692
4,736
3,760
835
9,331
25,023
$
$
31,093
2,734
33,827
(6,685)
(3,053)
(2,557)
(12,295)
21,532
$
$
$
$
65,153
(2,815)
62,338
4,299
(1,542)
2,035
4,792
67,130
Total
49,802
(283)
49,519
(1,949)
707
(1,722)
(2,964)
46,555
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
Changes in statutory tax rates
Non-deductible share-based payment
Unrecognized intercompany profits
Other
Provision for income taxes
2011
2010
$
86,848
26.60%
$
64,194
28.20%
(12,100)
(7,577)
1,764
600
(1,613)
(792)
67,130
$
(3.71)%
(2.32)%
0.54%
0.18%
(0.49)%
(0.24)%
20.56%
(11,812)
(6,770)
(1,470)
239
(1,102)
3,276
46,555
$
(5.19)%
(2.97)%
(0.65)%
0.10%
(0.48)%
1.44%
20.45%
In addition to the decreased combined statutory Canadian federal and provincial income tax rate referred to above, Finning recognized the
impact of the following substantively enacted corporate income tax rate changes:
•
•
Chile’s corporate (first tier) income tax rate increased from 17% to 20% effective January 1, 2011 and decreased to 18.5% effective January 1,
2012. The rate will further decrease to 17% effective January 1, 2013.
The U.K.’s corporate income tax rate decreased from 28% to 27% effective April 1, 2010 and to 26% effective April 1, 2011. The rate will
decrease to 25% effective April 1, 2012.
2011 ANNUAL REPORT FINNING INTERNATIONAL INC. 69
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
6. INCOME TAXES (continued)
DEFERRED TAX ASSET AND LIABILITY
Temporary differences and tax loss carry-forwards that give rise to deferred tax assets and liabilities are as follows:
($ THOUSANDS)
Deferred tax assets:
Accounting provisions not currently deductible for tax purposes
Employee benefits
Share-based payments
Loss carry-forwards
Deferred tax liabilities:
Fixed, rental, and leased assets
Other
Net deferred tax asset
December 31
2011
December 31
2010
January 1
2010(1)
$
$
50,403
35,042
11,026
3,629
100,100
(30,059)
(6,735)
(36,794)
63,306
$
$
53,254
28,841
6,979
3,442
92,516
(39,290)
(7,208)
(46,498)
46,018
$
$
54,999
35,845
1,907
3,563
96,314
(73,699)
(4,267)
(77,966)
18,348
(1) The January 1, 2010 opening balances disclosed in this note include the net deferred tax liability of discontinued operations of $14.9 million.
Deferred taxes are not recognized on retained profits of approximately $837 million (2010: $685 million) of foreign subsidiaries, as it is the
Company’s intention to invest these profits to maintain and expand the business of the relevant companies.
The Company has recognized the benefit of the following tax loss carry-forwards available to reduce future taxable income and capital gains
expiring through 2027 for Canada and expiring between 2013 and 2029 for International:
December 31
($ THOUSANDS)
Canada
International
2011
451
12,035
12,486
$
$
2010
–
10,551
10,551
$
$
As at December 31, 2011, the Company has unrecognized net operating losses and capital loss carry-forwards of $1.5 million and $253 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, 2011 and 2010.
The Company is authorized to issue an unlimited number of common shares.
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 2011, 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 2014 unless further extended by the shareholders prior to that time.
The plan will not be triggered if a bid meets certain criteria (a permitted bidder). These criteria include that:
•
•
•
the offer is made for all outstanding voting shares of the Company;
more than 50% of the voting shares have been tendered by independent shareholders pursuant to the Takeover Bid (voting shares tendered
may be withdrawn until taken up and paid for); and
the Takeover Bid expires not less than 60 days after the date of the bid circular.
70
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
8. SHARE-BASED PAYMENTS
The Company has a number of share-based compensation plans in the form of share options and other share-based compensation plans noted below.
SHARE OPTIONS
The Company has several share option plans for certain employees with vesting occurring over a three-year period. The exercise price of each
option is based on the weighted average trading price of the common shares of the Company on the date prior to 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 share options. At
December 31, 2011, 1.6 million common shares remain eligible to be issued in connection with future grants under this Stock Option Plan.
Details of the share option plans are as follows:
For years ended December 31
Options outstanding, beginning of year
Granted
Exercised(1)
Forfeited
Options outstanding, end of year
Exercisable at year end
2011
Weighted
Average
Exercise Price
$
$
$
$
$
$
24.16
28.28
13.92
30.52
24.47
25.31
Options
5,602,612
479,540
(238,825)
(432,721)
5,410,606
4,279,839
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
(1) Share options exercised in 2011 comprised both cash and cashless exercises, based on the terms of the particular share option plan. There were 78,568 options
exercised under the pre-2005 Stock Option Plan which utilized a cash method of exercise resulting in the same number (78,568) of common shares issued.
Under the 2005 Stock Option Plan, exercises are generally by way of 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 160,257 options were exercised in 2011 under the 2005 Stock Option Plan resulting in 63,835 common shares issued and 96,422 options were
withheld and returned to the option pool for future issues/grants.
In 2011 and 2010, long-term incentives for executives and senior management were a combination of both share options and performance share
units. In 2011, the Company granted 479,540 common share options to senior executives and management of the Company (2010: 548,990
common share options). The Company’s practice is to grant and price share 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(1)
Risk-free interest rate
Expected life
(1) Expected volatility is based on historical share price volatility.
The weighted average grant date fair value of options granted during the year was $8.44 (2010: $5.20).
The following table summarizes information about share options outstanding at December 31, 2011:
2011 Grant
2010 Grant
1.88%
33.81%
2.65%
5.9 years
1.75%
33.42%
2.65%
5.8 years
Range of exercise prices
$14.64 - $16.85
$16.86 - $19.78
$19.79 - $29.06
$29.07 - $30.72
$30.73 - $31.67
Options Outstanding
Options Exercisable
Number
Outstanding
930,697
1,486,833
481,776
1,495,100
1,016,200
5,410,606
Weighted
Average
Remaining
Life
Weighted
Average
Exercise
Price
3.7 years
2.8 years
6.3 years
3.4 years
2.4 years
3.3 years
$
$
$
$
$
$
14.91
18.94
28.23
29.83
31.66
24.47
Number
Outstanding
Weighted
Average
Exercise
Price
632,773
1,132,590
3,176
1,495,100
1,016,200
4,279,839
$
$
$
$
$
$
15.03
19.41
19.82
29.83
31.66
25.31
2011 ANNUAL REPORT FINNING INTERNATIONAL INC. 71
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
8. STOCK-BASED COMPENSATION PLANS (continued)
OTHER SHARE-BASED COMPENSATION PLANS
The Company has other share-based compensation plans in the form of deferred share units, performance share units, and share appreciation
rights that use notional common share units. These notional units are fair valued using a Black-Scholes option-pricing model.
In December 2007, the Company entered into a Variable Rate Share Forward (VRSF) with a financial institution to hedge a portion of its
outstanding vested 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 share-based compensation plans – see Note 4.
Details of the plans are as follows:
DIRECTORS
DIRECTORS’ DEFERRED SHARE UNIT PLAN A (DDSU)
The Company offers a Deferred Share Unit Plan (DDSU) for members of the Board of Directors. Under the DDSU Plan, non-employee
Directors of the Company may elect to allocate all or a portion of their annual compensation as deferred share units. These units are fully
vested upon issuance. These units accumulate dividend equivalents in the form of additional units based on the dividends paid on the Company’s
common shares.
Units are redeemable for cash or shares only following cessation of service on the Board of Directors and must be redeemed by December 31st
of the year following the year in which the cessation occurred. The value of the deferred share units when converted to cash will be equivalent
to the market value of the Company’s common shares at the time the conversion takes place.
Non-employee Directors of the Company were allocated a total of 21,386 deferred share units in 2011 (2010: 34,430 share units), which were
granted to the Directors and expensed over the calendar year as the units are issued. An additional 4,304 (2010: 11,464) DSUs were issued in
lieu of cash compensation payable for service as a director. A further 4,171 (2010: 7,770) DSUs were granted to present directors during 2011
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. All outstanding DSU-B units are vested.
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 210,000 performance share units in 2011, based on 100% vesting (2010: 236,390).
72
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The specified levels and respective vesting percentages are as follows:
Average Return on Equity
(over three-year period)
Performance Level
2011 Plan
2010 Plan
2009 Plan
Below Threshold
Threshold
Target
Maximum
<15%
15%
18%
22% or more
< 12%
12%
14%
17% or more
< 12%
12%
15%
17% or more
Proportion of PSUs Vesting
2011 Plan 2010 and 2009 plans
Nil
50%
100%
200%
Nil
25%
100%
150%
The return on equity performance levels for PSU granted in 2010 and 2009 have been set with reference to Canadian GAAP financial information.
These performance levels have subsequently been reviewed for IFRS impacts; for years where Canadian GAAP financial information is not
available, the actual performance will be decreased by approximately 3% to reflect the impact of the transition to IFRS.
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
Forfeited
Outstanding, end of year
LIABILITY
($ THOUSANDS)
Balance, beginning of year
Expense
Exercised
Forfeited
Balance, end of year
For year ended December 31
UNITS
Outstanding, beginning of year
Additions
Exercised
Forfeited
Outstanding, end of year
LIABILITY
($ THOUSANDS)
Balance, beginning of year
Expense
Exercised
Forfeited
Balance, end of year
DSU-B
DDSU
PSU
Total
2011
373,252
6,297
(80,801)
–
298,748
8,927
(838)
(2,259)
–
5,830
DSU-B
570,490
10,776
(208,014)
–
373,252
8,582
4,758
(4,413)
–
8,927
$
$
$
$
361,414
31,644
(163,744)
–
229,314
498,238
357,944
(122,701)
(10,321)
723,160
1,232,904
395,885
(367,246)
(10,321)
1,251,222
$
$
$
$
8,950
(219)
(4,229)
–
4,502
2010
DDSU
307,506
53,908
–
–
361,414
4,880
4,070
–
–
8,950
$
$
$
$
4,937
4,336
(2,599)
(312)
6,362
$
$
22,814
3,279
(9,087)
(312)
16,694
PSU
Total
–
510,303
–
(12,065)
498,238
895,429
575,065
(225,525)
(12,065)
1,232,904
–
4,943
–
(6)
4,937
$
$
13,724
13,960
(4,864)
(6)
22,814
DSU-A
17,433
78
(17,511)
–
–
$
$
262
189
(451)
–
–
As at December 31, 2011 and 2010, all outstanding deferred share units have vested. During the year ended December 31, 2011, the 2009 grant
of performance share units (PSU) vested (122,701 units). As at December 31, 2011 and 2010, none of the outstanding performance share units
(PSU) were vested.
