Finning International
Annual Report 2018

Plain-text annual report

2018 FINNING INTERNATIONAL INC. Financial report Finning International Inc. 2018 Annual Results February 20, 2019 MANAGEMENT’S DISCUSSION AND ANALYSIS This MD&A of Finning should be read in conjunction with the Annual Financial Statements for the year ended December 31, 2018 and the accompanying notes thereto, which have been prepared in accordance with IFRS. All dollar amounts presented in this MD&A are expressed in CAD, unless otherwise stated. Additional information relating to the Company, including its current AIF, can be found under the Company’s profile on the SEDAR website at www.sedar.com. Finning (TSX:FTT) is the world’s largest 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. The 2017 comparative results described in this MD&A have been restated to reflect the Company’s adoption of IFRS 15, Revenue from Contracts with Customers and IFRS 9, Financial Instruments effective for the financial year beginning January 1, 2018. Details of the impact of IFRS 15 and IFRS 9 for the date of initial application and the 2017 comparative period can be found in note 2 of the Company’s Annual Financial Statements. A glossary of defined terms is included on page 55. The first time a defined term is used, it is shown in bold italics. 2018 Annual Highlights (cid:120) Basic EPS in 2018 was $1.38 and in 2017 was $1.28. Results in both years include items which management does not consider indicative of operational and financial trends. In 2018, these items include the write-off of the Company’s investment in Energyst, tax impact of the significant devaluation of the ARS, and insurance proceeds related to the 2016 Alberta wildfires. In 2017, these items include insurance proceeds, severance costs, and the payment of a premium on the early redemption of long-term debt. These items are described on pages 7 and 8. (cid:120) Excluding the items noted above, Adjusted EPS (1)(2) of $1.65 in 2018 was 24% higher than Adjusted EPS of $1.33 earned in 2017 due to strong results from the Company’s Canadian and UK & Ireland operations reflecting improved market conditions. (cid:120) Revenue of $7.0 billion was up 12% from 2017, including 26% growth in new equipment sales. All operations reported higher revenue compared to 2017, particularly in the Company’s Canadian operations, which recorded a record $1 billion of revenue in Q4 2018. Revenue in the Company’s South American operations was negatively impacted by a slowdown in the processing and delivery of parts and components to mining customers following the new ERP system launch in Chile in mid-November. This resulted in an estimated $50 million shortfall in mining product support revenues in Q4 2018. The Company is actively working to resolve the business process delays and expects to return to normal parts revenue run rates in Q2 2019. (cid:120) (cid:120) SG&A relative to revenue was lower than 2017, down 140 basis points, due to leverage of incremental revenues on fixed costs in the Company’s Canadian and UK & Ireland operations. EBIT of $423 million and EBIT margin of 6.0% were reported for 2018 compared to $392 million and 6.3% in 2017, respectively. Adjusted EBIT (1) was $446 million and Adjusted EBIT margin (1) was 6.4% compared to $393 million and 6.3% in 2017, respectively. The 13% improvement in Adjusted EBIT reflected higher sales in the Company’s Canadian and UK & Ireland operations partially offset by a reduction in product support revenue in the Company’s South American operations. (cid:120) Adjusted EBITDA (1)(2) of $633 million was 9% higher than 2017 Adjusted EBITDA of $577 million. Adjusted EBITDA margin (1)(2) of 9.0% was slightly lower than the 2017 Adjusted EBITDA margin of 9.2%. (cid:120) 2018 free cash flow (2) was $78 million representing the sixth consecutive year of positive free cash flow generation. Invested capital turnover (2) of 2.12 times was the highest level since 2012. (cid:120) (cid:120) 2018 Adjusted ROIC (1)(2) improved over 2017 due to improved profitability and capital efficiencies in the Company’s Canadian and UK & Ireland operations. (1) Certain 2018 and 2017 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 7 and 8 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 financial metrics, referred to as “non-GAAP financial measures” do not have a standardized meaning under IFRS, which are also referred to herein as 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. 1 Finning International Inc. 2018 Annual Results Table of Contents Strategic Framework .................................................................................................................................................... 3 Sustainability................................................................................................................................................................ 5 2018 Annual Overview ................................................................................................................................................ 6 Non-GAAP Financial Measures ................................................................................................................................... 7 Annual Key Performance Measures ............................................................................................................................ 9 Annual Results ........................................................................................................................................................... 11 Invested Capital ......................................................................................................................................................... 13 Return on Invested Capital and Invested Capital Turnover ...................................................................................... 14 Annual Results by Reportable Segment.................................................................................................................... 15 2018 Fourth Quarter Highlights ................................................................................................................................. 20 2018 Fourth Quarter Overview .................................................................................................................................. 20 Quarterly Key Performance Measures ...................................................................................................................... 22 2018 Fourth Quarter Results .................................................................................................................................... 24 Outlook ...................................................................................................................................................................... 29 Liquidity and Capital Resources ................................................................................................................................ 30 Subsequent Event ..................................................................................................................................................... 33 Accounting and Estimates ......................................................................................................................................... 33 Risk Factors and Management .................................................................................................................................. 36 Contingencies and Guarantees ................................................................................................................................. 39 Outstanding Share Data ............................................................................................................................................ 39 Controls and Procedures Certification ....................................................................................................................... 40 Description of Non-GAAP Financial Measures and Reconciliations ......................................................................... 41 Selected Annual Information ..................................................................................................................................... 52 Selected Quarterly Information .................................................................................................................................. 53 Forward-Looking Disclaimer ...................................................................................................................................... 54 Glossary of Defined Terms ........................................................................................................................................ 55 2 Finning International Inc. 2018 Annual Results Strategic Framework The Company’s customer-centric growth strategy is based on three pillars – Develop, Perform, Innovate – which provide a strong foundation for the Company’s five Global Strategic Priorities and are summarized below: (cid:120) Customer Centricity – be our customers’ trusted partner by providing consistent and innovative services that add value to their business; (cid:120) Lean & Agile Global Finning – maintain relentless focus on productivity, efficiency, and our customers’ total cost of equipment ownership; (cid:120) Global Supply Chain – transform our globally-leveraged supply chain to enhance the omni-channel customer experience while increasing working capital efficiencies and generation of free cash flow; (cid:120) Digital Enterprise – advance the use of technology to improve our customers’ experience, enable data- driven decisions, and reduce cost to serve; and, (cid:120) Growth & Diversification – achieve profitable and capital efficient growth. All regions are committed to delivering our strategy by focusing on these Global Strategic Priorities. 3 The Company’s capital investments and allocation of resources are directly linked to the five Global Strategic Priorities and the key investments planned for 2018-2020 are summarized below. A large portion of the investment in strategic initiatives is success-based. Finning International Inc. 2018 Annual Results A reduced cost structure and sustainable operating improvements are expected to generate earnings torque, while global supply chain initiatives are expected to continue to increase capital efficiencies and support positive annual free cash flow. (cid:3) 4 Finning International Inc. 2018 Annual Results Sustainability Sustainability is an integral part of Finning’s purpose, vision and values, and is embedded in the Company’s strategy and operations. During its 85-year history, Finning has worked hard to strengthen its governance, improve safety, reduce environmental impact, engage employees, and create a positive impact in communities. In 2017, the Company formalized its sustainability focus, and in May 2018, Finning published its first Sustainability Report, reporting on the Company’s sustainability performance in 2017. The Sustainability Report covers the sustainability topics that are most important to Finning and its stakeholders: governance, safety & health, environment (including GHG emissions), people & workplace (including employee engagement, talent development, inclusion and diversity), and community. The Company’s performance in key sustainability metrics is calculated using standard industry and regulatory methodologies. Those key metrics are highlighted below and in summary, the Company: (cid:120) Reduced total recordable injury frequency from 0.99 in 2013 to 0.49 in 2018. Despite it being a challenging year for the Company with two fatalities in 2018, total recordable incident frequency remains low. (cid:120) Had only one reportable spill occur in the Company’s operations in 2018. (cid:120) Established a GHG measurement protocol to enable consistent tracking and reporting of GHG emissions in each of its regions. (cid:120) Developed a five-year plan with a goal of increasing inclusion and diversity in the Company’s business: o Aim to attract, retain, and advance women at all levels of the organization, with a spotlight on women in leadership and operational roles; and, o Aim to have at least 30 percent female representation on the Board. (cid:120) Has focused community investment efforts on promoting STEM education by collaborating with non-profit partners. Finning is defining and implementing a five-year sustainability roadmap that prioritizes actions to address gaps with best standards and recognized practices and strengthens engagement with stakeholders. The Company expects the content of future reports to evolve as it implements the sustainability roadmap. Finning is committed to creating value for all its stakeholders by operating and growing in a sustainable manner. For more information on the Company’s sustainability journey and to access the Sustainability Report, please visit www.finning.com. 5 2018 Annual Overview ($ millions, except per share amounts) Revenue Gross profit SG&A Equity earnings of joint ventures and associate Other income Other expenses EBIT Net income Basic EPS EBITDA (2) Free cash flow Adjusted EBIT Adjusted net income (3) Adjusted EPS Adjusted EBITDA Gross profit margin SG&A as a percentage of revenue EBIT margin EBITDA margin (2) ROIC (2) Adjusted EBIT margin Adjusted EBITDA margin Adjusted ROIC Finning International Inc. 2018 Annual Results % change fav (unfav) 12% 7% (4)% n/m n/m n/m 8% 8% 8% 6% (53)% 13% 24% 24% 9% $ $ $ $ $ $ $ $ $ $ 2018 2017 (Restated) (1) 6,996 $ 1,768 (1,327) 12 — (30) 423 $ 232 $ 1.38 $ 610 $ 78 $ 446 $ 277 $ 1.65 $ 633 $ 25.3% 19.0% 6.0% 8.7% 12.8% 6.4% 9.0% 13.5% 6,256 1,654 (1,271) 7 2 — 392 216 1.28 576 165 393 224 1.33 577 26.4% 20.3% 6.3% 9.2% 13.1% 6.3% 9.2% 13.1% (1) (2) The 2017 comparative results have been restated to reflect the Company’s adoption of IFRS 15, Revenue from Contracts with Customers and IFRS 9, Financial Instruments effective for the financial year beginning January 1, 2018. More information on the impact of this adoption can be found in note 2 of the Company’s Annual Financial Statements. These financial metrics, referred to as “non-GAAP financial measures” do not have a standardized meaning under IFRS, which are also referred to herein as 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 2018 and 2017 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 7 and 8 of this MD&A and the financial metrics which have been adjusted to take into account these items are referred to as “Adjusted” metrics. 6 Finning International Inc. 2018 Annual Results Non-GAAP Financial Measures Management believes that providing certain non-GAAP financial measures provides users of the Company’s MD&A and 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 periods reported and discussed in this MD&A, there were significant items that management does not consider indicative of future operational and 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. Financial metrics that have been adjusted to take into account these significant items are referred to as “Adjusted” metrics. Adjusted 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 identified in prior periods, described on pages 42 - 45 of this MD&A, impact certain reported metrics included in the Annual Key Performance Measures section for the years ended December 31, 2018 and 2017. Significant items that affected reported annual 2018 and 2017 results, which are not considered by management to be indicative of operational and financial trends, either by nature or amount, included: 2018 significant items: (cid:120) Insurance proceeds received in 2018 related to the final settlement of the Company’s business interruption insurance claim resulting from the Alberta wildfires in 2016. (cid:120) Following the Company’s review of its investment in Energyst, it was determined that Energyst was no longer a strategic fit and that it was held-for-sale at September 30, 2018. As a result, the Company wrote off its investment and released cumulative foreign translation losses to the income statement upon Energyst’s sale of its wholly-owned subsidiary in Argentina in 2018. (cid:120) The ARS experienced a rapid devaluation in 2018, losing approximately 45% of its value in the third quarter of 2018 (annual devaluation of approximately 100%) and reaching a new historic low of $1 USD to 41.25 ARS in September 2018. This devaluation resulted in higher tax expense in 2018 than the same prior year period, primarily relating to the revaluation of deferred tax balances. 2017 significant items: (cid:120) Severance costs incurred in the Company’s Canadian and South American operations related to facility and cost optimization. (cid:120) Insurance proceeds received related to the Company’s business interruption insurance claim resulting from the 2016 Alberta wildfires. (cid:120) Redemption costs on the early repayment of long-term debt. 7 The magnitude of these items, and reconciliation of the non-GAAP financial measures to their most directly comparable GAAP measures, is shown in the following table: Finning International Inc. 2018 Annual Results EBIT Net Income EPS For year ended December 31, 2018 ($ millions, except per share amounts) EBIT, net income, and EPS Significant items: Write-off and loss related to Energyst Tax impact of devaluation of ARS Insurance proceeds from Alberta wildfires Adjusted EBIT, Adjusted net income, and Adjusted EPS For year ended December 31, 2017 ($ millions, except per share amounts) EBIT, net income, and EPS (Restated) (1) Significant items: Severance costs Redemption cost on the early payment of long-term debt Insurance proceeds from Alberta wildfires Adjusted EBIT, Adjusted net income, and Adjusted EPS (Restated) (1) South Canada America $ 297 $ 142 $ UK & Ireland Consol Consol Consol 1.38 232 $ 423 $ — — (7) — — — 30 — (7) 30 20 (5) 0.18 0.12 (0.03) 51 $ — — — $ 290 $ 142 $ 51 $ 446 $ 277 $ 1.65 EBIT Net Income EPS South Canada America $ 225 $ 184 $ UK & Ireland Consol Consol 37 $ 392 $ 216 $ Consol 1.28 3 — (4) 2 — — — — — 5 — (4) 4 7 (3) 0.03 0.04 (0.02) $ 224 $ 186 $ 37 $ 393 $ 224 $ 1.33 (1) The 2017 comparative results have been restated to reflect the Company’s adoption of IFRS 15, Revenue from Contracts with Customers and IFRS 9, Financial Instruments effective for the financial year beginning January 1, 2018. More information on the impact of this adoption can be found in note 2 of the Company’s Annual Financial Statements. 8 Annual Key Performance Measures The Company utilizes the following KPIs to enable consistent measurement of performance across the organization. For years ended December 31 2018 2017 (Restated) (1) 2016 2015 2014 Finning International Inc. 2018 Annual Results ROIC (%) Consolidated Canada South America UK & Ireland EBIT (2) ($ millions) Consolidated Canada South America UK & Ireland EBIT Margin (%) (2) Consolidated Canada South America UK & Ireland Invested Capital (3) ($ millions) Consolidated Canada South America UK & Ireland Invested Capital Turnover (3) (times) Consolidated Canada South America UK & Ireland Inventory ($ millions) Inventory Turns (3) (times) Working Capital to Sales Ratio (3) Free Cash Flow ($ millions) EBITDA (2) ($ millions) Consolidated Canada South America UK & Ireland EBITDA Margin (%) (2) Consolidated Canada South America UK & Ireland Net Debt to EBITDA Ratio (2)(3) 12.8% 16.6% 12.2% 14.2% 423 297 142 51 6.0% 8.1% 6.6% 4.4% 3,163 1,675 1,190 336 2.12x 2.05x 1.86x 3.22x 2,061 2.68x 26.6% 78 610 393 204 79 8.7% 10.7% 9.4% 6.9% 1.7 13.1% 13.3% 17.8% 12.8% 392 225 184 37 6.3% 7.3% 8.5% 3.6% 2,830 1,621 983 250 2.09x 1.82x 2.09x 3.56x 1,708 2.82x 27.4% 165 576 324 242 63 9.2% 10.6% 11.2% 6.1% 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% 370 357 187 199 18 6.3% 6.6% 10.7% 2.0% 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% 325 126 219 (92) 23 2.0% 7.0% (3.3)% 2.3% 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% 483 720 396 268 82 10.4% 10.9% 12.0% 7.8% 1.4 (1) The 2017 comparative results have been restated to reflect the Company’s adoption of IFRS 15, Revenue from Contracts with Customers and IFRS 9, Financial Instruments effective for the financial year beginning January 1, 2018. More information on the impact of this adoption can be found in note 2 of the Company’s 2018 Annual Financial Statements. (2) Certain of these reported financial metrics have been impacted by significant items management does not consider indicative of operational and financial trends either by nature or amount. The financial metrics that have been adjusted to take into account these items are referred to as “Adjusted” metrics and are summarized on page 10 of this MD&A. (3) 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. 