2017
Finning International Inc.
(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)
Finning International Inc.
2017 Annual Results
MANAGEMENT’S DISCUSSION AND ANALYSIS
This Management’s Discussion and Analysis (MD&A) of Finning International Inc. (Finning or the Company) should
be read in conjunction with the audited annual consolidated financial statements for the year ended December 31,
2017 and the accompanying notes thereto, which have been prepared in accordance with International Financial
Reporting Standards (IFRS). All dollar amounts presented in this MD&A are expressed in Canadian dollars, unless
otherwise stated. Additional information relating to the Company, including its current Annual Information Form
(AIF), can be found under the Company’s profile on the SEDAR (System for Electronic Document Analysis and
Retrieval) website at www.sedar.com.
February 5, 2018
Finning International Inc. (TSX:FTT) is the world’s largest Caterpillar Inc. (Caterpillar) equipment dealer delivering
service to customers for 85 years. The Company sells, rents, and provides parts and service for equipment and
engines to customers in various industries, including mining, construction, petroleum, forestry, and a wide range of
power systems applications. Finning aims to consistently deliver solutions that enable customers to achieve the
lowest equipment owning and operating costs while maximizing uptime.
2017 Annual Highlights
(cid:120) Basic EPS (1) earned in 2017 was $1.31 and in 2016 was $0.38. Results in both the current and prior year include
items which management does not consider indicative of operational and financial trends. These items include
severance and restructuring costs in both years, insurance proceeds in 2017 related to the 2016 Alberta wildfires,
and the unavoidable costs incurred last year due to that fire, an early debt redemption premium in 2017, as well
as losses in 2016 on power system projects and alleged fraudulent activity by a customer in 2016. These items
are described on pages 4 and 5 in this MD&A.
(cid:120) Excluding the items noted above, and detailed on pages 4 and 5 in this MD&A, Adjusted EPS (2)(3) was $1.36 in
2017, 55% higher than the Adjusted EPS of $0.88 earned in 2016. Adjusted EPS was up from 2016 due to strong
results from all operations.
(cid:120) Revenue of $6.3 billion was up 11% from 2016 reflecting an 18% increase in new equipment revenue and a 10%
increase in product support revenue. All operations reported higher revenue compared to 2016.
(cid:120) SG&A (1) costs relative to revenue were lower than 2016 in all operations, and down on a consolidated basis.
Excluding the impact in SG&A of the significant items noted above, SG&A costs relative to revenue were down
140 basis points, reflecting the strong leverage of incremental revenues on fixed costs.
(cid:120) EBIT (1) was $399 million and EBIT margin was 6.4% in 2017 compared to $165 million and 2.9% in 2016.
(cid:120) Adjusting for the impact of the significant items noted above, Adjusted EBIT (3) of $400 million and Adjusted EBIT
margin of 6.4% was higher than the 2016 Adjusted EBIT of $273 million and Adjusted EBIT margin of 4.9%, due
to higher sales volumes and strong leverage on fixed costs.
(cid:120) Adjusted EBITDA (1)(2)(3) was up 26% from 2016.
(cid:120) Free cash flow (2) in 2017 of $165 million reflected lower cash generation in the Company’s South American and
Canadian operations compared to 2016 largely due to an increase in inventory purchases to meet higher
demand.
(cid:120) Working capital to sales ratio (2) improved by 330 basis points and inventory turns (2) were up 14% from 2016,
despite higher inventory levels to meet stronger demand.
(1) Basic Earnings Per Share (EPS); Selling, General & Administrative expenses (SG&A); Earnings Before Finance Costs and Income Taxes
(EBIT); Earnings Before Finance Costs, Income Taxes, Depreciation and Amortization (EBITDA).
(2)
These financial metrics, referred to as “non-GAAP financial measures” do not have a standardized meaning under International Financial
Reporting Standards (IFRS), which are also referred to herein as Generally Accepted Accounting Principles (GAAP), and therefore may not
be comparable to similar measures presented by other issuers. For additional information regarding these financial metrics, including
definitions and reconciliations from each of these non-GAAP financial measures to their most directly comparable measure under GAAP,
where available, see the heading “Description of Non-GAAP Financial Measures and Reconciliations” later in this MD&A.
(3) Certain 2017 and 2016 financial metrics were impacted by significant items management does not consider indicative of operational and
financial trends either by nature or amount; these significant items are described on pages 4 and 5 in this MD&A and the financial metrics
which have been adjusted to take into account these items are referred to as “Adjusted” metrics.
1
Finning International Inc.
2017 Annual Results
Table of Contents
2017 Annual Overview ................................................................................................................................................ 3
Non-GAAP Financial Measures ................................................................................................................................... 4
Strategic Direction ....................................................................................................................................................... 6
Key Performance Measures ........................................................................................................................................ 7
Annual Results ............................................................................................................................................................. 9
Invested Capital ......................................................................................................................................................... 11
Return on Invested Capital and Invested Capital Turnover ...................................................................................... 12
Results by Reportable Segment ................................................................................................................................ 13
Fourth Quarter Overview ........................................................................................................................................... 18
Outlook ...................................................................................................................................................................... 27
Liquidity and Capital Resources ................................................................................................................................ 28
Contractual Obligations ............................................................................................................................................. 31
Significant Accounting Estimates and Contingencies ............................................................................................... 31
Risk Factors and Management .................................................................................................................................. 33
Contingencies and Guarantees ................................................................................................................................. 37
Outstanding Share Data ............................................................................................................................................ 37
Controls and Procedures Certification ....................................................................................................................... 38
Description of Non-GAAP Financial Measures and Reconciliations ......................................................................... 39
Selected Annual Information ..................................................................................................................................... 49
Selected Quarterly Information .................................................................................................................................. 50
Forward-Looking Disclaimer ...................................................................................................................................... 51
2
2017 Annual Overview
Finning International Inc.
2017 Annual Results
($ millions, except for share data)
2017
2016
Revenue
Gross profit
Selling, general & administrative expenses (SG&A)
Equity earnings of joint ventures and associate
Other income
Other expenses
Earnings before finance costs and income taxes (EBIT)
Net income
Basic earnings per share (EPS)
Earnings before finance costs, income taxes, depreciation
and amortization (EBITDA)
Free cash flow
Adjusted EBIT (1)(2)
Adjusted net income (1)(2)
Adjusted EPS (1)(2)
Adjusted EBITDA (1)(2)
Gross profit margin
SG&A as a percentage of revenue
EBIT margin
EBITDA margin
Adjusted EBIT margin (1)(2)
Adjusted EBITDA margin (1)(2)
n/m = % change not meaningful
$
$
$
$
$
$
$
$
$
$
6,265 $
1,657
(1,267)
7
2
—
399 $
221 $
1.31 $
583 $
165 $
400 $
229 $
1.36 $
584 $
26.4%
20.2%
6.4%
9.3%
6.4%
9.3%
5,628
1,473
(1,280)
5
5
(38)
165
65
0.38
357
370
273
147
0.88
465
26.2%
22.7%
2.9%
6.3%
4.9%
8.3%
%
change
fav (unfav)
11%
13%
1%
25%
(59)%
n/m
141%
242%
242%
63%
(56)%
46%
55%
55%
26%
(1)
These financial metrics, referred to as “non-GAAP financial measures” do not have a standardized meaning under International Financial
Reporting Standards (IFRS), which are also referred to herein as Generally Accepted Accounting Principles (GAAP), and therefore may not
be comparable to similar measures presented by other issuers. For additional information regarding these financial metrics, including
definitions and reconciliations from each of these non-GAAP financial measures to their most directly comparable measure under GAAP,
where available, see the heading “Description of Non-GAAP Financial Measures and Reconciliations” later in this MD&A.
(2) Certain 2017 and 2016 financial metrics were impacted by significant items management does not consider indicative of operational and
financial trends either by nature or amount; these significant items are described on pages 4 and 5 of this MD&A and the financial metrics
which have been adjusted to take into account these items are referred to as “Adjusted” metrics.
3
Finning International Inc.
2017 Annual Results
Non-GAAP Financial Measures
Management believes that providing certain non-GAAP financial measures provides users of the Company’s
consolidated financial statements with important information regarding the operational performance and related
trends of the Company's business. By considering these measures in combination with the comparable IFRS
measures set out in this MD&A, management believes that users 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
IFRS measures alone.
During the years ended December 31, 2014 to December 31, 2017, there were a number of significant items that
management does not consider to be indicative of future financial trends of the Company either by nature or
amount. As a result, management excludes these items when evaluating its consolidated operating financial
performance and the performance of each of its operations. These items may not be non-recurring, but
management believes that excluding these significant items from financial results reported solely in accordance with
GAAP provides a better understanding of the Company’s consolidated financial performance when considered along
with the GAAP results. Adjusted financial metrics are intended to provide additional information to users of the
MD&A. This information should not be considered in isolation or as a substitute for financial measures prepared in
accordance with GAAP. In addition, because non-GAAP financial measures do not have a standardized meaning
under GAAP, they may not be comparable to similar measures presented by other companies.
Significant items that affected reported annual 2017 and 2016 results, which are not considered by management to
be indicative of operational and financial trends either by nature or amount, included:
2017 significant items:
(cid:120) Severance costs incurred in the Company’s Canadian and South American operations related to facility and
cost optimization.
(cid:120)
Insurance proceeds received related to the business interruption impact of the 2016 Alberta wildfires.
(cid:120) Redemption cost related to the early repayment of the $350 million 6.02% Medium Term Notes (MTN) due June
1, 2018.
2016 significant items:
(cid:120) Severance costs related to the global workforce reduction as the Company continued to align its cost structure
to lower market activity.
(cid:120) Restructuring costs incurred in the Company’s Canadian and UK operations related to facility closures and
consolidations.
(cid:120)
In Q4 2016, the Company’s South American operations recorded an estimated loss for which the Company filed
a criminal suit claiming fraudulent activities by a customer in connection with non-payment for equipment
financed through Caterpillar and guaranteed by the Company. The Company believes that the customer took
advantage of import and currency restrictions to take possession of equipment without paying for it, as a result
of which the Company was required to pay under its guarantee. The customer subsequently filed for insolvency
protection. In addition to bringing a criminal action, the Company has also filed a claim in the customer’s
insolvency proceedings.
(cid:120) As part of the restructuring and repositioning of the Company’s UK’s power systems business, management in
the UK & Ireland completed a detailed review of power systems contracts and projects. As a result,
management recorded provisions on certain power systems contracts in Q1 2016, as well as estimated losses
on disputes regarding two power system projects in Q2 2016.
(cid:120) Unavoidable costs incurred during the evacuation and cessation of operations in the Fort McMurray, Alberta
area due to wildfires for a six week period in May and June 2016.
(cid:120) Following a strategic review of the Company’s operations in the UK & Ireland, it was determined that
engineering and construction services for the water utility industry no longer represented a core sector for
Finning’s power systems division. The Company recorded a write-down of net assets and other costs in Q2
2016 related to the sale of this business in August 2016.
(cid:120) Mark-to-market gain on the Company’s investment in IronPlanet Holdings Inc.
4
The magnitude of these items, and reconciliation of the non-GAAP metrics to the closest equivalent GAAP metrics,
is shown in the following table.
EBIT
Net
Income
EPS
Finning International Inc.
2017 Annual Results
For year ended December 31, 2017
($ millions except per share amounts)
EBIT, net income, and EPS
Significant items:
Severance costs
Redemption cost on early repayment
of long-term debt
Impact from Alberta wildfires
– insurance proceeds
Adjusted EBIT, Adjusted net income, and
Adjusted EPS
For year ended December 31, 2016
($ millions except per share amounts)
EBIT, net income, and EPS
Significant items:
Severance costs
Facility closures and restructuring costs
Impact from Alberta wildfires
– unavoidable costs
Power systems project provisions,
estimated loss on disputes and
alleged fraudulent activity by a customer
Loss on sale of non-core business
Gain on investment
Adjusted EBIT, Adjusted net income, and
Adjusted EPS
South
Canada America
$
229 $
182 $
UK &
Ireland Consol (1) Consol Consol
1.31
221 $
399 $
42 $
3
—
(4)
2
—
—
—
—
—
5
—
(4)
4
7
0.03
0.04
(3)
(0.02)
$
228 $
184 $
42 $
400 $
229 $
1.36
EBIT
Net
Income
EPS
South
Canada America
$
87 $
137 $
UK &
Ireland
Consol Consol Consol
0.38
165 $
65 $
41
36
11
20
5
(5)
30
28
8
15
5
(4)
0.18
0.17
0.05
0.09
0.03
(0.02)
(12) $
9
4
—
10
5
—
24
32
11
—
—
—
8
—
—
10
—
—
$
154 $
155 $
16 $
273 $
147 $
0.88
(1) Consolidated (Consol) results include other operations – corporate head office
5
Finning International Inc.
2017 Annual Results
Strategic Direction
Finning’s purpose statement is ‘We believe in
partnering and innovating to build and power a
better world’. The Company’s customer-centric growth
strategy is comprised of three pillars – develop, perform
and innovate. This strategic framework aims to
advance the company-wide commitment towards
developing a safe, talented and inclusive team; drive
efficient and consistent operating performance across
Finning’s operations; and encourage innovation in all
areas of the business, including broadening digital
capabilities, and improving processes and systems.
Execution of this strategy is expected to generate
greater customer value, contribute to the Company’s
financial goals, and support achievement of Finning’s
vision: ‘Leveraging our global expertise and insight,
we are a trusted partner in transforming our
customers’ performance.’
The Company’s significantly reduced cost structure and
sustainable improvements are expected to drive higher
profitability as demand strengthens. Higher profitability
and increased capital discipline are consistent with the
Company’s commitment to grow return on invested
capital (ROIC)(1).
Profitable and Capital Efficient Growth
Finning’s focus on profitable and
capital efficient growth is consistent
with its commitment to improve ROIC.
The Company’s priorities include
transforming its global equipment
supply chain, growing product support
from its large installed equipment
population, and improving the financial
performance of its rental business. In
addition, the Company’s investment in
Finning Digital, a global division within
Finning, is expected to accelerate
delivery of innovative customer
solutions, improve customer
experience, and generate new
revenue opportunities.
(1) This is a non-GAAP financial measure that does not have a standardized meaning under IFRS, and therefore may not be comparable to
similar measures presented by other issuers. For additional information regarding this financial metric, including definition and reconciliation
from this non-GAAP financial measure to its most directly comparable measure under GAAP, where available, see the heading “Description
of Non-GAAP Financial Measures and Reconciliations” later in this MD&A.
6
Annual Key Performance Measures
The Company utilizes the following Key Performance Indicators (KPIs) to consistently measure performance across the
organization and monitor progress in improving ROIC. The Company’s 2017 incentive plans are aligned with these KPIs.
Finning International Inc.
2017 Annual Results
For years ended December 31
ROIC(1) (%)
Consolidated
Canada
South America
UK & Ireland
EBIT (1) ($ millions)
Consolidated
Canada
South America
UK & Ireland
EBIT Margin (%) (1)
Consolidated
Canada
South America
UK & Ireland
Invested Capital (2) ($ millions)
Consolidated
Canada
South America
UK & Ireland
Invested Capital Turnover (2) (times)
Consolidated
Canada
South America
UK & Ireland
Inventory ($ millions)
Inventory Turns (times)
Working Capital to Sales Ratio
Free Cash Flow ($ millions)
Net Debt to Invested Capital Ratio (2)
EBITDA (1) ($ millions)
Net Debt to EBITDA Ratio (1)(2)
2017
2016
2015
2014
2013
13.4%
13.5%
17.7%
14.7%
399
229
182
42
6.4%
7.4%
8.5%
4.0%
2,819
1,620
977
246
2.10x
1.82x
2.10x
3.68x
1,705
2.83x
27.1%
165
30.4%
583
1.5
5.6%
5.3 %
13.3%
(4.5)%
165
87
137
(12)
2.9%
3.1%
7.4%
(1.1)%
2,797
1,595
996
216
1.90x
1.70x
1.80x
3.54x
1,601
2.49x
30.4%
370
32.0%
357
2.5
(3.0)%
5.5%
(12.8)%
(1.4)%
(105)
98
(174)
(5)
(1.7)%
3.1%
(8.4)%
(0.5)%
3,240
1,760
1,122
321
1.78x
1.74x
1.52x
2.93x
1,800
2.38x
32.2%
325
36.7%
126
9.5
15.3%
17.1%
14.6%
16.3%
504
284
196
50
7.3%
7.8%
8.8%
4.8%
3,106
1,475
1,348
284
2.10x
2.19x
1.66x
3.43x
1,661
2.81x
26.1%
483
31.4%
720
1.4
15.7%
15.9%
17.6%
16.4%
521
263
249
43
7.7%
7.8%
9.9%
4.9%
3,138
1,488
1,391
265
2.04x
2.03x
1.78x
3.37x
1,756
2.74x
26.5%
441
40.8%
737
1.7
(1) Reported financial metrics may be impacted by significant items management does not consider indicative of operational and financial
trends either by nature or amount; these significant items are described on pages 40-43 of this MD&A and the financial metrics which
have been adjusted to take into account these items are referred to as “Adjusted” metrics.
(2) These are non-GAAP financial measures that do not have a standardized meaning under IFRS, and therefore may not be comparable to
similar measures presented by other issuers. For additional information regarding these financial metrics, including definitions and
reconciliations from each of these non-GAAP financial measures to their most directly comparable measure under GAAP, where
available, see the heading “Description of Non-GAAP Financial Measures and Reconciliations” later in this MD&A.
7
Annual Key Performance Measures – Adjusted
Reported financial metrics may be impacted by significant items management does not consider indicative of
operational and financial trends either by nature or amount; these significant items are described on pages 40-43 of
this MD&A and the financial metrics which have been adjusted to take these items into account are referred to as
“Adjusted” metrics. The impact of these items on certain key performance measures is shown below:
Finning International Inc.
2017 Annual Results
For years ended December 31
Adjusted ROIC (1) (%)
Consolidated
Canada
South America
UK & Ireland
Adjusted EBIT ($ millions)
Consolidated
Canada
South America
UK & Ireland
Adjusted EBIT Margin (%)
Consolidated
Canada
South America
UK & Ireland
Adjusted EBITDA (2) ($ millions)
Net Debt to Adjusted EBITDA Ratio (1)(2)
2017
2016
2015
2014
13.4 %
13.5 %
18.0 %
14.7 %
400
228
184
42
6.4 %
7.4 %
8.6 %
4.0 %
584
1.5
9.3 %
9.3 %
15.0 %
5.9 %
273
154
155
16
4.9 %
5.5 %
8.4 %
1.8 %
465
1.9
10.9 %
10.6 %
14.0 %
9.0 %
383
189
190
33
6.1 %
6.1 %
9.2 %
3.1 %
604
2.0
16.2 %
17.5 %
16.2 %
16.7 %
533
290
218
51
7.6 %
7.8 %
9.7 %
4.8 %
749
1.3
(1) These are non-GAAP financial measures that do not have a standardized meaning under IFRS, and therefore may not be comparable to
similar measures presented by other issuers. For additional information regarding these financial metrics, including definitions and
reconciliations from each of these non-GAAP financial measures to their most directly comparable measure under GAAP, where available,
see the heading “Description of Non-GAAP Financial Measures and Reconciliations” later in this MD&A.
(2) Of the significant items described on pages 40-43 of this MD&A, $10 million was recorded in depreciation and amortization expense in 2015.
(cid:3)
8
Finning International Inc.
2017 Annual Results
Revenue
Revenue by Line of Business and by Operation
For years ended December 31
($ millions)
3,500
1,750
0
Line of Business
2016
2017
6
9
4
3
,
2
8
1
3
,
9
6
1
2
,
8
3
8
1
,
7
6
3
9
5
3
6
2
2
8
2
2
New
Equipment
Used
Equipment
Equipment
Rental
Product
Support
5
1
3
1
Other
3,200
1,600
0
Operating Regions
2016
2017
3
7
0
,
3
1
2
8
,
2
1
5
1
,
2
7
5
8
,
1
0
5
9
1
4
0
,
1
Canada
South America
UK & Ireland
The Company generated revenue of $6.3 billion during 2017, an increase of 11% over 2016, driven by higher new
equipment and product support sales. Revenue was up in all operations.
New equipment sales increased 18% compared to 2016, driven by the Company’s South American and UK &
Ireland operations. New equipment sales in the Company’s South American operations in 2017 were 60% higher
than 2016 levels in functional currency, reflecting stronger activity in all markets, principally construction in
Argentina. In the UK & Ireland, new equipment revenues were up almost 25% in functional currency, as demand for
equipment in all the Company’s markets has strengthened, most notably in the power systems and construction
markets. The Company’s Canadian operations reported comparable new equipment revenue in both years,
reflecting strong gas compression sales and more robust activity in the construction market in 2017, while 2016
reflected the delivery of equipment related to certain construction projects and significant mining deliveries.
With improving market conditions in 2017, equipment backlog (1) was $1.3 billion at December 31, 2017, almost triple
the backlog at the end of 2016, and comparable to early 2014 levels, reflecting improved order intake (1) during
2017.
Product support sales were up 10% compared to 2016, with strong parts activity in all markets in the current year,
and up in all operations in functional currency, primarily in the Company’s Canadian operations. Product support
revenue in the Company’s South American and UK & Ireland operations was up 7% in functional currency. On a
consolidated basis, product support revenue as a percentage of sales was 56%, comparable to the prior year.
Used and rental revenue on a consolidated basis were comparable in both years.
The 7% stronger Canadian dollar relative to the U.K. pound sterling and 2% stronger Canadian dollar relative to the
U.S. dollar on average in 2017 compared to 2016 had an adverse impact on revenue of approximately $115 million.
However, the foreign currency translation impact on EBIT was minimal.
(1) These are non-GAAP financial measures that do not have a standardized meaning under IFRS, and therefore may not be comparable to
similar measures presented by other issuers. For additional information regarding these financial metrics, including definition, see the heading
“Description of Non-GAAP Financial Measures and Reconciliations” later in this MD&A.
9
Finning International Inc.
2017 Annual Results
Earnings Before Finance Costs and Income Taxes
Adjusted EBIT by Operation (1)
For years ended December 31
($ millions)
250
8
2
2
125
4
5
1
0
2016
2017
4
8
1
5
5
1
2
4
6
1
Canada
South America
UK & Ireland
(1) Excluding the corporate and other operations segment
2017 gross profit of $1.7 billion was up 13% compared
to 2016, with higher volumes from improved market
activity in all operations and all markets. Consolidated
gross profit margin of 26.4% was slightly up from 26.2%
earned in 2016, with a comparable revenue mix.
The Company’s Canadian operations reported higher
overall gross profit margin in 2017 compared to 2016,
primarily due to a revenue mix shift to higher product
support sales. The Company’s UK & Ireland operations
also reported higher overall gross profit margin from
higher new and used equipment margins, partly offset
by a revenue mix shift to higher new equipment sales.
Lower overall gross profit margin from the Company’s
South American operations reflected a revenue mix shift
to higher new equipment sales.
SG&A costs in 2017 were slightly lower than the prior year. In 2017, $5 million of severance costs were incurred in
the Company’s Canadian and South American operations related to facility and cost optimization. This was partly
offset by the favourable impact of $4 million of insurance proceeds related to the business interruption during the
2016 Alberta wildfires. The prior year included $44 million in severance and restructuring costs, $11 million of
unavoidable costs related to the Alberta wildfires and $10 million estimated loss due to alleged fraudulent activity
related to a customer in the Company’s South American operations. Excluding the significant items noted above in
both years, SG&A was up 4% in 2017 compared to 2016. This increase reflects higher variable costs from increased
sales volumes in all operations, higher short term and long term incentive plan costs and inflationary and statutory
salary increases in the Company’s South American operations.
As a percentage of revenue, SG&A is down by 250 basis points over 2016. Excluding the impact of the significant
items noted above, SG&A as a percentage of revenue in 2017 is down by 140 basis points over 2016, reflecting the
strong leverage of incremental revenues on fixed costs.
Other expenses of $38 million reported in 2016 include restructuring costs incurred in the Company’s Canadian
operations related to facility closures and consolidations, as well as a loss on sale of a non-core business in the
Company’s UK & Ireland operations. Other income of $2 million reported in 2017, and $5 million reported in 2016 is
a gain on the Company’s investment in IronPlanet Holdings Inc., the sale of which was completed in 2017.
The Company reported EBIT of $399 million and EBIT margin of 6.4% in 2017, compared to $165 million and 2.9%
earned in 2016. Excluding the significant items noted above, and detailed on pages 4 and 5 in this MD&A, 2017
Adjusted EBIT was $400 million and Adjusted EBIT margin was 6.4%, higher than the 2016 Adjusted EBIT of $273
million and Adjusted EBIT margin of 4.9%. The 46% increase in Adjusted EBIT in 2017 compared to 2016 was a
result of higher sales volumes and strong leverage on fixed costs. All operations reported higher Adjusted EBIT and
Adjusted EBIT margin in 2017 compared to 2016. On an adjusted basis, this is the highest consolidated EBIT and
EBIT margin reported since 2014.
EBITDA
EBITDA for 2017 was $583 million and EBITDA margin was 9.3% (2016: EBITDA was $357 million and EBITDA
margin was 6.3%). Excluding significant items detailed on pages 4 and 5 in this MD&A, 2017 Adjusted EBITDA was
$584 million and Adjusted EBITDA margin was 9.3%, up from Adjusted EBITDA of $465 million and Adjusted
EBITDA margin of 8.3% in 2016 driven by higher earnings from all the Company’s operations in 2017.
The net debt to Adjusted EBITDA ratio at December 31, 2017 was 1.5x, lower than the net debt to Adjusted EBITDA
ratio of 1.9x at December 31, 2016, due to higher Adjusted EBITDA in 2017.
Finance Costs
Finance costs in 2017 were $100 million and higher than the $85 million reported in 2016. 2017 includes a
redemption premium of $9 million related to the early repayment of the $350 million 6.02% MTN due June 1, 2018.
10
Finning International Inc.
2017 Annual Results
Provision for Income Taxes
The consolidated provision for income taxes for the year ended December 31, 2017 was $78 million at an annual
effective tax rate of 26.0%. The annual effective tax rate for 2016 was 19.0% and was lower than 2017 due to the
mix of income from various jurisdictions in which the Company carries on business.
Management expects the Company’s effective tax rate to generally be within the 25-30% range on an annual basis.
The rate may fluctuate from year to year as a result of changes in the source of income from various jurisdictions,
relative income from the various jurisdictions in which the Company carries on business, changes in the estimation
of tax reserves, and changes in tax rates and tax legislation.
Net Income
Net income was $221 million and basic EPS was $1.31 in 2017, compared to $65 million and $0.38 per share in
2016. Excluding significant items noted on pages 4 and 5 in this MD&A, Adjusted EPS in 2017 was $1.36 and higher
than 2016 Adjusted EPS of $0.88. The increase in Adjusted net income and Adjusted EPS compared to 2016 was
due to higher sales volumes and improved profitability from cost reduction measures and leverage of incremental
revenues on fixed costs.
Invested Capital
Decrease
from
Increase
(decrease) from
($ millions,
unless otherwise stated)
December 31, September 30,
2017
2017
September 30, December 31, December 31,
2016
2016
2017
$
Consolidated
$
Canada
$
South America
$
UK & Ireland
$
South America (U.S. dollar)
UK & Ireland (U.K. pound sterling) £
2,819 $
1,620 $
977 $
246 $
779 $
145 £
3,083
1,746
1,063
305
852
182
$
$
$
$
$
£
(264) $
(126) $
(86) $
(59) $
(73) $
(37) £
2,797
1,595
996
216
741
130
$
$
$
$
$
£
22
25
(19)
30
38
15
Compared to December 31, 2016:
The $22 million increase in consolidated invested capital from December 31, 2016 to December 31, 2017 is net of a
foreign exchange impact of approximately $60 million in translating the invested capital balances of the Company’s
foreign operations. The foreign exchange impact was primarily as a result of the 7% stronger Canadian dollar (CAD)
relative to the U.S. dollar (USD) at December 31, 2017 compared to the rate at December 31, 2016.
Excluding the impact of foreign exchange, consolidated invested capital increased by $85 million from December 31,
2016 to December 31, 2017 reflecting:
(cid:120) an increase in accounts receivable balances in the Company’s Canadian and South American operations
due to higher sales activity in Q4 2017 compared to the prior year;
(cid:120) an increase in parts inventory in the Company’s Canadian operations due to increased customer demand
for product support, as well as higher internal service work in progress inventories in all operations reflecting
increased demand;
(cid:120) an increase in intangible assets in the Company’s South American operations, relating to the investment in
a new Enterprise Resource Planning (ERP) system; and
(cid:120) partly offset by an increase in accounts payable balances(cid:3)in the Company’s Canadian and South American
operations as a result of higher inventory purchases to meet demand.