2011 ANNUAL REPORT FINNING INTERNATIONAL INC. 73
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
8. STOCK-BASED COMPENSATION PLANS (continued)
MANAGEMENT SHARE APPRECIATION RIGHTS (SAR) PLAN
Beginning in 2002, awards under the SAR Plan (which uses notional units) were granted to senior managers within Canada and the U.K. and are
exercisable over a seven-year period. The exercise price is based on the weighted average trading price of the common shares of the Company
on the date prior to the grant. Under the SAR Plan, the compensation expense is recognized over the three-year vesting period of the grant
based on the fair value of the awards at the end of each reporting period. Compensation expense is also adjusted over the seven-year life of the
award to reflect movements in the fair value of the awards.
No SAR units have been issued to management since 2005. Details of the SAR plans (which are all fully vested), excluding the impact of the VRSF
hedge, are as follows:
For years ended December 31
UNITS
Outstanding, beginning of year
Exercised
Forfeited
Outstanding, end of year
LIABILITY
($ THOUSANDS)
Balance, beginning of year
Expense (recovery)
Exercised
Foreign exchange rate changes
Balance, end of year
Strike price ranges:
2011
2010
242,440
(124,633)
–
117,807
474,664
(225,224)
(7,000)
242,440
$
$
$
2,812
(510)
(1,386)
12
928
$
$
2,474
1,624
(1,344)
58
2,812
16.22
$14.69-$16.22
The fair value of the DSU-B, DDSU, PSU, and SARs units granted has been estimated using the Black-Scholes option-pricing model with the
following weighted-average assumptions:
December 31, 2011
DSU-B
DDSU
PSU
SAR
Dividend yield
Expected volatility
Risk-free interest rate
Expected life
Share price at December 31 2011
Estimated fair value per unit at year-end
1.87%
33.85%
1.49%
6.92 years
22.21
$
19.51
$
1.91%
34.65%
1.44%
6.45 years
22.21
$
19.64
$
2.42%
35.78%
1.00%
3.00 years
22.21
$
20.65
$
2.14%
39.12%
1.21%
4.06 years
22.21
$
7.88
$
December 31, 2010
DSU-B
DDSU
PSU
SAR
Dividend yield
Expected volatility
Risk-free interest rate
Expected life
Share price at December 31 2010
Estimated fair value per unit at year-end
1.74%
31.63%
2.70%
7.16 years
27.09
23.92
$
$
2.04%
36.61%
2.24%
4.40 years
27.09
24.76
$
$
1.72%
40.66%
1.86%
3.00 years
27.09
25.73
$
$
2.01%
35.04%
2.29%
4.54 years
27.09
12.54
$
$
74
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY – IMPACT OF SHARE-BASED PAYMENT PLANS
For years ended December 31
($ THOUSANDS)
Consolidated statement of income
Compensation expense arising from equity-settled share option incentive plan
Compensation expense arising from cash-settled share based payments
Impact of variable rate share forward
Consolidated statement of financial position
Non-current liability for cash-settled share based payments (to be incurred within 1-5 years)
Variable rate share forward liability (Note 4)
2011
2010
$
$
$
$
3,463
2,457
7,823
13,743
17,622
16,493
$
$
$
$
4,117
15,578
(16,422)
3,273
25,626
8,672
The total intrinsic value of vested but not settled share based payments was $12.4 million (2010: 22.5 million).
9. EARNINGS PER SHARE
Basic earnings per share (EPS) is calculated by dividing net income available to common shareholders by the weighted average number of
common shares outstanding during the period. Diluted EPS is determined by dividing net income available to common shareholders by the
weighted average number of common shares outstanding, adjusted for the effects of all dilutive potential common shares, which comprise
share options granted to employees.
Net income used in determining EPS from continuing operations are presented below. Net income used in determining EPS from discontinued
operations in 2010 is the net income from discontinued operations as reported in the consolidated statements of income.
For years ended December 31
($ THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
2011
Basic EPS from continuing operations:
Net income
Effect of dilutive securities: share options
Diluted EPS from continuing operations:
Net income and assumed conversions
2010
Basic EPS from continuing operations:
Net income from continuing operations
Effect of dilutive securities: share options
Diluted EPS from continuing operations:
Net income from continuing operations and assumed conversions
10. INVENTORIES
($ THOUSANDS)
On-hand equipment
Parts and supplies
Internal service work in progress
Inventories
Income
Shares
Per Share
$
259,365
–
171,546,035
740,890
$
259,365
172,286,925
$
181,083
–
171,029,585
688,676
$
181,083
171,718,261
December 31
2011
December 31
2010
$
783,755
540,738
118,336
$ 1,442,829
$
$
567,085
393,146
115,593
1,075,824
$
$
$
$
$
$
1.51
–
1.51
1.06
–
1.06
January 1
2010(1)
564,998
326,481
77,059
968,538
(1) The January 1, 2010 opening balances disclosed in this note include the inventory of discontinued operations of $1.4 million.
For the year ended December 31, 2011, on-hand equipment, parts, supplies, and internal service work in progress recognized as an expense in cost
of sales amounted to $3,928.0 million (2010: $2,974.6 million from continuing operations). For the year ended December 31, 2011, the write-down
of inventories to net realizable value, included in cost of sales, amounted to $28.9 million (2010: $39.0 million from continuing operations).
2011 ANNUAL REPORT FINNING INTERNATIONAL INC. 75
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
11. POWER SYSTEMS CONSTRUCTION CONTRACTS
The Company undertakes long-term contracts to construct power systems solutions for certain customers. Information about these contracts is
summarised below:
December 31
($ THOUSANDS)
Aggregate of contract costs, profits and losses for contracts in progress
Advances from customers under construction contracts
Amounts due from customers under construction contracts
Retentions held by customers for contract work
2011
40,396
(6,657)
9,544
974
$
$
12. OTHER ASSETS
($ THOUSANDS)
Other assets – current:
Supplier claims receivable
Prepaid expenses
Current portion of finance assets (Note 14)
Value Added Tax receivable
Other
Other assets – long term:
Note receivable (Note 23)
Other
December 31
2011
December 31
2010
$
$
$
$
83,452
33,108
23,495
9,167
5,581
154,803
24,924
9,360
34,284
$
$
$
$
50,093
25,358
19,444
7,821
11,380
114,096
28,078
9,829
37,907
2010
39,745
(1,339)
3,264
445
January 1
2010(1)
40,121
28,551
23,479
12,400
13,569
118,120
–
13,735
13,735
$
$
$
$
$
$
(1) The January 1, 2010 opening balances disclosed in this note include the current and long-term other assets of discontinued operations of $4.5 million and
$0.5 million, respectively.
13. JOINT VENTURE AND ASSOCIATE
The Company accounts for its investment in joint ventures and associates using the equity method of accounting. The Company’s share of net
income and net assets in its joint ventures and associates is as follows:
For year ended December 31, 2011
($ THOUSANDS)
Name of Venture
PipeLine Machinery
Energyst B.V.(1)
Type of Venture
Jointly Controlled Entity
Associate
Proportion
of Ownership Company’s Share
of Net Assets
Interest Held
Company’s Share
of Net Income
(Loss)
25.0%
27.0%
$
$
41,468
20,132
61,600
$
$
7,990
(1,316)
6,674
(1) Included in the investment in associate is an advance of $2.2 million to Energyst, bearing interest at 6.5% + 3 month Euribor, and due April 30, 2014.
For year ended December 31, 2010
($ THOUSANDS)
Name of Venture
PipeLine Machinery
Energyst B.V.
As at January 1, 2010
($ THOUSANDS)
Name of Venture
PipeLine Machinery
Energyst B.V.
CSS LLP
Company’s Share
of Net Income
(Loss)
$
$
7,014
(1,424)
5,590
Type of Venture
Proportion
of Ownership
Interest Held
Jointly Controlled Entity
Associate
25.0%
25.4%
Type of Venture
Jointly Controlled Entity
Associate
Jointly Controlled Entity
Proportion
of Ownership
Interest Held
25.0%
25.4%
25.0%
Company’s Share
of Net Assets
$
$
34,995
18,013
53,008
Company’s Share
of Net Assets
$
$
32,157
27,687
511(1)
60,355
(1) This investment in joint venture was part of discontinued operations.
76
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
14. FINANCE ASSETS
($ THOUSANDS)
Instalment notes receivable
Equipment leased to customers
Less accumulated depreciation
Total finance assets
Less current portion of instalment notes receivable
December 31
2011
December 31
2010
$
$
32,767
38,731
(14,183)
24,548
57,315
(23,495)
33,820
$
$
26,760
32,253
(9,411)
22,842
49,602
(19,444)
30,158
January 1
2010
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, 2011 was $4.9 million (2010: $4.0 million).
December 31
($ THOUSANDS)
Instalment notes receivable:
Gross investment
Less: unearned finance income
Present value of minimum lease payments receivable
Receivable as follows:
Present value
Within one year
After more than one year
Minimum lease payments:
Within one year
After more than one year
Less unearned finance income
2011
2010
$
$
$
$
$
$
37,390
(4,623)
32,767
23,495
9,272
32,767
25,400
11,990
(4,623)
32,767
$
$
$
$
$
$
30,943
(4,183)
26,760
19,444
7,316
26,760
22,095
8,848
(4,183)
26,760
15. PROPERTY, PLANT, AND EQUIPMENT AND RENTAL EQUIPMENT
($ THOUSANDS)
Land
Buildings
Vehicles and
Equipment
Total
Rental
Equipment
Cost
January 1, 2011
Additions
Additions through business
combinations
Transfers from inventory/
rental equipment
Disposals
Foreign exchange rate changes
December 31, 2011
($ THOUSANDS)
Accumulated depreciation
January 1, 2011
Depreciation for the year
Disposals
Foreign exchange rate changes
December 31, 2011
$
50,687
10,942
$
423,844
67,313
$
238,136
60,452
$
712,667
138,707
$
576,438
309,712
–
–
–
729
–
–
(549)
657
61,737
–
(3,288)
3,639
491,508
$
Land
Buildings
851
(8,163)
3,554
294,830
$
Vehicles and
Equipment
–
–
–
–
–
$
$
(99,152)
(17,981)
1,006
(989)
(117,116)
$
$
(150,290)
(31,796)
3,365
(1,714)
(180,435)
$
$
$
851
(12,000)
7,850
848,075
Total
(249,442)
(49,777)
4,371
(2,703)
(297,551)
$
$
$
2,447
(233,590)
5,854
661,590
Rental
Equipment
(232,672)
(112,765)
88,076
(2,115)
(259,476)
$
$
$
2011 ANNUAL REPORT FINNING INTERNATIONAL INC. 77
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
15. PROPERTY, PLANT, AND EQUIPMENT AND RENTAL EQUIPMENT (continued)
($ THOUSANDS)
Land
Buildings
Vehicles and
Equipment
Total
Rental
Equipment
Net book value
January 1, 2011
December 31, 2011
$
$
50,687
61,737
$
$
324,692
374,392
$
$
87,846
114,395
$
$
463,225
550,524
$
$
343,766
402,114
Land, buildings, and equipment under finance leases of $12.4 million (2010: $14.2 million), which is net of accumulated depreciation of $3.4 million
(2010: $4.2 million), are included above, of which $1.2 million (2010: $1.1 million) was acquired during the year.
Rental equipment under finance leases of $2.8 million (2010: $5.3 million), which is net of accumulated depreciation of $9.1 million (2010:
$8.6 million), are included above, of which $0.3 million (2010: $nil million) was acquired during the year.