9 Annual Adjusted KPIs 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 7 and 8 and 42 - 45 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 KPIs is shown below: For years ended December 31 2018 2017 (Restated) (1) 2016 2015 2014 Finning International Inc. 2018 Annual Results Adjusted ROIC (%) 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) Consolidated Canada South America UK & Ireland Adjusted EBITDA Margin (%) Consolidated Canada South America UK & Ireland Net Debt to Adjusted EBITDA Ratio (3) 13.5 % 16.2 % 12.2 % 14.2 % 446 290 142 51 6.4 % 7.9 % 6.6 % 4.4 % 633 386 204 79 9.0 % 10.5 % 9.4 % 6.9 % 1.7 13.1 % 13.2 % 18.1 % 12.8 % 393 224 186 37 6.3 % 7.3 % 8.7 % 3.6 % 577 323 244 63 9.2 % 10.5 % 11.3 % 6.1 % 1.5 9.3 % 9.3 % 15.0 % 5.9 % 273 154 155 16 4.9 % 5.5 % 8.4 % 1.8 % 465 254 217 46 8.3 % 9.0 % 11.7 % 4.8 % 1.9 10.9 % 10.6 % 14.0 % 9.0 % 383 189 190 33 6.1 % 6.1 % 9.2 % 3.1 % 604 305 267 61 9.6 % 9.8 % 12.9 % 5.7 % 2.0 16.2 % 17.5 % 16.2 % 16.7 % 533 290 218 51 7.6 % 7.8 % 9.7 % 4.8 % 749 402 290 83 10.8 % 11.1 % 13.0 % 7.8 % 1.3 (1) The 2017 comparative results have been restated to reflect the Company’s adoption of IFRS 15, Revenue from Contracts with Customers and IFRS 9, Financial Instruments effective for the financial year beginning January 1, 2018. More information on the impact of this adoption can be found in note 2 of the Company’s 2018 Annual Financial Statements. (2) Of the significant items described on pages 42 - 45 of this MD&A, $10 million was recorded in depreciation and amortization expense in 2015. (3) These financial metrics, referred to as “non-GAAP financial measures” do not have a standardized meaning under IFRS, which are also referred to herein as GAAP, and therefore may not be comparable to similar measures presented by other issuers. For additional information regarding these financial metrics, including definitions and reconciliations from each of these non-GAAP financial measures to their most directly comparable measure under GAAP, where available, see the heading “Description of Non-GAAP Financial Measures and Reconciliations” later in this MD&A. (cid:3) 10 Finning International Inc. 2018 Annual Results Annual Results Revenue Revenue by Line of Business and by Operation For years ended December 31 ($ millions) (2017 Restated) Line of Business 2017 2018 2 3 6 3 , 1 8 4 3 , 9 5 3 1 7 3 8 2 2 9 3 2 3,700 1,850 0 0 4 7 2 , 5 7 1 2 , New equipment Used equipment Equipment rental Product support 3 1 4 1 Other 3,700 1,850 0 Operation 2017 2018 4 7 6 , 3 2 7 0 , 3 7 5 1 , 2 0 7 1 , 2 7 2 0 , 1 2 5 1 , 1 Canada South America UK & Ireland The Company generated revenue of just under $7.0 billion during 2018, an increase of 12% from 2017. Revenue was up in all operations, with the Canadian operations contributing over 80% of the overall revenue growth. In addition, revenue was up in all lines of business, particularly new equipment. New equipment revenue increased 26% compared to 2017, up in all operations, but primarily in the Company’s Canadian operations, reflecting improved demand, increased volumes in the mining sector, and higher industry activity in the construction sector. In the Company’s UK & Ireland operations, higher revenues were driven by increased demand in the power systems sector, specifically for power and industrial business units. The Company’s South American operations also reported higher new equipment revenue, higher in all markets in Chile, partially offset by reduced activity in the construction sector in both Argentina and Bolivia. Equipment backlog (1) was $1.3 billion at December 31, 2018, comparable to December 31, 2017 but down slightly from $1.5 billion at September 30, 2018 and June 30, 2018, reflecting strong equipment deliveries. Product support revenue was 4% higher compared to 2017 driven primarily by the Company’s Canadian operations, with strong parts activity in all sectors in 2018. Product support revenue in 2018 was also up from 2017 in the Company’s UK & Ireland operations partially offset by lower product support revenue in the Company’s South American operations, particularly in Argentina. Foreign currency translation of the results of the Company’s South American and UK & Ireland operations had a positive impact on revenue of approximately $35 million, primarily due to the weaker CAD relative to the GBP on average in 2018 compared to last year and was not significant at the EBITDA level. EBITDA and EBIT 2018 gross profit of $1.8 billion was up 7% compared to 2017, primarily due to higher volumes from improved market activity. Gross profit margin of 25.3% was lower than the 26.4% earned in 2017, with a revenue mix shift to higher new equipment revenue. On a consolidated basis, new equipment revenue as a proportion of the overall sales mix was 39%, compared to 35% in 2017. (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. 11 Finning International Inc. 2018 Annual Results SG&A of $1.3 billion in 2018 included a $30 million write-off of the Company’s investment in Energyst and $7 million of insurance proceeds received by the Company’s Canadian operations in relation to the business interruption insurance claim resulting from the Alberta wildfires. 2017 SG&A of $1.3 billion included $5 million of severance costs in the Company’s South American and Canadian operations and $4 million of insurance proceeds received relating to the Alberta wildfires. Excluding the investment write-down, severance costs, and the insurance proceeds, 2018 SG&A was up 5% compared to 2017 on 12% higher revenues primarily due to volume related variable costs. EBITDA for 2018 was $610 million and EBITDA margin was 8.7% (2017: EBITDA was $576 million and EBITDA margin was 9.2%). Excluding significant items noted above and on pages 7 and 8 of this MD&A, 2018 Adjusted EBITDA was $633 million and Adjusted EBITDA margin was 9.0%, compared with Adjusted EBITDA of $577 million and Adjusted EBITDA margin of 9.2% for the prior year. Adjusted EBITDA was up from the prior year due to higher earnings in the Company’s Canadian and UK & Ireland operations, partially offset by lower earnings in the Company’s South American operations. The net debt to EBITDA ratio at December 31, 2018 was 1.7x and slightly higher compared to December 31, 2017. The Company reported EBIT of $423 million in 2018 compared to the $392 million earned in 2017. EBIT margin was 6.0% in 2018 compared to 6.3% in 2017. As noted earlier, the Company was impacted by significant items management does not consider indicative of operational and financial trends. Excluding these significant items, 2018 Adjusted EBIT was $446 million with an Adjusted EBIT margin of 6.4%, higher than an Adjusted EBIT of $393 million and an Adjusted EBIT margin of 6.3% in the prior year. The Company’s Canadian and UK & Ireland operations experienced operating leverage in 2018 resulting from improved demand and operating efficiencies. The Company’s South American operations had a lower EBIT margin in 2018 due to a revenue mix shift to higher new equipment revenue as well as higher SG&A relative to total revenue. The annual results in South America were primarily affected by weak economic conditions in Argentina. Finance Costs Finance costs in 2018 were $76 million, lower than the $100 million reported in 2017 due to lower long-term debt and interest rates in 2018 as well as $9 million of redemption costs paid in 2017 on the early repayment of the $350 million 6.02% MTNs due June 1, 2018. Adjusted EBITDA by Operation (1) For years ended December 31 ($ millions) (2017 Restated) 2017 2018 6 8 3 3 2 3 400 200 0 4 4 2 4 0 2 9 7 3 6 Canada (1) Excluding Other Operations South America UK & Ireland Adjusted EBIT by Operation (1) For years ended December 31 ($ millions) (2017 Restated) 2017 2018 0 9 2 4 2 2 300 150 0 6 8 1 2 4 1 1 5 7 3 Canada South America UK & Ireland Provision for Income Taxes (1) Excluding Other Operations Income tax expense for the year ended December 31, 2018 was $115 million, compared to $76 million in 2017. The effective income tax rate for 2018 was 33.1%, compared to 26.1% in the prior year. The effective tax rate in 2018 was higher due to the non-deductibility, for tax purposes, of the write-off of the Company’s investment in Energyst as well as the impact of the significant devaluation of the ARS relative to the USD, primarily relating to the revaluation of deferred tax balances. Excluding these items, the effective tax rate in 2018 would have been 25.0%. Management expects the Company’s effective tax rate to generally be within the 25-30% range on an annual basis, but it may fluctuate from period to period as a result of changes in the source of income from various jurisdictions, changes in the estimation of tax reserves, and changes in tax rates and tax legislation. 12 Finning International Inc. 2018 Annual Results Net Income Net income was $232 million in 2018 compared to $216 million earned in 2017, and basic EPS was $1.38 in 2018 compared with $1.28 in 2017. Excluding significant items noted on pages 7 and 8, Adjusted EPS in 2018 of $1.65 was 24% higher than 2017 Adjusted EPS of $1.33. The increase in Adjusted EPS was primarily due to higher sales volumes and improved profitability due to savings from cost reduction measures and leverage of incremental revenues on fixed costs, particularly in the Company’s Canadian operations partially offset by lower earnings in the Company’s operations in Argentina. Invested Capital ($ millions, unless otherwise stated) December 31, September 30, 2018 2018 (Decrease) increase from September 30, 2018 December 31, 2017 (Restated) (1) Increase from December 31, 2017 Consolidated Canada South America UK & Ireland South America (USD) UK & Ireland (GBP) $ $ $ $ $ £ 3,163 $ 1,675 $ 1,190 $ 336 $ 872 $ 193 £ 3,431 1,889 1,173 404 906 239 $ $ $ $ $ £ (268) $ (214) $ 17 $ (68) $ (34) $ (46) £ 2,830 1,621 983 250 784 147 $ $ $ $ $ £ 333 54 207 86 88 46 (1) The 2017 comparative results have been restated to reflect the Company’s adoption of IFRS 15, Revenue from Contracts with Customers and IFRS 9, Financial Instruments effective for the financial year beginning January 1, 2018. More information on the impact of this adoption can be found in note 2 of the Company’s 2018 Annual Financial Statements. Compared to September 30, 2018: Consolidated invested capital decreased $268 million from September 30, 2018 to December 31, 2018. Offsetting this decrease is approximately $70 million of foreign exchange from translating the invested capital balances of the Company’s South American operations, primarily as a result of the 4% weaker CAD relative to the USD. Excluding the impact of foreign exchange, consolidated invested capital decreased by $340 million from September 30, 2018 to December 31, 2018 reflecting: (cid:120) an increase in deferred revenue in all operations, largely due to higher customer deposits received in the Company’s Canadian operations; (cid:120) higher accounts payable balances in all operations, primarily in the Company’s South American operations; (cid:120) (cid:120) largely matched to customer delivery commitments; lower rental equipment in the Company’s Canadian and UK & Ireland operations; and, strong collections in all operations offset by higher deliveries in the Company’s Canadian and UK & Ireland operations. Compared to December 31, 2017: Consolidated invested capital increased $333 million from December 31, 2017 to December 31, 2018. This increase includes the impact of approximately $105 million of foreign exchange from translating the invested capital balances of the Company’s South American operations, primarily as a result of the 9% weaker CAD relative to the USD. Excluding the impact of foreign exchange, consolidated invested capital increased by $228 million from December 31, 2017 to December 31, 2018 reflecting: (cid:120) an increase in equipment inventory in all operations, as well as an increase in parts inventory primarily in the Company’s South American operations; (cid:120) higher spend on rental equipment supporting the RUN Strategy, largely in the Company’s Canadian operations; and, (cid:120) higher spend on intangible assets, largely due to additional costs for the ERP system implemented in the Company’s South American operations, (cid:120) partially offset by higher deferred revenue in all operations, driven by the Company’s Canadian operations. 13 ROIC and Invested Capital Turnover ROIC Consolidated Canada South America UK & Ireland Adjusted ROIC Consolidated Canada South America UK & Ireland Invested Capital Turnover (times) Consolidated Canada South America UK & Ireland Finning International Inc. 2018 Annual Results December 31, September 30, December 31, 2018 2018 2017 (Restated) (1) 12.8 % 16.6 % 12.2 % 14.2 % 13.5 % 16.2 % 12.2 % 14.2 % 2.12x 2.05x 1.86x 3.22x 13.7 % 16.4 % 16.2 % 14.0 % 14.5 % 16.0 % 16.4 % 14.0 % 2.14x 1.98x 2.01x 3.30x 13.1 % 13.3 % 17.8 % 12.8 % 13.1 % 13.2 % 18.1 % 12.8 % 2.09x 1.82x 2.09x 3.56x (1) The 2017 comparative results have been restated to reflect the Company’s adoption of IFRS 15, Revenue from Contracts with Customers and IFRS 9, Financial Instruments effective for the financial year beginning January 1, 2018. More information on the impact of this adoption can be found in note 2 of the Company’s 2018 Annual Financial Statements. ROIC On a consolidated basis, ROIC was 12.8% at December 31, 2018, compared to 13.1% at December 31, 2017 and 13.7% at September 30, 2018. Adjusting for significant items that management does not consider indicative of operational and financial trends, as noted on pages 7 - 8 of this MD&A, Adjusted ROIC at December 31, 2018 was 13.5%, an increase from Adjusted ROIC at December 31, 2017 of 13.1%. The increase in Adjusted ROIC compared to the prior year end reflects the Company’s focus on capital efficiency. Adjusted ROIC at December 31, 2018 in the Company’s Canadian and UK & Ireland operations improved compared to Adjusted ROIC at December 31, 2017 due to EBIT margin improvement year over year. Adjusted ROIC in the Company’s South American operations decreased due to lower EBIT in 2018 than 2017 in Argentina as well as higher average invested capital levels. Canadian Operations (cid:120) Higher Adjusted ROIC at December 31, 2018 reflects growth in Adjusted EBIT outpacing the increase in average invested capital levels in the twelve-month period demonstrating improved capital efficiency. South American Operations (cid:120) Lower Adjusted ROIC at December 31, 2018 reflects lower Adjusted EBIT in 2018, largely due to lower EBIT in Argentina combined with higher average invested capital. UK & Ireland Operations (cid:120) Higher ROIC at December 31, 2018 reflects higher EBIT in 2018, outpacing the growth in average invested capital levels in the twelve-month period, demonstrating improved capital efficiency. Invested capital turnover Consolidated invested capital turnover at December 31, 2018 was 2.12 times, up from 2.09 times at December 31, 2017, driven by significant improvement in the Company’s Canadian operations, partially offset by the Company’s South American and UK & Ireland operations. The consolidated invested capital turnover rate in each quarterly period in 2018 improved over its comparable quarter in 2017 with higher revenues in the last twelve month period outpacing the growth in average invested capital levels. 14 Finning International Inc. 2018 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 Operations: Corporate head office. The table below provides details of revenue by lines of business and operation. For year ended December 31, 2018 ($ 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, 2017 ($ millions) (Restated) (1) New equipment Used equipment Equipment rental Product support Other Total Revenue percentage by operation $ $ $ $ 1,288 $ 233 154 1,997 2 3,674 $ 53% 714 $ 54 50 1,348 4 2,170 $ 31% 738 $ 84 35 287 8 1,152 $ 16% 2,740 371 239 3,632 14 6,996 100% Canada South America UK & Ireland Consol 873 $ 236 147 1,814 2 3,072 $ 49% 645 $ 53 50 1,405 4 2,157 $ 35% 657 $ 70 31 262 7 1,027 $ 16% 2,175 359 228 3,481 13 6,256 100% Revenue percentage 39% 5% 4% 52% — 100% Revenue percentage 35% 6% 4% 55% — 100% (1) The 2017 comparative results have been restated to reflect the Company’s adoption of IFRS 15, Revenue from Contracts with Customers and IFRS 9, Financial Instruments effective for the financial year beginning January 1, 2018. More information on the impact of this adoption can be found in note 2 of the Company’s 2018 Annual Financial Statements. 15 Canadian Operations The Canadian reporting segment includes Finning (Canada), OEM, and a 25% interest in 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: Finning International Inc. 2018 Annual Results For years ended December 31 ($ millions) Revenue Operating costs Equity earnings of joint ventures EBITDA Depreciation and amortization EBIT EBITDA margin EBIT margin Adjusted EBITDA Adjusted EBITDA margin Adjusted EBIT Adjusted EBIT margin 2018 3,674 (3,297) 16 393 (96) 297 10.7% 8.1% 386 10.5% 290 7.9% $ $ $ $ $ $ $ $ $ 2017 (Restated) (1) $ 3,072 (2,760) 12 324 (99) 225 10.6% 7.3% 323 10.5% 224 7.3% (1) The 2017 comparative results have been restated to reflect the Company’s adoption of IFRS 15, Revenue from Contracts with Customers and IFRS 9, Financial Instruments effective for the financial year beginning January 1, 2018. More information on the impact of this adoption can be found in note 2 of the Company’s 2018 Annual Financial Statements. Revenue for 2018 increased 20% to $3.7 billion compared to last year, primarily driven by higher new equipment and product support revenues. The revenue increase was driven by higher activity levels across all industry segments. In the oil sands, significant production activity has increased machine utilization and demand for associated product support, particularly component exchange and equipment rebuilds. New and reactivated coal and precious metal mines have generated higher demand for equipment and product support. In addition, strong infrastructure project activity continues to drive new equipment and product support demand. New equipment revenue in 2018 was up 48% from 2017, due to increased demand from mining and construction customers. Equipment backlog at December 31, 2018 was up slightly from December 31, 2017, reflecting higher order intake in the construction sector due to strong infrastructure activity in both British Columbia and Alberta offset by strong deliveries in the mining sector. Canada – Revenue by Line of Business For years ended December 31 ($ millions) (2017 Restated) 2,000 1,000 0 2017 2018 7 9 9 , 1 4 1 8 , 1 8 8 2 , 1 3 7 8 6 3 2 3 3 2 7 4 1 4 5 1 New equipment Used equipment Equipment rental Product support 2 2 Other Product support revenue was 10% higher than last year, up in all industries, but particularly driven by continued strong demand for parts in the construction and oil & gas sectors and increased activity in the mining sector. Gross profit in 2018 was higher than the prior year, reflecting higher sales volumes in most lines of business. Overall gross profit margin decreased in 2018 compared to 2017 primarily due to a revenue mix shift to new equipment, particularly in mining which typically generates a lower gross profit margin. In 2018, new equipment revenue comprised 35% of total revenue compared to 28% in the prior year. 16 Finning International Inc. 2018 Annual Results SG&A for 2018 included the favourable impact of $7 million of insurance proceeds received in relation to the Company’s business interruption insurance claim resulting from the Alberta wildfires in 2016. SG&A for 2017 included $4 million of business interruption insurance proceeds, partially offset by severance costs of $3 million. Excluding these significant items, SG&A was 5% higher compared to the same period in 2017, on 20% higher revenue. This increase was primarily due to higher variable costs associated with strong revenue growth. SG&A relative to revenue was down 270 basis points from the prior year period, reflecting leverage of incremental revenues on fixed costs and disciplined spending. The Canadian operations contributed EBITDA of $393 million in 2018 compared to $324 million earned in the prior year. EBITDA margin was 10.7% compared to the 10.6% earned in 2017. Excluding significant items noted above, Adjusted EBITDA margin was 10.5% in 2018, comparable to 2017 with lower gross profit margin due to a revenue mix shift offset by lower SG&A relative to revenue. South American Operations Finning’s South American operations sell, service, and rent mainly Caterpillar equipment and engines in Chile, Argentina, and Bolivia. The South American operations’ markets include mining, construction, forestry, and power systems. The table below provides details of the results from the South American Operations: For years ended December 31 ($ millions) Revenue Operating costs EBITDA Depreciation and amortization EBIT EBITDA margin EBIT margin Adjusted EBITDA Adjusted EBITDA margin Adjusted EBIT Adjusted EBIT margin 2018 2,170 (1,966) 204 (62) 142 9.4% 6.6% 204 9.4% 142 6.6% $ $ $ $ $ $ 2017 (Restated) (1) 2,157 $ (1,915) 242 (58) 184 11.2% 8.5% $ $ $ 244 11.3% 186 8.7% (1) The 2017 comparative results have been restated to reflect the Company’s adoption of IFRS 15, Revenue from Contracts with Customers and IFRS 9, Financial Instruments effective for the financial year beginning January 1, 2018. More information on the impact of this adoption can be found in note 2 of the Company’s 2018 Annual Financial Statements. South America – Revenue by Line of Business For years ended December 31 ($ millions) (2017 Restated) 1,450 725 0 2017 2018 5 0 4 , 1 8 4 3 , 1 4 1 7 5 4 6 3 5 4 5 0 5 0 5 New equipment Used equipment Equipment rental Product support 4 4 Other Revenue of $2.2 billion for the year ended December 31, 2018 was relatively consistent with the prior year (also consistent in functional currency). Higher new equipment sales in Chile were offset by lower revenues in Argentina. 