Compared to September 30, 2017:
The $264 million decrease in consolidated invested capital from September 30, 2017 to December 31, 2017 is net of
a foreign exchange impact of approximately $10 million in translating the invested capital balances of the
Company’s foreign operations. The foreign exchange impact was primarily as a result of the 1% weaker CAD
relative to the USD at December 31, 2017 compared to the rate at September 30, 2017.
Excluding the impact of foreign exchange, consolidated invested capital decreased by $273 million from September
30, 2017 to December 31, 2017 reflecting:
(cid:120) an increase in accounts payable balances in the Company’s Canadian and South American operations as a
result of higher inventory purchases made during the quarter; and
(cid:120) a decrease in parts inventory in the Company’s Canadian and South American operations from increased
product support demand and supply chain improvements.
11
ROIC and Invested Capital Turnover
ROIC
Consolidated
Canada
South America
UK & Ireland
Adjusted ROIC
Consolidated
Canada
South America
UK & Ireland (1)
Invested Capital Turnover (times)
Consolidated
Canada
South America
UK & Ireland
Finning International Inc.
2017 Annual Results
December 31, September 30, December 31,
2017
2016
2017
13.4 %
13.5 %
17.7 %
14.7 %
13.4 %
13.5 %
18.0 %
14.7 %
2.10x
1.82x
2.10x
3.68x
10.3 %
9.5 %
15.4 %
13.7 %
12.0 %
12.3 %
16.4 %
13.7 %
2.02x
1.74x
2.04x
3.59x
5.6 %
5.3 %
13.3 %
(4.5)%
9.3 %
9.3 %
15.0 %
5.9 %
1.90x
1.70x
1.80x
3.54x
(1) There were no significant items adjusted in the UK & Ireland for the twelve month periods ended December 31, 2017 and September 30,
2017, therefore the adjusted ROIC at December 31, 2017 and September 30, 2017 is the same as the reported metric.
Return on Invested Capital
On a consolidated basis, ROIC was 13.4% at December 31, 2017, compared to 5.6% at December 31, 2016 and
10.3% at September 30, 2017. Adjusting for significant items that management does not consider indicative of
operational and financial trends, as noted on pages 4 and 5 in this MD&A, Adjusted ROIC at December 31, 2017
remained 13.4%, higher than the Adjusted ROIC at September 30, 2017 of 12.0%. The increase in Adjusted ROIC
reflects improved capital efficiency with higher Adjusted EBIT for the last twelve month period relative to invested
capital in all operations.
Adjusted ROIC at December 31, 2017 of 13.4% improved compared to Adjusted ROIC of 9.3% at December 31,
2016. The increase in Adjusted ROIC compared to the prior year end reflects strong EBIT achieved in 2017 by the
Company on capital deployed. Adjusted ROIC at December 31, 2017 was higher in all operations compared to
December 31, 2016, demonstrating capital efficiency and is further discussed below.
Canadian operations
(cid:120) ROIC and Adjusted ROIC of 13.5% (December 31, 2016 ROIC: 5.3%, Adjusted ROIC: 9.3%).
(cid:120) Higher Adjusted ROIC at December 31, 2017 reflects Adjusted EBIT growth in 2017 which outpaced the
increase in average invested capital levels.
South American operations
(cid:120) Reported ROIC of 17.7% (December 31, 2016: 13.3%) and Adjusted ROIC of 18.0% (December 31, 2016:
15.0%).
(cid:120) Higher Adjusted ROIC at December 31, 2017 reflects higher Adjusted EBIT in 2017 and slightly lower
average invested capital levels.
UK & Ireland operations
(cid:120) ROIC and Adjusted ROIC of 14.7% (December 31, 2016 ROIC: (4.5)%, Adjusted ROIC: 5.9%).
(cid:120) Higher Adjusted ROIC at December 31, 2017 reflects higher Adjusted EBIT in 2017 which outpaced the
increase in average invested capital levels.
Invested capital turnover
Consolidated invested capital turnover at December 31, 2017 was 2.10 times, up from 1.90 times at December 31,
2016, reflecting an increase in the invested capital turnover rate in all operations. The consolidated invested capital
turnover rate has improved in all quarterly periods over the last twelve months with higher revenues in the last
twelve month period outpacing the growth in average invested capital levels.
12
Finning International Inc.
2017 Annual Results
Annual Results by Reportable Segment
The Company and its subsidiaries operate primarily in one principal business: the sale, service, and rental of heavy
equipment, engines, and related products in various markets worldwide as noted below. Finning’s reportable
segments are as follows:
(cid:120) Canadian operations: British Columbia, Alberta, Saskatchewan, Yukon, the Northwest Territories, and a
portion of Nunavut
South American operations: Chile, Argentina, and Bolivia
(cid:120)
(cid:120) UK & Ireland operations: England, Scotland, Wales, Northern Ireland, and the Republic of Ireland
(cid:120) Other: Corporate head office
The table below provides details of revenue by operation and lines of business.
For year ended December 31, 2017
($ millions)
Canada
South
America
UK
& Ireland
Consol
New equipment
Used equipment
Equipment rental
Product support
Other
Total
Revenue percentage by operation
For year ended December 31, 2016
($ millions)
New equipment
Used equipment
Equipment rental
Product support
Other
Total
Revenue percentage by operation
$
$
$
$
856 $
236
147
1,832
2
3,073 $
49%
646 $
53
50
1,398
4
2,151 $
34%
667 $
70
31
266
7
1,041 $
17%
2,169
359
228
3,496
13
6,265
100%
Canada
South
America
UK
& Ireland
Consol
858 $
238
140
1,584
1
2,821 $
50%
413 $
57
53
1,330
4
1,857 $
33%
567 $
72
33
268
10
950 $
17%
1,838
367
226
3,182
15
5,628
100%
Revenue
percentage
34%
6%
4%
56%
0%
100%
Revenue
percentage
33%
6%
4%
57%
0%
100%
13
Finning International Inc.
2017 Annual Results
Canadian Operations
The Canadian reporting segment includes Finning (Canada), OEM Remanufacturing Company Inc. (OEM), and a
25% interest in Pipeline Machinery International (PLM). The Canadian operations sell, service, and rent mainly
Caterpillar equipment and engines in British Columbia, Alberta, Saskatchewan, Yukon, the Northwest Territories,
and a portion of Nunavut. The Canadian operations’ 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 operations:
For years ended December 31
($ millions)
Revenue from external sources
Operating costs
Depreciation and amortization
Equity earnings of joint ventures
Other expenses
EBIT
EBIT margin
EBITDA
EBITDA margin
Adjusted EBIT (1)
Adjusted EBIT margin (1)
Adjusted EBITDA (1)
Adjusted EBITDA margin (1)
$
$
$
$
$
2017
2016
3,073
(2,757)
(99)
12
—
229
7.4%
328
10.7%
228
7.4%
327
10.7%
$
$
$
$
$
2,821
(2,609)
(100)
8
(33)
87
3.1%
187
6.6%
154
5.5%
254
9.0%
(1) Significant items that affected results for 2017 and 2016 which management does not consider to be indicative of operational and financial
trends are described on pages 4 and 5 of this MD&A.
Canada – Revenue by Line of Business
For years ended December 31
($ millions)
1,850
925
0
2016
2017
2
3
8
,
1
4
8
5
,
1
8
5
8
6
5
8
8
3
2
6
3
2
0
4
1
7
4
1
New Equip Used Equip Equip Rental
1
2
Other
Product
Support
Revenue for 2017 increased 9% to $3.1 billion compared
to last year, largely driven by 16% higher product support
revenue, reflecting strong activity and demand in all
markets and an increase in component rebuild work.
Excluding the estimated impact of the Alberta wildfires in
Q2 2016, product support revenue in 2017 would have
been 13% higher compared to 2016.
New equipment revenues in 2017 were comparable to the
prior year, reflecting strong gas compression sales and
more robust activity in the construction market this year,
while 2016 reflected the delivery of equipment related to
certain large construction projects and mining sites.
Rental revenues were up from last year resulting from the
integrated go-to-market offerings of new, used and rental
equipment, as well as a recovery in general construction
markets.
Gross profit in 2017 was higher than the prior year, reflecting higher sales volumes and a revenue mix shift to higher
product support sales, which typically generates a higher gross margin. Product support revenue comprised 60% of
total revenue in 2017 compared to 56% in 2016.
SG&A costs for 2017 were slightly lower compared to 2016 on revenue growth of 9%. In Q4 2017, the Company
restructured certain activities in order to optimize costs. As a result, severance costs of $3 million were recorded in
2017; however this was more than offset by the favourable impact of $4 million of insurance proceeds received in
Q4 2017 in relation to the business interruption resulting from the Alberta wildfires in 2016. In 2016, the Company
reduced its Canadian workforce in order to align its cost structure to lower market activity, which resulted in
severance costs of $24 million. 2016 SG&A also included $11 million of unavoidable costs related to the 2016
wildfires. Excluding severance costs, insurance proceeds and the impact from the 2016 wildfires, SG&A in 2017 was
up 4% from 2016. This increase reflects higher variable costs in line with revenue growth and higher short term and
long term incentive plan costs.
14
Finning International Inc.
2017 Annual Results
In 2016, the Canadian operations recognized $33 million of costs in other expenses related to facility closures and
restructuring to adjust its footprint to lower market activity.
The Canadian operations contributed EBIT of $229 million in 2017, compared to the $87 million earned in the prior
year. EBIT margin was 7.4% in 2017 and 3.1% in 2016. Excluding severance and restructuring costs, as well as the
impact of the Alberta wildfires discussed earlier, Adjusted EBIT margin for 2016 was 5.5%. Adjusted EBIT margin of
7.4% in 2017 was higher than the prior year due to higher gross profit margins achieved in the current year and the
leverage of incremental revenues on fixed costs.
South American Operations
Finning’s South American operations sell, service, and rent mainly Caterpillar equipment and engines in Chile,
Argentina, and Bolivia. The South American operations’ markets include mining, construction, forestry, and power
systems.
The table below provides details of the results from the South American operations:
For years ended December 31
($ millions)
Revenue from external sources
Operating costs
Depreciation and amortization
EBIT
EBIT margin
EBITDA
EBITDA margin
Adjusted EBIT (1)
Adjusted EBIT margin (1)
Adjusted EBITDA (1)
Adjusted EBITDA margin (1)
$
$
$
$
$
2017
2016
2,151
(1,911)
(58)
182
8.5%
240
11.1%
184
8.6%
242
11.3%
$
$
$
$
$
1,857
(1,658)
(62)
137
7.4%
199
10.7%
155
8.4%
217
11.7%
(1) Significant items that affected results for 2017 and 2016 which management does not consider to be indicative of operational and financial
trends are described on pages 4 and 5 of this MD&A.
South America – Revenue by Line of Business
For years ended December 31
($ millions)
2016
2017
8
9
3
,
1
0
3
3
,
1
1,400
6
4
6
700
3
1
4
7
5
3
5
3
5
0
5
0
New Equip Used Equip Equip Rental
4
4
Other
Product
Support
For the year ended December 31, 2017 revenues increased
16% to $2.2 billion compared to 2016 (up 18% in functional
currency). This increase was primarily driven by higher new
equipment revenue, up 60% over 2016 in functional
currency, reflecting stronger activity in all markets,
particularly construction in Argentina.
Product support revenue was also up compared to 2016 (up
7% in functional currency), resulting from stronger activity in
all markets, particularly mining in Chile and construction in
Chile and Argentina.
The stronger Canadian dollar relative to the U.S. dollar on
average in 2017 compared to 2016 had a negative foreign
currency translation impact on revenue in 2017 of
approximately $50 million and was not significant at the
EBIT level.
Gross profit was higher than 2016, due to higher sales volumes, partially offset by lower overall gross profit margin.
Gross profit margin decreased in 2017 compared to 2016, reflecting a revenue mix shift to higher new equipment
sales which typically generates lower gross margins. New equipment revenue comprised 30% of total revenue in
2017 compared to 22% in 2016.
15
Finning International Inc.
2017 Annual Results
SG&A costs in the Company’s South American operations for 2017 were higher compared to 2016 (up 5% in
functional currency). In 2017, the Company reduced its South American workforce related to a specific mine closure
in Argentina resulting in $2 million of severance costs compared to $8 million incurred in 2016 as the Company
aligned its cost structure to lower market activity. Prior year SG&A costs also included a $10 million estimated loss
due to alleged fraudulent activity related to a customer in the South American operations. Excluding these significant
items, SG&A costs (in functional currency) in 2017 increased by 9% compared to 2016. The increase in SG&A was
due in large part to inflationary and statutory salary increases and higher variable costs from increased sales
volumes, as well as higher short term and long term incentive plan costs. SG&A costs relative to sales were lower in
2017 compared to the prior year due to the leverage of incremental revenues on fixed costs.
For 2017, the Company’s South American operations contributed EBIT of $182 million and an EBIT margin of 8.5%
compared to $137 million and 7.4% respectively in 2016. Excluding severance costs in both periods, and the 2016
provision related to alleged fraudulent activity noted above, Adjusted EBIT margin for 2017 was 8.6%, higher than
the 2016 Adjusted EBIT margin of 8.4%. The lower gross profit margin in the current year from mix of sales was
more than offset by lower SG&A costs as a percentage of revenue.
UK & Ireland Operations
The Company’s UK & Ireland operations sell, service, and rent mainly Caterpillar equipment and engines in
England, Scotland, Wales, Northern Ireland, and the Republic of Ireland. The UK & Ireland operations’ markets
include quarrying, construction, power systems, and mining.
The table below provides details of the results from the UK & Ireland operations:
For years ended December 31
($ millions)
Revenue from external sources
Operating costs
Depreciation and amortization
Other expenses – related to sale of business
EBIT
EBIT margin
EBITDA
EBITDA margin
Adjusted EBIT (1)
Adjusted EBIT margin (1)
Adjusted EBITDA (1)
Adjusted EBITDA margin (1)
$
$
$
$
$
2017
2016
1,041
(973)
(26)
—
42
4.0%
68
6.5%
42
4.0%
68
6.5%
$
$
$
$
$
950
(927)
(30)
(5)
(12)
(1.1)%
18
2.0%
16
1.8%
46
4.8%
(1) There were no significant items adjusted in EBIT in 2017, therefore the adjusted metrics above for the year ended December 31, 2017 are
the same as the reported metrics. Significant items that affected results for 2016 which management does not consider to be indicative of
operational and financial trends are described on pages 4 and 5 of this MD&A.
UK & Ireland – Revenue by Line of Business
For year ended December 31
($ millions)
2016
2017
700
350
0
7
6
6
7
6
5
2
7
0
7
3
3
1
3
8
6
2
6
6
2
0
1
7
New Equip
Used Equip Equip Rental Prod Support
Other
Revenue in 2017 of $1 billion was 10% higher than 2016
(up 17% in functional currency), driven primarily by higher
new equipment sales, reflecting continued strong market
demand, particularly in the power systems market, both in
the electric power generation and industrial sectors, and in
the construction market.
Product support revenues were 7% higher than 2016 in
functional currency, reflecting stronger parts volumes in
both the construction and power systems markets.
The stronger Canadian dollar relative to the U.K. pound
sterling on average in 2017 compared to 2016 had a
negative foreign currency translation impact on revenue of
approximately $65 million and was not significant at the
EBIT level.
16
Finning International Inc.
2017 Annual Results
Gross profit was higher than 2016, reflecting higher sales volumes, as well as higher overall gross profit margin from
higher new and used equipment margins reflecting improved performance of power systems projects, partly offset
by a revenue mix shift to new equipment sales.
In 2016, as part of the restructuring and repositioning of the UK’s power systems business, management in the UK
& Ireland completed a detailed review of power systems contracts and projects. As a result of this review,
management recorded a provision of $10 million in the first half of 2016 relating to certain power systems contracts
and projects, unfavourably impacting gross profit margins in 2016, and contributing to the comparative improvement
in 2017.
SG&A costs for 2017 were lower compared to 2016 (down 5% in functional currency). Excluding severance and
restructuring costs of $13 million in 2016, SG&A costs (in functional currency) in 2017 increased by 4% compared to
2016. This increase reflects higher variable costs due to revenue growth. SG&A costs relative to sales were lower in
2017 as a result of higher volumes.
Following a strategic review in 2016 of the Company’s operations in the UK, it was determined that engineering and
construction services for the water utility industry no longer represented a core sector for Finning’s power systems
division in the UK. As a result, the Company recorded a charge in other expenses of approximately $5 million in the
second quarter of 2016, representing the write-down of net assets and other costs related to the August 2016 sale of
this business.
The UK & Ireland operations reported EBIT of $42 million, compared to an EBIT loss of $(12) million in 2016. EBIT
margin was 4.0% compared to (1.1)% in 2016. Excluding significant items noted above in 2016, Adjusted EBIT
margin for 2016 was 1.8%, significantly lower than the 4.0% EBIT margin achieved for 2017. EBIT margin was
higher in 2017 due to lower SG&A costs relative to sales as noted above as well as higher gross profit margin
achieved in the current year from higher new and used equipment margins.
Corporate and Other Operations
Net operating costs before finance costs and income taxes of the Company’s corporate and other operations
segment were $54 million in 2017 compared to $47 million in 2016. Included in this segment are corporate operating
costs, as well as equity earnings (loss) from the Company’s 28.8% investment in Energyst B.V.
Net operating costs in 2017 were $7 million higher than 2016 primarily due to:
(cid:120) $4 million higher long-term incentive plan costs due to improved performance against targets;
(cid:120) $2 million higher equity loss from Energyst B.V.; and
(cid:120) Higher gain recorded in 2016 relating to the sale of the Company’s investment in IronPlanet Holdings Inc. in
Q2 2017 (2017: $2 million gain on sale; 2016: $5 million mark-to-market gain on this investment)
17
Fourth Quarter Overview
Finning International Inc.
2017 Annual Results
($ millions, except for share data)
Q4 2017
Q4 2016
Revenue
Gross profit
SG&A
Equity earnings (loss) of joint ventures and associate
Other income
Other expenses
EBIT
Net income
EPS
EBITDA
Free cash flow
Adjusted EBIT (1)
Adjusted net income (1)
Adjusted EPS (1)
Adjusted EBITDA (1)
Gross profit margin
SG&A as a percentage of revenue
EBIT margin
EBITDA margin
Adjusted EBIT margin (1)
Adjusted EBITDA margin (1)
$
$
$
$
$
$
$
$
$
$
1,735 $
436
(325)
1
—
—
112 $
66 $
0.39 $
157 $
350 $
113 $
67 $
0.40 $
158 $
25.1%
18.7%
6.4%
9.0%
6.5%
9.1%
1,491
380
(333)
(1)
5
(33)
18
9
0.05
65
113
70
47
0.28
117
25.4%
22.3%
1.3%
4.3%
4.8%
7.9%
%
change
fav (unfav)
16%
15%
2%
n/m
n/m
n/m
495%
687%
686%
143%
208%
58%
43%
43%
35%
n/m = % change not meaningful
(1) Certain fourth quarter 2017 and 2016 financial metrics were impacted by significant items management does not consider indicative of
operational and financial trends either by nature or amount; these significant items are described on page 19 in this MD&A and the financial
metrics which have been adjusted to take into account these items are referred to as “Adjusted” metrics.
2017 Fourth Quarter Highlights
(cid:120) Revenue of $1.7 billion was up 16% from Q4 2016, with higher revenue in all lines of business and markets. All
operations reported higher revenue compared to the same period in the prior year, with the Company’s Canadian
operations accounting for more than half of this increase in revenue, reporting strong performance in all lines of
business, particularly within the construction market.
(cid:120) EBIT was $112 million and EBIT margin was 6.4% in Q4 2017 compared to the $18 million and 1.3% earned in
Q4 2016. Results in both the current and prior year quarter include items which management does not consider
indicative of operational and financial trends. These items include severance and restructuring costs in both
periods, insurance proceeds in 2017 related to the Alberta wildfires, as well as losses in 2016 on alleged
fraudulent activity by a customer and a 2016 gain on investment, as described on page 19 in this MD&A.
(cid:120) Excluding the significant items noted above, Adjusted EBIT was $113 million, and Adjusted EBIT margin was
6.5%, higher than Adjusted EBIT of $70 million and Adjusted EBIT margin of 4.8% in Q4 2016. The increase in
Q4 2017 was attributable to higher sales volumes due to improved market activity and strong leverage of
incremental revenues on fixed costs.
(cid:120) Consecutive improvement in quarterly EBIT generation and Adjusted ROIC during the year in all regions due to
focus on profitable and capital efficient growth.
(cid:120) Basic EPS earned in the fourth quarter of 2017 was $0.39 (Q4 2016: $0.05); adjusting for the impact of the
significant items noted above, Adjusted EPS was $0.40 in Q4 2017, higher than the $0.28 Adjusted EPS earned
in the same period in the prior year due to higher revenues and improved profitability.
18
Finning International Inc.
2017 Annual Results
Significant items that affected the results of the Company for the three months ended December 31, 2017 and 2016,
which are not considered by management to be indicative of operational and financial trends, either by nature or
amount are detailed below.
Q4 2017 significant items:
(cid:120) Severance costs incurred in the Company’s Canadian and South American operations related to facility and
cost structure optimization.
(cid:120)
Insurance proceeds received related to the business interruption impact of the 2016 Alberta wildfires.
Q4 2016 significant items
(cid:120) Severance and facility closure and restructuring costs in the Canadian operations to align its cost structure with
current market conditions.
(cid:120) The Company’s South American operations recorded an estimated loss for which the Company filed a criminal
suit claiming fraudulent activities by a customer in connection with non-payment for equipment financed through
Caterpillar and guaranteed by the Company. The Company believes that the customer took advantage of import
and currency restrictions to take possession of equipment without paying for it, as a result of which the
Company was required to pay under its guarantee. The customer subsequently filed for insolvency protection. In
addition to bringing a criminal action, the Company has also filed a claim in the customer’s insolvency
proceedings.
(cid:120) Mark-to-market gain on the Company’s investment in IronPlanet Holdings Inc.
The magnitude of each of these items, and reconciliation of the non-GAAP metrics to the closest equivalent GAAP
metrics, is shown in the following tables:
3 months ended December 31, 2017
($ millions except per share amounts)
EBIT, net income, and EPS
Significant items:
Severance costs
Impact from Alberta wildfires
– insurance proceeds
Adjusted EBIT, Adjusted net income, and
Adjusted EPS
3 months ended December 31, 2016
($ millions except per share amounts)
EBIT, net income, and EPS
Significant items:
Severance costs
Facility closures and restructuring costs
Estimated loss on alleged fraudulent
activity by a customer
Gain on investment
Adjusted EBIT, Adjusted net income, and
Adjusted EPS
South
Canada America
$
66 $
50 $
EBIT
Net
Income
UK &
Ireland
Consol
Consol
12 $
112 $
66 $
EPS
Consol
0.39
3
(4)
2
—
—
—
5
(4)
4
(3)
0.03
(0.02)
$
65 $
52 $
12 $
113 $
67 $
0.40
EBIT
Net
Income
EPS
South
Canada America
(3) $
$
27 $
UK &
Ireland
Consol Consol Consol
0.05
18 $
9 $
15
32
10
(5)
10
25
7
(4)
0.06
0.15
0.04
(0.02)
8 $
—
—
—
—
15
32
—
—
—
—
10
—
$
44 $
37 $
8 $
70 $
47 $
0.28
19
Quarterly Key Performance Measures
The Company utilizes the following Key Performance Indicators (KPIs) to consistently measure performance across
the organization and monitor progress in improving ROIC. The Company’s 2017 incentive plans are aligned with
these KPIs.
2017
2016
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
2015
Q4
Finning International Inc.
2017 Annual Results
ROIC (1)
Consolidated
Canada
South America
UK & Ireland
EBIT (1) ($ millions)
Consolidated
Canada
South America
UK & Ireland
EBIT Margin (1)
Consolidated
Canada
South America
UK & Ireland
Invested Capital ($ millions)
Consolidated
Canada
South America
UK & Ireland
Invested Capital Turnover
Consolidated
Canada
South America
UK & Ireland
Inventory ($ millions)
Inventory Turns (times)
Working Capital to Sales Ratio
Free Cash Flow ($ millions)
Net Debt to Invested Capital Ratio
EBITDA (1) ($ millions)
Net Debt to EBITDA Ratio (1)
13.4 % 10.3 % 9.4 % 7.1 %
(4.0)% (3.0)%
13.5 % 9.5 % 8.3 % 6.6 %
5.5 %
5.4 %
17.7 % 15.4 % 14.9 % 14.3 % 13.3 % (18.1)% (17.0)% (14.9)% (12.8)%
14.7 % 13.7 % 14.0 % 0.0 % (4.5)% (17.4)% (15.7)%
(4.5)% (1.4)%
5.6 % (6.6)%
5.3 % 4.3 %
(6.4)%
4.0 %
112
66
50
12
103
59
47
11
98
57
43
11
86
47
42
8
18
(3)
27
8
73
37
40
10
29
28
38
(26)
45
25
32
(4)
(349)
(17)
(303)
(31)
6.4 % 6.6 % 6.2 % 6.1 %
2.3 %
1.3 % 5.4 %
7.7 % 7.9 % 7.2 % 6.8 % (0.3)% 5.9 %
4.4 %
8.6 % 8.5 % 8.4 % 8.4 %
5.0 % 8.7 %
8.8 %
4.0 % 4.1 % 4.1 % 3.8 %
3.3 % 3.8 % (10.5)%
3.0 % (22.7)%
3.0 % (2.4)%
7.3 % (57.3)%
(1.9)% (10.6)%
2,819
1,620
977
246
3,083
1,746
1,063
305
3,094
1,764
1,041
300
2,926
1,629
1,022
280
2,797
1,595
996
216
2,917
1,650
1,021
253
3,041
1,695
1,072
263
3,085
1,685
1,033
340
3,240
1,760
1,122
321
2.10x
1.82x
2.10x
3.68x
1,705
2.83x
2.02x
1.74x
2.04
3.59
1,742
2.60x
1.90x
1.62x
1.88x
3.75x
1,653
2.61x
1.98x
1.70x
1.97x
3.73x
1,795
2.51x
1.78x
1.74x
1.52x
2.93x
1,800
2.38x
31.4 % 32.2 %
347
37.0 % 36.7 %
146
(282)
2.5
9.5
(1) Reported financial metrics may be impacted by significant items management does not consider indicative of operational and financial
trends either by nature or amount; these significant items are described on pages 40-43 in this MD&A and the financial metrics which
have been adjusted to take into account these items are referred to as “Adjusted” metrics.
1.85x
1.66x
1.74x
3.41x
1,726
2.26x
27.1 % 28.3 % 28.9 % 30.3 % 30.4 % 31.5 %
163
30.4 % 37.5 % 37.4 % 34.5 % 32.0 % 35.0 %
119
109.4
1.78x
1.68x
1.61x
2.98x
1,688
2.43x
32.4 %
64
37.9 %
77
71.5
1.82x
1.80x
1.59x
2.81x
1,740
2.58x
1.90x
1.70x
1.80x
3.54x
1,601
2.49x
96
12.0
131
2.6
149
2.4
157
1.5
65
2.5
(131)
(76)
113
350
22
30
20
Quarterly Key Performance Measures – Adjusted
Reported financial metrics may be impacted by significant items management does not consider indicative of
operational and financial trends either by nature or amount; these significant items are described on pages 40-43 in
this MD&A and the financial metrics which have been adjusted to take these items into account are referred to as
“Adjusted” metrics. The impact of these items on certain key performance measures is shown below:
Finning International Inc.
2017 Annual Results
Adjusted ROIC
Consolidated
Canada
South America
UK & Ireland
Adjusted EBIT (1) ($ millions)
Consolidated
Canada
South America
UK & Ireland
Adjusted EBIT Margin (1)
Consolidated
Canada
South America
UK & Ireland
Adjusted EBITDA (1)(2)
Net Debt to Adjusted EBITDA Ratio (2)
(1)
2017
2016
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
2015
Q4
13.4 % 12.0 % 11.2 % 10.0 % 9.3 % 9.2 %
9.4 % 10.4 % 10.9 %
13.5 % 12.3 % 11.2 % 10.2 % 9.3 % 8.7 %
9.3 % 10.1 % 10.6 %
18.0 % 16.4 % 15.9 % 15.4 % 15.0 % 15.6 % 14.2 % 14.5 % 14.0 %
14.7 % 13.7 % 14.0 % 8.2 % 5.9 % 3.4 %
7.4 % 9.0 %
3.3 %
113
65
52
12
103
59
47
11
98
57
43
11
86
47
42
8
70
44
37
8
73
37
40
10
63
40
39
(5)
67
33
39
3
82
39
46
3
6.5 % 6.6 % 6.2 % 6.1 % 4.8 % 5.4 %
7.6 % 7.9 % 7.2 % 6.8 % 6.2 % 5.9 %
9.0 % 8.5 % 8.4 % 8.4 % 7.0 % 8.7 %
4.0 % 4.1 % 4.1 % 3.8 % 3.3 % 3.8 %
119
2.1
131
2.1
117
1.9
149
2.1
146
2.3
158
1.5
4.9 %
6.3 %
9.1 %
(1.9)%
111
2.2
4.5 % 5.3 %
4.0 % 5.5 %
8.9 % 9.0 %
1.5 % 0.8 %
139
2.0
118
2.0
There were no significant items for which adjustments were made in Q3 2016, Q1 2017, and Q2 2017, therefore the adjusted metrics
above for Q3 2016, Q1 2017, and Q2 2017 are the same as the reported metrics.