Borrowing costs capitalized into property, plant, and equipment for the year ended December 31, 2011 were $1.2 million (2010: $0.2 million).
The average rate used for capitalization of borrowing costs was 4.87% (2010: 5.39%).
Included in property, plant, and equipment is investment property with a net book value of $3.0 million (2010: $4.2 million) and fair value of
$10.4 million (2010: $8.0 million). The fair value has been determined by an independent valuator.
($ THOUSANDS)
Land
Buildings
Vehicles and
Equipment
Total
Rental
Equipment
$
410,634
25,885
$
233,593
25,132
$
695,127
52,731
$
575,067
193,356
Cost
January 1, 2010
Additions
Acquisitions through business
combinations
Transfers from inventory
Disposals
Foreign exchange rate changes
December 31, 2010
($ THOUSANDS)
Accumulated depreciation
January 1, 2010
Depreciation for the year
Disposals
Foreign exchange rate changes
December 31, 2010
$
$
$
$
50,900
1,714
–
–
(435)
(1,492)
50,687
2,945
–
(6,728)
(8,892)
423,844
$
Land
Buildings
–
–
–
–
–
$
$
(86,398)
(19,337)
3,941
2,642
(99,152)
($ THOUSANDS)
Land
Buildings
562
–
(14,435)
(6,716)
238,136
Vehicles and
Equipment
(131,454)
(30,628)
7,742
4,050
(150,290)
Vehicles and
Equipment
$
$
$
3,507
–
(21,598)
(17,100)
712,667
Total
(217,852)
(49,965)
11,683
6,692
(249,442)
Total
$
$
$
–
2,104
(177,058)
(17,031)
576,438
Rental
Equipment
(225,120)
(97,973)
83,765
6,656
(232,672)
Rental
Equipment
$
$
$
Net book value
January 1, 2010(1)
December 31, 2010
$
$
50,900
50,687
$
$
324,236
324,692
$
$
102,139
87,846
$
$
477,275
463,225
$
$
349,947
343,766
(1) The January 1, 2010 opening balances disclosed in these reconciliations exclude the property, plant, and equipment and rental equipment of discontinued
operations of $43.2 million and $250.3 million, respectively.
78
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
16. INTANGIBLE ASSETS
($ THOUSANDS)
Cost
January 1, 2011
Additions
Acquisitions through business combinations
Disposals
Foreign exchange rate changes
December 31, 2011
($ THOUSANDS)
Accumulated depreciation
January 1, 2011
Depreciation for the year
Disposals
Foreign exchange rate changes
December 31, 2011
($ THOUSANDS)
Net book value
January 1, 2011
December 31, 2011
Customer contracts
and relationships
Software
Distribution
network
$
$
10,599
–
1,000
150
8
11,757
Customer contracts
and relationships
$
$
(8,402)
(1,133)
(150)
–
(9,685)
Customer contracts
and relationships
$
$
$
$
54,629
12,322
–
(431)
461
66,981
Software
(12,187)
(5,414)
–
(66)
(17,667)
Software
$
$
2,197
2,072
$
$
42,442
49,314
$
$
$
$
$
$
646
–
–
–
–
646
Distribution
network
–
–
–
–
–
Distribution
network
$
$
$
$
Total
65,874
12,322
1,000
(281)
469
79,384
Total
(20,589)
(6,547)
(150)
(66)
(27,352)
Total
646
646
$
$
45,285
52,032
Borrowing costs capitalized into intangible assets for the year ended December 31, 2011 were $0.3 million (2010: $0.5 million). The average rate
used for capitalization of borrowing costs was 4.87% (2010: 5.39%).
The distribution network is considered to have an indefinite life because it is expected to generate cash flows indefinitely.
($ THOUSANDS)
Cost
January 1, 2010
Additions
Disposals
Foreign exchange rate changes
December 31, 2010
($ THOUSANDS)
Accumulated depreciation
January 1, 2010
Depreciation for the year
Disposals
Foreign exchange rate changes
December 31, 2010
($ THOUSANDS)
Net book value
January 1, 2010(1)
December 31, 2010
Customer contracts
and relationships
Software
Distribution
network
$
$
13,349
–
(2,750)
–
10,599
Customer contracts
and relationships
$
$
(6,766)
(2,598)
962
–
(8,402)
Customer contracts
and relationships
$
$
6,583
2,197
$
$
$
$
$
$
35,654
20,131
(220)
(936)
54,629
Software
(10,444)
(2,079)
216
120
(12,187)
Software
25,210
42,442
$
$
$
$
$
$
646
–
–
–
646
Distribution
network
–
–
–
–
–
Distribution
network
646
646
Total
49,649
20,131
(2,970)
(936)
65,874
Total
(17,210)
(4,677)
1,178
120
(20,589)
Total
32,439
45,285
$
$
$
$
$
$
(1) The January 1, 2010 opening balances disclosed in these reconciliations exclude the intangible assets of discontinued operations of $9.1 million.
2011 ANNUAL REPORT FINNING INTERNATIONAL INC. 79
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
17. GOODWILL
The change in the carrying amount of goodwill is as follows:
December 31, 2011
($ THOUSANDS)
Goodwill, beginning of year
Acquired (Note 22)
Foreign exchange rate changes
Goodwill, end of year
December 31, 2010
($ THOUSANDS)
Goodwill, beginning of year
Foreign exchange rate changes
Goodwill, end of year
18. PROVISIONS
($ THOUSANDS)
January 1, 2011
New provisions
Charges/credits against provisions
Foreign exchange rate changes
December 31, 2011
Current portion
Long-term portion
($ THOUSANDS)
January 1, 2010(1)
New provisions
Charges/credits against provisions
Foreign exchange rate changes
December 31, 2010
Current portion
Long-term portion
$
$
$
$
Canada
South America
UK & Ireland
Consolidated
43,811
392
–
44,203
$
$
29,889
–
673
30,562
$
$
17,414
–
322
17,736
$
$
91,114
392
995
92,501
Canada
South America
UK & Ireland
Consolidated
43,811
–
43,811
$
$
31,451
(1,562)
29,889
Warranty Claims
$
$
$
$
49,240
112,736
(82,365)
714
80,325
80,325
–
Warranty Claims
$
$
$
$
50,329
43,286
(42,979)
(1,396)
49,240
49,240
–
$
$
$
$
$
$
$
$
$
$
18,992
(1,578)
17,414
Other
9,203
8,050
(6,687)
152
10,718
7,821
2,897
Other
9,963
4,609
(4,871)
(498)
9,203
8,125
1,078
$
$
$
$
$
$
$
$
$
$
94,254
(3,140)
91,114
Total
58,443
120,786
(89,052)
866
91,043
88,146
2,897
Total
60,292
47,895
(47,850)
(1,894)
58,443
57,365
1,078
(1) The January 1, 2010 opening balances disclosed in these reconciliations exclude the provisions of discontinued operations of $8.3 million.
WARRANTY CLAIMS
The provisions relate principally to warranty claims on equipment, spare parts, and service. The estimate is based on claims notified and past experience.
OTHER
Other provisions include provisions for losses on long-term contracts, decommissioning liabilities, and lawsuits. To determine the recorded liability
for decommissioning liabilities, the future estimated cash flows have been discounted using a rate of 3.4%. The total undiscounted amount of
estimated cash flows of decommissioning liabilities is $1.4 million.
19. LONG-TERM OBLIGATIONS
($ THOUSANDS)
Share-based payments (Note 8)
Finance leasing obligations (a) (Note 28)
Employee future benefit obligations (Note 24)
Other
December 31
2011
December 31
2010
$
$
17,622
12,697
160,882
1,209
192,410
$
$
25,626
13,188
139,266
2,645
180,725
January 1
2010(1)
16,198
15,428
157,111
955
189,692
$
$
(1) Long-term obligations of discontinued operations of $29.6 million are included in the January 1, 2010 disclosure.
(a) Finance leases issued at varying rates of interest from 0.5% - 8.6% and maturing on various dates up to 2078.
80
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
20. CUMULATIVE CURRENCY TRANSLATION ADJUSTMENTS
The Company’s principal subsidiaries operate in three functional currencies: Canadian dollars, U.S. dollars, and the U.K. pound sterling. Assets
and liabilities of the Company’s foreign operations which have functional currencies other than the Canadian dollar are translated into Canadian
dollars using the exchange rates in effect at the statement of financial position dates. Any unrealized translation gains and losses are recorded
as an item of other comprehensive income and accumulated other comprehensive income. Currency translation adjustments arise as a result
of fluctuations in foreign currency exchange rates at the period reporting date compared to the previous period reporting date. The cumulative
currency translation adjustment for 2011 mainly resulted from the weaker spot Canadian dollar relative to the U.S. dollar (2.3% weaker), and the
U.K. pound sterling (1.8% weaker), at December 31, 2011 compared to December 31, 2010.
The exchange rates of the Canadian dollar against the following foreign currencies were as follows:
Exchange rate
U.S. dollar
U.K. pound sterling
For years ended December 31
Average exchange rates
U.S. dollar
U.K. pound sterling
21. SUPPLEMENTAL CASH FLOW INFORMATION
CHANGES IN WORKING CAPITAL ITEMS
For years ended December 31
($ THOUSANDS)
Accounts receivable
Service work in progress
Inventories – on-hand equipment
Inventories – parts and supplies
Accounts payable and accruals
Income taxes
Other
Changes in working capital items
COMPONENTS OF CASH AND CASH EQUIVALENTS
($ THOUSANDS)
Cash
Short-term investments
Cash and cash equivalents
December 31
2011
December 31
2010
January 1
2010
1.0170
1.5799
0.9946
1.5513
2011
0.9891
1.5861
1.0466
1.6918
2010
1.0299
1.5918
2011
2010
$
$
(216,781)
(96,859)
(207,267)
(143,652)
354,109
43,792
(5,303)
(271,961)
December 31
2011
December 31
2010
$
$
66,206
56,539
122,745
$
$
105,888
240,499
346,387
$
$
$
$
(118,045)
(12,694)
(22,150)
(118,873)
382,644
28,352
4,072
143,306
January 1
2010(1)
107,678
87,232
194,910
(1) The January 1, 2010 opening balances disclosed in this table include the cash of discontinued operations of $51.8 million.
Dividends of $0.51 (2010: $0.47) per share were paid during the year.
2011 ANNUAL REPORT FINNING INTERNATIONAL INC. 81
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
22. ACQUISITION
In 2011, the Company acquired certain assets and operations which include the rights to sell and service machine control and monitoring
products in the Company’s Canadian and South American dealership territories. The total purchase price was approximately $3 million, to be
paid in cash; in 2011, $2.5 million was paid with the remaining $0.5 million expected to be paid over the next four years. In addition, acquisition
and other related costs of $0.7 million have been paid in 2011 related to the acquisition announced in January 2012 from Caterpillar of the
distribution and support business formerly operated by Bucyrus in Finning’s dealership territories (Note 32).