2018 new equipment revenue was 11% higher than 2017, primarily driven by the mining and power systems sectors in Chile, partially offset by lower activity in Argentina, particularly in the construction sector. Equipment backlog was down from the prior year, reflecting strong deliveries in the current year outpacing order intake. Product support revenue was down 4% compared to last year primarily due to lower revenue reported in Argentina and the impact of business process velocity issues on product support revenues in the mining sector in Chile related to the ERP implementation. Gross profit and gross profit margin were lower than 2017, largely driven by a revenue mix shift to new equipment sales. New equipment revenue comprised 33% of total revenue in 2018 compared to 30% in 2017. 17 Finning International Inc. 2018 Annual Results SG&A for 2018 was 6% higher compared to 2017. The increase in SG&A was due in large part to additional costs related to the ERP implementation this year and severance and restructuring costs in Argentina partially offset by the benefit of the significant devaluation of the ARS when translating local currency costs. These higher fixed costs resulted in SG&A relative to revenue increasing 110 basis points compared to the same period in 2017. For 2018, the Company’s South American operations contributed EBITDA of $204 million and an EBITDA margin of 9.4% compared to $242 million and 11.2% respectively in 2017. Excluding severance costs in the prior year, Adjusted EBITDA for 2018 was 17% lower than the same period in 2017. Lower EBITDA margin was largely due to the lower gross profit margin achieved in the current year from a higher mix of new equipment sales and higher percentage of SG&A relative to revenue. UK & Ireland Operations The Company’s UK & Ireland operations sell, service, and rent mainly Caterpillar equipment and engines in England, Scotland, Wales, Northern Ireland, and the Republic of Ireland. The UK & Ireland operations’ markets include quarrying, construction, power systems, and mining. The table below provides details of the results from the UK & Ireland Operations: For years ended December 31 ($ millions) Revenue Operating costs EBITDA Depreciation and amortization EBIT EBITDA margin EBIT margin $ $ $ 2018 1,152 (1,073) 79 (28) 51 6.9% 4.4% 2017 (Restated) (1) 1,027 $ (964) 63 (26) 37 6.1% 3.6% $ $ (1) The 2017 comparative results have been restated to reflect the Company’s adoption of IFRS 15, Revenue from Contracts with Customers and IFRS 9, Financial Instruments effective for the financial year beginning January 1, 2018. More information on the impact of this adoption can be found in note 2 of the Company’s 2018 Annual Financial Statements. Revenue in 2018 of $1.2 billion was 12% higher than 2017 (up 9% in functional currency), driven primarily by higher new and used equipment and product support revenue, up in all industries, particularly in the power systems sector. 2018 new equipment revenue increased 12% (9% in functional currency) from 2017 in all sectors but primarily from higher power and energy systems sales. Power and energy systems revenue was driven primarily by continued strong activity in the electric power generation business, increased industrial power sales, partially offset by lower activity in the marine industry. Equipment backlog was strong at December 31, 2018, higher by 41% than the prior year period, reflecting strong order intake in all segments, particularly in the construction sector. UK & Ireland – Revenue by Line of Business For years ended December 31 ($ millions) (2017 Restated) 2017 2018 750 375 0 8 3 7 7 5 6 0 7 4 8 1 3 5 3 7 8 2 2 6 2 New equipment Used equipment Equipment rental Product support 7 8 Other Product support revenue was 10% higher than last year (6% in functional currency), driven by higher parts sales in both the power systems and construction sectors. Used equipment revenue increased 20% compared to 2017 (17% in functional currency) reflecting the increased demand for used equipment in the current year. The weaker CAD relative to the GBP on average in 2018 compared to last year when translating results to CAD had a positive foreign currency translation impact on revenue of approximately $35 million and was not significant at the EBITDA level. Higher gross profit in 2018 compared with 2017 was due to increased sales volumes, as well as better overall gross profit margin from most lines of business. 18 Finning International Inc. 2018 Annual Results SG&A for 2018 was up 8% in functional currency, primarily due to higher variable costs driven by increased sales volumes and a benefit recorded in 2017 due to actions taken to manage the Company’s pension plan liabilities. In 2018, SG&A includes a one-time expense in Q4 2018 related to the Company’s defined benefit plan, offset by a gain on the sale of a property. The UK & Ireland operations contributed EBITDA of $79 million, 25% higher than EBITDA of $63 million in 2017. EBITDA margin was 6.9% compared to 6.1% in 2017 due to improved profitability. Other Operations The Other operations segment includes corporate operating costs, as well as equity earnings or losses from the Company’s 28.8% investment in Energyst up to September 30, 2018. EBITDA of this segment was a loss of $66 million in 2018 compared to $54 million in 2017. During 2018, the Company conducted a review of its investment in Energyst and determined that it was no longer a strategic fit. As a result, the Company decided that Energyst was held-for-sale at September 30, 2018 and recorded a write-down of its investment to its estimated fair value ($nil). The Company recorded a $30 million loss, comprising the investment write-off of $19 million and a reclassification of cumulative foreign translation losses of $11 million from accumulated other comprehensive income to the statement of income upon Energyst’s sale of its wholly-owned subsidiary in Argentina. Excluding the write-off and loss related to Energyst, EBITDA loss of $36 million in 2018 was 30% lower than the prior year primarily due to lower long-term incentive plan costs resulting from a decrease in the Company’s share price in 2018 compared with an increase in the prior year period. 19 Finning International Inc. 2018 Annual Results 2018 Fourth Quarter Highlights (cid:120) Free cash flow of $418 million was higher than Q4 2017 free cash flow of $350 million, reflecting strong cash generation from the Company’s Canadian operations, largely due to improved invested capital turnover and positively impacted by higher volumes of new equipment sales. The Company’s UK & Ireland operations also generated higher free cash flow compared with Q4 2017, while lower revenues drove lower cash generation in the Company’s South American operations. (cid:120) Revenue of $1.8 billion was up 6% from Q4 2017 reflecting a 24% increase in new equipment sales partially offset by a 7% decrease in product support revenue. The Company’s Canadian operations accounted for much of the revenue growth, recording its highest total quarterly revenue of $1 billion. The Company’s UK & Ireland operations also reported higher revenue compared with the same prior year period. Higher revenues were partially offset by the Company’s South American operations, where revenues were lower in Argentina due to weak economic conditions and lower in Chile due to the negative impact of the new ERP system launched in mid-November. Since go-live, the speed at which the Company has been processing and delivering parts and components to mining customers has been significantly reduced resulting in an estimated $50 million shortfall in mining product support revenues in Q4 2018. The Company is actively working to resolve the velocity issues with the new ERP system and expects to return to normal parts revenue run rates in Q2 2019. (cid:120) EBIT of $91 million and EBIT margin of 4.9% reported in Q4 2018 were lower than the $109 million and 6.3% earned in Q4 2017, mainly due to lower gross profit margin from a revenue mix shift to new equipment revenue partially offset by lower SG&A relative to total revenue. (cid:120) EBITDA of $140 million and EBITDA margin of 7.6% in Q4 2018 were lower than the $154 million and 8.9% earned in Q4 2017 for the same reasons noted above. (cid:120) Basic EPS earned in the fourth quarter of 2018 was $0.33, lower than Adjusted EPS of $0.39 earned in the prior period (adjusting for the impact of the significant items described on page 21), primarily due to lower profitability in the Company’s South American operations. 2018 Fourth Quarter Overview ($ millions, except per share amounts) Revenue Gross profit SG&A Equity earnings of joint ventures and associate EBIT Net income EPS EBITDA Free cash flow Adjusted EBIT Adjusted net income Adjusted EPS Adjusted EBITDA Gross profit margin SG&A as a percentage of revenue EBIT margin EBITDA margin ROIC Adjusted EBIT margin Adjusted EBITDA margin Adjusted ROIC % change fav (unfav) 6% (5)% 1% n/m (17)% (13)% (13)% (9)% 19% (18)% (14)% (14)% (10)% $ $ $ $ $ $ $ $ $ $ Q4 2018 Q4 2017 (Restated) (1) 1,842 $ 413 (324) 2 91 $ 55 $ 0.33 $ 140 $ 418 $ 91 $ 55 $ 0.33 $ 140 $ 22.4% 17.6% 4.9% 7.6% 12.8% 4.9% 7.6% 13.5% 1,733 434 (326) 1 109 64 0.38 154 350 110 65 0.39 155 25.1% 18.8% 6.3% 8.9% 13.1% 6.4% 9.0% 13.1% (1) The 2017 comparative results have been restated to reflect the Company’s adoption of IFRS 15, Revenue from Contracts with Customers and IFRS 9, Financial Instruments effective for the financial year beginning January 1, 2018. More information on the impact of this adoption can be found in note 2 of the Company’s 2018 Annual Financial Statements. 20 Finning International Inc. 2018 Annual Results There were no significant items identified by management that affected the results of the Company for the three months ended December 31, 2018. Significant items that affected the results of the Company for the three months ended December 31, 2017, which were not considered by management to be indicative of operational and financial trends 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. The magnitude of each of these items, and reconciliation of the non-GAAP financial measures to the closest equivalent GAAP metrics, is shown in the following table: EBIT Net Income EPS 3 months ended December 31, 2017 ($ millions except per share amounts) EBIT, net income, and EPS (Restated) (1) Significant items: Severance costs Insurance proceeds from Alberta wildfires Adjusted EBIT, Adjusted net income, and Adjusted EPS (Restated) (1) South Canada America 67 $ $ 50 $ UK & Ireland Consol Consol 8 $ 109 $ 64 $ Consol 0.38 3 (4) 2 — — — 5 (4) 4 (3) 0.03 (0.02) $ 66 $ 52 $ 8 $ 110 $ 65 $ 0.39 (1) The 2017 comparative results have been restated to reflect the Company’s adoption of IFRS 15, Revenue from Contracts with Customers and IFRS 9, Financial Instruments effective for the financial year beginning January 1, 2018. More information on the impact of this adoption can be found in note 2 of the Company’s Annual Financial Statements. 21 Quarterly Key Performance Measures Reported KPIs The Company utilizes the following KPIs to enable consistent measurement of performance across the organization. Finning International Inc. 2018 Annual Results ROIC Consolidated Canada South America UK & Ireland EBIT ($ millions) Consolidated Canada South America UK & Ireland EBIT Margin 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) EBITDA ($ millions) Consolidated Canada South America UK & Ireland EBITDA Margin Consolidated Canada South America UK & Ireland Net Debt to EBITDA Ratio 2018 2017 (Restated) (1) Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 2016 Q4 12.8 % 13.7 % 14.3 % 13.7 % 13.1 % 10.1 % 16.6 % 16.4 % 15.5 % 14.5 % 13.3 % 9.2 % 12.2 % 16.2 % 17.5 % 17.6 % 17.8 % 15.5 % 14.2 % 14.0 % 13.2 % 13.4 % 12.8 % 12.9 % 9.3 % 8.1 % 14.9 % 13.9 % 7.1 % 6.6 % 5.6 % 5.3 % 14.5 % 13.3 % (0.5)% (4.5)% 91 71 12 12 93 78 37 15 126 77 47 14 113 71 46 10 109 67 50 8 100 57 48 9 97 55 42 13 86 46 44 7 18 (3) 27 8 4.9 % 5.3 % 7.3 % 6.8 % 7.1 % 8.6 % 8.5 % 8.4 % 2.5 % 6.7 % 8.5 % 8.4 % 3.7 % 5.1 % 5.3 % 3.7 % 6.3 % 6.5 % 7.8 % 7.7 % 8.6 % 8.6 % 3.0 % 3.5 % 6.1 % 7.0 % 8.1 % 4.6 % 1.3 % 6.1 % 6.7 % (0.3)% 5.0 % 8.8 % 3.3 % 3.3 % 3,163 1,675 1,190 336 3,431 1,889 1,173 404 3,362 1,840 1,172 372 3,226 1,778 1,140 322 2,830 1,621 983 250 3,095 1,746 1,069 311 3,108 1,764 1,047 307 2,940 1,630 1,029 286 2,797 1,595 996 216 2.12x 2.05x 1.86x 3.22x 2,061 2.68x 2.14x 1.98x 2.01x 3.30x 2,017 2.58x 2.01x 1.74x 2.03x 3.47x 1,744 2.60x 26.6 % 26.7 % 26.9 % 27.1 % 27.4 % 28.6 % 22 2.09x 1.82x 2.09x 3.56x 1,708 2.82x 2.13x 1.87x 2.08x 3.65x 1,906 2.80x 2.13x 1.92x 2.05x 3.44x 1,968 2.57x (263) (49) (28) 350 418 1.97x 1.70x 1.97x 3.66x 1,789 2.52x 29.1 % (131) 1.89x 1.62x 1.87x 3.69x 1,650 2.61x 1.90x 1.70x 1.80x 3.54x 1,601 2.49x 30.5 % 30.4 % 113 (76) 140 97 29 18 142 104 52 23 171 99 62 21 157 93 61 17 154 91 65 14 146 82 61 16 145 81 57 20 131 70 59 13 65 21 43 15 7.6 % 8.1 % 9.9 % 9.4 % 8.9 % 9.5 % 9.7 % 11.4 % 11.0 % 10.9 % 10.6 % 11.2 % 5.8 % 9.3 % 11.2 % 11.1 % 11.0 % 11.2 % 5.7 % 7.7 % 7.9 % 6.3 % 5.2 % 6.0 % 2.4 1.9 2.1 1.5 1.7 2.0 9.1 % 10.3 % 11.0 % 7.0 % 2.5 9.3 % 10.1 % 11.8 % 6.5 % 2.6 4.3 % 3.0 % 7.9 % 6.1 % 2.5 (1) The 2017 comparative results have been restated to reflect the Company’s adoption of IFRS 15, Revenue from Contracts with Customers and IFRS 9, Financial Instruments effective for the financial year beginning January 1, 2018. More information on the impact of this adoption can be found in note 2 of the Company’s 2018 Annual Financial Statements. 22 Quarterly Adjusted KPIs 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 42 to 45 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 KPIs is shown below: Finning International Inc. 2018 Annual Results Adjusted ROIC 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 ($ millions) Consolidated Canada South America UK & Ireland Adjusted EBITDA Margin Consolidated Canada South America UK & Ireland Net Debt to Adjusted EBITDA Ratio 2018 2017 (Restated) (1) Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 2016 Q4 13.5 % 14.5 % 14.2 % 13.5 % 13.1 % 11.8 % 11.1 % 10.0 % 9.3 % 16.2 % 16.0 % 15.1 % 14.0 % 13.2 % 12.0 % 11.0 % 10.2 % 9.3 % 12.2 % 16.4 % 17.7 % 17.8 % 18.1 % 16.5 % 16.0 % 15.6 % 15.0 % 14.2 % 14.0 % 13.2 % 13.4 % 12.8 % 12.9 % 13.9 % 7.7 % 5.9 % 91 71 12 12 123 78 37 15 126 77 47 14 106 64 46 10 110 66 52 8 100 57 48 9 97 55 42 13 86 46 44 7 70 44 37 8 4.9 % 7.0 % 7.3 % 6.4 % 6.4 % 6.5 % 7.1 % 8.6 % 8.5 % 7.5 % 7.6 % 7.7 % 2.5 % 6.7 % 8.5 % 8.4 % 9.1 % 8.6 % 3.7 % 5.1 % 5.3 % 3.7 % 3.0 % 3.5 % 6.1 % 7.0 % 8.1 % 4.6 % 6.1 % 4.8 % 6.7 % 6.2 % 8.8 % 7.0 % 3.3 % 3.3 % 140 97 29 18 172 104 52 23 171 99 62 21 150 86 61 17 155 90 67 14 146 82 61 16 145 81 57 20 131 70 59 13 117 68 53 15 7.6 % 9.7 % 9.9 % 9.0 % 9.0 % 9.5 % 9.3 % 7.9 % 9.7 % 11.4 % 11.0 % 10.1 % 10.5 % 11.2 % 10.3 % 10.1 % 9.5 % 5.8 % 9.3 % 11.2 % 11.1 % 11.4 % 11.2 % 11.0 % 11.8 % 9.9 % 5.7 % 7.7 % 7.9 % 6.3 % 5.2 % 6.0 % 6.5 % 6.1 % 1.9 2.1 7.0 % 2.3 9.1 % 2.0 2.0 2.1 1.5 1.7 2.0 (1) The 2017 comparative results have been restated to reflect the Company’s adoption of IFRS 15, Revenue from Contracts with Customers and IFRS 9, Financial Instruments effective for the financial year beginning January 1, 2018. More information on the impact of this adoption can be found in note 2 of the Company’s 2018 Annual Financial Statements. 23 Finning International Inc. 2018 Annual Results 2018 Fourth Quarter Results Revenue Revenue by Line of Business and by Operation 3 months ended December 31 ($ millions) (2017 Restated) 900 450 0 Line of Business 2017 2018 6 9 8 4 3 8 2 2 8 4 6 6 0 1 1 9 1 1 0 6 4 6 New equipment Used equipment Equipment rental Product support 3 3 Other 1,110 555 0 Operation 2017 2018 5 0 0 , 1 6 5 8 9 8 5 9 0 5 8 2 3 8 8 2 Canada South America UK & Ireland The Company generated revenue of over $1.8 billion during the three months ended December 31, 2018, an increase of 6% over the same period last year. Revenue was up in the Company’s Canadian and UK & Ireland operations, particularly in new equipment revenue, partially offset by lower product support revenue in the Company’s South American operations. New equipment sales increased 24% compared to the same period in 2017, largely driven by 44% growth year over year in the Company’s Canadian operations. On a consolidated basis in the fourth quarter of 2018, new equipment revenue as a percentage of overall revenue was 45%, compared to 38% in the prior year period. Product support revenue decreased by 7% as higher revenues in the Company’s Canadian and UK & Ireland operations were offset by lower product support revenues in the Company’s South American operations due to business process velocity issues with the new ERP system, which went live in Chile in mid-November 2018. Foreign currency translation of the results of the Company’s South American and UK & Ireland operations had a positive impact on revenue of approximately $20 million, primarily due to the 4% weaker CAD relative to the USD in the fourth quarter of 2018, compared to last year and was not significant at the EBITDA level. EBITDA and EBIT Gross profit in the last three months of 2018 of $413 million was down 5% compared to the comparative prior year period largely due to a shift in the revenue mix to new equipment sales. Gross profit margin declined by 270 basis points from the fourth quarter of 2017. On a consolidated basis, new equipment revenue as a proportion of the overall sales mix was 45%, compared to 38% in the prior year period. SG&A in the fourth quarter of 2018 was slightly lower than the prior year comparative period. Excluding insurance proceeds and severance costs in Q4 2017, Q4 2018 SG&A was consistent with the prior year period on higher revenues. As a percentage of revenue, SG&A was down by 120 basis points over the same period of the prior year. SG&A relative to revenue was down in the Company’s Canadian and UK & Ireland operations reflecting the leverage of incremental revenues on fixed costs. This was partially offset by higher SG&A relative to revenue in the Company’s South American operations due to lower mining product support revenues in Chile. 