(2) Of the significant items described on page 40, $10 million was recorded in depreciation and amortization expense in Q4 2015.
(cid:3)
21
Finning International Inc.
2017 Annual Results
Revenue
Revenue by Line of Business and by Operation
3 months ended December 31
($ millions)
1,000
Line of Business
2016
2017
1
0
9
6
1
8
500
1
6
6
9
1
5
0
0
1
1
6
9
6
5
0
6
New
Equipment
Used
Equipment
Equipment
Rental
Product
Support
4
3
Other
Operating Regions
2016
2017
5
5
8
6
1
7
5
3
5
7
8
5
3
9
2
0
4
2
Canada
South America
UK & Ireland
900
450
0
The Company generated revenue of $1.7 billion during the fourth quarter of 2017, an increase of 16% over the same
period in the prior year. Revenue was up in all operations, lines of business and markets.
New equipment revenue increased 27% compared to the fourth quarter of 2016, and was higher in all operations
and all key markets, particularly the construction market, due to improving market conditions. On a consolidated
basis, in the fourth quarter of 2017, new equipment revenue as a percentage of overall revenue was 38%, compared
to 35% in the same period in the prior year.
Product support revenue increased 10% compared to Q4 2016, up in all operations, with the Company’s Canadian
operations accounting for almost 60% of this increase, resulting from strong demand for product support in all key
markets.
Used equipment and rental revenue were also up compared to Q4 2016, reflecting strong sales in these lines of
business in the Company’s Canadian operations.
Foreign currency translation of the results of the Company’s South American and UK & Ireland operations had a net
adverse impact on revenue of approximately $25 million, due to the 5% stronger Canadian dollar relative to the U.S.
dollar in the fourth quarter of 2017 compared to the same period in the prior year. However, the foreign currency
translation impact on EBIT was minimal.
Earnings Before Finance Costs and Income Taxes
Adjusted EBIT by Operation(1)
3 months ended December 31
($ millions)
2016
2017
80
40
0
5
6
4
4
2
5
7
3
2
1
8
Canada
South America
UK & Ireland
(1) Excluding the corporate and other operations segment
Gross profit in the last three months of 2017 of $436
million was up 15% compared to the same period in the
prior year reflecting higher sales volumes. Gross profit
margin of 25.1% was slightly down from 25.4% in the
fourth quarter of 2016, driven mainly by a revenue mix
shift to higher new equipment sales, which typically
generate lower margins.
SG&A costs in the fourth quarter of 2017 were slightly
lower than the prior year. In Q4 2017, $5 million of
severance costs were incurred in the Company’s
Canadian and South American operations related to
facility and cost optimization. This was partly offset by
the favourable impact of $4 million of insurance
proceeds received in relation to the business interruption
during the 2016 Alberta wildfires. The prior year included
$15 million in severance costs and a $10 million estimated loss due to alleged fraudulent activity related to a
customer in the Company’s South American operations. Excluding these significant items in both years as detailed
on page 19 in this MD&A, SG&A was up 5% in the fourth quarter of 2017 compared to the same period last year.
This increase reflects higher variable costs from increased sales volumes in all operations, higher short term and
long term incentive plan costs, and inflationary and statutory salary increases in the Company’s South American
operations.
As a percentage of revenue, excluding the impact of the significant items noted above, SG&A was down 190 basis
points over the same period in the prior year, reflecting the strong leverage of incremental revenues on fixed costs.
22
Finning International Inc.
2017 Annual Results
Other expenses in Q4 2016 included $33 million of restructuring costs incurred in the Company’s Canadian
operations related to facility closures and consolidations. Other income of $5 million in Q4 2016 was a mark-to-
market gain on the Company’s investment in IronPlanet Holdings Inc., which was sold in the second quarter of 2017.
The Company reported EBIT of $112 million and EBIT margin of 6.4% in the last quarter of 2017, compared to the
EBIT of $18 million and EBIT margin of 1.3% in the fourth quarter of 2016. Excluding significant items detailed on
page 19 in this MD&A, Q4 2017 Adjusted EBIT was $113 million and Adjusted EBIT margin was 6.5%, higher than
the Adjusted EBIT of $70 million and Adjusted EBIT margin of 4.8% in Q4 2016.
The 58% increase in Adjusted EBIT in Q4 2017 compared to Adjusted EBIT in Q4 2016 reflected higher sales
volumes and leverage of incremental revenues on fixed costs in all operations. On an adjusted basis, this is the
highest consolidated quarterly EBIT since Q4 2014. All operations reported higher Adjusted EBIT and Adjusted EBIT
margin in Q4 2017 compared to Q4 2016.
EBITDA
EBITDA for the fourth quarter of 2017 was $157 million and EBITDA margin was 9.0% (Q4 2016: EBITDA was $65
million and EBITDA margin was 4.3%). Excluding the significant items noted on page 19 in this MD&A, Q4 2017
Adjusted EBITDA was $158 million and Adjusted EBITDA margin was 9.1%, up from Adjusted EBITDA in the fourth
quarter of 2016 of $117 million and Adjusted EBITDA margin of 7.9% due to higher Adjusted earnings from all the
Company’s operations in the fourth quarter of 2017.
Finance Costs
Finance costs in the three months ended December 31, 2017 were $22 million and comparable to $20 million
reported in the same period in 2016.
Provision for Income Taxes
Income tax expense for Q4 2017 was $24 million and the effective income tax rate for Q4 2017 was 26.7%, well
within the Company’s expected range.
The income tax recovery of $11 million in Q4 2016 reflected significantly lower earnings in the fourth quarter of 2016
and lower proportionate income from higher tax jurisdictions. This was magnified by a tax recovery as a result of the
Company qualifying for and applying an adjustment to reduce taxable income in Argentina to compensate for the
loss of purchasing power due to inflation.
Net Income
Net income was $66 million in Q4 2017, compared to $9 million earned in Q4 2016. Basic EPS was $0.39 compared
with $0.05 in the fourth quarter of 2016. Excluding significant items noted on page 19 in this MD&A, Adjusted EPS in
Q4 2017 was $0.40 compared to Q4 2016 Adjusted EPS of $0.28. The increase in Adjusted net income and
Adjusted EPS compared to the fourth quarter of 2016 was due to higher sales volumes from improved market
activity, improved profitability from cost reduction measures and leverage of incremental revenues on fixed costs.
23
Quarterly Results by Reportable Segment
The table below provides details of revenue by operations and lines of business and results by operations.
Finning International Inc.
2017 Annual Results
For 3 months ended
December 31, 2017 ($ millions)
New equipment
Used equipment
Equipment rental
Product support
Other
Total revenues
Operating costs
Depreciation and amortization
Equity earnings (loss)
EBIT
Revenue percentage by operations
EBIT margin
EBITDA
EBITDA margin
$
Canada
267
$
77
40
470
1
855
(767)
(24)
2
66
49%
7.7%
90
10.6%
$
$
$
$
$
South
America
194
$
13
12
367
1
587
(522)
(15)
—
50
34%
8.6%
65
10.9%
$
UK
& Ireland
200
$
20
8
64
1
293
(275)
(6)
—
12
17%
4.0%
18
6.1%
Adjusted EBIT(1)
Adjusted EBIT margin(1)
Adjusted EBITDA(1)
Adjusted EBITDA margin(1)
$
$
65
7.6%
89
10.4%
52
9.0%
67
11.4%
12
4.0%
18
6.1%
For 3 months ended
December 31, 2016 ($ millions)
New equipment
Used equipment
Equipment rental
Product support
Other
Total revenues
Operating costs
Depreciation and amortization
Equity earnings (loss)
Other expenses
Other income
EBIT
Revenue percentage by operations
EBIT margin
EBITDA
EBITDA margin
$
Canada
202
$
59
34
421
—
716
(663)
(24)
1
(33)
—
(3)
48%
(0.3)%
21
3.0%
$
$
$
$
$
South
America
168
$
16
13
336
2
535
(492)
(16)
—
—
—
27
36%
5.0%
43
7.9%
$
UK
& Ireland
149
$
21
9
59
2
240
(225)
(7)
—
—
—
8
16%
3.3%
15
6.1%
Adjusted EBIT(1)
Adjusted EBIT margin(1)
Adjusted EBITDA(1)
Adjusted EBITDA margin(1)
$
$
44
6.2%
68
9.5%
37
7.0%
53
9.9%
8
3.3%
15
6.1%
Other
Consol
Revenue
%
38%
6%
4%
52%
—
100%
Revenue
%
35%
6%
4%
55%
—
100%
— $
—
—
—
—
— $
(15)
—
(1)
(16)
—
—
(16)
—
(16)
—
(16)
—
661
110
60
901
3
1,735
(1,579)
(45)
1
112
100%
6.4%
157
9.0%
113
6.5%
158
9.1%
Other
Consol
— $
—
—
—
—
— $
(17)
—
(2)
—
5
(14)
—
—
(14)
—
(19)
—
(19)
—
519
96
56
816
4
1,491
(1,397)
(47)
(1)
(33)
5
18
100%
1.3%
65
4.3%
70
4.8%
117
7.9%
(1) Certain Q4 2017 and 2016 financial metrics were impacted by significant items management does not consider indicative of operational
and financial trends either by nature or amount; these significant items are described on page 19 of this MD&A and the financial metrics
which have been adjusted to take into account these items are referred to as “Adjusted” metrics.
24
Finning International Inc.
2017 Annual Results
Quarterly Overview by Reportable Segment
Canada
Fourth quarter 2017 revenue of $855 million was 19% higher than the fourth quarter of 2016, reflecting higher
demand across all lines of business, particularly within the construction market.
New equipment revenue was up 32% in the fourth quarter of 2017 compared to last year, with higher deliveries in
the construction and power systems markets. Product support revenue was up 12% compared to the fourth quarter
of 2016, primarily due to strong parts activity in the construction market and component demand in mining markets.
Used equipment revenue was also up in Q4 2017, particularly in the general construction market, with higher ex-
rental fleet sales in 2017, partly offset by strong mining deliveries in the prior year.
Gross profit in Q4 2017 was higher than the prior year, reflecting higher sales volumes. Gross profit margin
decreased in Q4 2017 compared to Q4 2016 primarily due to a revenue mix shift to higher new equipment sales
which typically generate lower margins. New equipment revenue comprised 31% of total revenue in Q4 2017
compared to 28% in Q4 2016.
SG&A was lower in Q4 2017 compared to the same period in the prior year. Adjusted for severance costs recorded
in both periods, as well as the insurance proceeds related to the Alberta wildfires received in Q4 2017, SG&A costs
were up 3%, but relative to sales were 310 basis points lower in Q4 2017 compared to the same period in the prior
year. SG&A costs in Q4 2017 reflected higher variable costs from increased sales volumes with improved market
activity and higher short term and long term incentive plan costs.
Other expenses in Q4 2016 included $33 million of costs related to facility closures and restructuring.
Q4 2017 EBIT was $66 million, compared to a loss of $(3) million in Q4 2016. EBIT margin was 7.7% in Q4 2017
compared to (0.3)% in the same period in 2016. Excluding the significant items noted above and as summarized on
page 19 in this MD&A, Q4 2017 Adjusted EBIT margin was 7.6%, higher than the Adjusted EBIT margin of 6.2%
earned in Q4 2016 primarily due to strong leverage of incremental revenues on fixed costs.
South America
Fourth quarter 2017 revenue of $587 million was 10% higher than the fourth quarter of 2016 (up 15% in functional
currency), reflecting higher demand across most lines of business. Product support revenue was up 14% in
functional currency from 2016, primarily reflecting stronger parts sales in the Chilean mining and construction
markets. New equipment sales were up 21% in functional currency reflecting improvement in the construction and
mining markets.
The stronger Canadian dollar relative to the U.S. dollar on average in the quarter compared to Q4 2016 had an
unfavourable foreign currency translation impact on revenue in Q4 2017 of approximately $30 million and was not
significant at the EBIT level.
Gross profit increased compared to Q4 2016, reflecting higher sales volumes and higher overall gross profit margin.
Gross profit margin increased in Q4 2017 compared to Q4 2016, reflecting higher margins in product support and
rental revenues. Higher product support margins reflected improved operational performance in mining contracts.
The mix of revenues in the fourth quarter was comparable in 2017 and 2016.
SG&A (in functional currency) in Q4 2017 was slightly higher compared to the same period in the prior year.
Adjusted for severance costs recorded in Q4 2017, and an estimated loss due to alleged fraudulent activity by a
customer in Q4 2016, SG&A costs were up 11% in functional currency but relative to sales were 60 basis points
lower in Q4 2017 compared to the same period in the prior year. The increase in SG&A is primarily due to variable
costs from increased sales volumes and higher short term and long term plan incentive costs as well as inflationary
and statutory salary increases.
Q4 2017 EBIT was $50 million, compared to $27 million in Q4 2016 and Q4 2017 EBIT margin was 8.6%, compared
to 5.0% earned in the same period in 2016. Excluding the significant items noted above and as summarized on page
19 in this MD&A, Q4 2017 Adjusted EBIT margin was 9.0%, higher than the Adjusted EBIT margin of 7.0% earned
in Q4 2016 due to higher gross profit margins achieved in the quarter in the current year and the leverage of
incremental revenues on fixed costs. The fourth quarter results from last year were also impacted by the negative
performance of a specific mining maintenance contract.
UK & Ireland
Fourth quarter 2017 revenue of $293 million was 22% higher than the fourth quarter of 2016 (up 20% in functional
currency), driven primarily by higher new equipment sales (up 31% in functional currency), reflecting higher
deliveries particularly in the construction market.
25
Finning International Inc.
2017 Annual Results
Product support revenues were up 6% in functional currency compared to the prior year’s fourth quarter, reflecting
higher parts revenues in all markets.
The weaker Canadian dollar relative to the U.K. pound sterling on average in the quarter compared to last quarter in
the prior year had a favourable foreign currency translation impact on revenue in the fourth quarter of 2017 of
approximately $5 million and was not significant at the EBIT level.
Q4 2017 gross profit was higher than the same period in the prior year, reflecting higher sales volumes and a higher
overall gross profit margin. Gross profit margin increased in Q4 2017 compared to the last quarter in the prior year,
mostly reflecting higher margins in new and used equipment, partly offset by a revenue mix shift to new equipment
sales which typically generate lower margins. New equipment revenue comprised 68% of total revenue in Q4 2017
compared to 62% in Q4 2016.
Q4 2017 SG&A in functional currency increased by 23% compared to the same period in the prior year, which was
in line with revenue growth.
Q4 2017 EBIT was $12 million, compared to $8 million in Q4 2016. EBIT margin was 4.0% in Q4 2017, higher than
the 3.3% earned in Q4 2016 primarily due to higher gross profit margin.
26
Finning International Inc.
2017 Annual Results
Outlook
The Company remains focused on generating earnings leverage while investing in growth opportunities and long-
term strategic initiatives to transform customer experience. Continued progress on optimizing the global supply
chain is expected to drive further working capital efficiencies and support positive annual free cash flow in 2018. The
Company remains committed to improving its return on invested capital.
Canada
The gradual recovery of commodity prices is supporting improved activity levels from mining producers and
contractors. In 2018, the Company expects an increase in new equipment deliveries to mining customers, including
the oil sands. Demand for parts and service, including component rebuilds, is expected to remain strong in mining.
In British Columbia, activity levels are robust despite customers remaining cautious about opportunities for any
significant infrastructure projects. In Alberta, current and proposed infrastructure projects are expected to support an
increase in demand for construction equipment. Demand for power systems products, parts, and services has
increased as a result of significantly improved activity in the oil and gas sector, particularly gas compression. In
Saskatchewan, the new pipeline projects are starting to translate into improved demand for equipment. Product
support activity in the heavy construction and power systems markets has strengthened across all provinces.
Equipment markets remain very competitive across all sectors in Western Canada. The Company believes the rate
of recovery will continue to depend on the commodity markets and timing of significant infrastructure projects.
South America
In Chile, copper production levels and fleet utilization continue to improve, which is expected to have a positive
impact on future demand for mining equipment and product support, including component rebuilds.
Following the presidential election in December 2017, the Company expects the new Chilean government to invest
in infrastructure, which will support an improved long-term outlook for equipment sales and product support in the
construction sector.
In Argentina, the Company is successfully selling equipment into the growing but competitive construction market.
The Company expects the current level of public investment in infrastructure to continue, and oil and gas
development to accelerate going forward.
The Company will continue to invest in a new ERP system in the South American operations, which is expected to
go live in 2018. As a result, the Company’s EBIT margin in South America is expected to be around 8.5% in 2018.
UK & Ireland
In the UK & Ireland, activity levels in the quarry, general construction, and plant hire sectors are expected to
generate steady demand for new equipment and product support. In the power systems sector, the Company
continues to capitalize on strong demand for standby and short-term capacity power solutions. Competitive pricing
pressures in the UK’s equipment markets remain intense.
In early 2017, the UK started a two year process to exit the European Union (Brexit), and there are significant
uncertainties around the impact and final outcome. While Brexit has not had a material impact on activity levels to
this point, it has resulted in economic uncertainty that continues to impact customer confidence and future
investment decisions. To help offset reduced business confidence, the UK government is accelerating investments
in large-scale rail, power, road, and airport infrastructure projects.
Foreign Exchange Exposure
The Company expects on-going volatility in foreign exchange markets to continue impacting its results. The
devaluation of the Canadian dollar increases earnings translated from the Company’s foreign subsidiaries; the
opposite is true for the appreciation of the Canadian dollar. Transactional gains or losses are dependent on the
Company’s hedging activities and general market conditions.
27
Finning International Inc.
2017 Annual Results
Liquidity and Capital Resources
Management assesses liquidity in terms of the Company’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. Liquidity is
affected by the following items:
(cid:120) operating activities, including the level of accounts receivable, inventories, accounts payable, rental equipment,
and financing provided to customers;
(cid:120)
(cid:120)
investing activities, including property, plant, and equipment and intangible asset expenditures, acquisitions of
complementary businesses, and divestitures of non-core businesses; and
financing activities, including bank credit facilities, long-term debt, and other capital market activities, providing
both short and long-term financing.
The magnitude of each of these items is shown in the following table:
3 months ended
December 31
12 months ended
December 31
($ millions)
2017
2016
Increase
(Decrease)
in cash
2017
2016
Decrease
in cash
Cash provided by operating activities
$
Cash (used in) provided by investing activities $
Cash used in financing activities
$
Free Cash Flow
$
398 $
(48) $
(407) $
350 $
131 $
35 $
(37) $
113 $
267 $
(83) $
(370) $
237 $
283 $
(116) $
(276) $
165 $
440 $
(40) $
(255) $
370 $
(157)
(76)
(21)
(205)
The most significant contributors to the changes in cash flows for 2017 over 2016 were as follows:
Quarter over Quarter
Year over Year
(cid:120) higher earnings primarily from the
Company’s Canadian operations
reflecting improving market conditions
(cid:120) higher collections and advance
payments received from customers
compared to the prior year period
(cid:120) higher supplier payables, reflecting
higher inventory purchases in the
Company’s Canadian and South
American operations due to improving
market conditions and demand
(cid:120) partly offset by(cid:3)higher equipment
inventory in the Company’s Canadian
operations, with deliveries in early 2018
(cid:120) higher cash generated in the prior year
due to maturity of short term investment
in the Company’s South American
operations
(cid:120) higher capital expenditures in the
current year quarter primarily from
investment in a new ERP system in the
Company’s South American operations
(cid:120) higher equipment and parts inventory,
primarily in the Company’s Canadian
and South American operations,
supporting increased demand
(cid:120) higher spend on rental equipment,
primarily in the Company’s Canadian
operations
(cid:120) partly offset by higher earnings from all
operations reflecting improving market
conditions
(cid:120) higher capital expenditures in 2017,
primarily from (cid:3)investment in a new ERP
system in the Company’s South
American operations, as well as lower
proceeds from disposals in all
operations
(cid:120)
higher cash generated in 2016 due to
maturity of short term investment in the
Company’s South American operations
Cash provided by
operating activities
Cash (used in)
provided by
investing activities
28
Finning International Inc.
2017 Annual Results
Quarter over Quarter
Year over Year
(cid:120) $350 million cash used to redeem all of
the outstanding 6.02% MTN in the
quarter, and payment of a $9 million
early redemption premium
(cid:120) $350 million cash used to redeem all of
the 6.02% MTN in October 2017, and
payment of a $9 million early
redemption premium
(cid:120) $31 million of dividends paid in Q4 2017
(cid:120) Partly offset by $200 million of cash
was comparable to Q4 2016
Cash used in
financing activities
provided by long-term debt issuance in
September 2017
(cid:120) $125 million of dividends paid in 2017
were slightly higher than $123 million in
the prior year due to a 4% increase in
the dividend rate in Q3 2017
(cid:120) $115 million of cash used for repayment
of short-term debt in 2016 compared to
$17 million of cash generated by higher
borrowing in 2017
Free cash flow
generation
(cid:120) higher cash provided by operating
(cid:120) higher cash provided by operating
activities for the reasons outlined above
activities for the reasons outlined above
(cid:120) partly offset by higher capital
expenditures in Q4 2017
(cid:120) partly offset by higher capital
expenditures and lower proceeds on
disposals in 2017
Capital resources and management
The Company’s cash and cash equivalents balance at December 31, 2017 was $458 million (December 31, 2016:
$593 million). To complement the internally generated funds from operating and investing activities, the Company
has $1.7 billion in unsecured credit facilities. Included in this amount is a syndicated committed credit facility totaling
$1.0 billion with various Canadian and global financial institutions, the full amount of which was available at
December 31, 2017.
In October 2017, the Company completed a two-year extension to its $1.0 billion syndicated committed credit
facility, extending the maturity date to October 2022.
Based on 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 discussed below, the Company believes it
continues to have sufficient liquidity to meet operational needs and planned growth and development.
The Company’s capital expenditures for 2018 are expected to be in the range of $150 million to $200 million,
including investments in a new ERP system, Digital initiatives and electric drive mining vehicles. These are planned,
but not legally committed, capital expenditures. Net rental additions for 2018 are projected to be in the range of $125
million to $175 million due to strong market conditions.
In September 2017, the Company issued $200 million of 2.84% senior unsecured Notes due September 29, 2021.
On October 16, 2017, proceeds from issuance of the Notes were used to redeem, prior to maturity, all of the
outstanding $350 million 6.02% MTN due June 1, 2018. The total redemption price included an early redemption
premium of approximately $9 million which was recorded in finance costs in Q3 2017.
29
Finning International Inc.
2017 Annual Results
The Company is rated (1) by both Dominion Bond Rating Service (DBRS) and Standard & Poor’s (S&P):
December 31
DBRS
S & P
Long-term debt
Short-term debt
2017
BBB (high)
BBB+
2016
BBB (high)
BBB+
2017
R-2 (high)
N/A
2016
R-2 (high)
N/A
In September 2017, DBRS reconfirmed the Company’s BBB (high) long term rating, reflecting the Company’s
improved performance supported by strong market fundamentals and diversified operations.
In December 2017, S&P re-affirmed the Company’s BBB+ rating while revising its outlook from negative to stable,
noting the Company’s strong market position as the largest Caterpillar equipment dealer, its diversification by
geography and the earnings stability driven by the after-sales parts and service business.
In the second quarter of 2017, the Company renewed its normal course issuer bid (NCIB) (2) to enable the purchase
of its common shares for cancellation. During 2017, the Company repurchased 89,900 Finning common shares for
cancellation at an average price of $25.45 per share (no shares were repurchased in 2016).
The NCIB was implemented to take advantage of Finning’s strong balance sheet and cash balances in periods of
broader market volatility and the resulting negative impact on the Company’s share price. Execution of the NCIB is
governed by rules established by the Toronto Stock Exchange.
Net Debt to Invested Capital
Net debt to invested capital
Company
Target Range
35 – 45%
December 31,
2017
September 30,
2017
December 31,
2016
30.4%
37.5%
32.0%
The Company is subject to a maximum Net Debt to Total Invested Capital level of 62.5% pursuant to a covenant in
its syndicated bank credit facility. The Company was in compliance with this covenant at the end of 2017.
(1) A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the
rating organization
(2) A copy of the NCIB notice is available on request. Direct your request to the Corporate Secretary, 1000-666 Burrard Street, Vancouver, BC
V6C 2X8
30
Finning International Inc.
2017 Annual Results
Contractual Obligations
Payments on contractual obligations in each of the next five years and thereafter are as follows:
($ millions)
Short-term debt
2018
2019
2020
2021
2022
Thereafter
Total
- principal repayment
$
18 $
— $
— $
— $
—
$
— $
18
Long-term debt
- principal repayment
- interest
Operating leases (1)
Finance leases
Total contractual obligations
$
—
51
55
6
130 $
—
51
34
6
91 $
200
52
25
7
284 $
201
44
23
6
274 $
189
34
14
5
242
$
709
214
56
17
1,299
446
207
47
994 $ 2,017
(1) The Company recognized a liability of $17 million, $7 million in accrued liabilities, and $10 million in non-current other liabilities, related to
facility closure costs and future minimum lease payments due under certain operating leases that were considered to be onerous at
December 31, 2017 (2016: $14 million).
The above table does not include obligations to fund pension benefits. 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.
Pension Plan funding levels are monitored regularly and reset with new actuarial funding valuations performed by
the Company’s (or plan Trustees’) actuaries that occur at least every three years. In 2017, the Company contributed
approximately $16 million towards the defined benefit pension plans. Based on the most recent formal valuations
and a review of the UK pension scheme in late 2017, contributions expected to be paid during the financial year
ended December 31, 2018 amount to approximately $18 million for the defined benefit pension plans.
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, 2017, approximately 66%, 73% and 2% of eligible employees in the Company’s
Corporate, 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 & Ireland.
Under the terms of this plan, the Company will provide one common share, purchased in the open market, for every
three shares the employee purchases. Finning (UK) employees may contribute up to 10% of their salary to a
maximum of £150 per month. At December 31, 2017, approximately 29% of eligible employees in Finning (UK) were
contributing to this plan. Finning (Ireland) employees may contribute from their salary from €10 to a maximum of €70
per month. At December 31, 2017, approximately 18% of eligible employees in Finning (Ireland) were contributing to
this plan. These plans may be cancelled by Finning at any time.
Related Party Transactions
Related party transactions and balances incurred in the normal course of business between the Company and its
subsidiaries have been eliminated on consolidation and are not considered material for disclosure. Information on
the Company’s wholly owned subsidiaries and the main countries they operate in is contained in note 2 of the
annual consolidated financial statements. Compensation of key management personnel is disclosed in note 26 of
the annual consolidated financial statements.
Significant 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 report directly 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 SVP,
Corporate Controller and Treasurer, as well as the Audit Committee of the Board of Directors. Significant accounting
and financial topics and issues are presented to and discussed with the Audit Committee.
31
Finning International Inc.
2017 Annual Results
Management’s discussion and analysis of the Company’s financial condition and results of operations is based on
the Company’s annual consolidated financial statements, which have been prepared in accordance with IFRS. The
Company’s significant accounting policies are contained in the notes to the annual consolidated financial statements
for the year ended December 31, 2017. 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 and 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 and judgements include:
recoverable values for goodwill and other indefinite-lived intangible assets
identifying the cash-generating unit to which assets should be allocated for impairment testing
(cid:120)
(cid:120)
(cid:120) allowance for doubtful accounts
(cid:120) provisions for warranty
(cid:120) provisions for income tax
(cid:120)
(cid:120) provisions for slow-moving and obsolete inventory
(cid:120)
(cid:120)
the determination of post-employment employee benefits
the useful lives of the rental fleet and capital assets and related residual values
revenues and costs associated with long term contracts (primarily power and energy systems and long-term
product support contracts)
revenues and costs associated with the sale of assets with either repurchase commitments or rental purchase
options
(cid:120)
(cid:120) determination of the functional currency of each entity of the Company
(cid:120)
inputs to the models to determine the fair value of certain share-based payments
For additional information on the above judgements, estimates, and assumptions made, please refer to the annual
consolidated financial statements for the year ended December 31, 2017.