In August 2010, Finning was appointed the Caterpillar dealer for Northern Ireland and the Republic of Ireland. 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 was approximately $6 million (£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 were recorded
in other expenses on the consolidated statement of income. The total purchase price and acquisition and other related costs were paid in cash;
in 2010, $6.7 million was paid with the remaining $1.3 million paid in 2011. The purchase was accounted for as a business combination using
the purchase method of accounting. The results of these operations have been included in the consolidated financial statements since that date.
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.
23. 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 $120.8 million, which included the realization of $21.2 million of foreign exchange losses related to the Company’s
investment in Hewden which was previously recorded in accumulated other comprehensive loss. The loss on disposal differs from that reported
under Canadian GAAP, primarily due to the reclassification of the cumulative translation adjustment and associated net investment hedging gains
and losses from accumulated other comprehensive income to retained earnings, and the recognition of unamortized actuarial losses on Hewden’s
defined benefit pension plan in retained earnings in the IFRS opening consolidated statement of financial position. The results of operations of
Hewden for the periods up to May 5, 2010 have been reclassified as discontinued operations in the consolidated statements of income and cash
flow. The results of Hewden had previously been reported in the Finning (UK) Group segment.
Loss from discontinued operations to the date of disposition is summarized as follows:
($ THOUSANDS)
Revenue
Loss before provision for income taxes
Loss on sale of discontinued operation, pre tax
Provision for income taxes:
Tax recovery on operating loss
Tax recovery on loss on sale of discontinued operations
Loss from discontinued operations
January 1 - May 5,
2010
$
$
65,259
(6,891)
(130,836)
2,702
10,002
(125,023)
82
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The carrying amounts of assets and liabilities related to discontinued operations as at the date of disposition 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
Investment in joint venture
Total assets
LIABILITIES
Current liabilities
Accounts payable and accruals
Provisions
Income tax payable
Total current liabilities
Long-term obligations
Long-term provisions
Deferred taxes
Total liabilities
May 5, 2010
(date of disposition)
$
$
$
$
15,403
41,584
1,385
13,023
71,395
214,645
36,490
7,174
33,017
428
363,149
41,973
5,450
160
47,583
28,602
1,715
12,645
90,545
24. EMPLOYEE FUTURE BENEFITS
The Company and its subsidiaries in Canada and the U.K. have defined benefit pension plans and defined contribution pension plans providing
retirement benefits for most of their permanent employees. The defined benefit plans have been closed to new entrants for several years. 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 closed to new employees
and replaced with a defined contribution pension plan. In December 2011, the UK defined benefit pension plan was amended to cease future
accruals from April 2012, resulting in a curtailment gain of $6.4 million. From April 2012, affected members will commence accruing benefits
under a defined contribution arrangement.
In Canada, the defined contribution pension plans are registered pension plans that offer a base Company contribution rate for all members.
The Company will also partially match non-executive employee contributions to a maximum additional Company contribution of 1% of employee
earnings. The registered defined contribution plan for executive employees is supplemented by an unfunded supplementary accumulation plan.
Where contributions under the registered plan would otherwise exceed the maximum taxation limit, the excess contributions are provided
through this supplemental plan. In the UK, the defined contribution pension plans offer a match of employee contributions, within a required
range, plus 1%. In Ireland, the defined contribution pension plans offer a match of employee contributions at a level set by the Company.
2011 ANNUAL REPORT FINNING INTERNATIONAL INC. 83
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
24. EMPLOYEE FUTURE BENEFITS (continued)
The expense for the Company’s benefit plans for continuing operations, primarily for pension benefits, is as follows:
For years ended December 31
($ THOUSANDS)
Defined contribution plans
Net benefit cost
Defined benefit plans
Current service cost, net of
employee contributions
Interest cost
Expected return on plan assets
Past service cost(1)
Curtailment gain(2)
Net benefit cost
Net benefit cost recognized
in net income
Actuarial loss (gain) on
plan assets
Actuarial loss on plan liabilities
Total actuarial (gain)/loss
recognized in other
comprehensive income(3)
2011
2010
Canada UK & Ireland
Total
Canada
UK
Total
$
26,303
$
2,222
$
28,525
$
21,684
$
1,796
$
23,480
7,615
19,058
(20,444)
–
–
6,229
32,532
(12,518)
42,442
$
$
4,599
21,730
(25,853)
–
(6,431)
(5,955)
12,214
40,788
(46,297)
–
(6,431)
274
5,847
19,072
(18,642)
–
–
6,277
3,980
22,126
(22,763)
7,800
–
11,143
$
$
(3,733)
8,922
23,808
$
$
28,799
(3,596)
66,250
$
$
27,961
$
12,939
(8,590) $
42,439
(15,112)
10,499
$
$
9,827
41,198
(41,405)
7,800
–
17,420
40,900
(23,702)
52,938
$
29,924
$
32,730
$
62,654
$
33,849
$
(4,613)
$
29,236
(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 of $7.8 million were recognized in Q2 2010.
(2) In December 2011, the UK defined benefit pension plan was amended to cease future accruals from April 2012, resulting in a curtailment gain of $6.4 million.
(3) Included in the comparative consolidated statement of comprehensive income were actuarial losses of discontinued operations of $629 thousand.
Total cash payments for employee future benefits for 2011, which is made up of cash contributed by the Company to its defined benefit plans and
its defined contribution plans was $44.0 million and $28.1 million, respectively (2010: $41.0 million and $23.5 million, respectively).
Information about the Company’s defined benefit plans for continuing operations is as follows:
For years ended December 31
($ THOUSANDS)
Accrued benefit obligation
Balance at beginning of year
Current service cost
Interest cost
Benefits paid
Actuarial loss
Past service cost
Curtailment gain
Foreign exchange rate changes
Balance at end of year
Plan assets
Fair value at beginning of year
Expected return on plan assets
Actuarial gain (loss) on plan assets
Employer contributions
Employees’ contributions
Benefits paid
Foreign exchange rate changes
Fair value at end of year
Funded status – plan deficit(1)
2011
2010
Canada
UK
Total
Canada
UK
Total
$ 383,963
8,747
19,058
(21,155)
42,442
–
–
–
$ 433,055
$ 407,687
4,758
21,730
(12,213)
23,808
–
(6,431)
7,298
$ 446,637
$ 791,650
13,505
40,788
(33,368)
66,250
–
(6,431)
7,298
$ 879,692
$ 313,823
20,444
12,518
25,925
1,132
(21,155)
–
$ 352,687
80,368
$
$ 372,312
25,853
(8,922)
18,082
159
(12,213)
6,423
$ 401,694
44,943
$
$ 686,135
46,297
3,596
44,007
1,291
(33,368)
6,423
$ 754,381
$ 125,311
$
$
$
$
$
336,337
7,050
19,072
(20,935)
42,439
–
–
–
383,963
283,636
18,642
8,590
22,687
1,203
(20,935)
–
313,823
70,140
$
$
$
$
$
412,799
4,139
22,126
(14,008)
10,499
7,800
–
(35,668)
407,687
362,553
22,763
15,112
18,306
159
(14,008)
(32,573)
372,312
35,375
$
$
$
$
$
749,136
11,189
41,198
(34,943)
52,938
7,800
–
(35,668)
791,650
646,189
41,405
23,702
40,993
1,362
(34,943)
(32,573)
686,135
105,515
(1) The accrued benefit deficit is classified in long-term obligations on the consolidated statements of financial position.
84
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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)
2011
2010
Canada
UK
Total
Canada
UK
Total
Accrued benefit obligation
Fair value of plan assets
Funded status – plan deficit
$ 430,323
347,748
82,575
$
$ 446,637
401,694
44,943
$
$ 876,960
749,442
$ 127,518
$
$
381,624
308,602
73,022
$
$
407,687
372,312
35,375
$
$
789,311
680,914
108,397
Plan assets do not include a direct investment in common shares of the Company at December 31, 2011 and 2010.
Plan assets are principally invested in the following securities at December 31, 2011:
Equity
Fixed-income
Real estate
The significant actuarial assumptions are as follows:
Discount rate – obligation
Discount rate – expense(1)
Expected long-term rate of return on plan assets(1)
Rate of compensation increase
2011
Canada
4.30%
5.10%
6.75%
3.50%
UK
4.80%
5.30%
6.75%
4.00%
Canada
40.2%
52.8%
7.0%
Canada
5.10%
5.70%
7.00%
3.50%
2010
UK
33.5%
58.2%
8.3%
UK
5.30%
5.70%
7.00%
4.00%
(1) Used to determine the expense for the years ended December 31, 2011 and December 31, 2010.
Discount rates are determined based on high quality corporate bonds at the measurement date, December 31. 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 December 31, 2011, the accrued defined benefit pension obligation
presented would have increased by approximately $13.5 million for Finning (Canada)’s plans and £14.5 million for the Finning (UK) plan. The
overall expected rate of return on assets is a weighted average of expected long-term returns of the various categories of plan assets held and
considers both the actual asset mix and the Company’s investment policy.
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, 2010
December 31, 2008
December 31, 2012
December 31, 2012
December 31, 2012
December 31, 2013
December 31, 2011
The contributions expected to be paid during the financial year ended December 31, 2012 amount to approximately $35 million for the defined
benefit plans.
2011 ANNUAL REPORT FINNING INTERNATIONAL INC. 85
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
24. EMPLOYEE FUTURE BENEFITS (continued)
SEVERANCE INDEMNITY PROVISIONS
Employment terms at some of the Company’s South American operations provide for payment of a severance indemnity when an employment
contract comes to an end which can be considered a post employment benefit. This is typically at the rate of one month for each year of service
(subject in most cases to a cap as to the number of qualifying years of service) and based on the employee’s final salary level. The severance
indemnity obligation is treated as an unfunded defined benefit plan, and the obligation recognized is based on valuations performed by an
independent actuary using the projected unit credit method, which are regularly updated. The obligation recognized in the statement of financial
position represents the present value of the severance indemnity obligation. Actuarial gains and losses are immediately recognized in the
statement of other comprehensive income.
The most recent actuarial valuation was carried out in 2010.
The main assumptions used to determine the actuarial present value of benefit obligations were as follows:
For years ended December 31
($ THOUSANDS)
Discount rate – obligation
Rate of compensation increase
Average staff turnover
For years ended December 31
($ THOUSANDS)
Movement in the present value of the indemnity provision were as follows:
Balance at the beginning of the year
Current service cost
Interest cost
Actuarial loss
Paid in the year
Foreign exchange rate changes
Balance at the end of the year
25. ECONOMIC RELATIONSHIPS
2011
2.8%
3.0%
13.0%
2011
33,751
6,896
1,324
2,540
(7,684)
(1,256)
35,571
$
$
2010
3.8%
3.0%
8.9%
2010
28,291
6,400
1,531
–
(4,099)
1,628
33,751
$
$
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.
86
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
26. SEGMENTED INFORMATION
The Company and its subsidiaries have operated primarily in one principal business 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, Yukon, 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, the Falkland Islands, and the Channel Islands.
Other: corporate head office.