24 Finning International Inc. 2018 Annual Results Adjusted EBITDA and EBIT by Operation (1) 3 months ended December 31 ($ millions) (2017 Restated) Adjusted EBITDA 2017 2018 7 9 0 9 7 6 9 2 8 1 4 1 100 50 0 Adjusted EBIT 2018 2017 1 7 6 6 2 5 2 1 2 1 8 100 50 0 Canada South America UK & Ireland Canada South America UK & Ireland (1) Excluding Other Operations (1) Excluding Other Operations EBITDA for the fourth quarter of 2018 was $140 million and EBITDA margin was 7.6%. Q4 2017 EBITDA was $154 million and EBITDA margin was 8.9%. Excluding the significant items noted on page 21, Q4 2017 Adjusted EBITDA was $155 million and Adjusted EBITDA margin was 9.0%. There were no significant items in Q4 2018. The decrease in Q4 2018 was mainly due to a shift in revenue mix to higher new equipment sales in the Company’s Canadian and South American operations, partially offset by an improvement in SG&A relative to revenue in Q4 2018 from Q4 2017 in the Company’s Canadian and UK & Ireland operations. The Company reported EBIT of $91 million in the fourth quarter of 2018 compared to the $109 million in the fourth quarter of 2017. Excluding significant items detailed in the table on page 21, Q4 2017 Adjusted EBIT was $110 million. Q4 2018 EBIT was lower than Adjusted EBIT in the same prior year period, primarily due to lower product support revenue and EBIT in the Company’s South American operations. This was partially offset by higher EBIT. The Company’s EBIT margin was 4.9% in the fourth quarter of 2018, compared to 6.3% in the same period of 2017. Finance Costs Finance costs in the three months ended December 31, 2018 were $20 million and slightly below the $22 million reported in the same period in 2017. Provision for Income Taxes Income tax expense for Q4 2018 totaled $16 million (Q4 2017: $23 million) and the effective income tax rate of 22.2% was lower than the 27.1% in the comparable period of 2017, primarily as a result of a higher proportion of earnings in lower tax jurisdictions. Net Income Net income was $55 million and basic EPS was $0.33 in the fourth quarter of 2018 compared to $64 million net income and $0.38 basic EPS earned in the same period last year. Excluding significant items noted on page 21, Adjusted EPS earned in the fourth quarter of 2017 was $0.39. The decrease in basic EPS compared to Adjusted EPS in the prior year period was primarily due to lower gross profit, lower gross profit margins due to a higher mix of new equipment revenue, as well as challenges in the Company’s South American operations noted above. 25 The table below provides details of revenue by operation and lines of business and results by operations. Finning International Inc. 2018 Annual Results For 3 months ended December 31, 2018 ($ millions) New equipment Used equipment Equipment rental Product support Other Total revenue Operating costs Equity earnings EBITDA Depreciation and amortization EBIT Revenue percentage by Operation EBITDA margin EBIT margin For 3 months ended December 31, 2017 ($ millions) (Restated) (1) New equipment Used equipment Equipment rental Product support Other Total revenue Operating costs Equity earnings (loss) EBITDA Depreciation and amortization EBIT Revenue percentage by Operation EBITDA margin EBIT margin Adjusted EBITDA Adjusted EBITDA margin Adjusted EBIT Adjusted EBIT margin Canada 390 $ 73 45 496 1 $ 1,005 $ $ (910) 2 97 (26) 71 54% 9.7% 7.1% $ South America 218 $ 11 11 269 — 509 (480) — 29 (17) 12 28% 5.8% 2.5% $ $ $ UK & Ireland 214 $ 35 8 69 2 328 (310) — 18 (6) 12 18% 5.7% 3.7% $ $ Canada 271 77 40 467 1 856 (767) 2 91 (24) 67 49% 10.6% 7.8% $ South America 194 $ 13 12 369 1 589 (524) — 65 (15) 50 34% 11.0% 8.6% $ $ $ UK & Ireland 199 $ 20 8 60 1 288 (274) — 14 (6) 8 17% 5.2% 3.0% $ $ $ $ 90 10.5% 66 7.6% $ $ 67 11.4% 52 9.1% $ $ 14 5.2% 8 3.0% $ $ $ $ $ $ $ $ $ $ $ $ $ $ Other Consol Revenue % 45% 7% 3% 45% — 100% — $ — — — — — $ (4) — (4) $ — (4) $ — 822 119 64 834 3 1,842 (1,704) 2 140 (49) 91 100% 7.6% 4.9% Revenue % 38% 6% 4% 52% — 100% Other Consol — $ — — — — — $ (15) (1) (16) $ — (16) $ — (16) $ (16) $ 664 110 60 896 3 1,733 (1,580) 1 154 (45) 109 100% 8.9% 6.3% 155 9.0% 110 6.4% (1) The 2017 comparative results have been restated to reflect the Company’s adoption of IFRS 15, Revenue from Contracts with Customers and IFRS 9, Financial Instruments effective for the financial year beginning January 1, 2018. More information on the impact of this adoption can be found in note 2 of the Company’s 2018 Annual Financial Statements. 26 Finning International Inc. 2018 Annual Results Canada Q4 2018 revenue of over $1 billion was 17% higher than Q4 2017 and was the highest revenue recorded in a quarter, reflecting strong mining deliveries and higher market activity in the construction sector, particularly in British Columbia. New equipment revenue was up 44% in Q4 2018 compared to the same period last year, driven by significant equipment deliveries in the quarter, particularly in the mining and construction sectors. Product support revenue was 6% higher than Q4 2017, with continued strong demand for equipment overhauls in the mining and construction industries. Rental revenues also increased by 11% over Q4 2017. Gross profit in Q4 2018 was higher than the prior year, reflecting higher sales volumes. Gross profit margin decreased in Q4 2018 from the comparable period in 2017, primarily due to a revenue mix shift to a higher proportion of new equipment revenue. New equipment revenue comprised 39% of total revenue in Q4 2018, compared to 32% in Q4 2017. SG&A was 5% higher in Q4 2018 compared to the same period in the prior year, due in large part to higher variable costs from increased sales volumes. SG&A relative to revenue was down 210 basis points in Q4 2018 compared to the prior year period, reflecting leverage of incremental revenues on fixed costs and disciplined spending. Q4 2018 EBITDA was $97 million, compared to $91 million in Q4 2017. EBITDA margin was 9.7%, down from 10.6% earned in the same period in 2017. Excluding the significant items noted above and as summarized on page 21, Q4 2018 EBITDA margin of 9.7% was lower than the Adjusted EBITDA margin of 10.5% earned in Q4 2017, primarily due to a revenue mix shift to higher new equipment sales which typically generate lower margins, partially offset by lower SG&A. South America Q4 2018 revenue of $509 million was 14% lower than Q4 2017 (down 17% in functional currency), reflecting lower revenues in Argentina and a shortfall in mining product support revenues in Chile due to business process velocity issues following the new ERP system launch in mid-November. New equipment sales in the Company’s South American operations were up 12% (up 8% in functional currency), driven by higher new equipment revenue in all market segments in Chile, partially offset by lower sales in Argentina compared with the same prior year period. The weaker Canadian dollar relative to the U.S. dollar on average in the quarter compared to Q4 2017 had a favourable foreign currency translation impact on revenue in Q4 2018 of approximately $20 million and was not significant at the EBITDA level. Gross profit decreased 25% (28% in functional currency) compared to Q4 2017, in large part due to lower volumes across most lines of business, particularly in product support. Gross profit margin also decreased in Q4 2018 compared to Q4 2017, reflecting a revenue mix shift to a higher proportion of new equipment. New equipment revenue comprised 43% of total revenue in Q4 2018, compared to 33% in Q4 2017. SG&A (in functional currency) in Q4 2018 decreased by 5% compared to the same period in the prior year. Lower SG&A in Q4 2018 was primarily driven by the favourable impact of foreign exchange and lower people-related costs, partially offset by additional costs related to the ERP implementation. SG&A relative to revenue was higher than the prior year comparable period due to lower revenues on fixed costs. Q4 2018 EBITDA was $29 million, compared to $65 million in Q4 2017. EBITDA margin was 5.8%, down from 11.0% earned in the same period of 2017 due to lower gross profit margins achieved in the current year combined with higher SG&A relative to revenue. Results from Argentina in Q4 2018 showed an improvement compared to Q3 2018. As a result of weak economic conditions, the Company right-sized its costs in Argentina to align with reduced activity levels. 27 Finning International Inc. 2018 Annual Results UK & Ireland Fourth quarter 2018 revenue of $328 million was up 14% compared to the fourth quarter of 2017 (up 13% in functional currency), driven primarily by higher new and used equipment sales in the construction sector, as well as higher new equipment sales in the power systems sector. Product support revenue was up 15% (14% in functional currency) compared to last year’s fourth quarter, up in the construction and power systems sector. Q4 2018 gross profit was higher than the prior year period, in line with higher sales volumes and gross profit margin was consistent with the same period in the prior year. SG&A (in functional currency) in Q4 2018 increased by 6% compared to the same period in the prior year, on revenue growth of 13%, reflecting improved leverage on fixed SG&A. In addition, Q4 2017 included a benefit related to actions taken to manage the Company’s pension plan liabilities. Q4 2018 EBITDA was $18 million and higher than EBITDA of $14 million in Q4 2017. EBITDA margin was 5.7% in Q4 2018, up from the 5.2% earned in Q4 2017, primarily due to leverage of incremental revenue on fixed costs. 28 Finning International Inc. 2018 Annual Results Outlook Canadian Operations In the oil sands, demand for equipment and product support, including component rebuilds, remains stable, despite a shortage of pipeline capacity and production restrictions implemented by the Alberta government in December 2018. Demand for power systems products, parts and service has increased, mainly as a result of ongoing midstream infrastructure expansion and maintenance, particularly in the gas compression sector. Construction activity is expected to remain steady, with large infrastructure projects, notably LNG Canada, creating incremental demand for construction and power systems equipment and product support in the future. South American Operations In the near term, international trade tensions continue to pose a risk to the price of copper. However, the Company remains constructive on the long-term outlook for this commodity and expects increased copper production to have a positive impact on demand for mining equipment and product support. The Chilean government is business- friendly and has announced public investment in infrastructure which is expected to benefit the construction sector and generate improved demand for construction equipment and product support in the medium term. In Argentina, the economy appears to have stabilized but remains weak. The Argentine government has curtailed infrastructure spend, resulting in a significantly reduced demand for construction equipment. Despite the current economic downturn in Argentina, the Company expects oil and gas development at Vaca Muerta to proceed and provide meaningful upside potential for future equipment and product support demand. UK & Ireland Operations In the UK, uncertainty remains around the impact of a possible change in the trade relationship with the European Union (Brexit). The Company has worked with Caterpillar to develop a risk mitigation strategy to minimize the impact of any scenario that occurs, and continues to monitor all activities related to Brexit. The impact on customer confidence and future investment decisions continues to be mitigated by the UK government’s investments in large- scale rail, power, road, and airport infrastructure projects. In the UK & Ireland, order intake levels remain robust. The Company is capitalizing on strong demand for power systems products in the industrial and electric power sectors. Activity levels in the quarry, general construction, and plant hire sectors are expected to continue to generate solid demand for construction equipment and product support. Improving ROIC The Company continues to closely monitor global market conditions and inventory levels. In 2019, the Company expects low revenue growth and improved ROIC performance in all regions. Sustainable operating improvements and cost discipline are expected to generate earnings torque. Global supply chain initiatives are expected to continue to increase capital efficiencies and support positive annual free cash flow. The Company’s capital investments and resource allocation are directly linked to the Global Strategic Priorities described on pages 3 to 4, and are mostly success-based. Foreign Exchange Exposure The Company expects on-going volatility in foreign exchange markets to continue impacting its results. Any devaluation of the CAD increases earnings translated from the Company’s foreign subsidiaries. The opposite is true for any appreciation of the CAD. Transactional gains or losses are dependent on the Company’s hedging activities and general market conditions. 29 Finning International Inc. 2018 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, (cid:120) (cid:120) and financing provided to customers; 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-term and long-term financing. The magnitude of each of these items is shown in the following table: ($ millions) Cash provided by operating activities Cash used in investing activities Cash used in financing activities Free Cash Flow 3 months ended December 31 Years ended December 31 2018 2017 Increase (Decrease) in cash 2018 2017 (Decrease) Increase in cash $ $ $ $ 490 $ (73) $ 398 $ (48) $ (199) $ (407) $ 350 $ 418 $ 92 $ (25) $ 208 $ 68 $ 260 $ (184) $ (107) $ 78 $ 283 $ (116) $ (276) $ 165 $ (23) (68) 169 (87) The most significant contributors to the changes in cash flows for 2018 over 2017 were as follows: Quarter over Quarter Year over Year (cid:120) higher customer deposits received for future deliveries of new equipment, primarily in the Company’s Canadian operations Cash provided by operating activities (cid:120) higher supplier payments in the Company’s South American and Canadian operations, reflecting higher inventory purchases supporting increased demand (cid:120) partially offset by higher cash collections on receivable balances from the Company’s South American and Canadian operations and higher customer deposits received for future deliveries of new equipment, primarily in the Company’s Canadian operations Cash used in investing activities (cid:120) higher capital expenditures in Q4 2018 resulting from investments in a new ERP system and large mining vehicles in the Company’s South American operations (cid:120) higher capital expenditures in 2018 resulting from investments in a new ERP system and large mining vehicles in the Company’s South American operations (cid:120) $350 million repayment of long-term debt in Q4 (cid:120) $150 million net repayment of long-term debt in 2017 the prior year period (cid:120) partially offset by the repurchase of $94 million of common shares in Q4 2018 (Q4 2017: $nil); and, (cid:120) $136 million of cash provided by short-term debt in 2018, higher than the $17 million provided in 2017 (cid:120) $69 million repayment of short-term debt in Q4 2018 ($14 million repaid in the comparable prior year period). (cid:120) partially offset by a higher use of cash in 2018 to repurchase common shares (cid:120) higher cash generation primarily from higher (cid:120) lower cash provided by operating activities for customer deposits received in Q4 2018 partially offset by higher capital expenditures. the reasons outlined above (cid:120) higher capital expenditures Cash used in financing activities Free cash flow generation 30 Finning International Inc. 2018 Annual Results Capital resources and management The Company’s cash and cash equivalents balance at December 31, 2018 was $454 million (December 31, 2017: $458 million). To complement the internally generated funds from operating and investing activities, the Company has $2.2 billion in unsecured credit facilities. Included in this amount is a syndicated committed credit facility totaling $1.3 billion with various Canadian and other global financial institutions, of which $1.2 billion was available at December 31, 2018. In December 2018, the Company amended its previous $1 billion credit facility which was set to fully mature in October 2022 by, among other things, extending the maturity date to December 2023 and increasing the credit facility commitment to $1.3 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. 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, the Company believes it continues to have sufficient liquidity to meet operational needs and planned growth and development. The Company is subject to certain covenants within its syndicated committed credit facility. As at December 31, 2018 and 2017, the Company was in compliance with these covenants. 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 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 the year ended December 31, 2017. The Company is rated (1) by both DBRS and S&P: December 31 DBRS S&P Long-term debt Short-term debt 2018 BBB (high) BBB+ 2017 BBB (high) BBB+ 2018 R-2 (high) n/a 2017 R-2 (high) n/a In September 2018, DBRS reconfirmed the Company’s BBB (high) long-term rating as well as its commercial paper rating at R-2 (high), reflecting the Company’s improved performance, supported by strong market fundamentals and diversified operations. In November 2018, S&P reconfirmed the Company’s BBB+ rating, noting the Company’s strong market position as the largest Caterpillar equipment dealer, its diversification by geography and its earnings stability driven by the after- sales parts and services business. In May 2018, the Company renewed its NCIB (2) which enables the Company to purchase its common shares for cancellation. In November 2018, the Company amended the NCIB to increase the number of shares available for purchase for cancellation from 3 million to 5.3 million. In December 2018, the Company further amended the NCIB to put in place an automatic share repurchase plan with a designated broker, to enable continued share purchases for cancellation during the Company’s regular blackout period. In February 2019, the Company further amended the NCIB to increase the number of shares available for purchase for cancellation from 5.3 million to 7.6 million. During 2018, the Company repurchased 4,128,053 common shares for cancellation at an average cost of $26.41 per share (totalling $109 million). During 2017, the Company repurchased 89,900 common shares for cancellation at an average cost of $25.45 per share. The NCIB is in place to take advantage of Finning’s strong balance sheet and cash balances in periods of broader market volatility and the resulting negative impact on the Company’s share price. Execution of the NCIB is governed by rules established by the Toronto Stock Exchange. (1) A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the rating organization. (2) A copy of the NCIB notice is available on request from the Company. Direct your request to the Corporate Secretary, 300 – 565 Great Northern Way, Vancouver, BC V5T 0H8. 