Goodwill and intangible assets with indefinite lives
The Company performs impairment tests on its goodwill and intangible assets with indefinite lives at the appropriate
level (cash generating unit or group of cash generating units (CGU)) at least annually and when events or changes
in circumstances indicate that their value may not be fully recoverable. Any potential goodwill or intangible asset
impairment is identified by comparing the recoverable amount of the CGU to its carrying value. If the recoverable
amount of the CGU exceeds its carrying value, then goodwill and/or the intangible asset are considered not to be
impaired. If the recoverable amount of the CGU is less than the carrying amount, then the impairment loss is
allocated first to reduce the carrying amount of any goodwill allocated to the CGU and then to the other assets of the
CGU unit pro-rata on the basis of the carrying amount of each asset in the CGU. Any impairment loss is recognized
immediately in the consolidated statement of income. Impairment losses recognized for goodwill are never reversed
but impairment losses on indefinite-lived intangible assets may be reversed. If there is any indication that the
circumstances leading to the impairment loss of an indefinite-lived intangible asset no longer exist or may have
decreased, management estimates the recoverable value of the CGU. Indicators of a recovery include sustainable
improvement of the economic performance of the CGU and a positive trend in the forecast or budgeted results of the
CGU. If the recoverable amount exceeds the carrying amount, then a previously recognized impairment loss is
considered to have been reversed (either fully or in part). Any reversal of impairment loss is recognized immediately
in the consolidated statement of net income.
The Company determines the recoverable amount of a CGU using a discounted cash flow model. The process of
determining these recoverable amounts requires management to make estimates and assumptions including, but
not limited to, future cash flows, growth projections, associated economic risk assumptions and estimates of key
operating metrics and drivers, and the weighted average cost of capital rates. Cash flow projections are based on
financial budgets presented to the Company’s Board of Directors. Projected cash flows are discounted using a
weighted average cost of capital. These estimates are subject to change due to uncertain competitive and economic
market conditions and changes in business strategies.
The Company performed its assessment of goodwill and intangible assets with indefinite lives and determined that
there was no impairment at December 31, 2017 and 2016. There were no impairment reversals in 2017 or 2016
related to the distribution network in the Company’s South America operations. Please refer to note 20 in the annual
consolidated financial statements for further details.
32
Finning International Inc.
2017 Annual Results
Income tax asset or liability
Estimations in the recognition of tax assets or liabilities 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. Significant
judgment is required as 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 in which the Company operates, the
precision and reliability of the resulting estimates are subject to uncertainties and may change as additional
information becomes known. Net income in subsequent periods may be impacted by the amount that estimates
differ from the final tax return.
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 unused tax losses.
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 substantively enacted tax rates and
laws in each 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 and
changes in tax rates or regimes could have a material adverse effect on expected results.
Financial Instruments
Cash and cash equivalents, accounts receivable, unbilled work in progress, supplier claims receivable, and
instalment and other notes receivable are classified as loans and receivables. They are measured at amortized cost
using the effective interest method.
Derivative financial instruments and short-term investments are classified as fair value through profit or loss and are
recorded on the consolidated statement of financial position at fair value. Changes in fair value are recognized in the
consolidated statement of net income except for changes in fair value related to derivative financial instruments
which are effectively designated as hedging instruments which are recognized in other comprehensive income.
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.
Most of the Company’s financial instruments are measured at amortized cost and as a result, any income, expense,
gain, or loss is not material.
New Accounting Pronouncements
The adoption of recent amendments to accounting standards as noted below had no impact on the Company’s
financial results. For more details on recent changes in accounting policies, please refer to note 2 of the Company’s
annual consolidated financial statements. The effect of future accounting pronouncements and effective dates are
also discussed in note 2 of the annual consolidated financial statements.
Changes in Accounting Policies
The Company has adopted the following amendments to standards:
(cid:120)
IAS 7, Statement of Cash Flows (effective January 1, 2017) introduces new requirements to disclose changes in
liabilities arising from financing activities, including changes arising from cash flows and non-cash flows. The
required disclosures have been added to Note 24 of the Company’s 2017 annual consolidated financial
statements.
Risk Factors and Management
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 (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.
33
Finning International Inc.
2017 Annual Results
The Company is dedicated to a strong risk management culture to protect and enhance shareholder value. 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 AIF, MD&A, and annual
consolidated financial statements. All key financial risks are disclosed in the MD&A and other key business risks are
disclosed in the Company’s AIF. For more information on the Company’s financial instruments, including accounting
policies, description of risks, and relevant risk sensitivities, please refer to note 7 of the Company’s annual
consolidated financial statements.
Market Risk and Hedging
Market risk is the risk that changes in the market, such as foreign exchange rates, interest rates and commodity
prices, 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 derivative financial instruments and foreign currency debt in order to manage its foreign
currency and interest rate exposure. The Company uses derivative financial instruments only in connection with
managing related risk positions and does not use them for trading or speculative purposes. All such transactions are
carried out within the guidelines set by the Company and approved by the Company’s 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 Canadian dollar (CAD), U.S. dollar
(USD), U.K. pound sterling (GBP), Chilean peso (CLP), and Argentine peso (ARS). 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 and other comprehensive income is the
translation of foreign currency based earnings and net assets or liabilities into Canadian dollars, which is the
Company’s presentation currency. The functional currency of the Company’s South American operations is USD
and of the Company’s UK & Ireland operations is primarily GBP (Finning Ireland Limited’s’ functional currency is the
Euro).
As the Company’s South American and UK & Ireland operations have functional currencies other than the CAD,
exchange rate movements between the USD/CAD and GBP/CAD will impact the consolidated results of the South
American and UK & Ireland operations in CAD terms. The Company does not hedge its exposure to foreign
exchange risk with regard to foreign currency earnings.
Assets and liabilities of the Company’s South American and UK & Ireland operations are translated into CAD using
the exchange rates in effect at the statement of financial position dates. Any translation gains and losses are
recorded as foreign currency translation adjustments in other comprehensive income. To the extent practical, it is
the Company’s objective to manage this exposure. The Company has hedged a portion of its foreign investments
with foreign currency denominated loans. The currency translation loss of $89 million recorded in 2017 resulted from
the 7% stronger CAD relative to USD, partially offset by the 2% weaker CAD relative to GBP at December 31, 2017
compared to December 31, 2016. This was partially offset by $41 million of unrealized foreign exchange gains on
net investment hedges.
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, which may affect the
Company’s profitability as exchange rates fluctuate. For example, the Company’s Canadian operating results are
exposed to volatility in USD/CAD rates between the timing of equipment and parts purchases and the ultimate sale
to customers, where purchases or sales are made in USD. A portion of this exposure is hedged through the use of
forward exchange contracts as well as managed through pricing practices. The Company applies hedge accounting
to hedges of certain inventory purchases in its Canadian and UK operations.
The results of the Company’s operations are impacted by the translation of its foreign denominated transactions; the
results of the Canadian operations are impacted by USD based revenue and costs and the results of the South
American operations are impacted by CLP and ARS based revenues and costs.
34
Finning International Inc.
2017 Annual Results
The Company is also exposed to foreign currency risks related to the future cash flows on its foreign denominated
financial assets and financial liabilities and foreign denominated net asset or net liability positions on its statement of
financial position. The Company enters into forward exchange contracts to manage some mismatches in foreign
currency cash flows but does not fully hedge balance sheet exposure so this may result in unrealized foreign
exchange gains or losses until the financial assets and financial liabilities are settled.
The CAD has historically been positively correlated to commodity prices. In a scenario of declining commodity
prices, the Company’s resource industry customers may curtail capital expenditures and decrease production which
can result in reduced demand for equipment, parts, and services. At the same time, the weaker CAD to USD
positively impacts the Company’s financial results when USD based revenues and earnings are translated into CAD
reported revenues and earnings, although lags may occur.
The results of the Company’s South American operations are affected by changes in the USD/CLP and USD/ARS
relationships. Historically, the Chilean peso has been positively correlated to the price of copper. As the price of
copper declines, the value of the Chilean peso versus the USD declines as well. In such an environment, the
Company’s revenue may be impacted as mining customers curtail their equipment and product support spend. The
Company’s SG&A, which is in part in local currency, will be reduced when translated into USD, partly offsetting the
impact on revenue. The reverse holds in an environment where the copper price strengthens, although generally
there is a lag between the increase in SG&A and the improvement in revenue.
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.
Key exchange rates that impacted the Company’s results were as follows:
Exchange
rate
USD/CAD
GBP/CAD
USD/CLP
USD/ARS
December 31
2016
1.3427
1.6564
667.29
15.89
2017
1.2545
1.6961
615.22
18.65
Change
7 %
(2)%
8 %
(17)%
3 months ended
December 31 – average
2017
2016
1.2713
1.3341
1.6875
1.6567
633.80
665.08
17.53
15.46
5 %
(2)%
5 %
(13)%
Change
12 months ended
December 31 – average
2017
2016
1.2986
1.3248
1.6721
1.7962
649.31
676.31
16.47
14.74
Change
2 %
7 %
4 %
(12)%
The impact of foreign exchange due to fluctuation in the value of CAD relative to USD, GBP, CLP, and ARS is
expected to continue to affect Finning’s results.
Interest Rate Risk
Changes in market interest rates can 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 can
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, primarily from short-
term and long-term debt. The Company’s debt portfolio comprises both fixed and floating rate debt instruments, with
terms to maturity ranging up to June 2042. The Company’s floating rate debt is short term in nature and as a result,
the Company is exposed 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 is
exposed to changes in future interest rates upon refinancing of any debt prior to or at maturity.
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.
35
Finning International Inc.
2017 Annual Results
Commodity Prices
The Company provides equipment, parts, and service to customers in resource and construction industries. In the
resource sector, fluctuations in commodity prices and changes in long-term outlook for commodities impact
customer decisions regarding capital expenditures and production levels, which determine demand for equipment,
parts and service. In the construction sector, publicly funded infrastructure spending is indirectly impacted by
fluctuations in commodity prices, particularly in regions with resource-based economies (such as the prices of
copper, gold and other metals; thermal and metallurgical coal; natural gas, oil, and lumber). In Canada, the
Company’s customers are exposed to the price of oil, mostly in the oil sands in Northern Alberta. In South America,
the Company’s customers are primarily exposed to the price of copper and, to a much lesser extent, the prices of
gold, other metals, and natural gas. In the UK & Ireland, the Company’s resource sector customers operate in
thermal coal and off-shore oil & gas. Significant fluctuations in these commodity prices could have a material impact
on the Company’s financial results.
In periods of significantly lower commodity prices, demand is reduced as development of new projects is slowed or
stopped and production from existing projects can be curtailed, leading to less demand for equipment. However,
product support growth has been, and is expected to continue to be, important in mitigating the effects of downturns
in the business cycle. 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 endeavor to achieve an adequate and timely supply
of product or offers customers alternative solutions and has implemented human resources recruiting strategies to
achieve adequate staffing levels.
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, short-
term investments, receivables from customers and suppliers, instalment and other notes receivable, and derivative
assets.
Credit risk associated with cash and cash equivalents and short-term investments is managed by ensuring that
these financial assets are held with major financial institutions with strong investment grade ratings and by
monitoring the exposures with any single institution. An ongoing review is performed to evaluate the changes in the
credit rating of counterparties.
The Company has 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 and/or A2 from Moody’s. The Company has a large
diversified customer base and is not dependent on any single customer or group of customers. Credit risk
associated with receivables from customers and suppliers is minimized because of the diversification of the
Company’s operations as well as its large customer base and its geographical dispersion.
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 uncommitted
bilateral and committed syndicated bank credit facilities, continuously monitors actual and forecast cash flows, and
manages maturity profiles of financial liabilities. Based on the availability of credit 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 continues to have sufficient liquidity to meet operational needs.
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.
36
Finning International Inc.
2017 Annual Results
Share-Based Payment Risk
Share-based payment plans are an integral part of the Company’s employee 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. For further details on the
Company’s share-based payment plans, please refer to note 10 of the Company’s annual consolidated financial
statements.
Contingencies and Guarantees
Due to the size, complexity, and nature of the Company’s operations, various legal, customs, and tax matters are
pending. It is not currently possible for management to predict the outcome of such matters due to various factors,
including: the preliminary nature of some claims, an incomplete factual record, and uncertainty concerning
procedures and their resolution by the courts, customs, or tax authorities. However, subject to these limitations,
management is of the opinion, based on legal assessments and information presently available, that, except as
stated below, it is not likely that any liability would have a material effect on the Company’s financial position or
results of operations.
Finning’s South American operations began to export an agricultural animal feed product from Argentina in the third
quarter of 2012 in response to the Argentine government’s efforts to balance imports and exports and to manage
access to foreign currency exchange. These exports enabled Finning to import goods into Argentina to satisfy
customer demand, while meeting the government’s requirements. Finning’s South American operations have not
exported agricultural animal feed product since the third quarter of 2013.The Company has received a number of
claims from the Argentina Customs Authority associated with export of agricultural product. The Company is
appealing these claims, believes they are without merit, and is confident in its position. These pending matters may
take a number of years to resolve. Should the ultimate resolution of these matters differ from management’s
assessment, a material adjustment could arise and negatively impact the Company’s financial position.
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, 2017, the total estimated value of these contracts outstanding is $119 million (2016:
$121 million) coming due at periods ranging from 2018 to 2023. 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, however,
there can be no assurance that this experience will continue in the future. The total amount recognized as a
provision against these contracts is $1 million (2016: $1 million).
For further information on the Company’s contingencies, commitments, guarantees, and indemnifications, refer to
notes 28 and 29 of the notes to the annual consolidated financial statements.
Outstanding Share Data
As at February 1, 2018
Common shares outstanding
Options outstanding
168,287,877
3,765,131
37
Finning International Inc.
2017 Annual Results
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 is made known to them in a timely manner.
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.
(cid:120) 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.
(cid:120) The Disclosure Committee, consisting of senior management and legal counsel, reviews all financial information
prepared for communication to the public to ensure it meets all regulatory requirements. The Disclosure
Committee is responsible for raising any outstanding issues it believes require the attention of the Audit
Committee for that Committee’s approval prior to recommending disclosure.
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, 2017, that would materially affect, or is reasonably likely to materially affect, the Company’s internal control over
financial reporting.
Regular involvement of the Company’s internal audit function and quarterly reporting to the Audit Committee 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 to provide reasonable assurance that the objectives of the control system are met, 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 was conducted as of December 31, 2017, by and under the supervision of management. 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 (2013 edition). 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, 2017.
38
Finning International Inc.
2017 Annual Results
Description of Non-GAAP Financial Measures and Reconciliations
Non-GAAP Financial Measures
Management believes that providing certain non-GAAP financial measures provides users of the Company’s
consolidated financial statements with important information regarding the operational performance and related
trends of the Company's business. By considering these measures in combination with the comparable IFRS
financial measures, where available, management believes that users 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
IFRS financial measures alone.
The non-GAAP financial measures used by management do not have any standardized meaning prescribed by
IFRS and therefore may not be comparable to similar measures presented by other issuers. Accordingly, these
measures should not be considered as a substitute or alternative for GAAP measures as determined in accordance
with IFRS.
Set out below is a description of the non-GAAP financial measures used by the Company in this MD&A and a
quantitative reconciliation from each non-GAAP financial measure to the most directly comparable measure, where
available, specified, defined, or determined under GAAP and used in the Company’s consolidated financial
statements (GAAP measures).
Key Performance Indicators
Management uses key performance indicators (KPIs) to consistently measure performance against the Company’s
priorities across the organization. The Company’s KPIs include, among others, ROIC, net debt to invested capital,
inventory turns, invested capital turnover, working capital to sales ratio, equipment backlog, and net debt to EBITDA
ratio. These KPIs, including those that are expressed as ratios, are non-GAAP financial measures that do not have a
standardized meaning under IFRS and may not be comparable to similar measures used by other issuers.
Adjusted net income and Adjusted EPS
Adjusted net income excludes from net income (as disclosed in the Company’s consolidated statement of income)
the after-tax amounts of significant items that are not considered to be indicative of operational and financial trends
either by nature or amount to provide a better overall understanding of the Company’s underlying business
performance. The tax impact of each significant item is calculated by applying the relevant applicable tax rate for the
jurisdiction in which the significant item occurred.
Adjusted EPS is calculated by dividing Adjusted net income by the weighted average number of common shares
outstanding during the period.
An example of a reconciliation between net income and EPS (the nearest GAAP measures) and Adjusted net
income and Adjusted EPS can be found on page 5 of this MD&A.
EBITDA, Adjusted EBITDA, and Adjusted EBIT
EBITDA is defined as earnings before finance costs, income taxes, depreciation, and amortization and is utilized by
management to assess and evaluate the financial performance of its operating segments. Management believes
that EBITDA improves comparability between periods by eliminating the impact of finance costs, income taxes,
depreciation, and amortization. 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 may also calculate an Adjusted EBIT and Adjusted EBITDA to exclude items that are not considered
to be indicative of operational and financial trends either by nature or amount to provide a better overall
understanding of the Company’s underlying business performance.
EBITDA is calculated by adding depreciation and amortization to EBIT. Adjusted EBITDA is calculated by adding
depreciation and amortization to Adjusted EBIT.
The most comparable GAAP financial measure to EBITDA is EBIT.
39
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T
Selected Annual Information
($ millions, except for share and option data)
Total revenue from external sources
Net income (loss) (1)
Earnings Per Share (1) (2)
Basic EPS
Diluted EPS
Total assets (1)
Long-term debt
Non-current
Total long-term debt (3)
Cash dividends declared per common share
Finning International Inc.
2017 Annual Results
2017
2016
2015
$
$
$
$
$
$
$
6,265 $
5,628 $
221 $
65 $
1.31 $
$
1.31
5,092 $
0.38 $
$
0.38
4,910 $
1,296
1,487
1,296 $
1,487 $
0.745
$
0.730
$
6,275
(161)
(0.94)
(0.94)
5,108
1,548
1,548
0.725
1)
In July 2015, the Company’s Canadian operations acquired the operating assets of the Saskatchewan dealership and
became the approved Caterpillar dealer in Saskatchewan. The results of operations and financial position of this acquired
business have been included in the figures above since the date of acquisition.
2) Results in 2017, 2016, and 2015 were impacted by the following items:
($ millions except per share amounts)
2017
2016
2015
Impact from Alberta wildfires
- insurance proceeds
- unavoidable costs
Severance costs
Facility closures and restructuring costs
Power system project provisions, estimated loss on disputes and
alleged fraudulent activity by a customer
Gain on investment
Acquisition and disposal of businesses, net
Distribution network and goodwill impairment
Inventory and other asset impairments
Foreign exchange impact on ARS devaluation
Impact of significant items (a) on EBIT:
Impact of above significant items on EPS:
Items impacting net income only (below EBIT) - impact on EPS:
Redemption costs on early repayment of long-term debt ($7 million after tax)
Tax impact on devaluation of ARS ($12 million)
Capital loss utilized / tax rate change ($8 million)
Impact of significant items on EPS:
$
$
$
$
$
(4)
$
—
5
—
—
—
—
—
—
—
1
0.01
$
$
0.04
$
—
—
$
$
$
$
—
11
41
36
20
(5)
5
—
—
—
108
0.50
—
—
—
—
—
48
53
—
—
(5)
338
42
12
488
2.21
—
0.07
(0.05)
2.23
0.05
$
0.50
$
(a) Of the significant items described above, $10 million was recorded in depreciation and amortization expense in Q4 2015.
3)
In 2017, the Company issued $200 million of 2.84% senior unsecured Notes due September 29, 2021. Proceeds from the
issuance of the Notes were used to redeem, prior to maturity, all of the outstanding $350 million, 6.02% Medium Term Notes
due June 1, 2018.
In 2017, the Company completed a two-year extension to its $1.0 billion syndicated committed credit facility, extending the
maturity date to October 2022.
49
Selected Quarterly Information
($ millions, except for share,
per share, and option
amounts)
2017
2016
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Finning International Inc.
2017 Annual Results
Revenue from operations
Canada
South America
UK & Ireland
Total revenue
Net income (loss) (1)
Earnings Per Share (1)
Basic EPS
Diluted EPS
Total assets (1)
Long-term debt
Current
Non-current
Total long-term debt (2)
Cash dividends paid per
common share
Common shares
outstanding (000’s)
Options outstanding (000’s)
$
737 $
548
262
855 $
587
293
691
500
211
$ 1,735 $ 1,547 $ 1,581 $ 1,402
47
52 $
$
790 $
516
275
66 $
56 $
$
716 $
535
240
619 $
461
253
852
430
212
$ 1,491 $ 1,333 $ 1,310 $ 1,494
15
36 $
$
634 $
431
245
9 $
5 $
0.39 $
0.39 $
0.28
$
0.28
$
$ 5,092 $ 5,140 $ 5,029 $ 4,901
0.34 $
0.34 $
0.31 $
0.31 $
0.05 $
0.05 $
0.09
$
$
0.09
$ 4,910 $ 4,886 $ 4,754 $ 4,870
0.22 $
0.22 $
0.03 $
0.03 $
$
— $
350 $
350 $
— $
1,296
1,481
$ 1,296 $ 1,641 $ 1,466 $ 1,481
1,116
1,291
— $
— $
—
1,492
$ 1,487 $ 1,474 $ 1,470 $ 1,492
1,474
1,470
1,487
— $
19.00¢
19.00¢
18.25¢
18.25¢
18.25¢
18.25¢
18.25¢
18.25¢
168,267 168,118 168,097 168,083
4,501
3,864
4,574
4,755
168,167 168,134 168,102 168,034
5,102
4,823
5,026
4,564
1) 2017 and 2016 results were impacted by the following significant items:
($ millions except per share amounts)
Impact from Alberta wildfires
- insurance proceeds
- unavoidable costs
Severance costs
Facility closures and restructuring costs
Power systems provisions, estimated loss on disputes
and alleged fraudulent activity by a customer
Gain on investment
Disposal of business
Impact of significant items on EBIT:
Impact of above significant items on EPS:
Items impacting net income only (below EBIT) - impact on EPS:
Redemption costs on early repayment of long-term debt
($7 million after tax)
Impact of significant items on EPS:
(a) There were no adjustments in Q1 and Q2 2017, and Q3 2016.
2017 (a)
Q4
Q3
Q4
2016 (a)
Q2
Q1
$
(4) $ —
—
—
5 —
— —
— —
— —
— —
$
1 $ —
$ 0.01 $ —
$ — $ — $ —
—
9
17
4 —
—
15
32
11
5
5
10
(5) — —
5 —
—
$
22
52 $
$ 0.23 $ 0.17 $ 0.10
34 $
$ — $ 0.04
$ 0.01 $ 0.04
$ — $ — $ —
$ 0.23 $ 0.17 $ 0.10
2)
In September 2017, the Company issued $200 million of 2.84% senior unsecured Notes, due September 29, 2021.
Proceeds from the issuance of the Notes were used to redeem, prior to maturity, all of the outstanding $350 million, 6.02%
Medium Term Notes due June 1, 2018.
In October 2017, the Company completed a two-year extension to its $1.0 billion syndicated committed credit facility,
extending the maturity date to October 2022.
(cid:3)
50
Finning International Inc.
2017 Annual Results
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 terminology
such as aim, anticipate, assumption, believe, could, expect, goal, guidance, intend, may, objective, outlook, plan, project,
seek, should, strategy, strive, target, and will, and variations of such terminology. Forward-looking statements in this report
include, but are not limited to, statements with respect to: expectations with respect to the economy, markets and activities
and the associated impact on the Company’s financial results; in Canada, activity levels from mining producers and
contractors, demand for mining, oil sands, construction and pipeline equipment, parts and services, demand for power
systems products, expected deliveries of new equipment, competitive market conditions, upcoming infrastructure projects,
and activity in the oil and gas sector; in South America, expected demand for mining equipment and product support as a
result of copper production levels and fleet utilization, expectations of increased investment in infrastructure by the new
Chilean government and resultant activity in the construction sector, expectations regarding the Argentina government’s
continuing level of public investment in infrastructure and the acceleration of oil and gas development in Argentina, and
Finning’s continued investment in a new ERP system expected to go live in 2018 and the impact on EBIT margin; in the
UK & Ireland, demand for new equipment and product support, demand in the power systems sector, the impact of Brexit
and competitive pricing pressure; expected impact of and volatility in foreign exchange markets; expected revenue and
free cash flow; expected profitability levels; expected capital expenditures and expected net rental additions for 2018;
Finning’s belief that it continues to have sufficient liquidity to meet operational needs and planned growth and
development; expected range of the Company’s effective tax rate; the Company’s focus on generating earnings leverage
while investing in growth opportunities and long-term strategic initiatives; expected progress on optimizing the global
supply chain and its expected results; expected results from cost reductions and sustainability improvements; the
Company’s commitment to grow return on invested capital; expected results from execution of the Company's strategy
framework; the Company’s priorities including growing product support from its large installed equipment population, and
improving the financial performance of its rental business; timing and delivery of innovative customer solutions; planned
activities and anticipated results of Finning Digital; payments on contractual obligations over the next five years; Finning’s
contributions to its registered defined benefit pension plans; the expected impact of recently adopted amendments to
accounting standards or future expected changes; Finning’s plans to manage its financial risks and uncertainties; Finning’s
opinion that certain potential legal, customs, and tax liabilities would not have a material effect on its financial position or
results of operation; and Finning’s belief that the claims from the Argentina Customs Authority are without merit. 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 reflect Finning’s expectations at the date in this
MD&A. 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.
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 ability to maintain its relationship with Caterpillar; Finning’s
dependence on the continued market acceptance of its products, including Caterpillar products, and the 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 revenue occurs; Finning’s ability to
negotiate satisfactory purchase or investment terms and prices, obtain necessary approvals, and secure financing on
attractive terms or at all; Finning’s ability to manage its growth strategy effectively; Finning’s ability to effectively price and
manage long-term product support contracts with its customers; Finning’s ability to reduce costs in response to slowing
activity levels; Finning’s ability to attract sufficient skilled labour resources as market conditions, business strategy or
technologies change; 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 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 occurrence of one or more natural
disasters, pandemic outbreaks, geo-political events, acts of terrorism or similar disruptions; fluctuations in defined benefit
pension plan contributions and related pension expenses; the availability of insurance at commercially reasonable rates or
that the amount of insurance coverage will be adequate to cover all liability or loss incurred by Finning; the potential of
warranty claims being greater than Finning anticipates; the integrity, reliability and availability of, and benefits from
information technology and the data processed by that technology; and Finning’s ability to protect itself from cybersecurity
threats or incidents. 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.
51
Finning International Inc.
2017 Annual Results
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 including but not limited to (i) that general
economic and market conditions will be maintained; (ii) that the level of customer confidence and spending, and the
demand for, and prices of, Finning’s products and services will be maintained; (iii) Finning’s ability to successfully execute
its plans and intentions; (vi) Finning’s ability to attract and retain skilled staff; (iv) market competition; (v) the products and
technology offered by the Company’s competitors; and (vi) that our current good relationships with Caterpillar, our
suppliers, service providers and other third parties will be maintained. Refer in particular to the Outlook section of this
MD&A for forward-looking statements. 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 Section 4
of the Company’s current AIF and in the annual MD&A for the financial risks.
Finning cautions readers that the risks described in the MD&A and 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.
52
Finning International Inc.
2017 Annual Results
(cid:3)
MANAGEMENT'S REPORT TO THE SHAREHOLDERS
The accompanying Consolidated Financial Statements and Management’s Discussion and Analysis (MD&A) are the
responsibility of the management of Finning International Inc. (the Company). The Consolidated Financial
Statements have been prepared in accordance with International Financial Reporting Standards which recognize the
necessity of relying on management's best estimates and informed judgments. The financial information presented
in the Company’s MD&A is consistent with that in the Consolidated Financial Statements. The Consolidated
Financial Statements and MD&A have, in management's opinion, been properly prepared within reasonable limits of
materiality.
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 LLP, have audited the Consolidated Financial Statements, as
reflected in their report for 2017.
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 Audit 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.
/s/ L. Scott Thomson
/s/ Steven M. Nielsen
L. Scott Thomson
President and Chief Executive Officer
Steven M. Nielsen
Executive Vice President and Chief Financial Officer
February 5, 2018
1000-666 Burrard Street, Vancouver, BC, V6C 2X8, Canada
(cid:3)
1
Finning International Inc.
2017 Annual Results
INDEPENDENT AUDITOR’S 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, 2017 and December 31, 2016, and the
consolidated statements of net income, comprehensive income (loss), shareholders’ equity and cash flow for the
years then ended and a summary of significant accounting policies and other explanatory information.
Management's Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in
accordance with 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, 2017 and December 31, 2016, and its financial performance and its
cash flows for the years then ended in accordance with International Financial Reporting Standards.