For year ended December 31, 2011
($ THOUSANDS)
Canada
South
America
UK &
Ireland
Other Consolidated
Revenue from external sources
Operating costs
Depreciation and amortization
Equity earnings (loss)
Other income (expenses)
IT system implementation costs
Acquisition costs
Earnings from continuing operations
before interest and taxes
Finance costs
Provision for income taxes
Net income
Identifiable assets
Property, plant, and equipment and intangible assets
Gross capital expenditures(1)
Gross rental asset expenditures
(1) Includes finance leases and borrowing costs capitalized.
For year ended December 31, 2010
($ THOUSANDS)
Revenue from external sources
Operating costs
Depreciation and amortization
Equity earnings (loss)
Other income (expenses)
IT system implementation costs
Other
Earnings from continuing operations
before interest and taxes
Finance costs
Provision for income taxes
Income from continuing operations
Loss from discontinued operations, net of tax
Net income
Identifiable assets
Property, plant, and equipment and intangible assets
Gross capital expenditures(1)
Gross rental asset expenditures
(1) Includes finance leases and borrowing costs capitalized.
$ 2,943,738
(2,654,131)
(110,733)
178,874
7,990
$ 2,120,072
(1,880,634)
(41,211)
198,227
–
$ 831,100
(755,530)
(21,825)
53,745
–
$
–
(30,085)
(286)
(30,371)
(1,316)
$ 5,894,910
(5,320,380)
(174,055)
400,475
6,674
(16,528)
(262)
(4,517)
(488)
(1,945)
–
578
(4,250)
(22,412)
(5,000)
$ 170,074
$ 193,222
$
51,800
$
$ 2,066,084
$ 349,493
$ 68,684
$ 242,423
$ 1,445,857
$ 203,637
73,028
$
57,696
$
$ 502,070
49,205
$
11,168
$
12,769
$
$
$
$
$
(35,359) $ 379,737
(53,242)
(67,130)
$ 259,365
$ 4,085,360
$ 602,556
$ 152,880
$ 312,888
71,349
221
–
–
Canada
South
America
UK
Other Consolidated
$ 2,267,742
(2,016,896)
(98,757)
152,089
7,014
$ 1,668,438
(1,472,765)
(37,577)
158,096
–
$
648,425
(607,407)
(20,070)
20,948
–
$
–
(10,653)
(168)
(10,821)
(1,424)
$ 4,584,605
(4,107,721)
(156,572)
320,312
5,590
(14,663)
(5,201)
(9,311)
–
(2,637)
(2,627)
(1,209)
(5,000)
(27,820)
(12,828)
$ 139,239
$
148,785
$
15,684
$
$ 1,476,986
$ 316,307
37,281
$
$ 127,675
$ 1,434,998
148,671
$
29,360
$
46,581
$
$
$
$
$
437,913
42,929
9,728
21,204
$
$
$
$
(18,454) $ 285,254
(57,616)
(46,555)
181,083
(125,023)
$
56,060
$ 3,429,698
$ 508,510
76,369
$
$ 195,460
79,801
603
–
–
2011 ANNUAL REPORT FINNING INTERNATIONAL INC. 87
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
27. RELATED PARTY TRANSACTIONS AND TOTAL STAFF COSTS
(a) The consolidated statements include the accounts of Finning (a company incorporated in Canada) which includes the Finning (Canada)
division and Finning’s wholly owned subsidiaries. Balances and transactions between the Company and its subsidiaries, which are related
parties, have been eliminated on consolidation and are not disclosed in this note. The principal subsidiaries of the Company at the year end,
and the main countries in which they operate are as follows:
Name
Country
% Ownership
Functional currency
Finning (UK) Ltd
Finning Chile S.A.
Finning Argentina S.A.
Finning Soluciones Mineras S.A.
Finning Uruguay S.A.
Moncouver S.A.
Finning Bolivia S.A.
OEM Remanufacturing Company Inc.
England
Chile
Argentina
Argentina
Uruguay
Uruguay
Bolivia
Canada
100%
100%
100%
100%
100%
100%
100%
100%
GBP
USD
USD
USD
USD
USD
USD
CAD
All companies are wholly owned, and unless otherwise stated, incorporated in Canada or in the principal country of operations noted above
and are involved in the sale of equipment, power and energy systems, rental of equipment and providing product support including sales of parts
and servicing of equipment. All shareholdings are of ordinary shares or other equity capital. Other subsidiaries, while included in the consolidated
financial statements, are not material.
(b) The remuneration of the Board of Directors during the year was as follows:
For years ended December 31
($ THOUSANDS)
Short term employment benefits
Share-based payments(1)
Total
2011
853
(166)
687
$
$
2010
704
4,161
4,865
$
$
(1) Due to the decrease in the Company’s share price during 2011, the fair value of certain cash-settled share-based compensation plans reduced during the year.
Consequently, a negative amount is shown above for share-based payment expense for 2011.
(c) The remuneration of key management personnel excluding the Board of Directors (defined as officers of the company and country
presidents) during the year was as follows:
For years ended December 31
($ THOUSANDS)
Short term employment benefits
Post employment benefits
Share-based payments
Total
(d) Total staff costs
2011
6,210
2,490
2,347
11,047
$
$
2010
5,920
817
6,308
13,045
$
$
Total staff costs, including salaries, benefits, pension, share-based payments, and commissions are $1.2 billion (2010: $1.0 billion). This amount
includes staff costs associated with key management personnel noted in (b) and (c) above.
88
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
28. CONTRACTUAL OBLIGATIONS
Future minimum lease payments due under finance lease contracts and payments due under various operating lease contracts are as follows:
For years ended December 31
($ THOUSANDS)
2012
2013
2014
2015
2016
Thereafter
Less imputed interest
Less current portion of finance lease obligation
Total long-term finance lease obligation
Operating
Leases
64,467
51,791
42,361
25,666
20,978
104,255
309,518
$
$
Finance
Leases
3,087
2,468
1,504
1,299
1,318
17,234
26,910
(12,019)
14,891
(2,194)
12,697
$
$
$
29. 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. To date, the Company has spent approximately $48 million.
30. 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, 2011, the total
estimated value of these contracts outstanding is $131.0 million coming due at periods ranging from 2012 to 2018. 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 $0.3 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, 2011, 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 $8.3 million, covering
various periods up to 2016. As at December 31, 2011, 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, 2011, 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, 2011, 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, 2011 was $77.5 million, of which $67.3 million relates to letters of credit issued in Chile, principally
related to performance guarantees on delivery for prepaid equipment and other operational commitments.
2011 ANNUAL REPORT FINNING INTERNATIONAL INC. 89
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
31. EXPLANATION OF TRANSITION TO IFRS
These consolidated financial statements for the year ending December 31, 2011 are the Company’s first annual financial statements that comply
with IFRS. IFRS 1, First-Time Adoption of IFRS, requires that comparative financial information be provided with the Company’s first IFRS annual
consolidated financial statements. The first date at which the Company applied IFRS was January 1, 2010 (the “Transition Date”). IFRS 1 requires
first-time adopters to retrospectively apply all effective IFRS as of the reporting date, which for the Company is December 31, 2011. However,
it also provides for certain optional exemptions and certain mandatory exceptions for first time IFRS adopters. The consolidated statement of
financial position as at January 1, 2010 was prepared as described in Note 1, including the application of IFRS 1. IFRS 1 requires an entity to adopt
IFRS in its first annual financial statements prepared under IFRS by making an explicit and unreserved statement in those financial statements of
compliance with IFRS.
Described below are the IFRS 1 applicable exemptions and exceptions applied by the Company in the conversion from Canadian GAAP to IFRS.
IFRS EXEMPTION OPTIONS
EMPLOYEE BENEFITS
I.
Any unamortized defined benefit pension plan actuarial gains and losses accumulated at January 1, 2010 were recognized in retained earnings
in accordance with the IFRS 1 transitional exemption. Not taking this exemption would have required retrospective application of IAS 19,
Employee Benefits, from the inception of all defined benefit plans.
II. SHARE-BASED PAYMENTS
IFRS 1 does not require first-time adopters to apply the requirements of IFRS 2 Share-based Payment, to equity instruments that were granted
on or prior to November 7, 2002 or to equity instruments that were granted after November 7, 2002 and vested before the date of transition
to IFRS. The Company has not applied IFRS 2 to share options issued on or prior to November 7, 2002, or share options that were fully
vested prior to the transition to IFRS.
III. PROPERTY, PLANT, AND EQUIPMENT (PP&E)
No transitional elections were taken. The Company retained assets at historical cost upon transition rather than taking the allowed election
to recognize assets at fair value.
IV. BORROWING COSTS
Borrowing costs were not capitalized retrospectively. The Company only capitalizes borrowing costs for those qualifying assets that
commenced construction after the Transition Date.
V. BUSINESS COMBINATIONS
The Company did not retrospectively restate any business combinations; IFRS 3, Business Combinations, is applied prospectively to acquisitions
after January 1, 2010.
VI. CUMULATIVE TRANSLATION ADJUSTMENTS
All cumulative translation adjustments and associated cumulative hedging gains and losses were transferred to retained earnings from
accumulated other comprehensive income upon transition.
IFRS MANDATORY EXCEPTIONS
The mandatory IFRS 1 exceptions applied in the conversion from Canadian GAAP to IFRS are noted below.
I.
HEDGE ACCOUNTING
Hedge accounting can only be applied prospectively from the Transition Date to transactions that satisfy the hedge accounting criteria in
IAS 39, Financial Instruments: Recognition and Measurement, at that date. Hedging relationships cannot be designated retrospectively and
the supporting documentation cannot be created retrospectively. All of the Company’s hedging relationships satisfied IFRS hedging criteria
at the Transition Date, and as such these are reflected as hedges in the Company’s results under IFRS, and do not result in any adjustment
from the Canadian GAAP financial position.
II. ESTIMATES
Hindsight is not used to create or revise estimates. The estimates previously made by the Company under Canadian GAAP were not revised
for application of IFRS except where necessary to reflect any difference in accounting policies.
RECONCILIATIONS OF CANADIAN GAAP TO IFRS
IFRS 1 requires an entity to reconcile equity and comprehensive income for periods prior to January 1, 2011. The following represents
the reconciliations from Canadian GAAP to IFRS for the statement of financial position as at January 1, 2010 and December 31, 2010, and
consolidated statements of income and comprehensive income for the year ended December 31, 2010. Reconciliations of total operating,
investing, and financing cash flows for the year ended December 31, 2010, are not provided as the changes to these cash flows are not material
and relate only to the revised presentation of the Company’s joint venture under equity accounting.