31 Finning International Inc. 2018 Annual Results Net Debt to EBITDA The Company monitors net debt to EBITDA to assess operating leverage and ability to repay debt. This ratio approximates the length of time, in years, that it would take the Company to repay its debt, with net debt and EBITDA held constant. Previously, the Company managed its capital structure by monitoring net debt to invested capital, but in line with management’s focus on EBITDA as a key financial measure, management believes reporting net debt to EBITDA provides a better measurement of the Company’s management of capital resources. December 31 Net debt to EBITDA Ratio Company long-term target < 3.0 2018 1.7 2017 (Restated) (1) 1.5 (1) The 2017 comparative results have been restated to reflect the Company’s adoption of IFRS 15, Revenue from Contracts with Customers and IFRS 9, Financial Instruments effective for the financial year beginning January 1, 2018. More information on the impact of this adoption can be found in note 2 of the Company’s 2018 Annual Financial Statements. Contractual Obligations Payments on contractual obligations in each of the next five years and thereafter are as follows: ($ millions) Short-term debt 2019 2020 2021 2022 2023 Thereafter Total - principal repayment $ 154 $ — $ — $ — $ — $ — $ 154 Long-term debt - principal repayment - interest Operating leases (1) Finance leases Total contractual obligations $ — 54 74 7 289 $ 200 53 65 8 326 $ 201 47 58 7 313 $ 205 37 41 6 289 $ 123 30 20 3 176 $ 628 188 34 10 1,357 409 292 41 860 $ 2,253 (1) Included in accrued liabilities is $2 million and in non-current other liabilities is $8 million related to facility closure costs and future minimum lease payments due under certain operating leases that were considered to be onerous at December 31, 2018 (2017: $17 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. 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 2018, approximately $25 million was contributed by the Company towards the defined benefit pension plans. Based on the most recent valuations completed, the Company expects to contribute approximately $20 million to the defined benefit pension plans during the year ended December 31, 2019. Capital and Rental Expenditures The Company’s net spend on capital expenditures and rental fleet additions during the year ended December 31, 2019 is expected to be in the range of $250 million to $300 million depending on strength of market conditions. These are planned, but not legally committed, expenditures and include investments in a long-term network strategy, branch improvement initiatives, Digital initiatives, and electric drive mining vehicles. Employee Share Purchase Plans 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, 2018, approximately 71%, 74% and 3% 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 purchased by Finning (UK) employees and for every one share purchased by Finning (Ireland) employees. Finning (UK) employees may contribute from £10 to £150 of their salary per month. At December 31, 2018, approximately 31% of eligible employees in Finning (UK) were contributing to this plan. Finning (Ireland) employees may contribute from €10 to €70 of their salary per month. At December 31, 2018, approximately 24% of eligible employees in Finning (Ireland) were contributing to this plan. These plans may be cancelled by the Company at any time. 32 Finning International Inc. 2018 Annual Results Subsequent event On February 1, 2019, the Company completed the acquisition, announced in December 2018, of 4Refuel, through the acquisition of all of the outstanding shares of 4Refuel’s ultimate parent, Owl Holdco RF Limited. 4Refuel is a mobile on-site refueling service provider with operations in most of the provinces in Canada and in Texas. This acquisition is a complementary bolt-on acquisition that provides the Company with the opportunity to sell equipment, product support, rental and more value-added services to a customer base not currently taking advantage of Finning’s full suite of services. Furthermore, 4Refuel will have the opportunity to sell more fuel services to the Company’s customers and improve customer service. The Company funded the transaction, valued at approximately $260 million, with cash on hand and from existing credit facilities. 4Refuel is expected to generate approximately $100 million net revenue and approximately $30 million EBITDA in the year ended December 31, 2018. Net revenue, a non-GAAP financial measure, is defined as revenue attributed to service fees for the delivery of fuel and is calculated as total revenue charged to customers less the cost of fuel which is paid in full by the customer. Accounting and Estimates The Company employs professionally qualified accountants throughout its finance group and all of the operating unit financial officers report directly to the Company’s 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, as well as the audit committee of the Board of Directors (Audit Committee). Significant accounting and financial topics and issues are presented to and discussed with the Audit Committee. Management’s discussion and analysis of the Company’s financial condition and results of operations is based on the Company’s Annual Financial Statements, which have been prepared in accordance with IFRS. The Company’s significant accounting policies are contained in the notes to the Annual Financial Statements for the year ended December 31, 2018. Certain policies require management to make judgments, estimates, and assumptions in respect of the application of accounting policies and the reported amounts of assets, liabilities, revenues, expenses, and disclosure of contingent assets and liabilities. These policies may require particularly subjective and complex judgments to be made as they relate to matters that are inherently uncertain and because there is a likelihood that materially different amounts could be reported under different conditions or using different assumptions. The Company has discussed the development, selection, and application of its key accounting policies, and the critical accounting estimates and assumptions they involve, with the Audit Committee. The more significant estimates and judgments include: recoverable values for goodwill and other indefinite-lived intangible assets; identifying the CGU to which assets should be allocated for impairment testing; (cid:120) (cid:120) (cid:120) allowance for doubtful accounts; (cid:120) provisions for standard warranty; (cid:120) provisions for income tax; (cid:120) the determination of post-employment benefits; (cid:120) provisions for slow-moving and obsolete inventory; (cid:120) (cid:120) the useful lives and residual values of property, plant, and equipment, rental equipment, and intangible assets; revenues and costs associated with long term contracts (primarily long-term product support contracts and power and energy systems); 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; and, (cid:120) inputs to the models to determine the fair value of certain share-based payments. For additional information on the above judgments, estimates, and assumptions made, please refer to the Annual Financial Statements for the year ended December 31, 2018. 33 Finning International Inc. 2018 Annual Results 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 (CGU or group of CGUs) 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, 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 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 any indication that the circumstances leading to the impairment loss of an indefinite-lived intangible asset no longer exists 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 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 or 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, 2018 and 2017. Also, the Company reviewed if there was any indication that the circumstances leading to the previously recognized impairment loss on its indefinite-lived intangible asset no longer existed or may have decreased. No reversal of impairment losses was considered appropriate at December 31, 2018 and 2017. Refer to note 20 in the Annual Financial Statements for further details. Income tax asset or liability Estimations 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. 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. 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. Financial Instruments Cash and cash equivalents, accounts receivable, unbilled work in progress, supplier claims receivable, and instalment and other notes receivable are classified and measured at amortized cost using the effective interest method. Derivative financial instruments and short-term investments are classified and measured at 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 and measured at amortized cost using the effective interest method. 34 Finning International Inc. 2018 Annual Results 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 in which they operate 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. New Accounting Pronouncements Changes in the rules or standards governing accounting can impact Finning’s financial reporting. The impact of adopting new accounting standards is described in note 2 of the Company’s Annual Financial Statements. The effect of future accounting pronouncements and effective dates are also discussed in note 2 of the Annual Financial Statements. The Company has adopted the following new accounting standards and interpretation: (cid:120) (cid:120) (cid:120) IFRS 15, Revenue from Contracts with Customers (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. The Company applied this standard retrospectively. IFRS 15 supersedes existing standards and interpretations, including IAS 18, Revenue and IAS 11, Construction Contracts. IFRS 9, Financial Instruments (effective January 1, 2018) introduced new requirements for the classification and measurement of financial assets and financial liabilities, impairment of financial assets, and hedge accounting. The Company applied this standard retrospectively. Under the new standard, management utilizes a provision matrix, permitted under the simplified approach, to estimate expected credit losses for trade and other receivables and unbilled work in progress. There is no adjustment on transition for this change in methodology from incurred credit losses under the previous standard IAS 39, Financial Instruments: Recognition and Measurement. 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. IFRIC 22 clarifies the exchange rate used to translate deposits made on inventory purchases or advances received for equipment sales denominated in a foreign currency. Management elected to apply this interpretation prospectively to all in-scope assets, expenses, and income recognized on or after January 1, 2018. The Company has not applied the following new standard and interpretation that have been issued but are not yet effective: (cid:120) 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 higher non-current assets and current and non-current liabilities in the range of $250 million to $300 million in the consolidated statement of financial position across all reporting segments, primarily in the Canadian segment. The categories of assets expected to be most impacted are properties and vehicles. 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. Although total cash movement will be unchanged, the presentation in the statement of cash flows will look different under the new standard. There will be an increase in cash flows provided by operating activities offset by an increase in cash flows used within financing activities, as the principal component of lease payments currently accounted for as an operating activity will be presented as a financing activity. The Company will apply IFRS 16 retrospectively and recognize the cumulative effect of initial application on January 1, 2019, on the statement of financial position, subject to permitted and elected practical expedients. This method of application will not result in a restatement of amounts reported in periods prior to January 1, 2019. The Company will measure the right-of-use asset at an amount equal to the lease liability on January 1, 2019 and apply a single discount rate to leases with a similar remaining lease term for similar classes of underlying assets. The Company will not apply this standard to short-term leases and leases for which the underlying asset is of low value. (cid:120) 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 has assessed the interpretation and expects there to be no impact. 35 Finning International Inc. 2018 Annual Results 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 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 AIF, MD&A, and Annual 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 8 of the Company’s Annual 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 exposures. 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 CAD, USD, GBP, CLP, and ARS. 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’s functional currency is the Euro). 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 CAD, 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 currency translation gain of $133 million recorded in 2018 resulted primarily from the 9% weaker CAD relative to the USD as well as the 3% weaker CAD relative to the GBP at December 31, 2018, compared to December 31, 2017. This was partially offset by $58 million of unrealized foreign exchange loss 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. 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. 36 Finning International Inc. 2018 Annual Results 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 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 CLP has been positively correlated to the price of copper. As the price of copper declines, the value of the CLP 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 in South America, which is largely denominated in local currency, is 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 3 months ended December 31 – average 2017 Change 2018 (4)% 1.2713 (9)% 1.3204 (1)% 1.6875 (3)% 1.6989 (13)% 679.28 (7)% 633.80 17.53 (111)% 37.07 2017 Change 1.2545 1.6961 615.22 18.65 (102)% 12 months ended December 31 – average 2017 Change 2018 0 % 1.2986 1.2957 (3)% 1.6721 1.7299 1 % 649.31 639.90 (59)% 16.47 26.23 2018 1.3642 1.7439 695.69 37.70 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. 37 Finning International Inc. 2018 Annual Results Commodity Prices The Company provides equipment and 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 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 by Moody’s and/or A by Fitch. 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 its 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. 38 Finning International Inc. 2018 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 and the extent the Company is able to achieve or exceed specified performance levels. 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, performance of the Company, and employee exercise behaviour change. For further details on the Company’s share-based payment plans, please refer to note 11 of the Company’s Annual 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, 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. 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 (at the customer’s discretion), 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, 2018, the total estimated value of these contracts outstanding is $130 million (2017: $119 million) coming due at periods ranging from 2019 to 2025. The Company’s experience to date has been that the equipment fair value 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 at December 31, 2018 and December 31, 2017 is $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 Financial Statements. Outstanding Share Data As at February 18, 2019 Common shares outstanding Options outstanding 164,038,067 3,157,883 39 Finning International Inc. 2018 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 CEO and 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 the Audit 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, 2018, that would materially affect, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. In the second half of 2018, management did employ additional procedures to ensure key financial internal controls remained in place during and after the conversion to a new ERP system in the Company’s South American operations. Management also performed additional account reconciliations and other analytical and substantive procedures to mitigate any financial risks from the introduction of the new system. Regular involvement of the Company’s internal audit function and quarterly reporting to the Audit Committee assist in providing reasonable assurance that the objectives of the control system are met. While the officers of the Company have designed the Company’s disclosure controls and procedures and internal control over financial reporting 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 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, 2018, 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 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, 2018. 40 Finning International Inc. 2018 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 MD&A and 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). KPIs Management uses KPIs to consistently measure performance against the Company’s priorities across the organization. The Company’s KPIs include, among others, ROIC, 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. A reconciliation between net income and EPS (the most directly comparable GAAP measures) and Adjusted net income and Adjusted EPS can be found on pages 8 and 21 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. 41 . c n I l a n o i t a n r e t n I i g n n n F i s t l u s e R l a u n n A 8 1 0 2 d e d n e s r a e y d n a s r e t r a u q e n n t s a i l e h t r o f s n o i t a r e p o d e t a d i l o s n o c e h t r o f I A D T B E d e t s u d A d n a j , I T B E d e t s u d A j , I A D T B E o t I T B E m o r f n o i t a i l i c n o c e r A 1 3 c e D d e d n e s r a e Y 6 1 0 2 ) 1 ( ) d e t a t s e R ( 7 1 0 2 8 1 0 2 4 1 0 2 5 1 0 2 6 1 0 2 1 3 c e D 1 3 r a M 0 3 n u J 0 3 p e S 1 3 c e D 1 3 r a M 0 3 n u J 0 3 p e S 1 3 c e D 4 0 5 6 1 2 0 2 7 0 2 7 $ ) 5 0 1 ( $ $ $ 1 3 2 6 2 1 6 2 1 $ $ 5 6 1 2 9 1 7 5 3 7 5 3 4 0 5 $ ) 5 0 1 ( $ 5 6 1 $ $ $ $ — — — 7 1 — — — — — — — 2 1 — 3 3 5 6 1 2 9 4 7 3 3 5 9 4 7 $ $ $ $ — — — 8 4 3 5 — — — ) 5 ( 2 4 — 2 1 8 3 3 3 8 3 1 2 2 4 0 6 3 8 3 4 0 6 — — 1 1 1 4 6 3 ) 5 ( 0 2 5 — — — — — $ $ $ $ 3 7 2 2 9 1 5 6 4 3 7 2 5 6 4 $ $ $ $ e h t r o f e v i t c e f f e s t n e m u r t s n I l 8 1 7 4 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c n o i t p u r s d i r u o b a l d n a s t s o c e c n a r e v e S s t s o c g n i r u t c u r t s e r d n a s e r u s o c l y t i l i c a F s d e e c o r p e c n a r u s n i l s t s o c e b a d o v a n u i – – t d e a m i i i t s e , s n o s v o r p t c e o r p s m e t s y s j r e w o P l t n e u d u a r f d e g e l l a d n a s e t u p s d n o s s o i l r e m o t s u c a y b y t i v i t c a t n e m t s e v n i n o n a G i k r o w t e n n o i t u b i r t s d n o s s o i l t n e m r i a p m I s t n e m r i a p m i t e s s a r e h t o d n a y r o t n e v n I l l i w d o o g d n a i s s e n s u b e r o c - n o n f o e a s n o s s o L l t e n , s s e n s u b f o i l i a s o p s d d n a n o i t i s u q c A i ) 3 ( i d e z n g o c e r e d s t s o c P R E t s y g r e n E o t d e t a e r l s s o l d n a f f o - e t i r W n o i t a z i t r o m a d n a n o i t a c e r p e D i s h t n o m 2 1 t s a l – A D T B E I A D T B E I I T B E : s m e t i t n a c i f i n g S i I T B E s e r i f d l i w a t r e b A m o r f l t c a p m I n o i t l a u a v e d S R A n o t c a p m i e g n a h c x e n g e r o F i I T B E d e t s u d A j ) 4 ( n o i t a z i t r o m a d n a n o i t a c e r p e D i I A D T B E d e t s u d A j s h t n o m 2 1 t s a l I – T B E d e t s u d A j s h t n o m 2 1 t s a l I – A D T B E d e t s u d A j m e t s y s P R E l l u f a f o n o i t a t n e m e p m l i e h t t a h t i d e n m r e t e d t n e m e g a n a m i l , s s y a n a y t i l i b a p a c a d n a s n o i t a r e p o n a c i r e m A h t u o S s y n a p m o C e h t ’ f o s d e e n s s e n s u b i e h t f o n o i t l a u a v e n a i g n w o l l o F . 