/s/ Deloitte LLP
Chartered Professional Accountants
February 5, 2018
Vancouver, British Columbia
(cid:3)
2
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
December 31
(Canadian $ millions)
ASSETS
Current assets
Cash and cash equivalents (Note 24)
Accounts receivable
Unbilled work in progress
Inventories (Note 11)
Other assets (Note 14)
Total current assets
Property, plant, and equipment (Note 16)
Rental equipment (Note 16)
Goodwill (Note 17)
Intangible assets (Note 19)
Distribution network (Note 18)
Investment in joint ventures and associate (Note 15)
Other assets (Note 14)
Total assets
LIABILITIES
Current liabilities
Short-term debt (Note 6)
Accounts payable and accruals
Deferred revenue
Provisions (Note 22)
Other liabilities (Note 21)
Total current liabilities
Long-term debt (Note 6)
Net post-employment obligation (Note 23)
Other liabilities (Note 21)
Total liabilities
Commitments and contingencies (Note 28 and 29)
SHAREHOLDERS’ EQUITY
Share capital (Note 9)
Contributed surplus
Accumulated other comprehensive income
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders' equity
Approved by the Directors February 5, 2018
Finning International Inc.
2017 Annual Results
Consolidated Financial Statements
2017
2016
$
$
$
$
458
957
124
1,705
269
3,513
572
385
119
117
100
92
194
5,092
18
1,160
291
35
36
1,540
1,296
78
215
3,129
580
—
193
1,190
1,963
5,092
$
$
$
$
593
869
101
1,601
214
3,378
606
363
118
71
100
88
186
4,910
2
946
231
47
7
1,233
1,487
84
205
3,009
573
2
243
1,083
1,901
4,910
3
/s/ S. L. Levenick
/s/ D. W. G. Whitehead
S.L. Levenick, Director
D. W. G. Whitehead, Director
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements
CONSOLIDATED STATEMENTS OF NET INCOME
For years ended December 31
(Canadian $ millions, 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 ventures and associate (Note 15)
Other income (Note 5)
Other expenses (Note 5)
Earnings before finance costs and income taxes
Finance costs (Note 6)
Income before provision for income taxes
Provision for income taxes (Note 13)
Net income
Earnings per share (Note 4)
Basic
Diluted
Finning International Inc.
2017 Annual Results
Consolidated Financial Statements
2017
2016
$
$
$
$
2,169
359
228
3,496
13
6,265
(4,608)
1,657
(1,267)
7
2
—
399
(100)
299
(78)
221
1.31
1.31
$
$
$
$
1,838
367
226
3,182
15
5,628
(4,155)
1,473
(1,280)
5
5
(38)
165
(85)
80
(15)
65
0.38
0.38
Weighted average number of shares outstanding (Note 4)
Basic
Diluted
168,131,542
168,544,984
168,095,109
168,140,444
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements
4
Finning International Inc.
2017 Annual Results
Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For years ended December 31
(Canadian $ millions)
Net income
Other comprehensive income (loss), net of income tax
Items that may be subsequently reclassified to net income:
Foreign currency translation adjustments
Share of foreign currency translation adjustments of joint ventures and associate (Note 15)
Unrealized gain on net investment hedges
Income tax expense on foreign currency translation adjustments and net investment hedges
Impact of foreign currency translation and net investment hedges, net of income tax
Unrealized loss on cash flow hedges
Realized loss on cash flow hedges, reclassified to statement of net income
Realized loss on cash flow hedges, reclassified to statement of financial position
Income tax recovery (expense) on cash flow hedges
Impact of cash flow hedges, net of income tax
Items that will not be subsequently reclassified to net income:
Actuarial gain (loss) (Note 23)
Income tax (expense) recovery on actuarial gain (loss)
Actuarial gain (loss), net of income tax
Total comprehensive income (loss)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
2017
2016
$
221
$
65
(86)
(3)
41
—
(48)
(7)
1
3
1
(2)
18
(3)
15
186
$
(118)
(14)
48
—
(84)
(1)
1
2
(1)
1
(16)
3
(13)
(31)
$
Share Capital
Accumulated Other
Comprehensive Income
(Loss)
Number of
Shares
Amount
Contributed
Surplus
Impact of
Foreign
Currency
Translation
and Net
Investment
Hedges
168,031,428
$
570
$
— $
—
—
—
135,774
—
—
—
—
—
3
—
—
168,167,202
$
573
$
—
—
—
189,280
—
(89,900)
—
—
—
—
7
—
—
—
$
—
—
—
(3)
5
—
2
—
—
—
(3)
3
(2)
—
327
—
(84)
(84)
—
—
—
243
—
(48)
(48)
—
—
—
—
Impact of
Cash Flow
Hedges
Retained
Earnings
Total
$
(1) $
1,154
$
2,050
$
—
1
1
—
—
—
—
—
(2)
(2)
—
—
—
—
65
(13)
52
—
—
65
(96)
(31)
—
5
(123)
(123)
$
1,083
$
1,901
221
15
236
(4)
—
—
221
(35)
186
—
3
(2)
(125)
(125)
168,266,582
$
580
$
— $
195
$
(2)
$
1,190
$
1,963
(Canadian $ millions,
except number of shares)
Balance, January 1, 2016
Net income
Other comprehensive (loss) income
Total comprehensive (loss) income
Issued on exercise of share options
Share option expense
Dividends on common shares
Balance, December 31, 2016
Net income
Other comprehensive (loss) income
Total comprehensive (loss) income
Issued on exercise of share options
Share option expense
Repurchase of common shares (Note 8)
Dividends on common shares
Balance, December 31, 2017
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements
5
Finning International Inc.
2017 Annual Results
Consolidated Financial Statements
2017
2016
$
221
$
CONSOLIDATED STATEMENTS OF CASH FLOW
For years ended December 31
(Canadian $ millions)
OPERATING ACTIVITIES
Net income
Adjusting for:
Depreciation and amortization
Gain on disposal of rental equipment and property, plant, and equipment
Impairment of long-lived assets (Note 16)
Gain on investment (Note 5a)
Equity earnings of joint ventures and associate
Share-based payment expense (Note 10)
Provision for income taxes
Finance costs
Defined benefit and other post-employment benefit expense (Note 23)
Changes in operating assets and liabilities (Note 24)
Additions to rental equipment
Proceeds on disposal of rental equipment
Interest paid
Income tax paid
Cash flow provided by operating activities
INVESTING ACTIVITIES
Additions to property, plant, and equipment and intangible assets
Proceeds on disposal of property, plant, and equipment
Proceeds on disposal of investment (Note 5a)
Proceeds on disposal of subsidiary
Investment in and advances to associate (Note 15)
Decrease in short-term investments
Cash flow used in investing activities
FINANCING ACTIVITIES
Increase (decrease) in short-term debt
Issuance of long-term debt (Note 6)
Repayment of long-term debt (Note 6)
Decrease in other long-term debt
Decrease in finance lease liabilities (Note 24)
Debt issuance and related costs
Early redemption premium (Note 6)
Repurchase of common shares
Dividends paid
Cash flow used in financing activities
Effect of currency translation on cash balances
(Decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year (Note 24)
$
184
(1)
—
(2)
(7)
32
78
100
10
(71)
(307)
183
(81)
(56)
283
(121)
3
7
—
(5)
—
(116)
17
200
(350)
—
(6)
(1)
(9)
(2)
(125)
(276)
(26)
(135)
593
458
$
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements
65
192
(3)
20
(5)
(5)
24
15
85
13
196
(170)
147
(77)
(57)
440
(92)
22
—
8
—
22
(40)
(115)
—
—
(12)
(5)
—
—
—
(123)
(255)
(27)
118
475
593
6
Finning International Inc.
2017 Annual Results
Index to the Notes to the Consolidated Financial Statements
1. GENERAL INFORMATION ............................................................................................................................................... 8
2. SIGNIFICANT ACCOUNTING POLICIES, KEY ASSUMPTIONS, AND SIGNIFICANT JUDGMENTS ................................................ 8
3. SEGMENTED INFORMATION ......................................................................................................................................... 14
4. EARNINGS PER SHARE ............................................................................................................................................... 16
5. OTHER INCOME AND OTHER EXPENSES ...................................................................................................................... 16
6. SHORT-TERM AND LONG-TERM DEBT AND FINANCE COSTS .......................................................................................... 17
7. FINANCIAL INSTRUMENTS ............................................................................................................................................ 19
8. MANAGEMENT OF CAPITAL ......................................................................................................................................... 28
9. SHARE CAPITAL ......................................................................................................................................................... 29
10. SHARE-BASED PAYMENTS ....................................................................................................................................... 30
11. INVENTORIES ........................................................................................................................................................... 36
12. POWER AND ENERGY SYSTEMS CONTRACTS ............................................................................................................. 36
13. INCOME TAXES ......................................................................................................................................................... 37
14. OTHER ASSETS ........................................................................................................................................................ 40
15. JOINT VENTURES AND ASSOCIATE ............................................................................................................................ 41
16. PROPERTY, PLANT AND EQUIPMENT AND RENTAL EQUIPMENT ................................................................................... 42
17. GOODWILL ............................................................................................................................................................... 45
18. DISTRIBUTION NETWORK .......................................................................................................................................... 45
19. INTANGIBLE ASSETS ................................................................................................................................................. 46
20. ASSET IMPAIRMENT .................................................................................................................................................. 48
21. OTHER LIABILITIES ................................................................................................................................................... 49
22. PROVISIONS ............................................................................................................................................................. 50
23. POST-EMPLOYMENT BENEFITS ................................................................................................................................. 51
24. SUPPLEMENTAL CASH FLOW INFORMATION ............................................................................................................... 58
25. ECONOMIC RELATIONSHIPS ...................................................................................................................................... 59
26. RELATED PARTY TRANSACTIONS AND TOTAL STAFF COSTS ....................................................................................... 59
27. LEASES ................................................................................................................................................................... 60
28. COMMITMENTS AND CONTINGENCIES ........................................................................................................................ 61
29. GUARANTEES AND INDEMNIFICATIONS ....................................................................................................................... 61
(cid:3)
(cid:3)
(cid:3)
7
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
1. GENERAL INFORMATION
Finning International Inc. (“Finning”) is a widely held, publicly traded corporation, listed on the Toronto Stock
Exchange (TSX: FTT). The registered and head office of the Company is located at Suite 1000, Park Place, 666
Burrard Street, Vancouver, British Columbia, Canada. The Company’s principal business is the sale of heavy
equipment and power and energy systems, rental of equipment, and providing product support including sales of
parts and servicing of equipment.
2. SIGNIFICANT ACCOUNTING POLICIES, KEY ASSUMPTIONS, AND SIGNIFICANT JUDGMENTS
These consolidated financial statements of Finning and its subsidiaries (together, the “Company”) have been
prepared in accordance with International Financial Reporting Standards (IFRS) issued and effective as of February
5, 2018, the date these consolidated financial statements were authorized for issuance by the Company’s Board of
Directors. The Company has applied the same accounting policies consistently to all periods presented unless
otherwise noted.
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.
Certain of the Company’s accounting policies that relate to the financial statements as a whole, as well as estimates
and judgments it has made and how they affect the amounts reported in the consolidated financial statements, are
incorporated in this section. This note also describes new standards, amendments or interpretations that are
effective and applied by the Company during 2017 or are not yet effective. Where an accounting policy, estimate, or
judgment is applicable to a specific note to the accounts, it is described within that note.
These consolidated financial statements were prepared under the historical cost basis except for derivative financial
instruments, contingent consideration, and liabilities for share-based payment arrangements, which have been
measured at fair value.
(a) Principles of Consolidation
Accounting Policy
The consolidated financial statements include the accounts of the Company, which includes the Finning (Canada)
division and Finning’s wholly owned subsidiaries. Subsidiaries are those entities over which Finning has the power
over the investee, is exposed, or has rights, to variable returns from its involvement with the investee, and has the
ability to use its power to affect its returns, generally accompanying a shareholding that confers more than half of the
voting rights. The consolidated financial statements include the operating results of acquired or disposed
subsidiaries from the date the Company obtains control or the date control is lost.
The Company’s principal wholly owned subsidiaries, and the main countries in which they operate, are as follows:
Name
Finning (UK) Ltd
Finning Chile S.A.
Finning Argentina S.A.
Finning Soluciones Mineras S.A.
Moncouver S.A.
Finning Bolivia S.A.
OEM Remanufacturing Company Inc.
Finning (Ireland) Limited
Principal place
of business
United Kingdom
Chile
Argentina
Argentina
Uruguay
Bolivia
Canada
Republic of Ireland
% ownership
100%
100%
100%
100%
100%
100%
100%
100%
Functional
currency (1)
GBP
USD
USD
USD
USD
USD
CAD
EUR
(1) Canadian dollar (CAD), United States dollar (USD), U.K. pound sterling (GBP), Euro (EUR)
All shareholdings are of ordinary shares or other equity capital. Other subsidiaries, while included in the
consolidated financial statements, are not considered material.
8
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
(b) Foreign Currency Translation
Accounting Policy
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 the entity’s functional currency at
exchange rates prevailing at the time the transactions occurred. Account balances denominated in foreign
currencies are translated into the entity’s functional currency as follows:
(cid:120) Monetary items 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
(cid:120) 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 cash flow hedges. The effective portion of hedging gains and
losses associated with these cash flow hedges is recorded, net of tax, in other comprehensive income until it is
reclassified to include it in the initial carrying cost of the hedged asset or hedged liability 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:
(cid:120) Assets and liabilities are translated using the exchange rates in effect at the statement of financial position
dates;
(cid:120) Revenue and expense items are translated at average exchange rates prevailing during the period that the
transactions occurred; and
(cid:120) Foreign currency translation adjustments and gains and losses on net investment hedges are reported within
other comprehensive income. Cumulative foreign currency translation adjustments, net of gains and losses on
net investment hedges, 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 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 7 for further details on the Company’s hedge accounting
policy.
Areas of Significant Judgment
Management has made judgments with regard to the determination of the functional currency of each entity of the
Company.
9
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
(c) Revenue Recognition
Accounting Policy
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 incentives offered.
Revenue is recognized as performance requirements are achieved in accordance with the following:
(cid:120) 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;
(cid:120) 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;
(cid:120) 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. If it is expected that the overall contract will incur a loss, this loss is recognized
immediately in the consolidated statement of net income. 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; and,
(cid:120) The revenue recognition accounting policy for power and energy system contracts with customers is described
in Note 12.
If an arrangement with a customer 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.
10
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
Areas of Estimation Uncertainty
Long-Term Contracts
Where the outcome of a long-term contract (primarily power and energy 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 and is 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 in the
current period to the extent that it is probable that contract costs 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.
Repurchase Commitments
Guaranteed residual values are periodically given in connection with repurchase commitments provided to
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 commitments 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.
Areas of Significant Judgment
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.
(d) Amendments to Standards
The Company has adopted the following amendments to standards:
(cid:120)
IAS 7, Statement of Cash Flows (effective January 1, 2017) introduces new requirements to disclose
changes in liabilities arising from financing activities, including changes arising from cash flows and non-
cash changes. The required disclosures have been added to Note 24 of the Company’s 2017 Consolidated
Financial Statements.
11
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
(e) Future Accounting Pronouncements
The Company has not applied the following new standards and IFRS Interpretations Committee Interpretation
(IFRIC) that have been issued but are not yet effective:
(cid:120)
IFRS 15, Revenue from Contracts with Customers (IFRS 15) (effective date January 1, 2018) requires
companies to recognize revenue to depict the transfer of promised goods or services to customers in an amount
that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
IFRS 15 will supersede existing standards and interpretations, including International Accounting Standards
(IAS) 18, Revenue and IAS 11, Construction Contracts. Additionally, IFRS 15 will significantly increase
disclosures related to revenue recognition. Entities are permitted to apply the amendments either retrospectively
to each prior reporting period presented or retrospectively with the cumulative effect of initially applying IFRS 15
at the date of initial application.
Management evaluated the new standard and has completed its assessment including a review of revenue
contracts with customers. Management has determined that the new standard will have the following impact on
the timing and pattern of revenue recognition:
(cid:120) Revenue for sales of new equipment, used equipment, and parts will remain largely unchanged;
(cid:120) Revenue for complex power systems projects and servicing of equipment will be recognized over time in a
pattern that reflects the measure of progress. While the total amount of revenue recognized under IFRS 15
will not change materially, the timing of revenue recognized may differ to reflect the measure of progress or
allocation of the transaction price.
(cid:120) Revenue for non-complex power systems projects will be recognized at points in time as the performance
obligations are satisfied (upon delivery of the equipment to the customer or commissioning of the power
system project).
(cid:120) Revenue for rental equipment is excluded from the scope of the new revenue standard and therefore will
remain unchanged upon adoption of IFRS 15.
The Company will apply some of the practical expedients available under IFRS 15 such as, the Company will
not restate financial statements for any contracts completed and modifications made to such contracts prior to
January 1, 2017 and management will use the transaction price at the date the contract was completed rather
than estimating variable consideration amounts in the comparative reporting periods. Management will apply the
new standard retrospectively to each reporting period presented. The estimated impact is summarized in the
table below.
(cid:120)
IFRS 9, Financial Instruments (IFRS 9) (effective January 1, 2018) introduces new requirements for the
classification and measurement of financial assets and financial liabilities, impairment of financial assets, and
hedge accounting. The Company will apply this standard retrospectively. Under the new standard, management
will utilize a provision matrix, permitted under the simplified approach, to estimate expected credit losses for
trade receivables. Management does not expect any adjustment on transition for this change in methodology
from incurred credit losses under the current rules of IAS 39, Financial Instruments: Recognition and
Measurement (IAS 39).
Management elects to apply the hedge accounting requirements of IFRS 9 to its existing hedging relationships.
As a result, cash flow hedges of certain highly probable forecast transactions do not meet the requirements
under the new rules and as a result, any effective portion of such hedges previously recognized in other
comprehensive income will be restated to the consolidated statement of net income in the comparative period.
Under IAS 39, if a hedged forecast transaction subsequently results in the recognition of a non-financial asset or
non-financial liability, the Company reclassifies that amount and includes it directly in the initial cost of the asset
or the liability with an offsetting entry in other comprehensive income, referred to as a basis adjustment. Upon
adoption of IFRS 9, the Company will be required to remove the basis adjustment directly from accumulated
other comprehensive income and is not considered a reclassification adjustment and therefore will no longer
impact other comprehensive income. The estimated impact of this change is summarized in the table below and
will result in changes in both the statements of comprehensive income and shareholders’ equity.
Except as outlined in the table below, management does not expect the adoption of IFRS 9 to result in any other
changes to the consolidated statements of financial position, net income, comprehensive income or loss,
shareholders’ equity, or cash flow.
12
The impact of IFRS 15 and IFRS 9 for the date of initial application and the 2017 comparative period is estimated to
be approximately:
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
January 1, 2017
($ millions)
Decrease in total assets
Decrease in total liabilities
Increase in equity
December 31, 2017
($ millions)
Decrease in total assets
Decrease in total liabilities
Increase in equity
For year ended December 31, 2017
($ millions)
Decrease in total revenue
(Decrease) increase in total expenses
Decrease in net income
IFRS 15
$
$
$
(17)
(31)
14
IFRS 15
$
$
$
(22)
(34)
12
IFRS 15
$
$
$
(9)
(7)
(2)
Total
IFRS 9
$
$
$
— $
— $
— $
Total
IFRS 9
$
$
$
— $
— $
— $
(17)
(31)
14
(22)
(34)
12
Total
IFRS 9
$
$
$
— $
$
3
$
(3)
(9)
(4)
(5)
(cid:120)
(cid:120)
(cid:120)
IFRIC 22, Foreign Currency Transactions and Advance Consideration (effective January, 1, 2018) clarifies the
appropriate exchange rate to use on initial recognition of an asset, expense or income when advance
consideration is paid or received in a foreign currency. Management expects this IFRIC will change the
exchange rate used to translate deposits made on inventory purchases or advances received for equipment
sales denominated in a foreign currency. Management plans to apply this interpretation prospectively to all in-
scope assets, expenses, and income recognized on or after January 1, 2018. The future impact on the initial
measurement of inventory and revenue will depend on movements in exchange rates.
IFRS 16, Leases (effective January 1, 2019) introduces new requirements for the classification and
measurement of leases. Management is currently assessing the impact of the new standard but expects IFRS
16 will result in materially higher non-current assets and non-current liabilities recorded on the consolidated
balance sheet. Also, management expects lower selling, general, and administrative expense and higher
finance costs under this new standard due to lower operating lease expense partially offset by higher
depreciation expense and higher interest expense, respectively.
IFRIC 23, Uncertainty over Income Tax Treatments (effective January 1, 2019) provides guidance when there is
uncertainty over income tax treatments including (but not limited to) whether uncertain tax treatments should be
considered separately; assumptions made about the examination of tax treatments by tax authorities; the
determination of taxable profit, tax bases, unused tax losses, unused tax credits, and tax rates; and, the impact
of changes in facts and circumstances. Management is currently assessing the impact of the new interpretation.
13
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
3. 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.
Information reported to the chief operating decision maker for the purposes of resource allocation and assessment
of segment performance primarily focuses on the dealership territories in which the Company operates.
The reportable segments, which are the same as the Company’s operating segments, are as follows:
(cid:120) Canadian operations: British Columbia, Alberta, Saskatchewan, Yukon, the Northwest Territories, and a portion
of Nunavut.
(cid:120) South American operations: Chile, Argentina, and Bolivia.
(cid:120) UK & Ireland operations: England, Scotland, Wales, Northern Ireland, and the Republic of Ireland.
(cid:120) Other: corporate head office.
Revenue, results, and other information by reporting segment
For year ended December 31, 2017
($ millions)
Revenue from external sources
Operating costs
Depreciation and amortization
Equity earnings (loss) of joint ventures
and associate
Other income
Earnings (loss) before finance costs and
income taxes
Finance costs
Provision for income taxes
Net income
Invested capital (1)
Capital and rental equipment (2)
Gross capital expenditures (3)
Gross rental asset expenditures (3)
$
$
$
$
$
$
Canada
3,073
(2,757)
(99)
$
South
America
2,151
(1,911)
(58)
$
UK &
Ireland
Other
$
1,041
(973)
(26)
Consolidated
6,265
(5,691)
(184)
— $
(50)
(1)
12
—
—
—
—
—
(5)
2
229
$
182
$
42
$
(54) $
1,620
557
32
228
$
$
$
$
977
370
77
45
$
$
$
$
246
137
6
34
$
$
$
$
$
(24) $
$
10
7
$
— $
7
2
399
(100)
(78)
221
2,819
1,074
122
307
(1) Refer to Note 8 for the calculation of invested capital
(2) Capital includes property, plant and equipment, and intangibles
(3)
Includes finance leases and borrowing costs capitalized and excludes additions through business acquisitions
14
For year ended December 31, 2016
($ millions)
Revenue from external sources
Operating costs
Depreciation and amortization
Equity earnings (loss) of joint venture
and associate
Other income
Other expenses
Earnings (loss) before finance costs and
income taxes
Finance costs
Provision for income taxes
Net income
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
Canada
South
America
UK &
Ireland
Other
$
2,821 $
(2,609)
(100)
1,857 $
(1,658)
(62)
950 $
(927)
(30)
Consolidated
5,628
(5,243)
(192)
— $
(49)
—
8
—
(33)
—
—
—
—
—
(5)
(3)
5
—
$
87 $
137 $
(12) $
(47) $
5
5
(38)
165
(85)
(15)
65
2,797
1,040
92
185
$
(10) $
4 $
3 $
— $
Invested capital (1)
Capital and rental equipment (2)
Gross capital expenditures (3)
Gross rental asset expenditures (3)
$
$
$
$
1,595 $
562 $
35 $
111 $
996 $
354 $
50 $
43 $
216 $
120 $
4 $
31 $
(1) Refer to Note 8 for the calculation of invested capital
(2) Capital includes property, plant and equipment, and intangibles
(3)
Includes finance leases and borrowing costs capitalized and excludes additions through business acquisitions
Revenue and non-current assets (4) by location of operations
($ millions)
Canada
Chile
United Kingdom
Argentina
Other countries
(4) Non-current assets exclude deferred tax assets
$
$
$
$
$
Revenues
Year ended December 31
2016
2017
Non-current assets (4)
As at December 31
2017
2016
3,073
1,497
923
545
227
$
$
$
$
$
2,821
1,394
948
373
92
$
$
$
$
$
875
307
202
104
22
$
$
$
$
$
879
290
169
92
28
15
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
4. EARNINGS PER SHARE
Accounting Policy
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 year. 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 potentially dilutive common shares, which comprise share options granted to
employees.
For year ended December 31, 2017
($ millions, except share and per share amounts)
Basic EPS:
Net income, weighted average shares outstanding, EPS
Effect of dilutive securities: share options
Diluted EPS:
Net income and assumed conversions
For year ended December 31, 2016
Basic EPS:
Net income, weighted average shares outstanding, EPS
Effect of dilutive securities: share options
Diluted EPS:
Net income and assumed conversions
$
$
$
$
Income
Shares
EPS
221
—
168,131,542
413,442
221
168,544,984
65
—
168,095,109
45,335
65
168,140,444
$
$
$
$
1.31
—
1.31
0.38
—
0.38
Share options granted to employees of 4 million (2016: 5 million) are anti-dilutive and are excluded from the
weighted average number of ordinary shares for the purpose of calculating diluted earnings per share.(cid:3)
5. OTHER INCOME AND OTHER EXPENSES
For years ended December 31
($ millions)
Gain on investment (a)
Total other income
2017
2016
$
$
2
2
$
$
5
5
(a) In 2016, the Company recognized a $5 million gain related to the mark-to-market adjustment for its investment
in IronPlanet Holdings, Inc. In 2017, the Company received proceeds of $7 million and recognized a gain of $2
million upon the disposal of this investment.
For years ended December 31
($ millions)
Impairment loss on long-lived assets (b)
Provision for onerous contracts and restructuring costs (b)
Write-down of net assets (c)
Total other expenses
2017
2016
—
—
—
—
$
$
(20)
(13)
(5)
(38)
$
$
(b) As part of the actions taken by the Company to lower costs, the Company reduced its global workforce and
decided to exit a number of facilities, primarily in its Canadian operations. The Company recognized impairment
losses related to exited properties (Note 16) and provisions for any unavoidable costs from exited properties that
were under an operating lease and for expenditures related to the Company’s restructuring plans.
(c) Following a strategic review in 2016 of the Company’s operations in the UK, it was determined that engineering
and construction services for the water utility industry no longer represented a core sector for Finning’s power
systems division in the UK. The Company recorded a charge of approximately $5 million, representing the write-
down of net assets and other costs related to the August 2016 sale of this business in the UK & Ireland reporting
segment.
16
6. SHORT-TERM AND LONG-TERM DEBT AND FINANCE COSTS
December 31
($ millions)
Short-term debt
Long-term debt
6.02%, $350 million, due June 1, 2018
3.232%, $200 million, due July 3, 2020
2.84%, $200 million, due September 29, 2021
5.077% $150 million, due June 13, 2042
3.98% U.S. $100 million, due January 19, 2022, Series A
4.08% U.S. $100 million, due January 19, 2024, Series B
4.18% U.S. $50 million, due April 3, 2022, Series C
4.28% U.S. $50 million, due April 3, 2024, Series D
4.53% U.S. $200 million, due April 3, 2027, Series E
3.40% £70 million, due May 22, 2023, Series F
Other term loans
Total long-term debt
Non-current portion of long-term debt
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
2017
2016
$
18
$
2
—
200
200
149
125
125
63
63
250
118
3
1,296
1,296
$
$
350
199
—
149
134
134
67
67
268
116
3
1,487
1,487
The Company has an unsecured syndicated committed credit facility of $1.0 billion. The facility is available in
multiple borrowing jurisdictions and may be drawn by a number of the Company’s principal operating subsidiaries.
Borrowings under this facility are available in multiple currencies and at various floating rates of interest. The facility
contains annual options, subject to mutual consent of the syndicate bank lenders and the Company, to extend the
maturity date on terms reflecting market conditions at the time of the extension. In October 2017, the Company
completed a two-year extension to this facility, extending the maturity date to October 2022 from the previous
maturity in October 2020. (cid:3)
Short-Term Debt(cid:3)
At December 31, 2017, short-term debt represents local bank borrowings in the Company’s Argentina operations of
$18 million (2016: short-term debt is unsecured term loans from supplier merchandising programs of $2 million that
matured within one year). (cid:3)
The Company’s principal source of short-term funding is its access to the syndicated committed credit facility noted
above. The Company also maintains a maximum authorized commercial paper program of $600 million,
backstopped by credit available under the $1.0 billion committed credit facility. There was no commercial paper
outstanding at December 31, 2017 or December 31, 2016. In addition, the Company maintains certain other
committed and uncommitted bank credit facilities, including overdrafts and letters of credit, to support its subsidiary
operations. (cid:3)
The average interest rate applicable to the consolidated short-term debt for 2017 was 6.4% (2016: 1.7%).(cid:3)
(cid:3)
17
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
Long-Term Debt(cid:3)
The Company's Canadian dollar denominated Medium Term Notes (MTN) are unsecured, and interest is payable
semi-annually with the principal due on maturity. (cid:3)
At December 31, 2017 and 2016 no amounts were drawn on the global credit facility. (cid:3)
In September 2017, the Company issued $200 million of 2.84% senior unsecured Notes due September 29, 2021.