90
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
RECONCILIATION OF THE CONSOLIDATED STATEMENT OF FINANCIAL POSITION PREPARED ACCORDING TO
RECONCILIATION OF THE CONSOLIDATED STATEMENT OF FINANCIAL POSITION PREPARED ACCORDING TO
INTERNATIONAL FINANCIAL REPORTING STANDARDS
INTERNATIONAL FINANCIAL REPORTING STANDARDS
January 1, 2010
January 1, 2010
(CANADIAN $ THOUSANDS)
(CANADIAN $ THOUSANDS)
Canadian
Canadian
GAAP
GAAP
Employee Share Based
Employee Share Based
Benefits(1)
Benefits(1)
Payment(2)
Payment(2)
Leases(3)
Leases(3)
Income
Income
Taxes(4)
Taxes(4)
Other(5)
Other(5)
IFRS
IFRS
Reclassi-
Reclassi-
fications(8)
fications(8)
IFRS
IFRS
Current assets
Current assets
$ 197,904
Cash and cash equivalents
$ 197,904
Cash and cash equivalents
622,641
Accounts receivable
622,641
Accounts receivable
62,563
Service work in progress
62,563
Service work in progress
993,523
Inventories
993,523
Inventories
–
Income taxes recoverable
–
Income taxes recoverable
–
Derivative assets
–
Derivative assets
207,030
Other assets
207,030
Other assets
2,083,661
Total current assets
2,083,661
Total current assets
Rental equipment
657,464
657,464
Rental equipment
Property, plant, and equipment
Property, plant, and equipment 516,433
41,469
Intangible assets
41,469
Intangible assets
Goodwill
94,254
94,254
Goodwill
Investment in and
Investment in and
advance to joint venture
advance to joint venture
and associate
and associate
Finance assets
Finance assets
Derivative assets
Derivative assets
Deferred tax assets
Deferred tax assets
Other assets
Other assets
–
–
32,604
32,604
–
–
–
–
245,550
245,550
$ 3,671,435
$ 3,671,435
$
$
516,433
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
21,481
21,481
(174,554)
(174,554)
$ (153,073)
$ (153,073)
$ 162,238
$ 162,238
$
$
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
133,137
133,137
–
–
–
–
–
–
(61,730)
(61,730)
71,407
71,407
749,941
749,941
8,624
8,624
–
–
–
–
–
–
24,179
24,179
944,982
944,982
991,732
991,732
110,147
110,147
–
–
–
–
–
–
108,888
108,888
2,155,749
2,155,749
Current liabilities
Current liabilities
Short-term debt
Short-term debt
Accounts payable and
Accounts payable and
accruals
accruals
Income tax payable
Income tax payable
Provisions
Provisions
Deferred revenue
Deferred revenue
Derivative liabilities
Derivative liabilities
Current portion of
Current portion of
long-term debt
long-term debt
Total current liabilities
Total current liabilities
Long-term debt
Long-term debt
Long-term obligations
Long-term obligations
Derivative liabilities
Derivative liabilities
Provisions
Provisions
Deferred revenue
Deferred revenue
Deferred tax liabilities
Deferred tax liabilities
TOTAL LIABILITIES
TOTAL LIABILITIES
SHAREHOLDERS’
SHAREHOLDERS’
EQUITY
EQUITY
Share capital
Share capital
Contributed surplus
Contributed surplus
Accumulated other
Accumulated other
comprehensive loss
comprehensive loss
Retained earnings
Retained earnings
Total shareholders’
Total shareholders’
equity
equity
$
$
–
$
$
$
$
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(376)
(376)
–
–
(376)
(376)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
544
544
–
–
–
–
–
–
49
49
593
593
$
$
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
4,860
–
–
–
–
–
–
–
–
–
–
(690)
(690)
–
–
$ 4,170
$ 4,170
$
$
–
–
676
676
160
160
–
–
–
–
–
–
–
–
836
836
–
–
(2,019)
(2,019)
–
–
–
–
–
–
66
66
(1,117)
(1,117)
$
$
4,860
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
$
$
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(313)
–
–
–
–
$
$
–
–
(2,994) $ 194,910
(2,994) $ 194,910
620,151
(2,490)
620,151
(2,490)
62,563
62,563
968,538
(24,985)
968,538
(24,985)
35,826
35,826
35,826
35,826
3,420
3,420
3,420
3,420
(88,910)
118,120
118,120
(88,910)
(80,133) 2,003,528
(80,133) 2,003,528
600,257
(57,207)
600,257
(57,207)
520,448
(532)
41,457
(12)
41,457
(12)
94,254
–
94,254
–
(532)
(313)
520,448
$
$
$
$
–
–
–
–
–
–
(793)
(793)
–
–
(793)
(793)
–
–
–
–
–
–
244
244
(1,738)
(1,738)
$ (1,807)
$ (1,807)
60,355
60,355
–
–
26,079
26,079
13,669
13,669
(55,523)
(55,523)
60,355
60,355
32,604
32,604
26,079
26,079
33,535
33,535
13,735
13,735
$ (93,304) $ 3,426,252
$ (93,304) $ 3,426,252
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
4,530
4,530
4,530
4,530
–
–
–
–
$
$
–
–
$
$
– $ 162,238
– $ 162,238
–
–
32
32
–
–
–
–
–
–
(264,122)
(264,122)
458
458
63,667
63,667
170,034
170,034
5,669
5,669
486,495
486,495
9,274
9,274
63,667
63,667
170,034
170,034
5,669
5,669
–
–
32
32
–
–
(524)
(524)
–
–
–
–
–
–
(181)
(181)
(673)
(673)
–
–
–
–
–
–
24,179
24,179
921,556
(24,294)
921,556
(24,294)
959,157
(32,575)
959,157
(32,575)
189,692
(51,593)
189,692
(51,593)
26,144
26,144
26,144
26,144
4,949
4,949
4,949
4,949
20,500
20,500
20,500
20,500
(36,435)
15,187
15,187
(36,435)
(93,304) 2,137,185
(93,304) 2,137,185
–
–
–
–
557,052
557,052
32,069
32,069
557,052
557,052
33,509
33,509
–
–
–
–
–
–
(1,440)
(1,440)
–
–
–
–
(293,869)
(293,869)
1,218,994
1,218,994
–
–
(224,480)
(224,480)
–
–
471
471
–
–
5,287
5,287
–
–
(5,323)
(5,323)
–
–
(1,134)
(1,134)
289,023
289,023
(289,023)
(289,023)
(4,846)
(4,846)
704,792
704,792
1,515,686
1,515,686
$ 3,671,435
$ 3,671,435
(224,480)
(224,480)
$ (153,073)
$ (153,073)
(969)
(969)
(376)
(376)
5,287
5,287
$ 4,170
$ 4,170
(5,323)
(5,323)
(793)
(793)
$
$
(1,134)
(1,134)
$ (1,807)
$ (1,807)
–
–
1,289,067
1,289,067
$ (93,304) $ 3,426,252
$ (93,304) $ 3,426,252
$
$
2011 ANNUAL REPORT FINNING INTERNATIONAL INC. 91
2011 ANNUAL REPORT FINNING INTERNATIONAL INC. 91
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
RECONCILIATION OF THE CONSOLIDATED STATEMENT OF FINANCIAL POSITION PREPARED ACCORDING TO
INTERNATIONAL FINANCIAL REPORTING STANDARDS
Canadian
GAAP
Employee
Benefits(1)
Share Based
Payment(2)
Leases(3)
Income
Taxes(4)
Other(5) Depreciation(6)
IFRS
Reclassi-
fications(8)
IFRS
December 31, 2010
(CANADIAN $
THOUSANDS)
Current assets
Cash and cash
equivalents
Accounts receivable
Service work
in progress
Inventories
Income taxes
recoverable
Derivative assets
Other assets
Total current assets
Rental equipment
Property, plant, and
equipment
Intangible assets
Goodwill
Investment in and
advance to joint
venture and associate
Finance assets
Deferred tax
assets
Other assets
$ 349,857
669,192
$
73,602
1,086,924
–
–
198,941
2,378,516
396,948
461,056
45,752
91,114
–
30,158
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
210,097
$ 3,613,641
36,762
(151,912)
$ (115,150)
$
–
–
–
–
–
–
–
–
–
107,857
–
–
–
(30,467)
77,390
–
–
7,484
(200,024)
203,087
$ 92,739
1,004,148
8,127
–
–
–
Current liabilities
Short-term debt
Accounts payable
and accruals
Income tax payable
Provisions
Deferred revenue
Derivative liabilities
Current portion of
long-term debt
Total current
1,308,101
liabilities
736,056
Long-term debt
106,477
Long-term obligations
–
Derivative liabilities
–
Provisions
–
Deferred revenue
76,420
Deferred tax liabilities
TOTAL LIABILITIES 2,227,054
SHAREHOLDERS’
EQUITY
Share capital
Contributed surplus
Accumulated other
comprehensive loss
Retained earnings
Total shareholders’
equity
564,973
35,735
(274,346)
1,060,225
1,386,587
$ 3,613,641
92
$
$
$
$
$
$
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(753)
–
(753)
–
–
–
–
–
–
–
–
–
(2,071)
–
–
–
–
(2,071)
–
(2,607)
–
3,925
$
$
$
–
–
–
–
–
–
–
–
–
3,473
–
–
–
–
(604)
–
2,869
–
935
111
–
–
–
–
1,046
–
(2,726)
–
–
–
–
(1,680)
–
–
(27)
4,576
$
$
$
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2,543
–
2,543
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
119
2,424
2,543
2,543
$
–
–
–
–
–
–
–
–
–
177
489
–
–
–
(80)
(542)
44
–
–
(13)
–
–
–
–
(13)
–
(186)
–
–
–
–
(199)
–
–
118
125
243
44
$
$
$
–
–
–
22
–
–
–
22
1,585
(304)
(951)
–
$
(3,470)
(5,272)
$ 346,387
663,920
–
(11,122)
73,602
1,075,824
24,444
7,420
(84,845)
(72,845)
(54,767)
24,444
7,420
114,096
2,305,693
343,766
(1,177)
(5)
–
463,225
45,285
91,114
–
–
68
–
420
–
–
–
–
–
–
–
–
–
–
–
–
–
135
135
–
–
53,008
–
53,008
30,158
21,606
(19,736)
$ (73,916)
59,542
37,907
$ 3,429,698
$
(2,774)
$
89,965
(394,032)
–
57,365
318,657
4,421
611,051
8,225
57,365
318,657
4,421
–
203,087
(16,363)
(24,989)
(28,626)
8,672
1,078
18,876
(32,564)
(73,916)
1,292,771
711,067
180,725
8,672
1,078
18,876
13,524
2,226,713
–
–
564,973
33,128
(7)
292
213,274
(213,274)
(53,385)
658,269
285
420
–
$ (73,916)
1,202,985
$ 3,429,698
$
(192,540)
$ (115,150)
$
1,318
(753)
$
4,549
2,869
$
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
RECONCILIATION OF THE CONSOLIDATED STATEMENT OF INCOME PREPARED ACCORDING TO
INTERNATIONAL FINANCIAL REPORTING STANDARDS
For year ended
December 31, 2010
(CANADIAN $
THOUSANDS)
Canadian
GAAP
Employee
Share Based
Benefits(1)
Payment(2)
Leases(3)
Income
Taxes(4)
Other(5) Depreciation(6)
Hewden
Loss on
Disposal(7)
IFRS
Reclassi-
fications(8)
IFRS
(1,069,593)
–
(40,648)
Revenue
New equipment $ 1,940,648
272,388
Used equipment
299,911
Equipment rental
2,117,663
Product support
10,692
Other
4,641,302
Total revenue
(3,256,098)
Cost of sales
Gross profit
1,385,204
Selling, general,
and administrative
expenses
Equity earnings
of joint venture
and associate
Other expenses
Earnings from
continuing
operations
before
interest and
income taxes
Finance costs
Income from
continuing
operations
before provision
for income taxes
Provision for
income taxes
Income from
continuing
operations
Loss from
discontinued
operations,
net of tax
Net income
Earnings per
share – basic
From continuing
operations
From discontinued
operations
274,963
(58,701)
(45,546)
216,262
170,716
1.00
$
(1.46)
(0.46)
$
(249,089)
$ (78,373) $
$
$
–
–
–
–
–
–
–
–
$
–
–
–
–
–
–
–
–
(872) $
–
–
–
–
(872)
739
(133)
7,200
3,782
(395)
–
–
–
–
–
–
7,200
–
3,782
–
(528)
(134)
7,200
3,782
(662)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
$
$
$
–
–
–
–
–
–
–
–
–
–
–
–
–
–
4,598
4,598
(46)
(3,925)
–
–
–
–
(46)
672
673
–
626
673
(3,954)
(328)
121
3,216
(186)
(121)
3,246
3,454
(541)
3,216
440
552
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(18,835)
(25,223)
$ (11,134) $ 1,928,642
253,553
274,688
2,117,663
10,059
(55,825) 4,584,605
(3,206,796)
43,965
(11,860) 1,377,809
–
(633)
5,480
(1,057,497)
5,590
–
5,590
(40,648)
(790)
547
285,254
(57,616)
(243)
227,638
243
(46,555)
–
181,083
490
3,736
$
–
3,454
$
(157)
(698) $
296
3,512
$
176
616
$
–
552
123,261
$ 123,261
$
–
– $
(125,023)
56,060
$
1.06
(0.73)
0.33