4 1 0 2 3 Q n i s n o i t a r e p o n a c i r e m A h t u o S s y n a p m o C e h ’ t n i d e r r u c n i n o i l l i m 2 $ f o s t s o c n o i t p u r s d i r u o b a L 2 4 . 4 1 0 2 n i n o i l l i m 2 1 $ f o s t s o c d e z i l a t i p a c l y s u o v e r p i e h t i e z n g o c e r e d o t i n o s c e d i a d n a w e v e r i g n i t n u o c c a n a o t i g n d a e l , e r u t u f r a e n e h t n i r u c c o t o n l d u o w s n o i t a r e p o n a c i r e m A h t u o S s t i n i . 5 1 0 2 4 Q n i e s n e p x e n o i t a z i t r o m a d n a i n o i t a c e r p e d n i d e d r o c e r s a w n o i l l i m 0 1 $ , e v o b a d e b i r c s e d s m e t i t n a c i f i n g s i e h t f O . s t n e m e t a t S l i a c n a n F i l a u n n A 8 1 0 2 ’ s y n a p m o C e h t f o 2 e t o n n i d n u o f e b n a c n o i t p o d a i s h t f o t c a p m i e h t n o n o i t a m r o f n i e r o M . 8 1 0 2 , 1 y r a u n a J i i g n n n g e b r a e y l i a c n a n i f i a c n a n F i , 9 S R F I d n a s r e m o t s u C h t i w s t c a r t n o C m o r f e u n e v e R , 5 1 S R F I f o n o i t p o d a ’ s y n a p m o C e h t t c e l f e r o t d e t a t s e r n e e b e v a h s t l u s e r e v i t a r a p m o c 7 1 0 2 e h T ) 1 ( ) 2 ( ) 3 ( ) 4 ( . c n I l a n o i t a n r e t n I i g n n n F i s t l u s e R l a u n n A 8 1 0 2 , 1 3 r e b m e c e D d e d n e s r a e y d n a s r e t r a u q e n n t s a i l e h t r o f s n o i t i a r e p o n a d a n a C e h t r o f j I A D T B E d e t s u d A d n a T B E d e t s u d A o t I j I T B E m o r f n o i t a i l i c n o c e r A 1 3 c e D d e d n e s r a e Y 6 1 0 2 ) 1 ( ) d e t a t s e R ( 7 1 0 2 8 1 0 2 4 1 0 2 5 1 0 2 6 1 0 2 1 3 c e D 1 3 r a M 0 3 n u J 0 3 p e S 1 3 c e D 1 3 r a M 0 3 n u J 0 3 p e S 1 3 c e D 4 8 2 $ 8 9 $ 7 8 $ ) 3 ( $ 6 4 $ 5 5 $ 7 5 $ 7 6 $ 1 7 $ 7 7 $ 8 7 $ 1 7 $ : s w o l l o f s a s i 4 1 0 2 d n a , 5 1 0 2 , 6 1 0 2 d e d n e s h t n o m 3 ) s n o i l l i m $ ( s e r i f d l i w a t r e b A m o r f l t c a p m I : s m e t i t n a c i f i n g S i I T B E — — 6 — — — — 7 2 8 4 6 1 — 1 1 4 2 2 3 — 0 9 2 2 1 1 2 0 4 0 9 2 $ $ $ 9 8 1 6 1 1 5 0 3 9 8 1 $ $ $ 4 5 1 0 0 1 4 5 2 4 5 1 $ $ $ e h t r o f e v i t c e f f e s t n e m u r t s n I l — — 5 1 2 3 — 4 4 4 2 8 6 4 5 1 $ $ $ — — — — — 6 4 4 2 0 7 7 6 1 $ $ $ — — — — — 5 5 6 2 1 8 2 8 1 $ $ $ — — — — — 7 5 5 2 2 8 2 0 2 $ $ $ ) 4 ( 3 — — — 6 6 4 2 0 9 4 2 2 $ $ $ ) 7 ( — — — — 4 6 2 2 6 8 2 4 2 $ $ $ — — — — — 7 7 2 2 9 9 4 6 2 $ $ $ — — — — — 8 7 6 2 4 0 1 5 8 2 $ $ $ — — — — — 1 7 6 2 7 9 0 9 2 $ $ $ s t s o c g n i r u t c u r t s e r d n a s e r u s o c l y t i l i c a F s t n e m r i a p m i t e s s a r e h t o d n a y r o t n e v n I s t s o c e c n a r e v e S ) 2 ( n o i t a z i t r o m a d n a n o i t a c e r p e D i I A D T B E d e t s u d A j s h t n o m 2 1 t s a l I – T B E d e t s u d A j I T B E d e t s u d A j s d e e c o r p e c n a r u s n i l s t s o c e b a d o v a n u i – – 3 4 . s t n e m e t a t S l i a c n a n F i l a u n n A 8 1 0 2 ’ s y n a p m o C e h t f o 2 e t o n n i d n u o f e b n a c n o i t p o d a i s h t f o t c a p m i e h t n o n o i t a m r o f n i e r o M . 8 1 0 2 , 1 y r a u n a J i i g n n n g e b r a e y l i a c n a n i f . 5 1 0 2 4 Q n i e s n e p x e n o i t a z i t r o m a d n a i n o i t a c e r p e d n i d e d r o c e r s a w n o i l l i m 5 $ , e v o b a d e b i r c s e d s m e t i t n a c i f i n g s i e h t f O i a c n a n F i , 9 S R F I d n a s r e m o t s u C h t i w s t c a r t n o C m o r f e u n e v e R , 5 1 S R F I f o n o i t p o d a ’ s y n a p m o C e h t t c e l f e r o t d e t a t s e r n e e b e v a h s t l u s e r e v i t a r a p m o c 7 1 0 2 e h T ) 1 ( ) 2 ( . c n I l a n o i t a n r e t n I i g n n n F i s t l u s e R l a u n n A 8 1 0 2 d e d n e s r a e y d n a s r e t r a u q e n n t s a i l e h t r o f s n o i t a r e p o n a c i r e m A h u o S e h t t r o f j I A D T B E d e t s u d A d n a T B E d e t s u d A o t I j I T B E m o r f n o i t a i l i c n o c e r A 1 3 c e D d e d n e s r a e Y 6 1 0 2 ) 1 ( ) d e t a t s e R ( 7 1 0 2 8 1 0 2 4 1 0 2 5 1 0 2 6 1 0 2 1 3 c e D 1 3 r a M 0 3 n u J 0 3 p e S 1 3 c e D 1 3 r a M 0 3 n u J 0 3 p e S 1 3 c e D 6 9 1 $ ) 4 7 1 ( $ 7 3 1 $ 7 2 $ 4 4 $ 2 4 $ 8 4 $ 0 5 $ 6 4 $ 7 4 $ 7 3 $ 2 1 $ 0 1 — — — — 2 1 — 3 5 1 0 1 4 2 3 — — 2 1 8 — — — 0 1 — — 8 1 2 $ 0 9 1 $ 5 5 1 2 7 0 9 2 8 1 2 $ $ 7 7 7 6 2 0 9 1 $ $ 2 6 7 1 2 5 5 1 $ $ $ e h t r o f e v i t c e f f e s t n e m u r t s n I l — — — — 0 1 — — 7 3 6 1 3 5 5 5 1 $ $ $ — — — — — — — 4 4 5 1 9 5 0 6 1 — — — — — — — 2 4 5 1 7 5 3 6 1 $ $ $ — — — — — — — 8 4 3 1 1 6 1 7 1 $ $ $ 2 — — — — — — 2 5 5 1 7 6 6 8 1 $ $ $ $ $ $ — — — — — — — 6 4 5 1 1 6 8 8 1 — — — — — — — 7 4 5 1 2 6 3 9 1 $ $ $ — — — — — — — 7 3 5 1 2 5 2 8 1 $ $ $ — — — — — — — 2 1 7 1 9 2 2 4 1 $ $ $ $ $ $ : s w o l l o f s a s i 4 1 0 2 d n a , 5 1 0 2 , 6 1 0 2 , 1 3 r e b m e c e D d e d n e s h t n o m 3 ) s n o i l l i m $ ( ) 2 ( s t s o c n o i t p u r s d i r u o b a l d n a s t s o c e c n a r e v e S s t s o c g n i r u t c u r t s e r d n a s e r u s o c l y t i l i c a F k r o w t e n n o i t u b i r t s d n o s s o i l t n e m r i a p m I s t n e m r i a p m i t e s s a r e h t o d n a y r o t n e v n I l l i w d o o g d n a : s m e t i t n a c i f i n g S i I T B E l y t i v i t c a t n e u d u a r f d e g e l l a n o s s o l d e t a m i t s E n o i t l a u a v e d S R A n o t c a p m i r e m o t s u c a y b ) 3 ( f f o - e t i r w P R E e g n a h c x e n g e r o F i I T B E d e t s u d A j ) 4 ( n o i t a z i t r o m a d n a n o i t a c e r p e D i s h t n o m 2 1 t s a l I – T B E d e t s u d A j I A D T B E d e t s u d A j m e t s y s P R E l l u f a f o n o i t a t n e m e p m l i e h t t a h t i d e n m r e t e d t n e m e g a n a m i l , s s y a n a y t i l i b a p a c a d n a s n o i t a r e p o n a c i r e m A h t u o S s y n a p m o C e h t ’ f o s d e e n s s e n s u b i e h t f o n o i t l a u a v e n a i g n w o l l o F . 4 1 0 2 3 Q n i s n o i t a r e p o n a c i r e m A h t u o S s y n a p m o C e h ’ t n i d e r r u c n i n o i l l i m 2 $ f o s t s o c n o i t p u r s d i r u o b a L 4 4 . 4 1 0 2 n i n o i l l i m 2 1 $ f o s t s o c d e z i l a t i p a c l y s u o v e r p i e h t i e z n g o c e r e d o t i n o s c e d i a d n a w e v e r i g n i t n u o c c a n a o t i g n d a e l , e r u t u f r a e n e h t n i r u c c o t o n l d u o w s n o i t a r e p o n a c i r e m A h t u o S s t i n i . 5 1 0 2 4 Q n i e s n e p x e n o i t a z i t r o m a d n a i n o i t a c e r p e d n i d e d r o c e r s a w n o i l l i m 5 $ , e v o b a d e b i r c s e d s m e t i t n a c i f i n g s i e h t f O . s t n e m e t a t S l i a c n a n F i l a u n n A 8 1 0 2 ’ s y n a p m o C e h t f o 2 e t o n n i d n u o f e b n a c n o i t p o d a i s h t f o t c a p m i e h t n o n o i t a m r o f n i e r o M . 8 1 0 2 , 1 y r a u n a J i i g n n n g e b r a e y l i a c n a n i f i a c n a n F i , 9 S R F I d n a s r e m o t s u C h t i w s t c a r t n o C m o r f e u n e v e R , 5 1 S R F I f o n o i t p o d a ’ s y n a p m o C e h t t c e l f e r o t d e t a t s e r n e e b e v a h s t l u s e r e v i t a r a p m o c 7 1 0 2 e h T ) 1 ( ) 2 ( ) 3 ( ) 4 ( . c n I l a n o i t a n r e t n I i g n n n F i s t l u s e R l a u n n A 8 1 0 2 d e d n e s r a e y d n a s r e t r a u q e n n t s a i l e h t r o f s n o i t a r e p o d n a e r I l & K U e h t r o f j I A D T B E d e t s u d A d n a T B E d e t s u d A o t I j I T B E m o r f n o i t a i l i c n o c e r A 1 3 c e D d e d n e r a e Y 6 1 0 2 ) 1 ( ) d e t a t s e R ( 7 1 0 2 8 1 0 2 4 1 0 2 5 1 0 2 6 1 0 2 1 3 c e D 1 3 r a M 0 3 n u J 0 3 p e S 1 3 c e D 1 3 r a M 0 3 n u J 0 3 p e S 1 3 c e D 0 5 $ ) 5 ( $ ) 2 1 ( $ 8 $ 7 $ 3 1 $ 9 $ 8 $ 0 1 $ 4 1 $ 5 1 $ 2 1 $ 1 — — — — — 1 5 2 3 3 8 1 5 6 2 4 1 6 1 — — 3 3 8 2 1 6 3 3 $ $ $ 9 4 — — 5 0 1 6 1 0 3 6 4 6 1 $ $ $ $ $ $ — — — — — — 8 7 5 1 6 1 $ $ $ — — — — — — 7 6 3 1 0 2 — — — — — — 3 1 7 0 2 8 3 $ $ $ — — — — — — 9 7 6 1 7 3 $ $ $ — — — — — — 8 6 4 1 7 3 $ $ $ $ $ $ — — — — — — 0 1 7 7 1 0 4 — — — — — — 4 1 7 1 2 1 4 $ $ $ — — — — — — 5 1 8 3 2 7 4 $ $ $ — — — — — — 2 1 6 8 1 1 5 $ $ $ $ $ $ : s w o l l o f s a s i 4 1 0 2 d n a , 5 1 0 2 , 6 1 0 2 , 1 3 r e b m e c e D d e d n e s h t n o m 3 ) s n o i l l i m $ ( s t s o c g n i r u t c u r t s e r d n a s e r u s o c l y t i l i c a F k r o w t e n n o i t u b i r t s d n o i s s o l t n e m r i a p m I s t n e m r i a p m i t e s s a r e h t o d n a y r o t n e v n I l l i w d o o g d n a s t s o c e c n a r e v e S : s m e t i t n a c i f i n g S i I T B E i i d n a s n o s v o r p t c e o r p s m e t s y s j r e w o P i s e t u p s d n o s s o l d e t a m i t s e n o i t a z i t r o m a d n a n o i t a c e r p e D i I A D T B E d e t s u d A j s h t n o m 2 1 t s a l I – T B E d e t s u d A j I T B E d e t s u d A j i s s e n s u b f o l a s o p s D i e h t r o f e v i t c e f f e s t n e m u r t s n I l i a c n a n F i , 9 S R F I d n a s r e m o t s u C h t i w s t c a r t n o C m o r f e u n e v e R , 5 1 S R F I f o n o i t p o d a ’ s y n a p m o C e h t t c e l f e r o t d e t a t s e r n e e b e v a h s t l u s e r e v i t a r a p m o c 7 1 0 2 e h T ) 1 ( . s t n e m e t a t S l i a c n a n F i l a u n n A 8 1 0 2 ’ s y n a p m o C e h t f o 2 e t o n n i d n u o f e b n a c n o i t p o d a i s h t f o t c a p m i e h t n o n o i t a m r o f n i e r o M . 8 1 0 2 , 1 y r a u n a J i i g n n n g e b r a e y l i a c n a n i f I i n g r a M A D T B E d e t s u d A d n a , j i n g r a M A D T B E I , i I n g r a M T B E d e t s u d A j i i I y b d e d v d A D T B E d e t s u d A d n a , e u n e v e r j l a t o t i i y b d e d v d A D T B E I , e u n e v e r l a o t t y b i i I d e d v d T B E d e t s u d A s a , y e v i t c e p s e r j l , d e n i f e d e r a s e r u s a e m e s e h T 5 4 s s e s s a o t t n e m e g a n a m y b d e z i l i t u e r a s e r u s a e m e s e h T . e m o c n i f o t t n e m e a t s d e a d t i l o s n o c ’ s y n a p m o C e h t n i d e s o c s d i l s a e u n e v e r l i a t o t g n s u , e u n e v e r l a t o t . s t n e m g e s g n i t a r e p o s t i f o y t i l i b a t i f o r p r o e c n a m r o f r e p l i a c n a n i f e h t e t a u a v e d n a l . c n I l a n o i t a n r e t n I i g n n n F i s t l u s e R l a u n n A 8 1 0 2 s a , s t e s s a e b g n a t n i l i d n a t n e m p u q e i l d n a , t n a p , y t r e p o r p o t s n o i t i d d a t e n s s e l s e i t i v i t c a g n i t a r e p o ) n i d e s u ( i y b d e d v o r p w o l f h s a c s a d e n i f e d s i w o l f h s a c e e r F l w o F h s a C e e r F e c n a m r o f r e p g n i t a r e p o h s a c s s e s s a o t y n a p m o C e h t y b d e s u e r u s a e m a s i w o l f h s a c e e r F . w o l f h s a c f o t n e m e t a t s d e t a d i l o s n o c ’ s y n a p m o C e h t n i d e s o c s d l i 1 3 c e D d e d n e r a e y r o F 6 1 0 2 7 1 0 2 : s w o l l o f s a s i w o l f h s a c e e r f 8 1 0 2 f o n o i t a i l i c n o c e r A i . t b e d e c v r e s d n a e s a r o t i y t i l i b a e h t d n a d e d n e s h t n o m 3 4 1 0 2 5 1 0 2 6 1 0 2 1 3 c e D 1 3 r a M 0 3 n u J 0 3 p e S 1 3 c e D 1 3 r a M 0 3 n u J 0 3 p e S 1 3 c e D ) s n o i l l i m $ ( 6 4 5 $ 9 7 3 $ 0 4 4 $ 1 3 1 $ ) 8 5 ( $ ) 2 1 1 ( $ 5 5 $ 8 9 3 $ ) 2 4 2 ( $ 8 1 $ ) 6 ( $ 0 9 4 $ s e i t i v i t c a g n i t a r e p o ) n i d e s u ( i y b d e d v o r p w o l f h s a C i t n e m p u q e d n a , t n a p , y t r e p o r p o t l s n o i t i d d A ) 1 8 ( ) 6 7 ( ) 2 9 ( ) 0 2 ( ) 9 1 ( ) 0 2 ( ) 3 3 ( ) 9 4 ( ) 2 3 ( ) 6 4 ( ) 6 4 ( ) 7 7 ( 8 1 3 8 4 3 8 4 $ $ 2 2 5 2 3 5 2 3 $ $ 2 2 0 7 3 0 7 3 $ $ 2 3 1 1 0 7 3 $ $ 1 1 ) 6 7 ( $ ) 1 3 1 ( $ — 2 2 $ 1 0 5 3 5 6 1 $ $ 1 1 — 3 5 ) 3 6 2 ( $ ) 8 2 ( $ ) 9 4 ( $ 8 1 4 8 7 $ $ l d n a , t n a p , y t r e p o r p f o l i a s o p s d n o s d e e c o r P s t e s s a e b g n a t n l i i d n a s h t n o m 2 1 t s a l – w o l f h s a c e e r F t n e m p u q e i w o l f h s a c e e r F s n r u T y r o t n e v n I t e s s a f o e r u s a e m a s a t n e m e g a n a m y b d e s u s i d n a d o i r e p a l r e v o d e c a p e r d n a d o s l s i t y r o n e v n i ' s y n a p m o C e h t s e m i t f o r e b m u n e h t s i s n r u t y r o t n e v n I o w t t s a l e h t f o e g a r e v a n a n o d e s a b , y r o t n e v n i e g a r e v a y b d e d v d s h n o m x s t i i i t s a l e h t r o f l s e a s f o t s o c d e z i l a u n n a s a d e t a u c a c l l s i s n r u t t y r o n e v n I . n o i t a z i l i t u 4 1 0 2 5 1 0 2 6 1 0 2 ) 1 ( t ) d e a t s e R ( 7 1 0 2 8 1 0 2 1 3 c e D 1 3 c e D 1 3 c e D 1 3 r a M 0 3 n u J 0 3 p e S 1 3 c e D 1 3 r a M 0 3 n u J 0 3 p e S 1 3 c e D ) d e t o n s a t p e c x e , s n o i l l i m $ ( : s w o l l o f s a , s r e t r a u q 8 6 8 , 4 4 3 7 , 1 1 8 . 2 $ $ 4 2 5 , 4 7 9 8 , 1 $ $ 0 5 1 , 4 3 6 6 , 1 $ $ 8 3 . 2 9 4 . 2 0 4 2 , 4 4 2 6 , 1 1 6 . 2 $ $ 2 4 3 , 4 0 2 7 , 1 $ $ 0 9 5 , 4 7 6 7 , 1 $ $ 2 6 8 , 4 6 2 7 , 1 $ $ 2 5 . 2 0 6 . 2 2 8 2 . 6 5 0 , 5 7 0 8 , 1 0 8 2 . $ $ 7 8 9 , 4 7 3 9 , 1 $ $ 9 3 1 , 5 2 9 9 , 1 $ $ 0 7 4 , 5 9 3 0 , 2 $ $ e g a r e v a r e t r a u q 2 – y r o t n e v n I d e z i l a u n n a – s e a s l f o t s o C 7 5 2 . 8 5 2 . 8 6 2 . ) s e m i t f o r e b m u n ( s n r u t y r o t n e v n I e h t r o f e v i t c e f f e s t n e m u r t s n I l i a c n a n F i , 9 S R F I d n a s r e m o t s u C h t i w s t c a r t n o C m o r f e u n e v e R , 5 1 S R F I f o n o i t p o d a ’ s y n a p m o C e h t t c e l f e r o t d e t a t s e r n e e b e v a h s t l u s e r e v i t a r a p m o c 7 1 0 2 e h T ) 1 ( 6 4 . s t n e m e t a t S l i a c n a n F i l a u n n A 8 1 0 2 ’ s y n a p m o C e h t f o 2 e t o n n i d n u o f e b n a c n o i t p o d a i s h t f o t c a p m i e h t n o n o i t a m r o f n i e r o M . 8 1 0 2 , 1 y r a u n a J i i g n n n g e b r a e y l i a c n a n i f s t l u s e R l a u n n A 8 1 0 2 . c n I l a n o i t a n r e t n I i g n n n F i i . t b e d t e n g n d u c x e , s e i t i l i l b a i l l a t o t s s e l s t e s s a l a t o t l t s a d e a u c a c o s a s l l i l a t i p a c d e t s e v n I . y t i u q e ’ l s r e d o h e r a h s l s u p t b e d t e n s a d e t a u c a c l l s i l a t i p a c d e t s e v n I l a t i p a C d e t s e v n I t n e m t s e v n i h s a c l a t o t e h t f o e r u s a e m a s a t n e m e g a n a m y b d e s u s i l a t i p a c d e t s e v n I . h s a c f o t e n , t b e d m r e t - g n o l d n a m r e t - t r o h s s a d e t a u c a c l l s i t b e d t e N l i a c n a n i f g n s s e s s a n i i s t n e m e r u s a e m t n e r e f f i d f o r e b m u n a n i l a t i p a c d e t s e v n i s e s u t n e m e g a n a M . t n e m g e s g n i t a r e p o h c a e d n a y n a p m o C e h t n i e d a m : s w o l l o f s a s i l a t i p a c d e t s e v n i f o n o i t l l a u c a c e h T l . s t n e m g e s e b a t r o p e r n e e w e b d n a s e n a p m o c t i i r e h t o t s n a g a e c n a m r o f r e p 4 1 0 2 5 1 0 2 6 1 0 2 ) 1 ( ) d e t a t s e R ( 7 1 0 2 8 1 0 2 1 3 c e D 1 3 c e D 1 3 c e D 1 3 r a M 0 3 n u J 0 3 p e S 1 3 c e D 1 3 r a M 0 3 n u J 0 3 p e S 1 3 c e D ) 0 5 4 ( $ ) 5 7 4 ( $ ) 3 9 5 ( $ ) 9 8 4 ( $ ) 1 1 4 ( $ ) 6 1 5 ( $ ) 8 5 4 ( $ ) 5 2 3 ( $ ) 0 0 3 ( $ ) 1 2 2 ( $ ) 4 5 4 ( $ 7 — 5 7 9 8 1 4 , 1 1 3 1 , 2 6 0 1 , 3 — 7 1 1 2 — 8 4 5 , 1 7 8 4 , 1 $ 0 9 1 , 1 $ 6 9 8 $ 0 5 0 , 2 1 0 9 , 1 $ 0 4 2 , 3 $ 7 9 7 , 2 $ 6 1 — 1 8 4 , 1 8 0 0 , 1 2 3 9 , 1 0 4 9 , 2 2 0 1 0 5 3 2 3 0 5 3 8 1 — 6 1 1 , 1 1 9 2 , 1 6 9 2 1 , $ 7 5 1 , 1 $ 7 5 1 , 1 $ 6 5 8 $ 1 5 9 , 1 8 3 9 1 , 4 7 9 , 1 $ 8 0 1 , 3 $ 5 9 0 3 , $ 0 3 8 , 2 $ — 9 6 1 2 2 3 , 1 6 6 1 , 1 0 6 0 , 2 6 2 2 , 3 — 3 1 2 — 3 2 2 — 4 5 1 0 3 3 1 , 5 1 3 1 , 4 5 3 1 , $ 3 4 2 , 1 $ 7 1 3 , 1 $ 4 5 0 , 1 $ 2 6 3 , 3 $ 1 3 4 , 3 $ 3 6 1 , 3 9 1 1 2 , 4 1 1 2 , 9 0 1 2 , $ $ t b e d m r e t - g n o l f o n o i t r o p t n e r r u C t b e d m r e t - t r o h S t b e d m r e t - g n o L t b e d t e N y t i u q e ’ l s r e d o h e r a h S l a t i p a c d e t s e v n I i l s t n e a v u q e h s a c d n a h s a C ) d e t o n s a t p e c x e , s n o i l l i m $ ( 7 4 . s t n e m e t a t S l i a c n a n F i l a u n n A 8 1 0 2 ’ s y n a p m o C e h t f o 2 e t o n n i d n u o f e b n a c n o i t p o d a i s h t f o t c a p m i e h t n o n o i t a m r o f n i e r o M . 8 1 0 2 , 1 y r a u n a J i i g n n n g e b r a e y l i a c n a n i f e h t r o f e v i t c e f f e s t n e m u r t s n I l i a c n a n F i , 9 S R F I d n a s r e m o t s u C h t i w s t c a r t n o C m o r f e u n e v e R , 5 1 S R F I f o n o i t p o d a ’ s y n a p m o C e h t t c e l f e r o t d e t a t s e r n e e b e v a h s t l u s e r e v i t a r a p m o c 7 1 0 2 e h T ) 1 ( . c n I l a n o i t a n r e t n I i g n n n F i s t l u s e R l a u n n A 8 1 0 2 s i d n a 7 4 e g a p n o d e n i f e d , l a t i p a c d e t s e v n i ’ s y n a p m o C e h t f o e s u e h t n i y c n e c i f f i e f o e r u s a e m a s a t n e m e g a n a m y b d e s u s i r e v o n r u t l a t i p a c d e t s e v n I r e v o n r u T l a t i p a C d e t s e v n I 4 1 0 2 5 1 0 2 6 1 0 2 ) 1 ( t ) d e a t s e R ( 7 1 0 2 8 1 0 2 1 3 c e D 1 3 c e D 1 3 c e D 1 3 r a M 0 3 n u J 0 3 p e S 1 3 c e D 1 3 r a M 0 3 n u J 0 3 p e S 1 3 c e D ) d e t o n s a t p e c x e , s n o i l l i m $ ( d e t s e v n i l f o n o i t a u c a c e h T l . s r e t r a u q r u o f t s a l e h t f o e g a r e v a n a n o d e s a b l a t i p a c d e t s e v n i i i y b d e d v d s h n o m e v e w t l t t s a l e h t r o f e u n e v e r l a t o t s a d e t a u c a c l l : s w o l l o f s a s i r e v o n r u t l a t i p a c 8 1 9 , 6 8 9 2 , 3 0 1 . 2 4 3 6 , 3 7 5 6 , 1 9 1 . 2 7 2 2 , 2 1 4 3 , 1 6 6 . 1 8 0 3 3 4 . 3 7 5 0 , 1 $ $ $ $ $ $ $ $ 5 7 2 , 6 0 3 5 , 3 8 7 . 1 6 2 1 , 3 2 9 7 , 1 4 7 . 1 7 6 0 , 2 7 5 3 , 1 2 5 . 1 9 6 3 3 9 . 2 2 8 0 , 1 $ $ $ $ $ $ $ $ 8 2 6 , 5 0 6 9 , 2 0 9 . 1 1 2 8 , 2 6 5 6 , 1 0 7 . 1 7 5 8 , 1 0 3 0 , 1 0 8 . 1 0 5 9 8 6 2 4 5 . 3 $ $ $ $ $ $ $ $ 5 3 5 , 5 7 2 9 , 2 9 8 . 1 9 5 6 , 2 3 4 6 , 1 2 6 . 1 0 3 9 , 1 1 3 0 , 1 7 8 . 1 6 4 9 6 5 2 9 6 . 3 $ $ $ $ $ $ $ $ 9 0 8 , 5 4 4 9 , 2 7 9 . 1 5 1 8 , 2 0 6 6 , 1 0 7 . 1 5 1 0 , 2 4 2 0 , 1 7 9 . 1 9 7 9 7 6 2 6 6 . 3 $ $ $ $ $ $ $ $ 4 1 0 6 , 9 8 9 2 , 1 0 2 . 2 3 9 2 , 4 8 6 1 , 4 7 1 . 3 0 1 2 , 6 3 0 1 , 3 0 2 . 9 7 9 2 8 2 7 4 . 3 $ $ $ $ $ $ $ $ 6 5 2 , 6 3 9 9 , 2 9 0 2 . 2 7 0 , 3 0 9 6 , 1 2 8 1 . 7 5 1 , 2 2 3 0 , 1 9 0 2 . 8 8 2 6 5 3 . 7 2 0 , 1 $ $ $ $ $ $ $ $ 5 2 5 , 6 5 6 0 , 3 3 1 2 . 4 3 2 , 3 7 2 7 , 1 7 8 1 . 6 0 2 , 2 0 6 0 , 1 8 0 2 . 8 9 2 5 6 3 . 5 8 0 , 1 $ $ $ $ $ $ $ $ 0 7 6 , 6 8 2 1 , 3 3 1 2 . 1 5 3 , 3 6 4 7 , 1 2 9 1 . 1 4 2 , 2 1 9 0 , 1 5 0 2 . 4 1 3 4 4 3 . 8 7 0 , 1 $ $ $ $ $ $ $ $ 7 8 8 , 6 2 1 2 , 3 4 1 2 . 5 2 5 , 3 2 8 7 , 1 8 9 1 . 0 5 2 , 2 7 1 1 , 1 1 0 2 . 7 3 3 0 3 3 . 2 1 1 , 1 $ $ $ $ $ $ $ $ 6 9 9 , 6 5 9 2 , 3 2 1 2 . 4 7 6 , 3 5 9 7 , 1 5 0 2 . 0 7 1 , 2 9 6 1 , 1 6 8 1 . 8 5 3 2 2 3 . 2 5 1 , 1 $ $ e g a r e v a r e t r a u q 4 – l a t i p a c d e t s e v n I s h t n o m 2 1 t s a l – e u n e v e R l o s n o C ) s e m i t f o r e b m u n ( r e v o n r u t l a t i p a c d e t s e v n I $ $ e g a r e v a r e t r a u q 4 – l a t i p a c d e t s e v n I s h t n o m 2 1 t s a l – e u n e v e R a d a n a C ) s e m i t f o r e b m u n ( r e v o n r u t l a t i p a c d e t s e v n I $ $ e g a r e v a r e t r a u q 4 – l a t i p a c d e t s e v n I s h t n o m 2 1 t s a l – e u n e v e R a c i r e m A h t u o S ) s e m i t f o r e b m u n ( r e v o n r u t l a t i p a c d e t s e v n I $ $ e g a r e v a r e t r a u q 4 – l a t i p a c d e t s e v n I s h t n o m 2 1 t s a l – e u n e v e R d n a e r I l & K U ) s e m i t f o r e b m u n ( r e v o n r u t l a t i p a c d e t s e v n I 8 4 . s t n e m e t a t S l i a c n a n F i l a u n n A 8 1 0 2 ’ s y n a p m o C e h t f o 2 e t o n n i d n u o f e b n a c n o i t p o d a i s h t f o t c a p m i e h t n o n o i t a m r o f n i e r o M . 