On October 16, 2017, proceeds from the Notes were used to redeem, prior to maturity, all of the outstanding $350
million, 6.02% Medium Term Notes due June 1, 2018. The total redemption price included an early redemption
premium of approximately $9 million which was recorded in other finance related expenses.(cid:3)
The average interest rate applicable to the consolidated long-term debt for 2017 was 4.4% (2016: 4.5%).(cid:3)
Long-Term Debt Repayments(cid:3)
Principal repayments of long-term debt (carrying amount) in each of the next five years and thereafter are as follows:(cid:3)
December 31
($ millions)
2018
2019
2020
2021
2022
Thereafter
Finance Costs
Finance costs as shown on the consolidated statements of net income comprise the following
For years ended December 31
($ millions)
Interest on short-term debt
Interest on long-term debt
Interest on debt securities
Net interest on pension and other post-employment benefit obligations (Note 23)
Other finance related expenses
Finance costs
$
$
2017
9
64
73
1
26
100
$
$
$
$
—
—
200
201
188
707
1,296
2016
1
68
69
1
15
85
18
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
7. FINANCIAL INSTRUMENTS
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 (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. 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.
(a) Financial Assets and Credit Risk
Accounting Policy
Classification and measurement
Cash and cash equivalents, accounts receivable, unbilled work in progress, supplier claims receivable, instalment
and other notes receivable, and Value Added Tax receivable are classified as loans and receivables. They are
measured at amortized cost using the effective interest method.
Financial assets that are measured at amortized cost are assessed for impairment at the end of each reporting
period. For certain categories of financial assets, such as trade receivables, that are considered not to be impaired
individually are also 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 trade receivables is reduced
through the use of an allowance account. Changes in the carrying amount of the allowance account are recognized
in net income. At the point when the Company is satisfied that no recovery of the amount owing is possible, the
amount is considered not recoverable and the financial asset is written off.
Derivative assets and short-term investments are classified as fair value through profit or loss and are recorded on
the consolidated statement of financial position at fair value. Changes in fair value are recognized in the
consolidated statement of net income except for changes in fair value related to derivative assets which are
effectively designated as hedging instruments which are recognized in other comprehensive income.
Areas of Estimation Uncertainty
Allowance for Doubtful Accounts
The Company records allowance for doubtful accounts that represent management’s best estimate of potential
losses in respect of trade and other receivables and unbilled work in progress. 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 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.
19
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
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, short-
term investments, receivables from customers and suppliers, instalment and other notes receivable, and derivative
assets.
Exposure to Credit Risk
The carrying amount of financial assets and unbilled work in progress represents the maximum credit exposure. The
Company’s exposure to credit risk at the reporting date was:
December 31
($ millions)
Cash and cash equivalents
Accounts receivable – trade
Accounts receivable – other
Unbilled work in progress
Supplier claims receivable
Instalment notes receivable
Derivative assets
2017
2016
$
$
458 $
895
62
124
104
44
1
1,688 $
593
797
72
101
88
37
1
1,689
Cash and Cash Equivalents, Derivatives, and Short-Term Investments(cid:3)
Credit risk associated with cash and cash equivalents and short-term investments is managed by ensuring that
these financial assets are held with major financial institutions with strong investment grade ratings and by
monitoring the exposures with any single institution. An ongoing review is performed to evaluate the changes in the
credit rating of counterparties.(cid:3)
The Company has 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 and/or A2 by Moody’s. (cid:3)
Accounts Receivable, Unbilled Work in Progress, and Other Receivables(cid:3)
Accounts receivable comprises trade accounts and non-trade accounts. Unbilled work in progress from external
customers represents the costs incurred plus recognized profits, net of any recognized losses and progress billings. (cid:3)
The Company has a large, diversified customer base, and is not dependent on any single customer or group of
customers. Credit risk associated with receivables from customers and suppliers is minimized because of the
diversification of the Company’s operations as well as its large customer base and its geographical dispersion. (cid:3)
(cid:3)
20
The maximum exposure to credit risk for trade receivables at the reporting date by geographic location of customer
was:(cid:3)
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
December 31
($ millions)
Canada
Chile
U.K.
Argentina
Other
Total
Impairment Losses(cid:3)
The aging of trade receivables at the reporting date was:(cid:3)
December 31
($ millions)
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
2017
Allowance
$
Gross
699
119
64
9
39
930
$
$
$
—
—
—
1
34
35
2017
2016
356
246
72
76
47
797
415
266
92
82
40
895
$
$
2016
Gross
635
109
43
15
32
834
Allowance
—
—
1
11
25
37
$
$
$
$
$
$
The movement in the allowance for doubtful accounts in respect of trade receivables during the year was as follows:(cid:3)
For years ended December 31
($ millions)
Balance, beginning of year
Additional allowance
Receivables written off
Foreign exchange translation adjustment
Balance, end of year
2017
2016
$
$
37
19
(20)
(1)
35
$
$
23
33
(19)
—
37
21
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
(b) Financial Liabilities and Liquidity Risk
Accounting Policy
Classification and measurement
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.
Derivative liabilities are classified as fair value through profit or loss and are recorded on the consolidated statement
of financial position at fair value. Changes in fair value are recognized in the consolidated statement of net income
except for changes in fair value related to derivative liabilities which are effectively designated as hedging
instruments which are recognized in other comprehensive income.
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, continuously monitors actual and forecast cash flows, and manages maturity
profiles of financial liabilities. At December 31, 2017, the Company had approximately $1.7 billion (2016: $1.9 billion)
of unsecured credit facilities. Included in this amount is a syndicated committed credit facility totalling $1.0 billion
(2016: $1.0 billion) with various Canadian and other global financial institutions. In October 2017, the Company
completed a two-year extension to its $1.0 billion syndicated committed credit facility, extending the maturity date to
October 2022. At December 31, 2017, $1.0 billion (2016: $1.0 billion) was available under this syndicated committed
credit facility.
The following are the contractual maturities of non-derivative financial liabilities and derivative financial instruments.
The amounts presented represent the future undiscounted principal and interest cash flows, and therefore, do not
equate to the carrying amount on the consolidated statement of financial position.
($ millions)
Carrying amount
December 31, 2017
2018
Contractual cash flows
2019-2020 2021-2022 Thereafter
Non-derivative financial liabilities
Short-term debt
Unsecured $550 million MTN
U.S. $500 million Notes
£70 million Notes
Other term loans
Finance lease obligations
Accounts payable and accruals (excluding
current portion of finance lease
liabilities)
Total non-derivative financial liabilities
Derivative financial (liabilities) assets
Forward foreign currency contracts and swaps
Sell CAD
Buy USD
Sell USD
Buy CLP (1)
Sell CLP
Buy USD
Sell DKK (1)
Buy EUR
Sell GBP
Buy EUR
Total derivative (liabilities) assets
(1) Chilean peso (CLP), Danish Krone (DKK)
$
(18) $
(549)
(626)
(118)
(3)
(34)
(18) $
(20)
(27)
(4)
—
(6)
— $
— $
(240)
(54)
(8)
(1)
(12)
(221)
(238)
(8)
(1)
(11)
—
(299)
(502)
(121)
(1)
(17)
$
$
$
(1,155)
(2,503) $
(1,155)
(1,230) $
—
(315) $
—
(479) $
—
(940)
(5) $
—
—
1
(3)
—
—
—
—
—
(7) $
(198) $
193
(15)
16
(119)
116
(22)
22
(2)
2
(7) $
— $
—
—
—
—
—
—
—
—
—
— $
— $
—
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
—
—
22
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
(c) Hedging and Market Risk
Accounting Policy
Hedges
The Company utilizes derivative financial instruments and foreign currency debt in order to manage its foreign
currency and interest rate exposure. 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 net income.
Cash Flow Hedges
The Company uses foreign exchange forward contracts and, at times, may use 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 recognized in
earnings in the same period as the hedged item. For cash flow hedges of non-financial items, these gains and
losses are reclassified and included in the initial carrying cost of the hedged asset or hedged liability. 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 foreign exchange forward contracts that are not designated as hedges for accounting
purposes are recorded in the consolidated statement of income as selling, general, and administrative expenses or
finance costs, as appropriate.
Net Investment Hedges
The Company typically uses foreign currency debt 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. 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).
23
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
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.
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 CAD, USD, GBP, CLP, and Argentine
peso (ARS).
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 and other comprehensive income is the
translation of foreign currency based earnings and net assets or liabilities into Canadian dollars, which is the
Company’s presentation currency. The Company’s South American and UK & Ireland operations have functional
currencies other than the CAD and, as a result, exchange rate movements between the USD/CAD and GBP/CAD
will impact the consolidated results of the South American and UK & Ireland operations in CAD terms. The Company
does not hedge its exposure to foreign exchange risk with regard to foreign currency earnings.
Assets and liabilities of the Company’s South American and UK & Ireland operations are translated into CAD using
the exchange rates in effect at the statement of financial position dates. Any translation gains and losses are
recorded as foreign currency translation adjustments in other comprehensive income. To the extent practical, it is
the Company’s objective to manage this exposure. The Company has hedged a portion of its foreign investments
with foreign currency denominated loans.
The fair value of the Company’s long-term debt that is designated as net investment hedging instruments is $813
million (2016: $839 million).
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, which may affect the
Company’s profitability as exchange rates fluctuate. For example, the Company’s Canadian operating results are
exposed to volatility in USD/CAD rates between the timing of equipment and parts purchases and the ultimate sale
to customers. A portion of this exposure is hedged through the use of forward exchange contracts as well as
managed through pricing practices. The Company applies hedge accounting to hedges of certain inventory
purchases in its Canadian and UK operations. For the year ended December 31, 2017 the Company entered into
forward exchange contracts for inventory purchases of U.S. $319 million of which approximately U.S. $19 million
related to forecast transactions that were no longer expected to occur. These hedges were discontinued and the
ineffective portion of $(1) million was recognized in the consolidated statement of net income immediately.
The results of the Company’s operations are impacted by the translation of its foreign denominated transactions; the
results of the Canadian operations are impacted by USD based revenue and costs and the results of the South
American operations are impacted by CLP and ARS based revenues and costs.
The Company is also exposed to foreign currency risks related to the future cash flows on its foreign denominated
financial assets and financial liabilities and foreign denominated net asset or net liability positions on its statement of
financial position. The Company enters into forward exchange contracts to manage some mismatches in foreign
currency cash flows but does not fully hedge balance sheet exposure so this may result in unrealized foreign
exchange gains or losses until the financial assets and financial liabilities are settled.
The fair value of derivative instruments designated as cash flow hedging instruments is $(2) million (2016: less than
$1 million).
24
Exposure to Foreign Exchange Risk
The currencies of the Company’s significant financial instruments were as follows:
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
December 31, 2017
(millions)
Cash and cash equivalents
Accounts receivable
Short-term and long-term debt
Accounts payable and accruals
Net statement of financial position exposure
December 31, 2016
(millions)
Cash and cash equivalents
Accounts receivable
Short-term and long-term debt
Accounts payable and accruals
Net statement of financial position exposure
Sensitivity Analysis to Foreign Exchange Risk(cid:3)
CAD
USD
GBP
6
335
(549)
(342)
(550)
110
173
(499)
(438)
(654)
43
58
(71)
(62)
(32)
CAD
USD
GBP
91
277
(698)
(241)
(571)
216
158
(500)
(346)
(472)
40
46
(72)
(68)
(54)
CLP
98,982
115,252
—
(48,066)
166,168
CLP
62,084
107,381
—
(34,614)
134,851
ARS
58
—
(266)
(405)
(613)
ARS
67
—
—
(273)
(206)
As a result of foreign exchange gains or losses on the translation of foreign currency denominated financial
instruments, a weakening of the CAD against the following currencies would increase (decrease) pre-tax income
and other comprehensive income by the amounts shown below. This analysis uses estimated forecast foreign
exchange rates for the upcoming year and assumes that all other variables, in particular volumes, relative pricing,
interest rates, and hedging activities are unchanged. (cid:3)
December 31, 2017
($ millions)
CAD/USD
CAD/GBP
CAD/CLP
CAD/ARS
Weakening
of CAD
15%
20%
10%
20%
Pre-tax
Income (Loss)
$
$
$
$
16
—
34
(8)
Other
Comprehensive
Loss
$
$
$
$
(79)
(24)
—
—
A strengthening of the CAD against the above currencies relative to the December 31, 2017 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.(cid:3)
25
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
Interest Rate Risk(cid:3)
Changes in market interest rates can cause fluctuations in the fair value or future cash flows of financial instruments.(cid:3)
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 can 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. (cid:3)
The Company is exposed to changes in interest rates on its interest bearing financial liabilities, primarily from short-
term and long-term debt. The Company’s debt portfolio comprises both fixed and floating rate debt instruments, with
terms to maturity ranging up to June 2042. The Company’s floating rate debt is short-term nature and as a result,
the Company is exposed to limited fluctuations in changes to fair value, but finance expense and cash flows will
increase or decrease as interest rates change. (cid:3)
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 is exposed to changes in future interest rates upon
refinancing of any debt prior to or at maturity. (cid:3)
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. (cid:3)
Profile(cid:3)
At the reporting date the interest rate profile of the Company’s interest-bearing financial instruments were as follows:(cid:3)
December 31
($ millions)
Fixed rate instruments
Financial assets
Financial liabilities
Variable rate instruments
Financial assets
Financial liabilities
2017
2016
$
$
$
$
44
(1,330)
458
(18)
$
$
$
$
37
(1,526)
593
(2)
Fair Value Sensitivity Analysis for Fixed Rate Instruments(cid:3)
The Company does not account for any fixed rate financial assets and liabilities at fair value through the
consolidated statement of net income, 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.(cid:3)
Pre-tax Income Sensitivity Analysis for Variable Rate Instruments(cid:3)
The Company’s variable rate instruments are in a net asset position; therefore, an increase of 1.0% in interest rates
for a full year relative to the interest rates at the reporting date would have increased income by approximately (cid:3)
$4 million with a 1.0% decrease having the opposite effect. This analysis assumes that all other variables, in
particular foreign currency exchange rates, remain constant. (cid:3)
26
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
(d) Fair Values
Financial instruments measured at fair value are grouped into Levels 1 to 3 based on the degree to which fair value
is observable:
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
The Company’s only financial instruments measured at fair value are derivative instruments, short-term investments,
investments in equity securities, and contingent consideration. All of the derivative instruments are measured at fair
value using Level 2 inputs. Investments in equity securities and contingent consideration are measured at fair value
using Level 3 inputs. The Company did not move any instruments between levels of the fair value hierarchy during
the years ended December 31, 2017 and 2016.
Derivative Instruments (Level 2)
The fair value of foreign currency forward contracts is determined by discounting contracted future cash flows using
a discount rate derived from interest rate curves and observed forward prices for comparable assets and liabilities.
The fair values of other derivative instruments and short-term investments are determined using present value
techniques applied to estimated future cash flows. These techniques utilize a combination of quoted prices and
market observable inputs.
Where appropriate, fair values are adjusted for credit risk based on observed credit default spreads or market yield
spreads for counterparties for financial assets and based on the Company’s credit risk when for financial liabilities.
The Company’s credit risk is derived from yield spreads on the Company’s market quoted debt.
Investments in Equity Securities and Contingent Consideration (Level 3)
The fair value of the investment in IronPlanet Holdings, Inc. of $5 million at December 31, 2016 was estimated using
the price that the Company expected to receive to sell these shares to a market participant. There was no quoted
price on an active market for similar assets. The Company disposed of this investment in June 2017.
The fair value of the contingent consideration, related to the acquisition of SITECH in the Company’s UK and Ireland
operations in 2014, of $2 million (£1 million) (2016: $4 million (£2 million)) was estimated by discounting cash flows
based on the probability-adjusted profit in the acquired business.
Long-Term Debt
The carrying value and fair value of the Company’s long-term debt is estimated as follows:
December 31
($ millions)
Long-term debt
2017
Carrying Value
$
1,296
$
Fair Value
Carrying Value
Fair Value
1,397
$
1,487
$
1,562
2016
The fair value of the Company’s long-term debt is based on the present value of future cash flows required to settle
the debt which is derived from the actual interest accrued to date. The present value of future cash flows is
discounted using the yield to maturity rate as at the measurement date. This technique utilizes a combination of
quoted prices and market observable inputs (Level 2).(cid:3)
Cash and Cash Equivalents, Accounts Receivable, Instalment Notes Receivables, Short-Term Debt, and Accounts
Payable(cid:3)
The recorded values of cash and cash equivalents, accounts receivable, instalment notes receivable, short-term
debt, and accounts payable approximate their fair values due to the short-term maturities of these instruments.(cid:3)
27
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
8. 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 cash and cash equivalents, short-term debt and long-term
debt, and shareholders’ equity in the definition of capital.
The Company manages its capital structure and makes adjustments to it in light of actual and forecast cash flows,
actual and anticipated capital expenditures and investments, 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. In 2017, the Company renewed its normal course issuer bid (NCIB) to purchase its common shares
for cancellation. During 2017, the Company repurchased 89,900 Finning shares for cancellation at an average price
of $25.45 (no shares were repurchased in 2016).
The Company monitors net debt to invested capital and its target range is shown below. The Company’s strategy is
to meet target ranges over a longer-term average basis. The net debt to invested capital ratio was below the target
range for 2017 and 2016 due to significant cash generation during each of the years.
December 31
Net debt to invested capital
Company
Target
35 – 45%
2017
2016
30.4%
32.0%
Net debt to invested capital is calculated as net debt divided by invested capital. Net debt is calculated as short-term
and long-term debt, net of cash. Invested capital is net debt plus all components of shareholders’ equity (share
capital, contributed surplus, accumulated other comprehensive income, and retained earnings). Invested capital is
also calculated as total assets less total liabilities, excluding net debt. (cid:3)
December 31
($ millions)
Cash and cash equivalents
Short-term debt
Long-term debt
Net debt
Shareholders’ equity
Invested capital
Covenant
2017
2016
$
$
(458)
18
1,296
856
1,963
2,819
$
$
(593)
2
1,487
896
1,901
2,797
The Company is subject to a maximum net debt to invested capital level of 62.5% pursuant to a covenant within its
syndicated bank credit facility. As at December 31, 2017 and 2016, the Company is in compliance with this
covenant.
28
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
9. SHARE CAPITAL
Accounting Policy
Common shares repurchased by the Company are recognized as a reduction in share capital and contributed
surplus (and retained earnings once contributed surplus is fully drawn down) on the date of repurchase. A liability is
recognized for any committed repurchases but not yet settled at a reporting period end with a corresponding
reduction in contributed surplus (or retained earnings). The cash consideration paid to repurchase shares is
presented as a financing activity in the Statement of Cash Flows. Details of the transaction (number of shares
repurchased and amount deducted from equity) are disclosed in the Statement of Shareholder’s Equity.
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 convertible preferred shares. The Company had no preferred shares
outstanding for the years ended December 31, 2017 and 2016.
The Company is authorized to issue an unlimited number of common shares. All issued common shares have no
par value and are fully paid.
The Company's dealership agreements with subsidiaries of Caterpillar Inc. (Caterpillar) are fundamental to its
business and a change in control of Finning may result in Caterpillar exercising its right to terminate those
dealership agreements.
In addition, a shareholder 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 if a third party attempts to acquire a significant interest
in the Company. The rights 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 share purchase rights
become exercisable. The rights may also be triggered by a third party proposal for a merger, amalgamation or
similar transaction. In May 2017, 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 2020 unless further extended by the shareholders
prior to that time. The rights plan was also amended to reflect recent amendments made to Canada’s take-over bid
regime.
The rights will not be triggered if a bid meets certain criteria (a permitted bid). These criteria include that:
(cid:120)
(cid:120) more than 50% of the voting shares have been tendered by independent shareholders pursuant to the bid and
the offer is made for all outstanding voting shares of the Company;
not withdrawn (voting shares tendered may be withdrawn until taken up and paid for); and
the bid must expire not less than 105 days after the date of the bid circular, or such shorter period that a take-
over bid (that is not exempt from the general take-over bid requirements under applicable securities law) must
remain open for deposits of securities thereunder, in the applicable circumstances at such time.
(cid:120)
(cid:3)
29
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
10. SHARE-BASED PAYMENTS
Accounting Policy
The Company has share option plans and other share-based compensation plans for directors and certain eligible
employees.
Equity settled share-based payments are measured at fair value using the Black-Scholes option pricing model. The
fair value is determined on the grant date of the share option and recorded over the vesting period in selling,
general, and administrative expense, 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.
Total Shareholder Return Performance Share Units are measured at fair value using the Monte Carlo model and all
other cash-settled share-based awards are measured at fair value using the period-end closing share price (2016:
Black-Scholes model). Cash settled share-based compensation plans are recognized as a liability. Compensation
expense which arises from vesting and fluctuations in the fair value of the Company’s cash settled share-based
compensation plans 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
other liabilities.
Areas of Estimation Uncertainty
The Company uses inputs in the Black-Scholes option pricing models to determine the fair value of share options.
Inputs to the model are subject to various estimates relating to volatility, interest rates, dividend yields and expected
life of the units issued. Fair value inputs are subject to market factors as well as internal estimates. The Company
considers historic trends together with any new information to determine the best estimate of fair value at the date of
grant. Separate from the fair value calculation, the Company is required to estimate the expected forfeiture rate of
equity-settled share-based payments in estimating how many units will vest.
The Company also estimates the projected outcome of performance conditions for Performance Share Units
(PSUs), including the relative ranking of the Company’s total shareholder return compared with a specified peer
group using a Monte Carlo simulation option-pricing model and forecasting the Company’s return on invested
capital.
In 2017 and 2016, long-term incentives for executives and senior management were a combination of share options,
performance share units, restricted share units, and deferred share units.
Share Options
The Company has one share option plan for certain employees. Options granted under the plan vest over a three-
year period and are exercisable over a seven-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. Under the
Stock Option Plan, the Company may issue up to 7.5 million common shares pursuant to the exercise of share
options. At December 31, 2017, approximately 2 million common shares remain eligible to be issued in connection
with future grants.
In 2017, the Company granted 440,238 common share options to senior executives and management of the
Company (2016: 515,840 common share options). The Company only grants and prices share options when all
material information has been disclosed to the market.
Under the Stock Option Plan, exercises generally utilize the cashless method, whereby the actual number of shares
issued is based on the premium between the fair value at the time of exercise and the grant value, and the
equivalent value of the number of options up to the grant value is withheld. Share options exercised in 2017
comprised both cash and cashless exercises. 1,007,594 options were exercised in 2017 resulting in 189,280
common shares being issued; 818,314 options were withheld and returned to the option pool for future issues/grants
(2016: 636,091 options were exercised resulting in 135,774 common shares being issued; 500,317 options were
withheld and returned to the option pool for future issues/grants).
30
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
Details of the share option plans are as follows:
For years ended December 31
Options outstanding, beginning of year
Granted
Exercised
Forfeited
Expired
Options outstanding, end of year
Options
4,563,871
440,238
(1,007,594)
(132,177)
—
3,864,338
Exercisable, end of year
2,641,850
2017
Weighted Average
Exercise Price
25.20
26.84
24.71
27.10
—
25.45
Options
5,170,689
515,840
(636,091)
(485,644)
(923)
4,563,871
25.66
2,829,646
$
$
$
$
$
$
$
2016
Weighted Average
Exercise Price
$
$
$
$
$
$
$
24.78
22.05
18.44
26.28
24.25
25.20
25.32
The fair value of the options granted has been estimated on the date of grant using the following weighted-average
assumptions:(cid:3)
Dividend yield
Expected volatility (1)
Risk-free interest rate
Expected life
Share price
2017 Grant
2016 Grant
2.72%
29.32%
1.10%
5.55 years
$
26.84 $
2.55%
30.56%
0.76%
5.45 years
22.05
(1) Expected volatility is based on historical share price volatility of Finning shares
The weighted average grant date fair value of options granted during the year was $5.49 (2016: $4.69). (cid:3)
The following table summarizes information about share options outstanding at December 31, 2017:(cid:3)
Options Outstanding
Options Exercisable
Range of
Number
exercise prices outstanding Remaining Life
Weighted
Average
$19.53 - $22.15
$22.16 - $24.97
$24.98 - $25.47
$25.48 - $27.46
$27.47 - $32.38
693,098
375,194
1,127,110
861,474
807,462
3,864,338
4.44 years
2.33 years
4.36 years
4.32 years
3.01 years
3.89 years
Other Share-Based Payment Plans(cid:3)
Weighted
Average
Exercise Price
$
$
$
$
$
$
21.79
22.40
25.44
26.27
29.14
25.45
Number
outstanding
370,186
375,194
688,316
406,124
802,030
2,641,850
Weighted
Average
Exercise Price
21.81
22.40
25.44
25.72
29.12
25.66
$
$
$
$
$
$
The Company has other share-based payment plans in the form of deferred share units, performance share units,
and restricted share units that use notional common share units. (cid:3)
Details of the plans are as follows: (cid:3)
Directors(cid:3)
Directors’ Deferred Share Unit (DDSU) Plan A (cid:3)
The Company offers a DDSU Plan A for members of the Board of Directors. Under the DDSU Plan A, non-employee
Directors of the Company may also 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. (cid:3)
Units are redeemable for cash or shares or a combination of cash and shares (as requested by the holder) 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.(cid:3)
31
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
Non-employee Directors of the Company were granted a total of 55,698 share units in 2017 (2016: 49,839 share
units), and expensed over the calendar year as the units were issued. An additional 22,410 (2016: 31,416) DDSUs
were issued in lieu of cash compensation payable for service as a Director. A further 10,467 (2016: 9,968) DDSUs
were granted to Directors during 2017 as payment for notional dividends. (cid:3)
Executive(cid:3)
Executive Deferred Share Unit (Exec DSU) Plan (cid:3)
Under the Exec DSU Plan, executives of the Company may elect to have all or a portion of their annual bonus
issued in the form of deferred share units. The Exec DSU Plan utilizes notional units that become fully vested at the
time of issuance. Vested deferred share units are redeemable for cash before December 15th of the year following
the year employment with the Company ceases. Only vested units accumulate dividend equivalents in the form of
additional units based on the dividends paid on the Company’s common shares.(cid:3)
Executives were granted a total of 9,589 deferred share units in 2017 (2016: 24,250) in lieu of their annual bonus
payment and 878 deferred share units (2016: 794 deferred share units) were issued as payment for notional
dividends.(cid:3)
Deferred Share Unit (DSU-B) Plan B for Executives(cid:3)
Under the DSU-B Plan, executives of the Company may be awarded deferred share units as approved by the Board
of Directors. The DSU-B Plan utilizes notional units that become vested in accordance with terms set at the time of
grant, or in certain years, the vesting schedule set out in the plan. Vested deferred share units are redeemable for
cash or for common shares of the Company for a period of 30 days after cessation of employment with the
Company, or before December 31st of the year following the year of retirement, death, or disability. Deferred share
units that have not vested within five years from the date that they were granted will expire. Only vested units
accumulate dividend equivalents in the form of additional deferred share units based on the dividends paid on the
Company’s common shares. (cid:3)
During 2017, 4,263 (2016: 7,987) DSU-Bs were granted to executives as payment for notional dividends.(cid:3)
Performance Share Unit (PSU) Plan (cid:3)
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 vest upon achieving future specified performance levels.
Vested units accumulate dividend equivalents in the form of additional units based on the dividends paid on the
Company’s common shares. All PSUs granted in 2017 and 2016 were divided equally into two categories. Half of
the awards are based on the extent to which the Company’s average return on invested capital achieves or exceeds
the specified performance levels over a three-year period (ROIC PSUs). The remaining half of the awards is based
on the performance of the Company’s total shareholder return over the three-year period relative to the performance
of the total shareholder return of all companies in the S&P/TSX Capped Industrials Index (TSR PSUs). (cid:3)
Vested performance share units are redeemable in cash based on the five-day volume-weighted average price of
the common shares at the end of the performance period. Executives of the Company were granted a total of
448,782 performance share units in 2017, based on 100% vesting (2016: 630,580 performance share units) and
14,000 dividend equivalent units were recorded in relation to the 2015 grant as the expected payout (2016: 8,000
dividend equivalent units were recorded in relation to the 2014 grant as the expected payout). (cid:3)
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 fair value of the PSUs and
the number of PSUs anticipated to vest.