$
2011 ANNUAL REPORT FINNING INTERNATIONAL INC. 93
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
RECONCILIATION OF THE CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS PREPARED ACCORDING TO
RECONCILIATION OF THE CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS PREPARED ACCORDING TO
INTERNATIONAL FINANCIAL REPORTING STANDARDS
INTERNATIONAL FINANCIAL REPORTING STANDARDS
For year ended
For year ended
December 31, 2010
December 31, 2010
(CANADIAN $
(CANADIAN $
THOUSANDS)
THOUSANDS)
Canadian
Canadian
GAAP
GAAP
Employee
Employee
Benefits(1)
Benefits(1)
Share Based
Share Based
Payment(2)
Payment(2)
Leases(3)
Leases(3)
Income
Income
Taxes(4)
Taxes(4)
Other(5) Depreciation(6)
Other(5) Depreciation(6)
Hewden
Hewden
Loss on
Loss on
Disposal(7)
Disposal(7)
IFRS
IFRS
$ (78,373)
$ (78,373)
$
$
3,736
3,736
$
$
3,454
3,454
$
$
(698)
(698)
$
$
3,512
3,512
$
$
616
616
$
$
552
552
$ 123,261
$ 123,261
$ 56,060
$ 56,060
Net income (loss)
Net income (loss)
Other comprehensive
Other comprehensive
income (loss), net
income (loss), net
of income tax
of income tax
Currency translation
Currency translation
adjustments
adjustments
Unrealized gain on net
Unrealized gain on net
investment hedges
investment hedges
Realized loss on foreign
Realized loss on foreign
currency translation, net
currency translation, net
of realized gain on net
of realized gain on net
investment hedges,
investment hedges,
reclassified to earnings
reclassified to earnings
on disposal of
on disposal of
discontinued operations
discontinued operations
Tax recovery on net
Tax recovery on net
investment hedges
investment hedges
Foreign currency
Foreign currency
translation and gain
translation and gain
(loss) on net investment
(loss) on net investment
hedges, net of income tax
hedges, net of income tax
Unrealized gain on
Unrealized gain on
cash flow hedges
cash flow hedges
Realized loss on
Realized loss on
cash flow hedges,
cash flow hedges,
reclassified to earnings
reclassified to earnings
Tax expense on
Tax expense on
cash flow hedges
cash flow hedges
Gain on cash flow hedges,
Gain on cash flow hedges,
net of income tax
net of income tax
Actuarial loss
Actuarial loss
Tax recovery on
Tax recovery on
actuarial loss
actuarial loss
Actuarial loss, net
Actuarial loss, net
of income tax
of income tax
Comprehensive
Comprehensive
income (loss)
income (loss)
(98,793)
(98,793)
7,484
7,484
16,768
16,768
–
–
82,833
82,833
14,938
14,938
–
–
–
–
15,746
15,746
7,484
7,484
3,817
3,817
1,127
1,127
(1,167)
(1,167)
3,777
3,777
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(29,236)
(29,236)
7,501
7,501
(21,735)
(21,735)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(27)
(27)
–
–
119
119
–
–
–
–
–
–
–
–
–
–
20
20
96
96
–
–
2
2
(7)
(7)
–
–
–
–
–
–
4,026
4,026
(87,178)
(87,178)
–
–
16,864
16,864
(63,691)
(63,691)
19,142
19,142
(16,084)
(16,084)
(1,144)
(1,144)
–
(27)
(27)
119
119
118
118
(7)
(7)
(75,749)
(75,749)
(52,316)
(52,316)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
3,817
3,817
1,127
1,127
(1,167)
(1,167)
–
–
(629)
(629)
3,777
3,777
(29,865)
(29,865)
177
177
7,678
7,678
(452)
(452)
(22,187)
(22,187)
$ (58,850)
$ (58,850)
$ (10,515)
$ (10,515)
$
$
3,454
3,454
$
$
(725)
(725)
$
$
3,631
3,631
$
$
734
734
$
$
545
545
$ 47,060
$ 47,060
$ (14,666)
$ (14,666)
94
94
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
TRANSITIONAL ADJUSTMENTS AND ACCOUNTING POLICY CHANGES ARISING FROM THE TRANSITION TO IFRS
The following notes explain each adjustment arising from the Company’s transition to IFRS as referenced on the reconciliations on the previous pages:
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.
As described above in ‘IFRS exemption options’, the Company elected to recognize all unamortized cumulative actuarial gains and losses that
existed at the Transition Date in opening retained earnings for all employee benefit plans. Any unrecognized fully vested past service costs
were also recognized in full in retained earnings.
In addition, IFRS requires that the Company measure the assets and liabilities of the defined benefit plan at the end of the reporting period,
whereas Canadian GAAP allows the measurement to occur up to 3 months prior to the reporting date. The Company’s measurement date
prior to adopting IFRS was November 30th. Plans that were previously measured on November 30, 2009 and 2010 were re-measured as at
December 31, 2009 and 2010.
Under IFRS, the Company has elected to record any actuarial gains and losses arising from its defined benefit pension plans in other
comprehensive income. Actuarial gains and losses are separately identified in the consolidated statement of comprehensive income.
Fully vested past service costs arose in the Company’s UK defined benefit pension plans, relating to the reversal of the decision to move to a
Career Average Re-valued Earnings basis of benefit accrual during the second quarter of 2010. These past service costs were being deferred
and amortized over time for Canadian GAAP purposes, but are required to be recognized immediately under IFRS, as they are fully vested.
The IFRS pension expense has therefore been adjusted to reflect these past service costs in full in the second quarter of 2010.
2. SHARE-BASED PAYMENTS
A. CASH SETTLED PLANS
Under Canadian GAAP, cash settled share-based payments are measured at intrinsic value, with changes in intrinsic value taken to the
consolidated statement of income immediately. IFRS requires such cash settled plans to be valued at fair value and valuation movements
continue to be taken to the consolidated statement of income. The additional liability arising from the fair valuation of the Company’s cash
settled plans at the Transition Date is therefore recognized in the opening statement of financial position as at January 1, 2010, and the
subsequent share based payment expense is adjusted to reflect the difference in valuation methodology.
B. EQUITY SETTLED PLANS
Under Canadian GAAP, the Company previously measured share options that vest in tranches at fair value 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 recognized forfeitures of awards as and when
they arose. The Company therefore adjusted contributed surplus and retained earnings at January 1, 2010 for unvested share options to reflect
these changes in the valuation process. Subsequent grants of share options are also valued using this methodology.
3. LEASES
A. ACCELERATED RECOGNITION OF SALE AND LEASEBACK GAINS
Under Canadian GAAP, operating sale and leaseback gains were deferred and amortized over the term of the operating lease. Under IFRS,
such gains are recognized upfront if the sale and leaseback results in an operating lease, and is undertaken at fair value. As certain sale and
leaseback transactions met these criteria, the unamortized portion of the gain on sale is recognized in retained earnings and the deferred
gain derecognized in the opening IFRS statement of financial position. The amortization of the deferred gain for these transactions was then
reversed in the IFRS comparative consolidated statement of income.
B. RECLASSIFICATION OF CERTAIN LEASES FROM OPERATING TO FINANCE LEASE
While the concepts of operating and finance leases are very similar under 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. The leased asset is now capitalized
on the opening statement of financial position, with the corresponding payable recognized as a liability. Depreciation and interest expense,
rather than operating lease costs, are recognized in the consolidated statement of income.
2011 ANNUAL REPORT FINNING INTERNATIONAL INC. 95
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4. INCOME TAXES
IAS 12, Income Taxes, 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. In addition, under IFRS deferred taxes are recognized on temporary differences arising from intra-company transfers, whereas
this is not required under Canadian GAAP.
IFRS specifically addresses the accounting for current and deferred taxes arising from share-based payment transactions whereas Canadian
GAAP did not. Adjustments have been recorded to conform the Company’s accounting treatment to IAS 12.
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 are now included in the tax basis of the asset for deferred tax
computation purposes. In the UK, the determination of the tax basis for certain buildings is impacted by the different approaches of Canadian
GAAP and IFRS with respect to circumstances where the tax deductible amount of a building differs dependent on whether it is used or sold.
Under Canadian GAAP the tax basis for certain buildings was determined to be the higher of the tax basis if the building was sold and the tax
basis if the building was used, whereas IFRS requires the tax basis to be based on the expected manner of recovery.
Movements in these revised deferred taxation balances are reflected as adjustments to tax expense throughout the 2010 comparative IFRS
statement of income. The tax expense adjustment is impacted by exchange rate movements, the timing of asset acquisitions and the volume
of non-monetary assets transferred within the consolidated group.
5. OTHER MISCELLANEOUS ADJUSTMENTS
Borrowing costs for all qualifying assets (defined as assets constructed by the Company that necessarily take a substantial period of time to be
ready for use) that commenced construction after January 1, 2010 are capitalized. This reduces finance costs and increases PP&E and intangible
asset balances and associated depreciation for those assets constructed after January 1, 2010.
This section also includes other immaterial adjustments including differences in the accounting treatment of decommissioning liabilities and
a financial instrument that did not meet the retrospective quantitative hedge effectiveness test under IFRS.
6. DEPRECIATION
IFRS requires that uniform accounting policies be used throughout the Company, while Canadian GAAP had no such explicit requirement.
The depreciation methods used for certain assets are therefore aligned throughout the Company for IFRS purposes, and the difference in
the Canadian GAAP depreciation charge and the IFRS straight line depreciation charge is adjusted in the 2010 comparative IFRS consolidated
statement of income.