8 1 0 2 , 1 y r a u n a J i i g n n n g e b r a e y l i a c n a n i f e h t r o f e v i t c e f f e s t n e m u r t s n I l i a c n a n F i , 9 S R F I d n a s r e m o t s u C h t i w s t c a r t n o C m o r f e u n e v e R , 5 1 S R F I f o n o i t p o d a ’ s y n a p m o C e h t t c e l f e r o t d e t a t s e r n e e b e v a h s t l u s e r e v i t a r a p m o c 7 1 0 2 e h T ) 1 ( . c n I l a n o i t a n r e t n I i g n n n F i s t l u s e R l a u n n A 8 1 0 2 I o i t a R A D T B E d e t s u d A o t j t b e D t e N d n a o i t a R A D T B E o t I t b e D t e N e h t r o f , j I A D T B E d e t s u d A y b d e d v d t b e d t e n d n a , i i I A D T B E y b d e d v d i i , t e v o b a d e a u c a c d n a l l d e n i f e d , t b e d t l e n s a , y e v i t c e p s e r l l , d e t a u c a c e r a s o i t a r e s e h T l . t n a t s n o c d e h A D T B E d e t s u d A I j I r o A D T B E d n a t b e d t e n h t i w , t b e d s t i y a p e r o t y n a p m o C e h t e k a t l d u o w t i t a h t , s r a e y n i , e m i t f o h t g n e l e h t e t a m x o r p p a i s o i t a r e s e h T . t b e d s t i y a p e r o t y t i l i b a d n a e g a r e v e l g n i t ’ a r e p o s y n a p m o C e h t i g n s s e s s a n i t n e m e g a n a m y b d e s u e r a s o i t a r e s e h T . s h t n o m e v e w l t t s a l : s w o l l o f l l s a d e t a u c a c e r a s o i t a r e s e h T 1 3 c e D 1 3 c e D 1 3 c e D 1 3 r a M 0 3 n u J 0 3 p e S 1 3 c e D 1 3 r a M 0 3 n u J 0 3 p e S 1 3 c e D 5 7 9 0 2 7 4 . 1 5 7 9 9 4 7 3 . 1 $ $ $ $ 6 2 1 5 . 9 0 9 1 , 1 4 0 6 0 . 2 0 9 1 , 1 $ $ $ $ 6 9 8 7 5 3 5 . 2 6 9 8 5 6 4 9 . 1 $ $ $ $ 2 9 3 6 . 2 8 0 0 , 1 8 7 4 1 . 2 8 0 0 , 1 $ $ $ $ 0 6 4 5 . 2 7 5 1 , 1 2 1 5 3 . 2 7 5 1 , 1 $ $ $ $ 7 8 4 4 . 2 7 5 1 , 1 9 3 5 1 . 2 7 5 1 , 1 $ $ $ $ 6 5 8 6 7 5 5 1 . 6 5 8 7 7 5 5 1 . $ $ $ $ 2 0 6 9 1 . 6 6 1 , 1 6 9 5 0 2 . 6 6 1 , 1 $ $ $ $ 8 2 6 . 0 2 3 4 2 , 1 2 2 6 . 0 2 3 4 2 , 1 $ $ $ $ 4 2 6 1 2 . 7 1 3 , 1 8 4 6 0 2 . 7 1 3 , 1 $ $ $ $ 0 1 6 7 1 . 4 5 0 , 1 3 3 6 7 1 . 4 5 0 , 1 $ $ $ $ s h t n o m 2 1 t s a l I – A D T B E d e t s u d A j s h t n o m 2 1 t s a l – A D T B E I o i t a R A D T B E o t I t b e D t e N t b e d t e N t b e d t e N I o i t a R A D T B E d e t s u d A o t j t b e D t e N ) d e t o n s a t p e c x e , s n o i l l i m $ ( 4 1 0 2 5 1 0 2 6 1 0 2 ) 1 ( ) d e t a t s e R ( 7 1 0 2 8 1 0 2 1 3 r e b m e c e D 9 4 . s t n e m e t a t S l i a c n a n F i l a u n n A 8 1 0 2 ’ s y n a p m o C e h t f o 2 e t o n n i d n u o f e b n a c n o i t p o d a i s h t f o t c a p m i e h t n o n o i t a m r o f n i e r o M . 8 1 0 2 , 1 y r a u n a J i i g n n n g e b r a e y l i a c n a n i f e h t r o f e v i t c e f f e s t n e m u r t s n I l i a c n a n F i , 9 S R F I d n a s r e m o t s u C h t i w s t c a r t n o C m o r f e u n e v e R , 5 1 S R F I f o n o i t p o d a ’ s y n a p m o C e h t t c e l f e r o t d e t a t s e r n e e b e v a h s t l u s e r e v i t a r a p m o c 7 1 0 2 e h T ) 1 ( . c n I l a n o i t a n r e t n I i g n n n F i s t l u s e R l a u n n A 8 1 0 2 e h t f o e g a r e v a n a n o d e s a b , ) e v o b a d e n i f e d ( l a t i p a c d e t s e v n i i i y b d e d v d s h n o m e v e w t l t t s a l e h t r o f I T B E s a d e n i f e d s i , I C O R r o , l a t i p a C d e t s e v n I n o n r u t e R I j C O R d e t s u d A d n a C O R I . e g a t n e c r e p a s a d e s s e r p x e , s r e t r a u q r u o f t s a l r o e r u t a n y b r e h t i e s d n e r t l i a c n a n i f d n a l a n o i t a r e p o f o e v i t i a c d n i e b o t d e r e d s n o c i t o n e r a t a h t s m e t i t n a c i f i i n g s e d u c x e o t l i j I T B E d e t s u d A g n s u C O R d e t s u d A I j l l n a e t a u c a c o s a y a m l t n e m e g a n a M . s t n e m g e s d n a s r o t i t i e p m o c n a t r e c n e e w e b y t i l i t b a r a p m o c t c e f f a y a m t a h t s m e t i i n a t r e c r o f j s t s u d a t i s a , s n o s c e d i i . i e c n a m r o f r e p s s e n s u b g n y l r e d n u s y n a p m o C e h i ’ t f i o g n d n a t s r e d n u l l a r e v o r e t t e b a e d v o r p o t i t n u o m a : s w o l l o f s a d e t a u c a c l l s i j I C O R d e t s u d A d n a C O R I 4 1 0 2 5 1 0 2 6 1 0 2 ) 1 ( ) d e t a t s e R ( 7 1 0 2 8 1 0 2 1 3 c e D 1 3 c e D 1 3 c e D 1 3 r a M 0 3 n u J 0 3 p e S 1 3 c e D 1 3 r a M 0 3 n u J 0 3 p e S 1 3 c e D 4 0 5 3 3 5 8 9 2 , 3 % 3 . 5 1 % 2 . 6 1 4 8 2 0 9 2 7 5 6 , 1 % 1 . 7 1 % 5 . 7 1 6 9 1 8 1 2 1 4 3 , 1 % 6 . 4 1 % 2 . 6 1 0 5 1 5 8 0 3 % 3 . 6 1 % 7 . 6 1 $ $ $ $ $ $ $ $ $ $ $ $ ) 5 0 1 ( 3 8 3 0 3 5 , 3 % ) 0 . 3 ( % 9 . 0 1 8 9 9 8 1 2 9 7 , 1 % 5 . 5 % 6 . 0 1 ) 4 7 1 ( 0 9 1 7 5 3 , 1 % 0 . 4 1 % ) 8 . 2 1 ( $ $ $ $ $ $ $ $ $ 5 6 1 3 7 2 % 6 . 5 % 3 . 9 0 6 9 , 2 7 8 4 5 1 % 3 . 5 % 3 . 9 6 5 6 , 1 7 3 1 5 5 1 0 3 0 , 1 % 3 . 3 1 % 0 . 5 1 ) 5 ( 3 3 9 6 3 % 0 . 9 % ) 4 . 1 ( $ $ $ ) 2 1 ( 6 1 8 6 2 % 9 . 5 % ) 5 . 4 ( $ $ $ $ $ $ $ $ $ $ $ $ 6 0 2 2 9 2 7 2 9 , 2 % 1 . 7 % 0 . 0 1 8 0 1 7 6 1 3 4 6 , 1 % 6 . 6 % 2 . 0 1 9 4 1 0 6 1 1 3 0 , 1 % 5 . 4 1 % 6 . 5 1 ) 1 ( 0 2 6 5 2 % 7 . 7 % ) 5 . 0 ( $ $ $ $ $ $ $ $ $ 4 7 2 6 2 3 4 4 9 , 2 % 3 . 9 % 1 . 1 1 5 3 1 2 8 1 0 6 6 , 1 % 1 . 8 % 0 . 1 1 3 5 1 3 6 1 4 2 0 , 1 % 9 . 4 1 % 0 . 6 1 $ $ $ $ $ $ $ $ $ 1 0 3 3 5 3 9 8 9 2 , % 1 0 1 . % 8 1 1 . 5 5 1 2 0 2 4 8 6 1 , % 2 9 . % 0 2 1 . 1 6 1 1 7 1 6 3 0 1 , % 5 5 1 . % 5 6 1 . $ $ $ $ $ $ $ $ $ 2 9 3 3 9 3 3 9 9 , 2 % 1 3 1 . % 1 3 1 . 5 2 2 4 2 2 0 9 6 , 1 % 3 3 1 . % 2 3 1 . 4 8 1 6 8 1 2 3 0 , 1 % 8 7 1 . % 1 8 1 . $ $ $ 8 3 8 3 7 6 2 $ $ $ 7 3 7 3 2 8 2 $ $ $ 7 3 7 3 8 8 2 $ $ $ $ $ $ $ $ $ $ $ $ 9 1 4 3 1 4 5 6 0 , 3 % 7 3 1 . % 5 3 1 . 0 5 2 2 4 2 7 2 7 , 1 % 5 4 1 . % 0 4 1 . 6 8 1 8 8 1 0 6 0 , 1 % 6 7 1 . % 8 7 1 . $ $ $ $ $ $ $ $ $ 8 4 4 2 4 4 8 2 1 , 3 % 3 4 1 . % 2 4 1 . 2 7 2 4 6 2 6 4 7 , 1 % 5 5 1 . % 1 5 1 . 1 9 1 3 9 1 1 9 0 , 1 % 5 7 1 . % 7 7 1 . $ $ $ $ $ $ $ $ $ 1 4 4 5 6 4 2 1 2 , 3 % 7 3 1 . % 5 4 1 . 3 9 2 5 8 2 2 8 7 , 1 % 4 6 1 . % 0 6 1 . 0 8 1 2 8 1 7 1 1 , 1 % 2 6 1 . % 4 6 1 . $ $ $ $ $ $ $ $ $ 3 2 4 6 4 4 5 9 2 , 3 % 8 2 1 . % 5 3 1 . 7 9 2 0 9 2 5 9 7 , 1 % 6 6 1 . % 2 6 1 . 2 4 1 2 4 1 9 6 1 , 1 % 2 2 1 . % 2 2 1 . 0 4 0 4 8 9 2 $ $ $ 1 4 1 4 4 1 3 $ $ $ 7 4 7 4 7 3 3 $ $ $ 1 5 1 5 8 5 3 $ $ $ $ $ $ $ $ $ $ $ $ % 9 . 3 1 % 9 . 3 1 % 9 2 1 . % 9 2 1 . % 8 2 1 . % 8 2 1 . % 4 3 1 . % 4 3 1 . % 2 3 1 . % 2 3 1 . % 0 4 1 . % 0 4 1 . % 2 4 1 . % 2 4 1 . e g a r e v a r e t r a u q 4 – l a t i p a c d e t s e v n I I C O R s h t n o m 2 1 t s a l I – T B E d e t s u d A j s h t n o m 2 1 t s a l – T B E I l o s n o C I C O R d e t s u d A j e g a r e v a r e t r a u q 4 – l a t i p a c d e t s e v n I I C O R s h t n o m 2 1 t s a l I – T B E d e t s u d A j s h t n o m 2 1 t s a l – T B E I a d a n a C I C O R d e t s u d A j e g a r e v a r e t r a u q 4 – l a t i p a c d e t s e v n I I C O R s h t n o m 2 1 t s a l I – T B E d e t s u d A j s h t n o m 2 1 t s a l – T B E I a c i r e m A h t u o S I C O R d e t s u d A j s h t n o m 2 1 t s a l – T B E I d n a e r I l & K U e g a r e v a r e t r a u q 4 – l a t i p a c d e t s e v n I I C O R I C O R d e t s u d A j s h t n o m 2 1 t s a l I – T B E d e t s u d A j ) d e t o n s a t p e c x e , s n o i l l i m $ ( 0 5 . s t n e m e t a t S l i a c n a n F i l a u n n A 8 1 0 2 ’ s y n a p m o C e h t f o 2 e t o n n i d n u o f e b n a c n o i t p o d a i s h t f o t c a p m i e h t n o n o i t a m r o f n i e r o M . 8 1 0 2 , 1 y r a u n a J i i g n n n g e b r a e y l i a c n a n i f e h t r o f e v i t c e f f e s t n e m u r t s n I l i a c n a n F i , 9 S R F I d n a s r e m o t s u C h t i w s t c a r t n o C m o r f e u n e v e R , 5 1 S R F I f o n o i t p o d a ’ s y n a p m o C e h t t c e l f e r o t d e t a t s e r n e e b e v a h s t l u s e r e v i t a r a p m o c 7 1 0 2 e h T ) 1 ( n o i t a c o l l a e c r u o s e r d n a t n e m t s e v n i g n i t r o p p u s r o f e r u s a e m l f u e s u a s a , ) l e v e l t l n e m g e s e b a t r o p e r d n a d e t a d i l o s n o c a t a ( I C O R s w e v i t n e m e g a n a M . c n I l a n o i t a n r e t n I i g n n n F i s t l u s e R l a u n n A 8 1 0 2 o i t a R s e l a S o t l a t i p a C g n i k r o W & l a t i p a C g n i k r o W t n e r r u c d n a t b e d m r e t - t r o h s g n d u c x e ( l i s e i t i l i b a i l t n e r r u c l a o t t s s e l i l ) s t n e a v u q e h s a c d n a h s a c g n d u c x e ( i l s t e s s a t n e r r u c l a t o t s a d e n i f e d s i l a t i p a c g n k r o W i . y t i d u q i i l l l i a r e v o g n s s e s s a r o f e r u s a e m a s a l a t i i p a c g n k r o w s w e v i t n e m e g a n a M . ) t b e d m r e t - g n o l f o n o i t r o p 4 1 0 2 5 1 0 2 6 1 0 2 ) 1 ( ) d e t a t s e R ( 7 1 0 2 8 1 0 2 1 3 c e D 1 3 c e D 1 3 c e D 1 3 r a M 0 3 n u J 0 3 p e S 1 3 c e D 1 3 r a M 0 3 n u J 0 3 p e S 1 3 c e D ) 0 5 4 ( ) 5 7 4 ( ) 3 9 5 ( ) 9 8 4 ( ) 1 1 4 ( ) 6 1 5 ( ) 8 5 4 ( ) 5 2 3 ( ) 0 0 3 ( ) 1 2 2 ( ) 4 5 4 ( 7 7 4 , 3 $ 0 6 4 , 3 $ 8 7 3 , 3 $ 9 8 3 , 3 $ 3 9 4 , 3 $ 6 6 5 3 , $ 1 3 5 , 3 $ 7 8 6 , 3 $ 3 6 7 , 3 $ 6 9 6 , 3 $ 4 2 9 , 3 7 2 0 , 3 $ 5 8 9 , 2 $ 5 8 7 , 2 $ 0 0 9 , 2 $ 2 8 0 , 3 $ 0 5 0 3 , $ 3 7 0 , 3 $ 2 6 3 , 3 $ 3 6 4 , 3 $ 5 7 4 , 3 $ 0 7 4 , 3 ) 7 ( — — ) 7 1 1 ( ) 2 ( — ) 6 1 ( — ) 2 0 1 ( ) 0 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a v u q e h s a c d n a h s a C ) 2 ( s t e s s a t n e r r u c l a t o T s t e s s a t n e r r u c l a t o T ) d e t o n s a t p e c x e , s n o i l l i m $ ( ) 3 ( s e i t i l i b a i l t n e r r u c l a t o T e g a r e v a r e t r a u q 4 – l a t i p a c g n k r o W i s h t n o m 2 1 t s a l – e u n e v e R l s e a s o t l a t i p a c g n k r o W i l a t i p a c g n k r o W i e h t r o f e v i t c e f f e s t n e m u r t s n I l i a c n a n F i , 9 S R F I d n a s r e m o t s u C h t i w s t c a r t n o C m o r f e u n e v e R , 5 1 S R F I f o n o i t p o d a ’ s y n a p m o C e h t t c e l f e r o t d e t a t s e r n e e b e v a h s t l u s e r e v i t a r a p m o c 7 1 0 2 e h T . s t n e m e t a t S l i a c n a n F i l a u n n A 8 1 0 2 ’ s y n a p m o C e h t f o 2 e t o n n i d n u o f e b n a c n o i t p o d a i s h t f o t c a p m i e h t n o n o i t a m r o f n i e r o M . 8 1 0 2 , 1 y r a u n a J i i g n n n g e b r a e y l i a c n a n i f . t b e d m r e t - g n o l f o n o i t r o p t n e r r u c d n a t b e d m r e t - t r o h s i g n d u c x E l . s t l n e a v u q e i h s a c d n a h s a c i g n d u c x E l ) 1 ( ) 2 ( ) 3 ( l . s e a s e t a r e n e g o t l a t i p a c g n k r o w i f o e s u s t i n i y c n e c i f f i ’ e s y n a p m o C e h t i g n s s e s s a n i t n e m e g a n a m r o f I P K l u f e s u a s i i s h T . s h t n o m : s w o l l o f s a d e t a u c a c l l s i o i t a r l s e a s o t l i a t i p a c g n k r o w e h T 1 5 i t n e m p u q e w e n e r u t u f g n i t c e o r p f o j s e r u s a e m s a e k a n t i r e d r o d n a g o k c a b l t n e m p u q e i s e s u t n e m e g a n a M . s r e d r o t n e m p u q e w e n d e t t i i m m o c s t n e s e r p e r . e k a n t i r e d r o d n a g o k c a b l t i n e m p u q e r o f s e r u s a e m S R F l I e b a r a p m o c y l t c e r i d o n e r a e r e h T . s e i r e v i l e d e k a t n i r e d r O . s e i r e v i l e d e r u t u f r o f s r e m o t s u c y b d e r e d r o s t i n u t i n e m p u q e w e n f o e u a v l l i t a e r e h t s a d e n i f e d s i l g o k c a b t n e m p u q e i l l ’ a b o g s y n a p m o C e h T e k a t n I r e d r O d n a g o l k c a B t n e m p u q E i l e v e w t t s a l e h t r o f e u n e v e r l a t o t i i y b d e d v d , s r e t r a u q r u o f t s a l e h t f o e g a r e v a n a n o d e s a b , l a t i i p a c g n k r o w s a d e t a u c a c l l s i o i t a r l s e a s o t l i a t i p a c g n k r o w e h T Selected Annual Information ($ millions, except for share and option data) Total revenue from external sources Net income (2) Earnings Per Share (2) Basic EPS Diluted EPS Total assets Long-term debt Non-current Total long-term debt (3) Cash dividends declared per common share Finning International Inc. 2018 Annual Results 2018 2017 (Restated) (1) 2016 $ $ $ $ $ $ $ 6,996 $ 232 $ 6,256 $ 216 $ 1.38 $ $ 1.38 5,696 $ 1,354 1,354 $ $ 0.79 1.28 $ $ 1.28 5,069 $ 1,296 1,296 $ $ 0.745 5,628 65 0.38 0.38 4,910 1,487 1,487 0.73 (1) The 2017 comparative results have been restated to reflect the Company’s adoption of IFRS 15, Revenue from Contracts with Customers and IFRS 9, Financial Instruments effective for the financial year beginning January 1, 2018. More information on the impact of this adoption can be found in note 2 of the Company’s 2018 Annual Financial Statements. (2) Results in 2018, 2017, and 2016 were impacted by the following items: ($ millions except per share amounts) Write-off and loss related to Energyst 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 Loss on 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: Tax impact of devaluation of ARS ($20 million) Redemption costs on early repayment of long-term debt ($7 million after tax)(3) Impact of significant items on EPS: $ $ $ $ 2018 2017 2016 $ 30 $ — $ (7) — — — — — — 23 0.15 $ $ 0.12 $ — 0.27 $ (4) — 5 — — — — 1 0.01 — 0.04 0.05 $ $ $ $ — — 11 41 36 20 (5) 5 108 0.50 — — 0.50 (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% MTNs due June 1, 2018. In December 2018, the Company amended its previous $1 billion credit facility which was set to fully mature in October 2022 by, among other things, extending the maturity date to December 2023 and increasing the credit facility commitment to $1.3 billion. 52 Selected Quarterly Information Finning International Inc. 2018 Annual Results ($ millions, except for share, per share, and option amounts) Revenue from operations Canada South America UK & Ireland Total revenue Net income (2) Earnings Per Share (2) Basic EPS Diluted EPS Total assets Long-term debt Current Non-current Total long-term debt (3) Cash dividends paid per common share Common shares outstanding (000’s) Options outstanding (000’s) 2018 2017 (Restated) (1) Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 509 328 $ 1,005 $ 910 $ 558 287 852 552 266 $ 1,842 $ 1,755 $ 1,729 $ 1,670 71 25 $ $ 907 $ 551 271 55 $ 81 $ $ 856 $ 589 288 736 $ 549 253 690 503 208 $ 1,733 $ 1,538 $ 1,584 $ 1,401 47 50 $ $ 790 $ 516 278 64 $ 55 $ 0.33 $ 0.33 $ 0.42 $ 0.42 $ $ 5,696 $ 5,413 $ 5,457 $ 5,254 0.15 $ 0.15 $ 0.48 $ 0.48 $ 0.38 $ 0.38 $ 0.28 $ $ 0.28 $ 5,069 $ 5,111 $ 5,002 $ 4,882 0.29 $ 0.29 $ 0.33 $ 0.33 $ $ — $ — $ — $ — $ 1,354 1,322 $ 1,354 $ 1,315 $ 1,330 $ 1,322 1,330 1,315 — $ 350 $ — 1,481 $ 1,296 $ 1,641 $ 1,466 $ 1,481 350 $ 1,296 1,291 1,116 20.00¢ 20.00¢ 20.00¢ 19.00¢ 19.00¢ 19.00¢ 18.25¢ 18.25¢ 164,382 168,191 168,184 168,401 3,301 3,164 3,226 3,241 168,267 168,118 168,097 168,083 4,501 3,864 4,574 4,755 (1) The 2017 comparative results have been restated to reflect the Company’s adoption of IFRS 15, Revenue from Contracts with Customers and IFRS 9, Financial Instruments effective for the financial year beginning January 1, 2018. More information on the impact of this adoption can be found in note 2 of the Company’s 2018 Annual Financial Statements. (2) 2018 and 2017 quarterly results were impacted by the following significant items: ($ millions except per share amounts) Write-off and loss related to Energyst Insurance proceeds from Alberta wildfires Severance costs Impact of significant items on EBIT: Impact of above significant items on EPS: Items impacting net income only (below EBIT) - impact on EPS: Tax impact of devaluation of ARS ($20 million) 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 Q2 2018, Q4 2018, Q1 2017, and Q2 2017. 2018 (a) 2017 (a) Q3 Q1 Q4 Q3 30 $ — $ — $ — — (7) — 30 $ (7) $ (4) 5 1 $ 0.18 $ (0.03) $ 0.01 $ — — — — — 0.12 $ — $ — — $ $ — $ — $ 0.30 $ (0.03) $ 0.01 $ — 0.04 0.04 $ $ $ $ $ $ (3) 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% MTNs due June 1, 2018. In December 2018, the Company amended its previous $1 billion credit facility which was set to fully mature in October 2022 by, among other things, extending the maturity date to December 2023 and increasing the credit facility commitment to $1.3 billion. 53 Finning International Inc. 2018 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, demand for equipment and product support, including component rebuilds, along with demand for power systems products, parts and service, anticipated construction activity, including large infrastructure projects such as LNG Canada; in South America, international trade tensions posing a risk to the price of copper, the Company’s long-term outlook for the price of copper, demand for mining equipment and product support, public investment by the Chilean government and anticipated benefits to the construction sector and increased demand for construction equipment and product support in the medium term, reduction on infrastructure spending in Argentina and reduced demand for construction equipment, expected oil and gas development at Vaca Muerta and anticipated upside for future equipment and support demand in Argentina; in the UK & Ireland, uncertainty surrounding Brexit, the impact of Brexit on customer confidence and future investment decisions being mitigated by the UK government’s investments in large-scale rail, power, road and airport infrastructure projects, demand for power systems products in the industrial and electric power sectors and the activity levels in the quarry, general construction and plant hire sectors generating solid demand for construction equipment and product support; expected impact of and volatility in foreign exchange markets; expected revenue and free cash flow; expected earnings torque from sustainable operating improvements and cost discipline, expected increased capital efficiencies and positive annual free cash flow from global supply chain initiatives; expected profitability levels; expected range of the Company’s effective tax rate; expected results from cost reductions; sustainability improvements and the Company’s commitment to grow ROIC; expectations regarding future liquidity needs; expected net rental additions; expected contributions to the defined benefit pension plan; expected results from execution of the Company's strategy; the Company’s priorities; inventory turns; timing and delivery of innovative customer solutions; expected capital expenditures, including investments in a long-term network strategy, branch improvement initiatives, Digital initiatives, and electric mining vehicles; the Company’s response to business process velocity challenges experienced in connection with the new ERP system in Chile and the expected return to normal parts revenue run rates in Q2 2019; expected sources of funding for the acquisition of 4Refuel; and the financial performance of its rental business. 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; activities of foreign governments; 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 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 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. Forward-looking statements made in this report are based on a number of assumptions that Finning believed were reasonable on the day the Company made the forward-looking statements. Refer in particular to the Outlook section of 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. 