(cid:3)
32
The specified levels and respective vesting percentages for the 2017 and 2016 grant are as follows: (cid:3)
TSR PSUs
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
Percentile Rank < 25th Percentile 25th Percentile
0%
TSR PSUs Vested
50%
50th Percentile
100%
75th Percentile 100th Percentile
150%
200%
ROIC PSUs
The specified levels and respective vesting percentages for the 2017 grant are as follows:
Performance Level
Below Threshold
Threshold
Target
Maximum
Average Return on Invested Capital
(over three-year period)
< 9.5%
9.5%
12.5%
15.5% or more
Proportion of PSUs Vesting
Nil
50%
100%
200%
The specified levels and respective vesting percentages for the 2016 grant are as follows:
Performance Level
Below Threshold
Threshold
Target
Maximum
Restricted Share Unit Plan
Average Return on Invested Capital
(over three-year period)
< 9.5%
9.5%
12.5%
14% or more
Proportion of PSUs Vesting
Nil
50%
100%
200%
In February 2016, the Board of Directors approved a Restricted Share Unit (RSU) Plan for executives. This plan
utilizes notional units that may become vested in accordance with terms set at the time of grant. All units accumulate
dividend equivalents in the form of additional units based on the dividends paid on the Company’s common shares.
Restricted share units that have vested are redeemable in cash based on the five-day volume-weighted average
trading price of the Company’s common shares at the end of the three-year period. During the year ended
December 31, 2017, 197,709 units were granted to Executives (2016: 271,455 units) and 10,915 notional units
(2016: 5,934 notional units) are issuable as payment for dividends upon vesting.
(cid:3)
33
Details of the DSU, PSU, and RSU plans are as follows:
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
For year ended December 31, 2017
Units
Exec
DSU
Outstanding, beginning of year
Additions
Exercised
Forfeited
Outstanding, end of year
Vested, beginning of year
Vested
Exercised
Vested, end of year
Liability
($ millions)
Balance, beginning of year
Expensed
Exercised
Forfeited
Balance, end of year
For year ended December 31, 2016
Units
Outstanding, beginning of year
Additions
Exercised
Forfeited
Outstanding, end of year
Vested, beginning of year
Vested
Exercised
Vested, end of year
Liability
($ millions)
Balance, beginning of year
Expensed
Exercised
Forfeited
Balance, end of year
DDSU
DSU-B
24,889 191,467 368,366
10,467
88,575
—
(38,657)
—
—
PSU
RSU
824,962 262,196 1,671,880
925,787
613,858 208,624
(194,603)
—
(82,759)
(74,343)
(22,740)
(51,603)
35,356 122,543 418,284 1,304,458 448,080 2,328,721
4,263
(73,187)
—
Total
24,889 187,201 368,366
10,467
88,575
—
(38,657)
35,356 122,543 418,284
8,529
(73,187)
93,824
162,046
(82,759)
173,111
—
—
—
—
674,280
269,617
(194,603)
749,294
$
$
1 $
—
—
—
1 $
4 $
2
(2)
—
4 $
8 $
6
(1)
—
13 $
12 $
18
(3)
(2)
25 $
2 $
5
—
—
7 $
27
31
(6)
(2)
50
Exec
DSU
DSU-B
— 272,742
7,987
(89,262)
—
24,889 191,467
25,044
(155)
—
— 264,210
12,253
(89,262)
24,889 187,201
25,044
(155)
DDSU
277,143
91,223
—
—
368,366
277,143
91,223
—
368,366
PSU
RSU
—
163,444
718,499 277,389
—
—
(56,981)
(15,193)
824,962 262,196
Total
713,329
1,120,142
(89,417)
(72,174)
1,671,880
—
93,824
—
93,824
—
—
—
—
541,353
222,344
(89,417)
674,280
$
$
— $
1
—
—
1 $
5 $
1
(2)
—
4 $
4 $
4
—
—
8 $
2 $
11
—
(1)
12 $
— $
2
—
—
2 $
11
19
(2)
(1)
27
34
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
The fair value of the DSUs, ROIC PSUs, and RSUs outstanding as at December 31, 2017 has been estimated using
the period-end closing share price of $31.72 and December 31, 2016 has been estimated using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
December 31, 2016
Dividend yield
Expected volatility
Risk-free interest rate
Expected life
Share price at year-end
Estimated fair value per unit
at year end
Exec DSU
2.79 %
28.97 %
1.06 %
4.66 years
DSU-B
2.79 %
28.97 %
1.06 %
4.66 years
DDSU
2.67 %
30.61 %
1.19 %
5.58 years
PSU
2.98 %
29.94 %
0.85 %
3.00 years
RSU
2.98 %
29.94 %
0.85 %
3.00 years
$ 26.29
$ 26.29
$ 26.29
$ 26.29
$ 26.29
$ 23.08
$ 23.08
$ 22.65
$ 24.04
$ 24.04
The impact of the share-based payment plans on the Company’s financial statements was as follows:
For years ended December 31
($ millions)
Consolidated statement of income
Compensation expense arising from equity-settled share option incentive plan
Compensation expense arising from cash-settled share based payments
Consolidated statement of financial position
Current liability for cash-settled share-based payments
Non-current liability for cash-settled share-based payments (to be incurred
between 1-5 years) (Note 21)
2017
2016
$
$
$
$
3
29
32
5
45
$
$
$
$
5
19
24
4
23
The total intrinsic value of vested but not settled share-based payments was $24 million (2016: $18 million).
35
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
11. INVENTORIES
Accounting Policy
Inventories are assets held for sale in the ordinary course of business, in the process of production for sale, or in the
form of materials or supplies to be consumed in the production process or in the rendering of services. Inventories
are stated at the lower of cost and net realizable value. Cost is determined on a specific item basis for on-hand
equipment and internal service work in progress, and on a weighted average cost basis for parts and supplies. The
cost of inventories includes all costs of purchase, conversion costs, other costs incurred in bringing inventories to
their existing location and condition, and an appropriate share of overhead costs based on normal operating
capacity.
Areas of Estimation Uncertainty
The Company makes estimates of the provision required to reflect slow-moving and obsolete inventory. These
estimates are determined on the basis of age, redundancy, and stock levels. For equipment inventory, estimates are
determined on a specific item basis.
December 31
($ millions)
On-hand equipment
Parts and supplies
Internal service work in progress
Total inventory
2017
2016
$
$
739
652
314
1,705
$
$
741
598
262
1,601
For the year ended December 31, 2017, on-hand equipment, parts, supplies, and internal service work in progress
recognized as an expense in cost of sales amounted to $4.2 billion (2016: $3.7 billion). For the year ended
December 31, 2017, the write-down of inventories to net realizable value, included in cost of sales, amounted to $50
million (2016: $58 million).(cid:3)
12. POWER AND ENERGY SYSTEMS CONTRACTS
Accounting Policy
Revenue from sales of power and energy systems involve the design, installation, and assembly of power and
energy systems. Revenue is recognized on a percentage of completion basis proportionate to the work that has
been completed which is based on associated costs incurred, except where this would not be representative of the
stage of completion (when revenue is recognized in accordance with the specific activities outlined in the contract). If
it is expected that the overall contract will incur a loss, this loss is recognized immediately in the income statement.
Periodically, amounts are received from customers under long-term contracts in advance of the associated contract
work being performed. These amounts are recorded on the consolidated statement of financial position as deferred
revenue.
Information about the Company’s long-term power and energy system contracts is summarized below:
December 31
($ millions)
Aggregate of costs for contracts in progress
Aggregate of profits for contracts in progress
Advances from customers under power and energy systems contracts
Amounts due from customers under power and energy systems contracts
Amounts due to customers under power and energy systems contracts
Retentions held by customers for contract work
2017
2016
$
$
$
$
$
$
285
31
(7)
32
(18)
1
$
$
$
$
$
$
170
19
(13)
51
—
1
For the year ended December 31, 2017, the amount of contract revenue recognized in the year was $199 million
(2016: $137 million). (cid:3)
36
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
13. INCOME TAXES
Accounting Policy
The balance sheet liability 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 enacted or substantively
enacted.
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.
Current and deferred tax are recognized in net income, 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
Company records the deferred tax impact of foreign exchange gains or losses arising on the translation of foreign
denominated non-monetary assets and non-monetary liabilities in provision for income tax in the consolidated
statement of net income.
Areas of Estimation Uncertainty
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.
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 substantively enacted tax rates and
laws in each jurisdiction at the time of the expected reversal. The composition of deferred tax assets and liabilities
change from period to period due to the uncertainties surrounding these assumptions and changes in tax rates or
regimes could have a material adverse effect on expected results.
Areas of Significant Judgment
Judgment is required as 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 in which the Company operates, the
precision and reliability of the resulting estimates are subject to uncertainties and may change as additional
information becomes known. Net income in subsequent periods may be impacted by the amount that estimates
differ from the final tax return.
37
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
For year ended December 31, 2017
($ millions)
Current
Adjustment for prior periods recognized in the current year
Total current tax
Deferred
Origination and reversal of timing differences
Decrease due to tax rate changes
Adjustment for prior periods recognized in the current year
Total deferred tax
Provision for income taxes
For year ended December 31, 2016
($ millions)
Current
Adjustment for prior periods recognized in the current year
Total current tax
Deferred
Origination and reversal of timing differences
Increase due to tax rate changes
Adjustment for prior periods recognized in the current year
Total deferred tax
(Recovery of) provision for income taxes
Canada
18
—
18
6
—
1
7
25
Canada
8
(1)
7
(13)
—
1
(12)
(5)
$
$
$
$
International
61
$
(2)
59
(6)
(4)
4
(6)
53
$
International
$
33
(2)
31
(14)
1
2
(11)
20
$
$
$
$
$
Total
79
(2)
77
—
(4)
5
1
78
41
(3)
38
(27)
1
3
(23)
15
Total
The provision for income taxes differs from the amount that would have resulted from applying the Canadian
statutory income tax rates to income before income taxes as follows: (cid:3)
For years ended December 31
($ millions)
Combined Canadian federal and provincial income taxes at
2017
2016
the statutory tax rate
$
80
26.8 %
$
21
26.8 %
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 expense
Recognition of capital tax losses
Unrecognized intercompany profits
Non-taxable/non-deductible foreign exchange in Argentina
Inflationary adjustment
Other
Provision for income taxes
(7)
(4)
(4)
1
—
—
12
(8)
8
78
(2.4)%
(1.3)%
(1.4)%
0.3 %
—
—
3.9 %
(2.5)%
2.6 %
26.0 %
$
(7)
(3)
1
1
(1)
1
11
(12)
3
15
(8.4)%
(3.8)%
1.0 %
1.5 %
(0.5)%
0.5 %
14.2 %
(15.2)%
2.9 %
19.0 %
$
38
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
The Company recognized the impact of the following substantively enacted corporate income tax rate changes:
(cid:120) The U.S. Government announced the reduction of the corporate tax rate from 35% to 21% effective January 1,
2018. These tax rate changes were substantively enacted in 2017 and relate to the Company’s investment in
PipeLine Machinery International.
(cid:120) The Argentinean government announced the reduction of the corporate tax rate from 35% to 30% effective
January 1, 2018 and a further reduction to 25% effective January 1, 2020. These tax rate changes were
substantively enacted in 2017.
Deferred Tax Asset and Liability (cid:3)
Temporary differences and tax loss carry-forwards that give rise to deferred tax assets and liabilities are as follows: (cid:3)
December 31
($ millions)
Accounting provisions not currently deductible for tax purposes
Employee benefits
Share-based payments
Loss carry-forwards
Deferred tax assets
Property, plant and equipment, rental, leased, and other intangible assets
Distribution network
Other
Deferred tax liabilities
Net deferred tax asset
2017
2016
$
$
59 $
12
11
3
85
(31)
(11)
(2)
(44)
41 $
61
17
5
9
92
(30)
(10)
(5)
(45)
47
Deferred taxes are not recognized on retained profits of approximately $1.6 billion (2016: $1.5 billion) of foreign
subsidiaries, as it is the Company’s intention to invest these profits to maintain and expand the business of the
relevant companies. (cid:3)
The Company has recognized the benefit of the following tax loss carry-forwards available to reduce future taxable
income of which $11 million do not expire and $3 million expire between 2018 and 2022.(cid:3)
December 31
($ millions)
International
2017
2016
$
14 $
38
As at December 31, 2017, the Company has unrecognized capital loss carry-forwards of $79 million to reduce future
taxable income. These amounts do not expire. (cid:3)
The tax expense (recovery) relating to components of other comprehensive income is as follows:
For years ended December 31
($ millions)
Deferred tax
$
Provision for (recovery of) income taxes recognized in other comprehensive income $
2017
2016
2
2 $
(2)
(2)
39
14. OTHER ASSETS
December 31
($ millions)
Supplier claims receivable
Equipment deposits
Prepaid expenses
Finance assets (a)
Value Added Tax receivable
Income tax recoverable
Derivative assets
Indemnification asset (b)
Asset held for sale
Other
Total other assets – current
December 31
($ millions)
Deferred tax assets (Note 13)
Indemnification asset (b)
Prepaid expenses
Net post-employment assets (Note 23)
Finance assets (a)
Other
Total other assets – non-current
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
2017
2016
$
$
$
$
104
23
52
40
14
18
1
6
10
1
269
2017
69
21
23
21
11
49
194
$
$
$
$
88
5
46
33
5
20
1
6
—
10
214
2016
74
28
24
—
16
44
186
(a) Finance assets include equipment leased to customers under long-term financing leases. Depreciation expense
for equipment leased to customers of $7 million was recorded in 2017 (2016: $11 million). Depreciation expense
is recognized in equal monthly amounts over the terms of the individual leases.
(b) In 2012, the Company acquired from Caterpillar the distribution and support business formerly operated by
Bucyrus International Inc. (Bucyrus) in the Company’s dealership territories in South America, Canada and the
U.K. As part of the acquisition, the Company assumed non-financial liabilities which were not previously
recognized by Bucyrus relating to long-term contracts, commitments related to prime product sales, and
employee related liabilities. Caterpillar agreed to indemnify the Company for any below market returns on
certain long term contracts (covering various periods up to 2023), to an amount equal to the liabilities assumed.
The liabilities were measured at fair value by using management’s best estimate, at the acquisition date, of the
difference between market-rate returns and the contracted returns expected under the long-term contracts. The
related indemnification asset was measured on the same basis as the liability up to an amount collectible from
Caterpillar.
40
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
15. JOINT VENTURES AND ASSOCIATE
Accounting Policy
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 its joint ventures and associate in which the Company has an interest using the equity
method. The joint ventures and associate follow accounting policies that are materially consistent with the
Company’s accounting policies. Where the Company transacts with its joint ventures or associate, unrealized profits
or losses are eliminated to the extent of the Company’s interest in the joint venture or associate.
Nature of Relationships
PipeLine Machinery International (PLM) is a strategic partnership that sells and rents both purpose-built pipeline and
traditional Caterpillar products to mainline pipeline construction customers worldwide.
In January 2017, the Company acquired a 20% interest in Agriterra for $3 million. Agriterra, an Alberta based
company, is a consolidation of equipment dealers providing customers with agriculture and consumer products.
Energyst B.V. (Energyst) is a pan-European company formed by Caterpillar and ten of its dealers to be the exclusive
Caterpillar dealer in Europe for rental power and temperature control solutions. Energyst provides coverage
worldwide by collaborating with local Caterpillar dealers.
The Company’s proportion of ownership interest in its joint ventures and associate is as follows:
December 31
Name of Venture
PLM
Agriterra
Energyst
Type of Venture
Joint Venture
Joint Venture
Associate
Principal place of
business/country of
incorporation
United States
Canada
Netherlands
Proportion of Ownership
Interest Held
2017
2016
25.0%
20.0%
28.8%
25.0%
n/a
28.8%
Information about the Company’s joint ventures and associate that are not considered individually material to the
Company:
For year ended December 31, 2017
($ millions)
Company’s share of income (loss)
Company's share of other comprehensive loss
Carrying amount of the Company’s interests in joint
ventures and associate (1)
For year ended December 31, 2016
($ millions)
Company’s share of income (loss)
Company's share of other comprehensive loss
Carrying amount of the Company’s interests in joint
venture and associate
$
$
$
$
PLM
Agriterra
$
—
—
12
(2)
Energyst
$
(5) $
(1)
65
$
3
$
24 $
Total
7
(3)
92
PLM
Agriterra
Energyst
Total
$
8
(4)
$
n/a
n/a
(3) $
(10)
63
$
n/a
$
25 $
(1)
Included in the investment in associate is an advance of $2 million (2016: $nil million) to Energyst, bearing
interest at 6.5% + 3 month Eurobor, and due December 30, 2020.
5
(14)
88
41
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
16. PROPERTY, PLANT AND EQUIPMENT AND RENTAL EQUIPMENT
Accounting Policy
Property, plant, and equipment and rental 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 net income. Depreciation of rental equipment is recorded in cost of sales in the consolidated statement of net
income.
Depreciation commences when the asset becomes available for use, and ceases when the asset is derecognized or
classified as held for sale. Rental equipment that becomes available for sale after being removed from rental fleet is
transferred to inventory. Where significant components of an asset have different useful lives, depreciation is
calculated on each separate component.
All classes of property, plant, and equipment and rental equipment are depreciated over their estimated useful lives
to their estimated residual value on a straight-line basis using the following:
Buildings
Equipment and vehicles
Rental equipment
10 - 50 years
3 - 10 years
2 - 5 years
Property, plant, and equipment and rental equipment held under finance lease are depreciated over the lesser of
useful life or the term of the relevant lease.
Property, plant, and equipment and rental equipment are tested for impairment at the end of each reporting period or
whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An
impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount.
The recoverable amount is the higher of an asset’s fair value less costs of disposal and value-in-use. Where an
impairment loss is recognized for an item of property, plant, and equipment and rental equipment, the asset is
reviewed for possible reversal of the impairment at the end of each subsequent reporting period.
Areas of Estimation Uncertainty
Depreciation expense is sensitive to the estimated useful life determined for each type of 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.
42
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
December 31, 2017
($ millions)
Land
Buildings
Vehicles and
Equipment
Total
Rental
Equipment
Cost
Balance, beginning of year
Additions
Transfers from inventory
Reclassification to asset held
$
for sale
Disposals
Foreign exchange rate changes
Balance, end of year
$
December 31, 2017
($ millions)
Accumulated depreciation
and impairment losses
Balance, beginning of year
Depreciation for the year
Reclassification to asset held
for sale
Disposals
Foreign exchange rate changes
Balance, end of year
December 31, 2017
($ millions)
Net book value
Balance, beginning of year
Balance, end of year
$
$
$
$
80 $
1
—
(3)
—
(3)
75 $
722 $
31
—
(8)
(17)
(13)
715 $
340 $
26
—
—
(10)
(9)
347 $
1,142 $
58
—
(11)
(27)
(25)
1,137 $
611
175
132
—
(322)
(7)
589
Land
Buildings
Vehicles and
Equipment
Total
Rental
Equipment
(10) $
—
—
—
—
(10) $
(265) $
(28)
1
4
5
(283) $
(261) $
(26)
—
8
7
(272) $
(536) $
(54)
1
12
12
(565) $
(248)
(98)
—
139
3
(204)
Land
Buildings
Vehicles
Equipment
Total
Rental
Equipment
70 $
65 $
457 $
432 $
79 $
75 $
606 $
572 $
363
385
43
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
Land
Buildings
Vehicles and
Equipment
Total
Rental
Equipment
89 $
2
—
—
(7)
(4)
80 $
736 $
24
—
—
(17)
(21)
722 $
346 $
20
1,171 $
46
1
—
(17)
(10)
340 $
1
—
(41)
(35)
1,142 $
750
153
—
31
(288)
(35)
611
Land
Buildings
Vehicles and
Equipment
Total
Rental
Equipment
(5) $
—
1
(6)
—
(10) $
(242) $
(28)
9
(12)
8
(265) $
(247) $
(32)
9
—
9
(261) $
(494) $
(60)
19
(18)
17
(536) $
(309)
(96)
141
(2)
18
(248)
Land
Buildings
Vehicles and
Equipment
Total
Rental
Equipment
84 $
70 $
494 $
457 $
99 $
79 $
677 $
606 $
441
363
December 31, 2016
($ millions)
Cost
Balance, beginning of year
Additions
Additions through business
combinations (Note 17a)
Transfers from inventory
Disposals
Foreign exchange rate changes
Balance, end of year
December 31, 2016
($ millions)
Accumulated depreciation
and impairment losses
Balance, beginning of year
Depreciation for the year
Disposals
Impairment loss
Foreign exchange rate changes
Balance, end of year
December 31, 2016
($ millions)
Net book value
Balance, beginning of year
Balance, end of year
Impairment losses(cid:3)
$
$
$
$
$
$
During the year ended December 31, 2017, the Company decided to exit certain properties in its Canadian
operations and made the decision to prepare certain properties for sale. These decisions prompted management to
review these assets for impairment. The Company recognized no impairment losses in the year ended December
31, 2017 (2016: $20 million in other expenses). In the prior year, land and buildings were written down by $18 million
to management’s best estimate of fair value less costs of disposal based on an independent valuation assessment.
Also, in the prior year rental equipment was written down by $2 million to management’s best estimate of its fair
value less costs of disposal based on internal equipment expertise and knowledge of market characteristics and the
type, condition, and age of equipment. These valuations utilized unobservable inputs and are classified as a level 3
fair value. (cid:3)
Finance leases(cid:3)
Land, buildings, and equipment under finance leases of $4 million (2016: $4 million), which are net of accumulated
depreciation and impairment losses of $11 million (2016: $10 million), are included above. There were no finance
leases related to land, buildings, or equipment acquired during 2017 and 2016. (cid:3)
Rental equipment under finance leases of $27 million (2016: $28 million), which are net of accumulated depreciation
of $11 million (2016: $16 million), are included above, of which none (2016: $14 million) was acquired during the
year. (cid:3)
44
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
17. GOODWILL
Accounting Policy
Goodwill represents the excess of the acquisition-date fair value of consideration transferred over the fair value of
the identifiable net assets acquired in a business combination. Goodwill is not amortized. Refer to Note 20 for the
Company’s policy on impairment reviews.
December 31, 2017
($ millions)
Balance, beginning of year
Foreign exchange rate changes
Balance, end of year
December 31, 2016
($ millions)
Balance, beginning of year
Acquired (a)
Foreign exchange rate changes
Balance, end of year
Canada
South
America
$
$
$
$
81
—
81
Canada
85
(4)
—
81
$
$
$
$
UK & Ireland Consolidated
118
$
1
119
32
1
33
$
$
$
5
—
5
South
America
UK & Ireland
5
—
—
5
$
$
39
—
(7)
32
$
Consolidated
129
(4)
(7)
118
$
(a) In July 2015, the Company’s Canadian operations acquired the operating assets of the Saskatchewan
dealership and became the approved Caterpillar dealer in Saskatchewan. Management finalized the purchase
price allocation in 2016.
18. DISTRIBUTION NETWORK
Accounting Policy
The distribution network is recorded at the acquisition date fair value, net of any impairment losses. The distribution
network is an intangible asset with an indefinite life and therefore not amortized. The distribution network is
estimated to have an indefinite life because it is expected to generate cash flows indefinitely. Refer to Note 20 for
the Company’s policy on impairment reviews.
December 31, 2017
($ millions)
Balance, beginning of year
Balance, end of year
December 31, 2016
($ millions)
Balance, beginning of year
Foreign exchange rate changes
Balance, end of year
$
$
$
$
Canada
98
98
UK & Ireland Consolidated
100
$
100
$
2
2
$
$
Canada
UK & Ireland
98
—
98
$
$
3
(1)
2
$
Consolidated
101
(1)
100
$
45
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
19. INTANGIBLE ASSETS
Accounting Policy
Intangible assets are recorded at cost, net of any accumulated amortization and any impairment losses. Intangible
assets with finite lives are amortized on a straight-line basis over the periods during which they are expected to
generate benefits. Amortization is recorded in selling, general, and administrative expenses in the consolidated
statement of net income using the following estimated useful lives:
Contracts and Customer relationships
Software and Technology
2 – 10 years
2 – 7 years
Borrowing costs are capitalized during the development of qualifying intangible assets. As the Company manages
the financing of all operations centrally, the development of qualifying assets is financed through general borrowings
and therefore, a weighted average borrowing rate is used in calculating interest to be capitalized.
December 31, 2017
($ millions)
Cost
Balance, beginning of year
Additions
Disposals
Foreign exchange rate changes
Balance, end of year
December 31, 2017
($ millions)
Accumulated depreciation
Balance, beginning of year
Amortization for the year
Foreign exchange rate changes
Balance, end of year
December 31, 2017
($ millions)
Net book value
Balance, beginning of year
Balance, end of year
Contracts and
Customer
relationships
Software
and
Technology
Total
$
$
148
15
—
(8)
155
$
$
109
61
(1)
(3)
166
Contracts and
Customer
relationships
Software
and
Technology
$
$
(110)
(14)
6
(118)
$
$
(76)
(11)
1
(86)
Contracts and
Customer
relationships
Software
and
Technology
$
$
$
$
257
76
(1)
(11)
321
Total
(186)
(25)
7
(204)
Total
$
$
38
37
$
$
33
80
$
$
71
117
Borrowing costs capitalized to intangible assets for the year ended December 31, 2017 were $1 million (2016: $nil).
The average rate used for capitalization of borrowing costs was 4.6% (2016: not applicable).(cid:3)
46
December 31, 2016
($ millions)
Cost
Balance, beginning of year
Additions
Foreign exchange rate changes
Balance, end of year
December 31, 2016
($ millions)
Accumulated depreciation
Balance, beginning of year
Amortization for the year
Foreign exchange rate changes
Balance, end of year
December 31, 2016
($ millions)
Net book value
Balance, beginning of year
Balance, end of year
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
Contracts and
Customer
relationships
Software
and
Technology
Total
$
$
124
27
(3)
148
Contracts and
Customer
relationships
$
$
(99)
(14)
3
(110)
$
$
$
$
90
21
(2)
109
Software
and
Technology
(66)
(11)
1
(76)
$
$
$
$
Contracts and
Customer
relationships
Software
and
Technology
214
48
(5)
257
Total
(165)
(25)
4
(186)
Total
$
$
25
38
$
$
24
33
$
$
49
71
47
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
20. ASSET IMPAIRMENT
Accounting Policy
Goodwill and intangible assets with indefinite lives are subject to an assessment for impairment at least annually
and when events or changes in circumstances indicate that their value may not be fully recoverable, in which case
the assessment is done at that time. Assets which do not have separate identifiable cash inflows are allocated to
cash generating units (CGUs). CGUs are subject to impairment reviews whenever there is an indication they may be
impaired. For the purpose of impairment testing, goodwill is allocated to each of the Company’s CGUs or group of
CGUs 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
recoverable amount of the CGU 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, unless the impairment loss would reduce the carrying
amount of an individual asset below the highest of its fair value less costs of disposal; its value-in-use; or, zero. Any
impairment is recognized immediately in the consolidated statement of net income.
Impairment losses on goodwill are never reversed but impairment losses on indefinite-lived intangible assets may be
reversed. If there is any indication that the circumstances leading to the impairment loss of an indefinite-lived
intangible asset no longer exist or may have decreased, management estimates the recoverable value of the CGU.
Indicators of a recovery include sustainable improvement of the economic performance of the CGU and a positive
trend in the forecast or budgeted results of the CGU. If the recoverable amount exceeds the carrying amount, then a
previously recognized impairment loss is considered to have been reversed (either fully or in part). Any reversal of
impairment loss is recognized immediately in the consolidated statement of net income.
Areas of Significant Judgment
Judgment is used in identifying an appropriate discount rate and growth rate for these calculations, identifying the
CGUs to which the intangible assets should be allocated to, and the CGU or group of CGUs at which goodwill is
monitored for internal management purposes.
Areas of Estimation Uncertainty
The recoverable value of CGUs require the use of estimates related to the future operating results and cash
generating ability of the assets.
Recoverable value
The recoverable amount of all CGUs and groups of CGUs are determined based on a value-in-use calculation. The
value-in-use calculation uses cash flow projections based on financial budgets which employ the following key
assumptions: future cash flows and growth projections, associated economic risk assumptions, and estimates of
achieving key operating metrics and drivers.
The cash flow projection key assumptions are based upon the Company’s financial budgets, covering a three-year
period which is discounted using post-tax weighted average cost of capital (WACC) rates. For the annual
impairment testing valuation purposes, the cash flows subsequent to the three-year projection period are
extrapolated using growth rates based on estimated long-term real gross domestic product and inflation (where
appropriate) in the markets in which the Company operates.