7. HEWDEN LOSS ON DISPOSAL
The loss on disposal of the Company’s discontinued operation, Hewden Stuart Limited, has been adjusted to reflect the impact of IFRS
adjustments on the disposal calculation. The adjustments to the loss on disposal were primarily caused by the election to reclassify the
cumulative translation adjustment and associated net investment hedge gains and losses to retained earnings upon transition to IFRS, and
changes to the accounting for defined benefit pension plans.
8. PRESENTATION RECLASSIFICATIONS
The following notes explain financial statement reclassifications arising from the Company’s transition to IFRS:
JOINT VENTURE ACCOUNTING
Canadian GAAP prescribed the use of the proportionate consolidation method for joint ventures. Under IFRS, the Company may use either
proportionate consolidation or equity method accounting for jointly controlled entities. In anticipation of the new requirements of IFRS 11,
Joint Arrangements, the Company has elected to adopt the available option in IAS 31, Joint Ventures, to use equity accounting for its existing
joint venture. This has no overall impact on net assets or net income, but alters the presentation of the Company’s joint venture; the joint
venture is now presented as a separate line item, ‘Investment in and advances to joint venture and associate’ on the consolidated statement of
financial position, and ‘Equity earnings of joint venture and associate’ on the consolidated statement of income. The Company’s investment in
an associate, which was always accounted for using the equity method, was re-classified from ‘Other assets’ to ‘Investment in and advances to
joint venture and associate’ on the consolidated statement of financial position, and from selling, general, and administrative expenses to ‘Equity
earnings of joint venture and associate’ on the consolidated statement of income.
CUMULATIVE TRANSLATION ADJUSTMENT
As described above in ‘IFRS exemption options’, the Company elected to reclassify all cumulative translation gains and losses, previously
recorded in Accumulated Other Comprehensive Income (AOCI), to retained earnings in the opening statement of financial position.
96
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
INCOME TAXES
Canadian GAAP requires deferred tax balances to be split between current and non-current assets and liabilities. In contrast, IAS 12 requires
that all deferred tax balances be presented as non-current. Current deferred tax balances were therefore re-classified to non-current assets
and liabilities.
PROVISIONS
IAS 1 prescribes that provisions must be presented separately on the face of the statement of financial position. Liabilities meeting the
definition of a provision are therefore re-classified from accounts payable and accruals and long-term obligations. The estimation process used
for measurement of provisions in the Company’s Canadian GAAP consolidated financial statements is compliant with IFRS measurement
requirements, consequently no adjustment to these liabilities has been applied in the opening statement of financial position.
DEFERRED REVENUE; DERIVATIVE FINANCIAL ASSETS AND LIABILITIES
The Company has decided that separate presentation of deferred revenue and derivative financial instruments provides users of the financial
statements with useful information. These amounts have therefore been re-classified.
32. SUBSEQUENT EVENTS
In January 2012, the Company announced that it had reached an agreement to acquire from Caterpillar the distribution and support business
formerly operated by Bucyrus International, Inc (Bucyrus) in Finning’s dealership territories in South America, Canada, and the U.K. The
transaction is valued at approximately U.S. $465 million. After closing, Finning expects to begin providing sales, service, and support for former
Bucyrus mining products in all of Finning’s dealership territories. The Company expects to fund the transaction primarily through the issuance of
U.S. and Canadian dollar denominated term debt. Subject to customary closing conditions, it is anticipated that the transaction will close in two
phases: first in the Company’s operations in South America and UK and Ireland, and subsequently in the Canadian operations. Both closings are
expected to occur in the second quarter of 2012.
On February 3, 2012, the Company acquired 100% of the shares of Damar Group Ltd, an engineering company specializing in the water utility
sector in the U.K. The acquired business provides opportunities for Finning to increase market share in the U.K. and Ireland water industries. It
also increases Finning’s mechanical, electrical and civil engineering capability to deliver a wide range of projects within its target power systems
markets which is a key strategic objective of the Company’s U.K. and Ireland operations. Cash consideration of £5.7 million was paid at the time of
acquisition, which may be subject to customary closing adjustments. Further contingent consideration (with a possible range of £nil-£9.5 million)
may be paid on an annual basis after acquisition, contingent upon the acquired business’s performance over the next three years. Due to the short
time period that has elapsed since the acquisition was completed, initial accounting for the business combination is not yet complete.
2011 ANNUAL REPORT FINNING INTERNATIONAL INC. 97
IFRS
Canadian GAAP
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
TEN YEAR FINANCIAL SUMMARY
For years ended December 31
($ 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
$ 2,943,738
2,120,072
831,100
–
$ 5,894,910
$
$
379,737
6.4%
259,365
4.4%
$
$
$
$
2,267,742
1,668,438
648,425
–
4,584,605
285,254
6.2%
181,083
3.9%
$
$
$
$
2,386,642
1,489,600
603,678
–
4,479,920
246,896
5.5%
156,707
3.5%
Free cash flow(3)
$
(220,796)
$
262,458
$
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
$
$
$
$
$
$
$
$
1.57
42.0%
7.84
20.3%
1.51
1.51
0.51
30.25
18.55
22.21
$
$
$
$
$
$
$
$
1.34
35.3%
7.02
14.9%
1.06
1.06
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%
23,218
1.26
48.9%
9.19
13.4%
1.38
1.37
0.43
31.15
12.09
14.25
Common shares outstanding (thousands)
171,574
171,431
170,747
170,445
176,132
179,090
178,404
176,780
155,510
155,160
NUMBER OF EMPLOYEES
Canada
South America
UK and Ireland
International
TOTAL
5,435
6,453
1,626
78
13,592
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
Revenue from continuing operations per employee(1)(2)
Income from continuing operations per employee(1)(2)
$
$
433,704
19,082
$
$
384,582
15,190
$
$
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
The results reported for 2011 and 2010 have been prepared in accordance with International Financial Reporting Standards (IFRS). Prior to
January 1, 2011, the Company prepared its consolidated financial statements in accordance with Canadian generally accepted accounting principles.
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 property, plant, and equipment expenditures.
(4) Number of employees includes all employees up to the point of sale.
98
$
(110,704)
98,169
$
(193,984)
59,054
$
160,210
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
869,893
1,403,807
15
561,964
1,574,950
24
444,644
1,493,512
55
$
5,662,244
$
4,853,239
$
4,328,280
$
3,836,299
$
3,593,295
$
3,207,486
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
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
$
$
$
$
$
$
$
$
$
$
$
$
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%
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
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
1.15
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
IFRS
Canadian GAAP
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
TEN YEAR FINANCIAL SUMMARY
$
$
$
$
2,936,229
1,325,582
1,400,427
6
5,662,244
455,847
8.0%
280,107
4.9%
$
(110,704)
$
$
$
$
$
$
$
$
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
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%
59,054
$
160,210
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
Common shares outstanding (thousands)
171,574
171,431
170,747
170,445
176,132
179,090
178,404
176,780
155,510
155,160
Revenue from continuing operations per employee(1)(2)
Income from continuing operations per employee(1)(2)
$
$
433,704
19,082
$
$
384,582
15,190
$
$
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
4,618
4,638
3,543
51
12,850
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
TOTAL CONSOLIDATED
$ 5,894,910
$
4,584,605
$
4,479,920
$
5,598,356
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
Canada
South America
UK and Ireland
International
TOTAL
$ 2,943,738
$
$
(220,796)
$
262,458
$
493,891
$
$
$
$
$
$
$
$
$
$
2,120,072
831,100
–
379,737
6.4%
259,365
4.4%
1.57
42.0%
7.84
20.3%
1.51
1.51
0.51
30.25
18.55
22.21
5,435
6,453
1,626
78
13,592
$
$
$
$
$
$
$
$
$
$
2,267,742
1,668,438
648,425
–
285,254
6.2%
181,083
3.9%
1.34
35.3%
7.02
14.9%
1.06
1.06
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%
23,218
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
The results reported for 2011 and 2010 have been prepared in accordance with International Financial Reporting Standards (IFRS). Prior to
January 1, 2011, the Company prepared its consolidated financial statements in accordance with Canadian generally accepted accounting principles.
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 property, plant, and equipment expenditures.
(4) Number of employees includes all employees up to the point of sale.
2011 ANNUAL REPORT FINNING INTERNATIONAL INC. 99
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 PC, OBC
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
Director since 2007
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.
100
EXECUTIVE OFFICERS
MICHAEL T. WAITES
President and Chief Executive Officer
Finning International Inc.
NEIL DICKINSON
Managing Director
Finning U.K.
ANDREW S. FRASER
President
Finning (Canada)
ANNA P. MARKS
Senior Vice President,
Corporate Controller
Finning International Inc.
TOM M. MERINSKY
Vice President, Treasurer
Finning International Inc.
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
2011 ANNUAL REPORT FINNING INTERNATIONAL INC. 101
NOTES
Company name: Finning International Inc.
Exchange: Toronto Stock Exchange (TSX)
Symbol: FTT
Filings: SEDAR
HEAD OFFICE
Suite 1000, 666 Burrard Street
Vancouver, British Columbia
Canada V6C 2x8
Telephone: 604-691-6444
Fax: 604-691-6440
Website: www.finning.com
AUDITORS
Deloitte & Touche LLP
SOLICITORS
Borden Ladner Gervais LLP
TRANSFER AGENT AND REGISTRAR
Computershare Trust Company of Canada
Phone: 1-800-564-6253 (North America),
514-982-7555 (international)
Email: service@computershare.com
Website: www.computershare.com
SHAREHOLDER INFORMATION
CORPORATE INFORMATION
Finning prepares an Annual Information Form (AIF)
which is filed with the securities commission. The AIF, annual
and quarterly reports are available on the Investors section
of www.finning.com
CORPORATE GOVERNANCE INFORMATION
Please refer to Finning’s management proxy circular issued
in connection with the 2012 Annual Meeting of Shareholders
and the Governance section of Finning’s website for
a full discussion of Finning’s corporate governance policies
and practices, including: Board mandate and composition;
Board committees and terms of references; Shareholder
Rights Plan; Compliance Disclosure; Code of Ethics;
Corporate Disclosure Policy; Whistleblower Policy as well as
Employee Privacy and Share Trading policies. These documents
are available on Finning’s website.
CODE OF CONDUCT
One important way that Finning promotes our values and
communicates the behaviours and actions expected from
our employees is through our Code of Conduct. The Code
provides a common set of principles and key policies to help
guide day-to-day behaviour in support of our values. All
employees are required to review the Code and affirm
that they understand their role in upholding Finning’s
ethical standards. The Code of Conduct is available in
the Governance section of www.finning.com.
ANNUAL GENERAL MEETING
May 8, 2012
2:00 pm Pacific Time
Terminal City Club
837 West Hastings Street
Vancouver, British Columbia
INVESTOR CONTACT INFORMATION
For inquiries related to Finning’s operating activities
and financial performance:
Mauk Breukels
Vice President, Investor Relations and Corporate Affairs
604-331-4934
investor_relations@finning.ca
For inquiries related to shares or dividends:
Computershare Trust Company of Canada
1-800-564-6253 (North America)
514-982-7555 (international)
service@computershare.com
www.finning.com