48
Key assumptions(cid:3)
The significant assumptions used in the Company’s value-in-use calculations for each CGU or group of CGUs are
as follows:(cid:3)
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
For years ended December 31
Canada
Canada Mining
Chile
UK & Ireland
Sensitivities to key assumptions(cid:3)
2017
2016
Post-tax
WACC rate
Growth rate
Post-tax
WACC rate
Growth rate
9%
9%
9%
9%
2%
1%
3%
2%
8%
8%
8%
9%
2%
2%
3%
2%
Sensitivity testing is conducted as part of the annual impairment tests, including stress testing the WACC rate with
all other assumptions being held constant. Management believes that any reasonable change in the key
assumptions used to determine the recoverable amount would not cause the carrying amount of any cash
generating unit or group of cash generating units to exceed its recoverable amount. Management believes its
assumptions are reasonable. If future events were to differ from management’s best estimate, key assumptions and
associated cash flows could be materially adversely affected and the Company could potentially experience future
material impairment charges in respect of the intangibles with indefinite lives and goodwill.(cid:3)
Overview of annual impairment tests(cid:3)
There were no impairment losses recognized in 2017 or 2016 related to CGUs, goodwill, or distribution networks.
There were no impairment reversals in 2017 or 2016 related to the distribution network in the Company’s South
American operations.(cid:3)
21. OTHER LIABILITIES
December 31
($ millions)
Income tax payable
Derivative liabilities
Total other liabilities – current
December 31
($ millions)
Deferred revenue
Deferred tax liabilities (Note 13)
Liability for long-term contracts (Note 14b)
Finance lease liabilities (a) (Note 27)
Onerous contracts
Share-based payments (Note 10)
Provisions (Note 22)
Other
Total other liabilities – non-current
2017
2016
$
$
$
$
28
8
36
2017
58
28
21
29
10
45
7
17
215
$
$
$
$
7
—
7
2016
37
27
28
34
12
23
7
37
205
(a) Finance leases were issued at varying rates of interest from 2% (cid:2163) 10% and mature on various dates up to 2078.
49
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
22. PROVISIONS
Accounting Policy
Warranty claims
Provisions are made for estimated warranty claims in respect of certain equipment, spare parts, and service
supplied to customers which are still under warranty at the end of the reporting period. These claims are expected to
be settled in the next financial year.
Other provisions
Provisions are recognized if it is expected that a long-term service or power and energy systems contract will incur a
loss. The expected loss is recognized as a provision with a corresponding expense in the statement of net income.
Areas of Estimation Uncertainty
Management estimates the warranty provision based on claims notified and past experience. Factors that could
impact the estimated claim include the quality of the equipment, spare parts, and labour costs.
For year ended December 31, 2017
($ millions)
Balance, beginning of year
New provisions
Charges against provisions
Foreign exchange rate changes
Balance, end of year
Current portion
Non-current portion
For year ended December 31, 2016
($ millions)
Balance, beginning of year
New provisions
Charges against provisions
Foreign exchange rate changes
Balance, end of year
Current portion
Non-current portion
Warranty
Claims
Other
Total
$
$
$
$
$
$
$
$
31
30
(32)
(1)
28
28
—
Warranty
Claims
41
34
(41)
(3)
31
31
—
$
$
$
$
$
$
$
$
23
24
(33)
—
14
7
7
Other
24
42
(41)
(2)
23
16
7
$
$
$
$
$
$
$
$
54
54
(65)
(1)
42
35
7
65
76
(82)
(5)
54
47
7
Total
50
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
23. POST-EMPLOYMENT 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., the Republic of Ireland, and South America. These plans include defined benefit
and defined contribution pension plans in Canada, UK and Ireland, and include other post-employment benefits in
South America.
Pension Plans
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.
(cid:120) In Canada, defined benefit pension plans exist for eligible employees but are closed to new members. Final
average earnings are based on the highest 3 or 5 year average salary depending on employment category and
there is no standard indexation feature. Effective July 1, 2004, non-executive members of the defined benefit
pension plan were offered a voluntary opportunity to convert their benefits to a defined contribution pension plan.
The registered defined benefit pension plan was subsequently closed to all new non-executive employees, who
became eligible to enter one of the Company’s defined contribution pension plans. Effective January 1, 2010, the
defined benefit pension plan was closed to new executive employees as well, who became eligible to join a
defined contribution pension plan. Pension benefits under the registered defined benefit pension plan’s 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.
(cid:120) Finning (UK) provided a defined benefit pension plan for eligible employees hired prior to January 2003. Under
this plan, 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 who became eligible to
join a defined contribution pension plan. In December 2011, the UK defined benefit pension plan was further
amended to cease future accruals for existing members from April 2012 at which time affected members began
accruing benefits under a defined contribution pension plan.
The defined contribution pension plans are pension plans under which the Company pays fixed contributions, as a
percentage of earnings, into the plans, where an account exists for each plan member.
(cid:120) 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
pension 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.
(cid:120) In the UK, the defined contribution pension plans offer a match of employee contributions, within a required range,
plus 1%. The Company’s Irish subsidiary has a defined contribution pension plan, which offers a match of
employee contributions at a level set by the Company.
Other Post-Employment Benefits
The Company’s South American employees do not participate in employer pension plans but are covered by country
specific government pension arrangements.
Employment terms at some of the Company’s South American operations provide for a payment when an
employment contract comes to an end under certain conditions, which can be considered a post-employment
benefit. The benefit is typically at the rate of one month of final salary for each year of service (subject in most cases
to a cap as to the number of qualifying years of service and a cap on the salary rate). The Company’s South
American post-employment benefits are not funded.
51
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
Accounting Policy
Pension Plans
Defined Benefit Plans:
The cost of pensions and other retirement benefits is determined by independent actuaries using the projected unit
credit method.
Current service costs, past service costs, and administration costs (net of employee contributions) are recognized in
selling, general, and administrative expenses and net interest costs are recognized in finance costs in the
consolidated statement of net income. Net interest cost is calculated by applying the discount rate at the beginning
of the period to the net defined benefit liability or asset and contributions to and benefit payments from the plan
during the year.
Actuarial gains and losses arising from experience and changes in actuarial assumptions are recognized 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 reduced by the fair value of plan assets. The present value of the defined benefit
obligation is determined by discounting the estimated future cash outflows using high-quality corporate bond yields,
denominated in the same currency of the benefits to be paid, that approximate the timing of the related pension
obligation.
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 net income as they become due.
Other Post-Employment Benefits
The Company’s post-employment benefits in South America are accounted for as an unfunded defined benefit
pension plan. Current service costs are recognized in selling, general, and administrative expenses and interest
costs are recognized in finance costs in the consolidated statement of net income. Interest costs are calculated by
applying the discount rate at the beginning of the period to the post-employment benefit liability and contributions to
and benefit payments from the plan during the year.
Actuarial gains and losses arising from experience and changes in actuarial assumptions are recognized 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 post-
employment benefit obligation. The obligation recognized is based on valuations performed and regularly updated
through independent actuarial calculations by using the projected unit credit method.
Areas of Significant Judgment
Actuarial valuations of the Company’s defined benefit plans and other post-employment benefits are based on
assumptions requiring significant judgment, such as mortality rates, inflation (which is particularly relevant in the
UK), estimates of future salary increases, and employee turnover. Judgment is exercised in setting these
assumptions. These assumptions combined with the high quality corporate bond yield, used to discount the
estimated future cash flows, impact the measurement of the net defined benefit obligation, the net benefit cost, the
actuarial gains and losses recognized in other comprehensive income, and funding levels in Canada and the UK.
52
The net benefit cost and actuarial loss (gain) for the Company’s post-employment benefit plans is as follows:
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
For years ended
December 31
($ millions)
Defined contribution
pension plans
Net benefit cost
Defined benefit and other
post-employment benefit
plans
Current service cost, net of
employee contributions
Past service cost (1)
Administration costs
Net interest cost
Net benefit cost (recovery)
Total benefit cost recognized
2017
2016
Canada
South
UK &
Ireland America
South
Total Canada Ireland America
UK &
Total
$
32 $
9 $
— $
41 $
32 $
9 $ — $
41
6
—
1
—
7
—
(10)
2
—
(8)
11
—
—
1
12
17
(10)
3
1
11
6
—
—
—
6
—
—
1
—
1
6
—
—
1
7
12
—
1
1
14
in net income
$
39 $
1 $
12 $
52 $
38 $
10 $
7 $
55
Actuarial gain on plan
assets (2)
Actuarial loss (gain) on plan
liabilities
Total actuarial loss (gain)
recognized in other
comprehensive income
$
(16) $
(38) $
— $ (54) $
(13) $ (118) $ — $ (131)
21
17
(2)
36
2
143
2
147
$
5 $
(21) $
(2) $ (18) $
(11) $
25 $
2 $
16
(1)
(2)
In July 2017, management commenced two pension plan option exercises in relation to the defined benefit plan
in the Company’s UK operations. These exercises provide members with additional flexibility than was
previously available, and also assist the Company in managing the plan liabilities and the associated risks (for
example, inflation risk). The impact of these exercises is a decrease in the accrued benefit obligation of
approximately $12 million of which approximately $10 million and $2 million are recognized in the income
statement and other comprehensive income, respectively.
In 2017, the Company invested a portion of its Canadian defined benefit plan assets in annuity contracts
(totaling $192 million) in order to partly mitigate the Company’s exposure to investment and longevity risk. This
change in investments resulted in an actuarial loss on plan assets of approximately $8 million that was
recognized in other comprehensive income.
53
Other financial information about the Company’s post-employment benefit plans is as follows:
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
For years ended December 31
($ millions)
Accrued benefit obligation
Balance, beginning of year
Current service cost
Past service cost
Interest cost
Benefits paid
Remeasurements:
- Actuarial loss from change in
demographic assumptions
- Actuarial loss (gain) from
change in financial
assumptions
Experience (gain) loss
Foreign exchange rate changes
Balance, end of year
Plan assets
Balance, beginning of year
Return on plan assets:
- Return on plan assets
included in net interest cost
- Actuarial gain on plan assets
Employer contributions
Employee contributions
Benefits paid
Administration costs
Foreign exchange rate changes
Balance, end of year
Net post-employment
obligation (asset)
2017
South
America
Canada
UK
Total
Canada
UK
2016
South
America
Total
$ 514 $
7
—
18
(29)
700 $
—
(10)
18
(41)
50 $ 1,264
18
11
(10)
—
37
1
(74)
(4)
$
512 $ 702 $
7
—
19
(26)
—
—
23
(23)
44 $ 1,258
13
—
43
(55)
6
—
1
(6)
3
—
2
5
—
—
5
5
20
(2)
—
$ 531 $
14
3
17
701 $
(2)
(2)
1
32
(1)
18
57 $ 1,289
$ 494 $
686 $
— $ 1,180
18
16
11
1
(29)
(1)
—
$ 510 $
18
38
5
—
(41)
(2)
18
722 $
36
—
54
—
20
4
1
—
(74)
(4)
(3)
—
—
18
— $ 1,232
$
21 $
(21) $
57 $
57
$
$
$
$
14
(12)
—
149
(6)
(145)
514 $ 700 $
—
(3)
3
163
(21)
(142)
50 $ 1,264
474 $ 702 $ — $ 1,176
19
13
13
1
(26)
—
—
42
131
31
1
(55)
(1)
(145)
494 $ 686 $ — $ 1,180
23
118
12
—
(23)
(1)
(145)
—
—
6
—
(6)
—
—
20 $
14 $
50 $
84
Included in the 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:
2017
2016
For years ended December 31
($ millions)
Accrued benefit obligation
Fair value of plan assets
Funded status - plan deficit
Canada
$
UK
62 $ — $
37
25 $ — $
—
$
South
America
57 $
—
57 $
119
37
82
$
$
Total
Canada
South
America
UK
85 $ 700 $
60
25 $
14 $
686
50 $
—
50 $
Total
835
746
89
54
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
Key Assumptions and Related Sensitivities(cid:3)
The significant actuarial assumptions used in the valuations of the Company’s defined benefit pension plans and
other post-employment benefits include: (cid:3)
For years ended December 31
Discount rate – obligation
Discount rate – expense (1)
Retail price inflation – obligation
Retail price inflation – expense (1)
Average staff turnover – obligation
2017
South
2016
Canada
3.4%
3.7%
n/m
n/m
n/m
UK
America Canada
UK
2.5%
2.7%
3.3%
3.4%
n/m
1.8%
1.3%
n/m
n/m
10.4%
3.7%
3.9%
n/m
n/m
n/m
2.7%
3.7%
3.4%
3.2%
n/m
South
America
1.3%
1.5%
n/m
n/m
10.9%
(1) Used to determine the net interest cost and expense for the years ended December 31, 2017 and December 31, 2016.
n/m – not a material assumption used in the valuation
Assumptions regarding future mortality are required for the defined benefit pension plans, and are set based on
management’s best estimate in accordance with published statistics and experience in each country. These
assumptions translate into an average life expectancy (in years) as follows:(cid:3)
Life expectancy for male currently aged 65
Life expectancy for female currently aged 65
Life expectancy at 65 for male currently aged 45
Life expectancy at 65 for female currently aged 45
22
24
23
25
Canada
UK
South
America
n/a
n/a
n/a
n/a
1
1
1
1
22
25
24
27
The post-employment benefit obligations and expense are sensitive to changes in the significant actuarial
assumptions. At the end of the most recent calendar year, the weighted average duration of the obligation in
Canada is 14 years, the U.K. is 19 years, and South America is 4 years. A 0.25% increase in the significant actuarial
assumptions would impact the accrued benefit obligations by the amounts shown below. (cid:3)
($ millions)
Discount rate
Retail price inflation (1)
Average staff turnover (1)
Rate of compensation increase (1)
Change in
assumption
+0.25%
+0.25%
+0.25%
+0.25%
$
Increase (decrease) in accrued benefit obligation
UK
Canada
(17)
$
n/m $
n/m
n/m
(35)
27
n/m
n/m
South America
$
$
$
$
(1)
n/m
(1)
1
A 0.25% decrease in the discount rate, retail price inflation, rate of compensation increase, and average staff
turnover would have an approximately equivalent but opposite effect on the above accounts in the amounts shown.(cid:3)
The sensitivity analysis is based on a change in an assumption while holding all other assumptions constant. In
practice, this is unlikely to occur, as changes in some of the assumptions may be correlated. When calculating the
sensitivity of the accrued benefit obligation to significant actuarial assumptions, the same method (i.e. present value
of the accrued benefit obligation calculated with the projected unit credit method at the end of the reporting period)
has been applied as when calculating the accrued benefit obligation recognized within the statement of financial
position.(cid:3)
The methods and types of assumptions used in preparing the sensitivity analysis did not change compared to the
previous period.(cid:3)
55
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
Funding and Valuations of Defined Benefit Plans(cid:3)
In Canada, the Company is funding its obligations in accordance with pension legislation requiring funding of going
concern deficits over a fifteen year period and solvency deficits over a ten year period. In the U.K., at the last formal
valuation, a schedule was set out for contributions to be made until mid-2021. Based on the most recent formal
valuations and a review of the UK pension scheme following the liability management exercises that were completed
in late 2017, the contributions expected to be paid during the financial year ended December 31, 2018 amount to
approximately $18 million for the defined benefit pension plans. Funding levels are monitored regularly and reset
with new valuations that occur at least every three years. Defined benefit pension plans are country and entity
specific. The valuation dates of the Company’s material post-employment benefit plans are as follows:(cid:3)
Post-Employment Benefit Obligations
Canada – Regular & Executive DB Plan
Canada – Executive Supplemental Income Plan
Finning UK Defined Benefit Scheme
Finning South America Pension Arrangements
Last Actuarial
Valuation Date
December 31, 2016
December 31, 2016
December 31, 2014
December 31, 2017
Next Required Actuarial
Valuation Date
December 31, 2019
December 31, 2019
December 31, 2017 (1)
December 31, 2020
(1) The December 31, 2017 actuarial valuations are in progress as at February 5, 2018.
Plan Assets(cid:3)
The fair values of plan assets are determined using a combination of quoted prices and market observable inputs
except for investments in real estate and annuity contracts. The fair values of real estate investment funds is based
on the net asset value reported by the funds in their audited financial statements and are determined using inputs
that are not based on observable market data (unobservable inputs). Investments in annuity contracts by the plan
will have cashflows that exactly match the amount and timing of certain benefits payable under the plans. The value
of these contracts is deemed to be the present value of the related obligations. Plan assets are principally invested
in the following securities (segregated by geography):(cid:3)
Fixed-income (2)
Equity (3)
Real estate investment funds
Cash and cash equivalents
Canada
UK
Canada
Global (1)
UK
Global (1)
81%
5%
—
4%
—
10%
—
—
62%
1%
5%
—
10%
22%
—
—
(1) Global investments exclude investments in Canadian and UK securities in Canada and UK, respectively.
(2) Fixed-income includes investments in annuity contracts in Canada.
(3) Half of the UK scheme's equity investments are hedged to the GBP to manage foreign currency risk.
Plan assets do not include any direct investment in common shares of the Company at December 31, 2017 and
2016.
56
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
Key Risks(cid:3)
Through its defined benefit pension plans, the Company is exposed to a number of risks, the most significant of
which are detailed below:(cid:3)
Investment Risk (i.e. asset volatility)(cid:3)
The plan liabilities are calculated using a discount rate set with reference to high quality corporate bond yields; if
plan assets underperform this yield, this will create a deficit. Both the Canadian and U.K. plans invest in various
asset categories including primarily equities, fixed income, and real estate. These investments, in aggregate, are
expected to outperform corporate bonds in the long-term but may result in volatility in the shorter-term.(cid:3)
To help mitigate this risk, in selecting the portfolios and the weightings in each category, the Company considers
and monitors how the duration and the expected yield of the investments match the expected cash outflows arising
from the pension obligations. A framework has been developed and adopted for each of the Canadian and U.K.
defined benefit pension plans whereby the investments will be adjusted over time as plan funding positions improve.
The planned adjustments are intended to improve the asset-liability match over time. This is to be accomplished
primarily by reducing the exposure to equity investments over time and increasing exposure to investments such as
long-term fixed interest securities with maturities that better match the benefit payments as they fall due. Recent
progress included investments in annuity contracts in Canada and liability matching funds in the U.K. (cid:3)
Equity investments still remain in the plans, as the Company believes that equities offer higher returns over the long
term with an acceptable level of risk considering the proportion of assets held in this category and the long-term
nature of the liabilities. Investments remain well diversified, such that the failure of any single investment would not
have a material impact on the overall level of assets.(cid:3)
Discount Rate Risk (i.e. changes in bond yields)(cid:3)
A decrease in corporate bond yields will increase the value placed on the plan liabilities. This risk is managed by
selecting certain investments that aim to better match assets and liabilities. For example, a liability increase that
results from a decrease in corporate bond yields will be partially offset by an increase in the value of the plans’ bond
holdings.(cid:3)
Inflation Risk(cid:3)
The majority of the pension obligations in the U.K. are linked to inflation. Higher inflation will lead to higher liabilities
although, in most cases, caps on the level of inflationary increases are in place to protect the plan against extreme
inflation. While some of the plan’s assets are either unaffected by (i.e. fixed interest bonds) or loosely correlated with
(i.e. equities) inflation, in recent years, the plan has increased its investments in assets that have a direct correlation
with inflation (e.g. real estate, index-linked gilts and liability matching funds) in order to manage this risk. To further
manage the risk, during 2017, the Company offered pensioners a voluntary ‘Pension Increase Exchange’ whereby
pensioners had a choice to trade certain automatic future inflationary adjustments for a higher immediate pension
that will not increase with inflation, or will but to a lesser degree in some cases. This option provided members with
additional flexibility in how they receive their pension, and also lowered the Company’s exposure to inflation risk.(cid:3)
In the Canadian plans, the pension payments are not linked to inflation, so this is not a direct risk. However, to the
extent that future benefits are based on final average earnings and salaries are generally linked to inflation to some
degree, an increase in inflation beyond expectations will result in higher liabilities. With a relatively small number of
employees still earning benefits in a defined benefit plan, this risk is limited. (cid:3)
Longevity Risk (i.e. increasing life expectancy)(cid:3)
The plans provide benefits for the life of the member after retirement, so increases in life expectancy will result in an
increase in the plans’ liabilities. This is particularly significant in the U.K. plan, where inflationary increases result in
higher sensitivity to changes in life expectancy.(cid:3)
The Company has mitigated much of this risk in the Canadian registered pension plan with the purchase of annuity
contracts which provide cashflows that exactly match the amount and timing of the majority of the retiree benefit
payments currently under the plans.(cid:3)
57
Maturity Analysis(cid:3)
Expected maturity analysis of undiscounted pension and other post-employment benefit obligations of the
Company’s operations in Canada, U.K. and Ireland, and South America are as follows:(cid:3)
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
December 31, 2017
($ millions)
Less than
a year
Defined benefit pension plans
Other post-employment benefits
Total
$
$
46
7
53
Accumulated Remeasurement Losses(cid:3)
Between
1-2 years
$
Between
2-5 years
$
47
4
51
$
151
11
162
$
Over
5 years
$
$
1,808 $ $
83 1
1,891 $ $
Total
2,052
105
2,157
The accumulated actuarial loss, net of tax, of the post-employment benefit obligations in the Company’s operations
in Canada, U.K. and Ireland, and South America recognized in retained earnings is $213 million as at December 31,
2017 (December 31, 2016: $228 million).(cid:3)
24. SUPPLEMENTAL CASH FLOW INFORMATION
Accounting Policy
Cash and cash equivalents comprise cash on hand together with short-term investments, consisting of highly rated
and liquid money market instruments with original maturities of three months or less, and are classified as loans and
receivables.
The components of cash and cash equivalents are as follows:
December 31
($ millions)
Cash
Cash equivalents
Cash and cash equivalents
The changes in operating assets and liabilities are as follows:
For years ended December 31
($ millions)
Accounts receivable
Unbilled work in progress
Inventories
Other assets
Accounts payable and accruals
Other liabilities
Changes in operating assets and liabilities
2017
2016
$
$
$
$
279
179
458
2017
(111)
(24)
(148)
(52)
234
30
(71)
$
$
$
$
458
135
593
2016
(71)
(6)
134
(3)
177
(35)
196
58
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
The changes in liabilities arising from financing activities are as follows:
($ millions)
Balance, January 1, 2017
Cash flows provided by (used in)
Financing activities
Operating activities
Total cash movements
Non-cash changes
Interest expense
Foreign exchange rate changes
Total non-cash movements
Balance, December 31, 2017
Short-term
debt
Long-term
debt
Finance lease
liability
Total
$
$
$
$
2
$
1,487
$
39
$
1,528
17
—
17
—
(1)
(1)
18
$
$
$
(150)
—
(150)
—
(41)
(41)
1,296
$
$
$
(6)
(2)
(8)
2
1
3
34
$
$
$
(139)
(2)
(141)
2
(41)
(39)
1,348
Dividends of $0.745 (2016: $0.73) per share were paid during the year. Subsequent to year end in February 2018,
the Board of Directors approved a quarterly dividend of $0.19 per share payable on March 8, 2018 to shareholders
of record on February 22, 2018. This dividend will be considered an eligible dividend for Canadian income tax
purposes. As at December 31, 2017, the Company has not recognized a liability for this dividend.(cid:3)
25. ECONOMIC RELATIONSHIPS
The Company distributes and services heavy equipment, engines, and related products. The Company has
dealership agreements with numerous equipment manufacturers, of which the most significant are with subsidiaries
of Caterpillar. Distribution and servicing of Caterpillar products account for the major portion of the Company's
operations. Finning has a strong relationship with Caterpillar that has been ongoing since 1933.
26. RELATED PARTY TRANSACTIONS AND TOTAL STAFF COSTS
Balances and transactions between the Company and its subsidiaries, which are related parties, have been
eliminated on consolidation and are not disclosed in this note.
The remuneration of the Board of Directors during the year was as follows:
For years ended December 31
($ millions)
Short-term benefits
Share-based payments
Total
2017
2016
$
$
1
6
7
$
$
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
($ millions)
Salaries and benefits
Post-employment benefits
Share-based payments
Total
2017
2016
$
$
9 $
1
9
19 $
Total staff costs, including salaries, benefits, pension, share-based payments, termination payments, and
commissions are $1,180 million (2016: $1,130 million). This amount includes staff costs associated with key
management personnel noted above.(cid:3)
—
4
4
9
1
11
21
59
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
27. LEASES
Accounting Policy
Leases are classified as either finance or operating leases. Leases where substantially all of the benefits and risks
of ownership of property rest with the lessee are accounted for as finance leases; all other leases are classified as
operating leases.
The Company as Lessee
Assets held under finance leases are initially recognized as assets of the Company at their fair value at the
inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability
to the lessor is included in the statement of financial position as a finance lease obligation. Lease payments are
apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of
interest on the remaining balance of the liability. Contingent rental payments are recognized as expenses in the
periods in which they are triggered.
Operating lease payments are recognized as an expense on a straight-line basis over the lease term, except where
another systematic basis is more representative of the time pattern in which economic benefits from the leased
asset are consumed. In the event that lease incentives are received to enter into operating leases, such incentives
are recognized as a liability. The aggregate benefit of incentives is recognized as a reduction of rental expense on a
straight-line basis over the term of the lease, except where another systematic basis is more representative of the
time pattern in which economic benefits from the leased asset are consumed.
Future minimum lease payments due under finance lease contracts and payments due under various operating
lease contracts are as follows:
For years ended December 31
($ millions)
Finance
Leases
Operating
Leases (1)
2018
2019
2020
2021
2022
Thereafter
Less imputed interest
Total finance lease obligation
Less current portion of finance lease obligation
Non-current portion of finance lease obligation
55
34
25
23
14
56
207
$
$
$
$
$
6
6
7
6
5
17
47
(13)
34
(5)
29
(1) The Company recognized a liability of $17 million, $7 million in accrued liabilities and $10 million in non-current other
liabilities, related to facility closure costs and future minimum lease payments due under certain operating leases that were
considered to be onerous at December 31, 2017 (2016: $14 million).
Minimum lease payments recognized as lease expense for the year ended December 31, 2017 is $73 million (2016:
$79 million).
60
Finning International Inc.
2017 Annual Results
Notes to the Consolidated Financial Statements
28. COMMITMENTS AND CONTINGENCIES
Due to the size, complexity, and nature of the Company’s operations, various legal, customs, and tax matters are
pending. It is not currently possible for management to predict the outcome of such matters due to various factors,
including: the preliminary nature of some claims, an incomplete factual record, uncertainty concerning procedures
and their resolution by the courts, customs, or tax authorities. However, subject to these limitations, management is
of the opinion, based on legal assessments and information presently available, that, except as stated below, it is
not likely that any liability would have a material effect on the Company’s financial position or results of operations.
The Company has received a number of claims from the Argentina Customs Authority associated with export of
agricultural product. The Company is appealing these claims, believes they are without merit, and is confident in its
position. These pending matters may take a number of years to resolve. Should the ultimate resolution of these
matters differ from management’s assessment, a material adjustment could arise and negatively impact the
Company’s financial position.
29. 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, 2017, the total estimated value of these contracts outstanding is $119 million (2016:
$121 million) coming due at periods ranging from 2018 to 2023. 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, however,
there can be no assurance that this experience will continue in the future. The total amount recognized as a
provision against these contracts is $1 million (2016: $1 million).
The Company has issued certain guarantees to Caterpillar Finance to guarantee 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, 2017, 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 $9 million,
covering various periods up to 2021. As at December 31, 2017 and 2016, the Company has not recognized a
liability for these guarantees.
The Company has also issued guarantees for certain equipment sold to Caterpillar Finance to guarantee their
residual values. The guarantees would be enforceable in the event that the market value of equipment at the time of
its ultimate disposal is below the residual value guarantee issued by the Company. As at December 31, 2017, the
maximum potential amount of future payments that the Company could be required to make under the guarantees is
$15 million, covering various periods up to 2022. As at December 31, 2017, the Company has recognized a liability
of $6 million for these guarantees (2016: $nil million).
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 million to the end of the lease term in 2020. The Company has not
recognized a liability for this guarantee in 2017 or 2016.
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, 2017 was $191 million (2016: $158
million) principally related to performance guarantees on delivery for prepaid equipment and other operational
commitments in Chile.
61
Finning International Inc.
1000 – 666 Burrard Street
Vancouver, British Columbia V6C 2X8
(cid:90)(cid:90)(cid:90)(cid:17)(cid:191)(cid:81)(cid:81)(cid:76)(cid:81)(cid:74)(cid:17)(cid:70)(cid:82)(cid:80)