54 Finning International Inc. 2018 Annual Results Glossary of Defined Terms 4Refuel Canada and 4Refuel US Annual Information Form 4Refuel AIF Annual Financial Statements Audited annual consolidated financial statements ARS Argentine Peso Audit Committee Audit Committee of the Board of Directors of Finning Board Board of Directors of Finning CAD Canadian dollar Caterpillar Caterpillar Inc. CEO Chief Executive Officer CFO Chief Financial Officer CGU Cash-generating unit CLP Chilean Peso Company Finning International Inc. Consol Consolidated COSO Committee of Sponsoring Organizations of the Treadway Commission DBRS Dominion Bond Rating Service EBIT Earnings (loss) before finance costs and income tax EBITDA Earnings (loss) before finance costs, income tax, depreciation, and amortization Energyst Energyst B.V. EPS Earnings per share ERM Enterprise risk management ERP Enterprise Resource Planning fav Favourable Finning Finning International Inc. GAAP Generally accepted accounting principles GHG Greenhouse gas GBP U.K. pound sterling IFRIC International financial reporting standards interpretations committee IFRS International Financial Reporting Standards KPI Key performance indicator M&A Mergers and acquisitions MD&A Management Discussion and Analysis MTNs Medium term notes n/a not applicable n/m % change not meaningful NCIB Normal course issuer bid OEM OEM Remanufacturing Company Inc. PLM PipeLine Machinery International ROIC Return on invested capital RUN Rental, used, and new equipment S&P Standard and Poor’s SEDAR System for Electronic Document Analysis SG&A Selling, general, and administrative costs STEM Science, technology, engineering, and mathematics SVP Senior Vice President TSX Toronto Stock Exchange unfav Unfavourable USD U.S. dollar 55 Finning International Inc. 2018 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 2018. 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 20, 2019 300-565 Great Northern Way, Vancouver, BC, V5T 0H8, Canada (cid:3) 1 INDEPENDENT AUDITOR’S REPORT To the Shareholders of Finning International Inc.: Finning International Inc. 2018 Annual Results Opinion We have audited the consolidated financial statements of Finning International Inc. and its subsidiaries (the “Company”), which comprise the consolidated statements of financial position as at December 31, 2018 and 2017 and January 1, 2017, and the consolidated statements of net income, comprehensive income, changes in equity and cash flows for the years ended December 31, 2018 and 2017, and notes to the consolidated financial statements, including a summary of significant accounting policies (collectively referred to as the “financial statements”). In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2018 and 2017 and January 1, 2017, and its financial performance and its cash flows for the years ended December 31, 2018 and 2017 in accordance with International Financial Reporting Standards (“IFRS”). Basis for Opinion We conducted our audit in accordance with Canadian generally accepted auditing standards (“Canadian GAAS”). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Other Information Management is responsible for the other information. The other information comprises: (cid:322) Management’s Discussion and Analysis; and (cid:322) The information, other than the financial statements and our auditor’s report thereon, in the Financial Report. Our opinion on the financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. We obtained Management’s Discussion and Analysis prior to the date of this auditor’s report. If, based on the work we have performed on this other information, we conclude that there is a material misstatement of this other information, we are required to report that fact in this auditor’s report. We have nothing to report in this regard. The Financial Report is expected to be made available to us after the date of the auditor’s report. If, based on the work we will perform on this other information, we conclude that there is a material misstatement of this other information, we are required to report that fact to those charged with governance. Responsibilities of Management and Those Charged with Governance for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company’s financial reporting process. 2 Finning International Inc. 2018 Annual Results Auditor’s Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian GAAS will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with Canadian GAAS, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: (cid:322) Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. (cid:322) Obtain an understanding of internal control relevant to the audit 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 Company’s internal control. (cid:322) Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. (cid:322) Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern. (cid:322) Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. (cid:322) Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Company to express an opinion on the financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. The engagement partner on the audit resulting in this independent auditor’s report is Raj S. Bhogal. /s/ Deloitte LLP Chartered Professional Accountants Vancouver, British Columbia February 20, 2019 3 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION Finning International Inc. 2018 Annual Results Consolidated Financial Statements December 31, 2018 December 31, 2017 (Restated - Note 2) January 1, 2017 (Restated - Note 2) (Canadian $ millions) ASSETS Current assets Cash and cash equivalents (Note 24) Accounts receivable Unbilled work in progress (Note 4) Inventories (Note 12) 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 7) Accounts payable and accruals Deferred revenue (Note 4) Provisions (Note 22) Other liabilities (Note 21) Total current liabilities Long-term debt (Note 7) Net post-employment obligation (Note 23) Other liabilities (Note 21) Total liabilities Commitments and contingencies (Note 28) SHAREHOLDERS’ EQUITY Share capital (Note 10) Contributed surplus Accumulated other comprehensive income Retained earnings Total shareholders’ equity Total liabilities and shareholders' equity Approved by the Directors February 20, 2019 $ $ $ $ 454 969 152 2,061 288 3,924 645 441 120 176 100 87 203 5,696 154 1,220 517 46 55 1,992 1,354 72 169 3,587 573 — 282 1,254 2,109 5,696 $ $ $ $ 458 934 162 1,708 269 3,531 572 385 119 117 100 92 153 5,069 18 1,160 296 35 36 1,545 1,296 78 176 3,095 580 — 195 1,199 1,974 5,069 $ $ $ $ /s/ S. L. Levenick S.L. Levenick, Director /s/ H.N. Kvisle H.N. Kvisle, Director The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements 593 814 177 1,597 214 3,395 606 363 118 71 100 88 152 4,893 2 946 233 47 7 1,235 1,487 84 172 2,978 573 2 243 1,097 1,915 4,893 4  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 (Note 4) Cost of sales Gross profit Selling, general, and administrative expenses Equity earnings of joint ventures and associate (Note 15) Other income (Note 6) Other expenses (Note 6) Earnings before finance costs and income taxes Finance costs (Note 7) Income before provision for income taxes Provision for income taxes (Note 13) Net income Earnings per share (Note 5) Basic Diluted Finning International Inc. 2018 Annual Results Consolidated Financial Statements 2018 2017 (Restated - Note 2) $ $ $ $ 2,740 371 239 3,632 14 6,996 (5,228) 1,768 (1,327) 12 — (30) 423 (76) 347 (115) 232 1.38 1.38 $ $ $ $ 2,175 359 228 3,481 13 6,256 (4,602) 1,654 (1,271) 7 2 — 392 (100) 292 (76) 216 1.28 1.28 Weighted average number of shares outstanding (Note 5) Basic Diluted 167,997,608 168,544,313 168,131,542 168,544,984 The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements 5  CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For years ended December 31 (Canadian $ millions) Net income Other comprehensive income, 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) Foreign currency translation losses reclassified to net income (Note 6b) (Loss) gain on net investment hedges Impact of foreign currency translation and net investment hedges, net of income tax Gain (loss) on cash flow hedges Loss on cash flow hedges, reclassified to statement of net income Income tax 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 (Note 23) Income tax expense on actuarial gain Actuarial gain, net of income tax Total comprehensive income CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY Share Capital Finning International Inc. 2018 Annual Results Consolidated Financial Statements 2018 $ 232 2017 (Restated - Note 2) 216 $ 133 (2) 11 (58) 84 7 — (4) 3 66 (11) 55 374 $ (86) (3) — 41 (48) (4) 1 — (3) 18 (3) 15 180 $ (Canadian $ millions, except number of shares) Balance, January 1, 2017 Net income Other comprehensive (loss) income Total comprehensive (loss) income Issued on exercise of share options Share option expense Hedging loss transferred to statement of financial position Repurchase of common shares (Note 9) Dividends on common shares Balance, December 31, 2017 Net income Other comprehensive income Total comprehensive income Issued on exercise of share options Share option expense Repurchase of common shares (Note 9) Dividends on common shares Balance, December 31, 2018 Number of Shares 168,167,202 — — — 189,280 — — (89,900) — 168,266,582 — — — 243,438 — (4,128,053) — 164,381,967 Accumulated Other Comprehensive Income Impact of Foreign Currency Translation and Net Investment Hedges $ Impact of Cash Flow Hedges (Restated - Note 2) $ Amount 573 $ — — — 7 — Contributed Surplus $ 2 — — — (3) 3 243 — (48) (48) — — Retained Earnings (Restated - Note 2) $ 1,097 216 15 231 (4) — Total Shareholders' Equity (Restated - Note 2) $ 1,915 216 (36) 180 — 3 — — (3) (3) — — — — — 580 — — — 7 — (14) — 573 $ $ $ $ — (2) — — $ — — — (3) 3 — — — $ — — — 195 — 84 84 — — — — 279 $ $ 3 — — — — 3 3 — — — — 3 $ $ — — (125) 1,199 232 55 287 (4) — (95) (133) 1,254 $ $ 3 (2) (125) 1,974 232 142 374 — 3 (109) (133) 2,109 The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements 6 Finning International Inc. 2018 Annual Results Consolidated Financial Statements 2018 2017 (Restated - Note 2) CONSOLIDATED STATEMENTS OF CASH FLOW For years ended December 31 (Canadian $ millions) OPERATING ACTIVITIES Net income Adjusting for: Depreciation and amortization Gain on sale of property, plant, and equipment Write-off and loss related to investment (Note 6b) Equity earnings of joint ventures and associate (Note 15) Share-based payment expense (Note 11) Provision for income taxes Finance costs Net benefit cost of post-employment benefit plans (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 6a) Advances to and investment in joint ventures and associate (Note 15) Cash flow used in investing activities FINANCING ACTIVITIES Increase in short-term debt Issuance of long-term debt (Note 7) Repayment of long-term debt (Note 7) Decrease in finance lease liabilities (Note 24) Debt issuance and related costs Early redemption premium (Note 7) Repurchase of common shares Dividends paid Cash flow used in financing activities Effect of currency translation on cash balances Decrease in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year (Note 24) $ 232 $ 187 (6) 30 (12) 7 115 76 19 (103) (306) 162 (73) (68) 260 (201) 19 — (2) (184) 136 — — (4) (1) — (105) (133) (107) 27 (4) 458 454 $ $ The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements 216 184 — — (7) 32 76 100 10 (67) (307) 183 (81) (56) 283 (121) 3 7 (5) (116) 17 200 (350) (6) (1) (9) (2) (125) (276) (26) (135) 593 458 7 Finning International Inc. 2018 Annual Results Index to the Notes to the Consolidated Financial Statements (cid:3) 1. GENERAL INFORMATION ............................................................................................................................................... 9 2. SIGNIFICANT ACCOUNTING POLICIES, KEY ASSUMPTIONS, AND SIGNIFICANT JUDGMENTS ................................................ 9 3. SEGMENTED INFORMATION ......................................................................................................................................... 14 4. REVENUE ................................................................................................................................................................... 16 5. EARNINGS PER SHARE ............................................................................................................................................... 20 6. OTHER INCOME AND OTHER EXPENSES ...................................................................................................................... 20 7. SHORT-TERM AND LONG-TERM DEBT AND FINANCE COSTS .......................................................................................... 21 8. FINANCIAL INSTRUMENTS ............................................................................................................................................ 23 9. MANAGEMENT OF CAPITAL ......................................................................................................................................... 32 10. SHARE CAPITAL ....................................................................................................................................................... 33 11. SHARE-BASED PAYMENTS ....................................................................................................................................... 34 12. INVENTORIES ........................................................................................................................................................... 39 13. INCOME TAXES ......................................................................................................................................................... 40 14. OTHER ASSETS ........................................................................................................................................................ 43 15. JOINT VENTURES AND ASSOCIATE ............................................................................................................................ 44 16. PROPERTY, PLANT AND EQUIPMENT AND RENTAL EQUIPMENT ................................................................................... 45 17. GOODWILL ............................................................................................................................................................... 48 18. DISTRIBUTION NETWORK .......................................................................................................................................... 48 19. INTANGIBLE ASSETS ................................................................................................................................................. 49 20. ASSET IMPAIRMENT .................................................................................................................................................. 51 21. OTHER LIABILITIES ................................................................................................................................................... 52 22. PROVISIONS ............................................................................................................................................................. 53 23. POST-EMPLOYMENT BENEFITS ................................................................................................................................. 54 24. SUPPLEMENTAL CASH FLOW INFORMATION ............................................................................................................... 61 25. ECONOMIC RELATIONSHIPS ...................................................................................................................................... 63 26. RELATED PARTY TRANSACTIONS AND TOTAL STAFF COSTS ....................................................................................... 63 27. LEASES ................................................................................................................................................................... 64 28. COMMITMENTS AND CONTINGENCIES ........................................................................................................................ 64 29. GUARANTEES AND INDEMNIFICATIONS ....................................................................................................................... 65 30. SUBSEQUENT EVENT ................................................................................................................................................ 65 (cid:3) (cid:3) (cid:3) 8(cid:3) Finning International Inc. 2018 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 300, 565 Great Northern Way, 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 20, 2019, 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 2018 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, certain assets held for sale, 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. 9 Finning International Inc. 2018 Annual Results Notes to the Consolidated Financial Statements (b) Foreign Currency Translation Accounting Policy These consolidated financial statements are presented in CAD, 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 be included 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 CAD 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 8 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. 10 Finning International Inc. 2018 Annual Results Notes to the Consolidated Financial Statements (c) New Accounting Standards, Interpretations, and Amendments to Standards The Company has adopted the following new accounting standards and interpretation issued by the IFRS Interpretations Committee (IFRIC): (cid:120) IFRS 15, Revenue from Contracts with Customers (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 supersedes existing standards and interpretations, including IAS 18, Revenue and IAS 11, Construction Contracts. Additionally, IFRS 15 significantly increases disclosures related to revenue recognition. Management evaluated the new standard, completed its assessment, and determined that the new standard has the following impact on the timing and pattern of revenue recognition: (cid:120) Revenue for sales of new equipment, used equipment, and parts remains unchanged. (cid:120) Revenue for complex power and energy systems projects and servicing of equipment is recognized over time in a pattern that reflects the measure of progress. While the total amount of revenue recognized under IFRS 15 does not change materially, the timing of revenue recognized can differ to reflect the measure of progress or allocation of the transaction price. (cid:120) Revenue for non-complex power and energy systems projects is 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 remains unchanged upon adoption of IFRS 15. The Company applied some of the practical expedients available under IFRS 15 such as not restating financial statements for any contracts completed prior to January 1, 2017 and using the transaction price at the date the contract was completed rather than estimating variable consideration amounts in the comparative reporting periods. Also, modifications of contracts prior to January 1, 2017 were appropriately assessed and reflected in the identified performance obligations, estimated transaction price, and allocation of the transaction price to those performance obligations. Management applied the new standard retrospectively to each reporting period presented. The impact of IFRS 15 on the comparative periods in the consolidated financial statements is shown in the tables on pages 12 – 13. The Company’s accounting policy for revenue is disclosed in Note 4. (cid:120) IFRS 9, Financial Instruments (IFRS 9) (effective January 1, 2018) introduced new requirements for the classification and measurement of financial assets and financial liabilities, impairment of financial assets, and hedge accounting. The Company applied this standard retrospectively. Under the new standard, management utilizes a provision matrix, permitted under the simplified approach, to estimate expected credit losses for trade and other receivables and unbilled work in progress. There is no adjustment on transition for this change in methodology from incurred credit losses under the previous standard IAS 39, Financial Instruments: Recognition and Measurement (IAS 39). Management elected 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 did not meet the requirements under IFRS 9, therefore any effective portion of such hedges previously recognized in other comprehensive income was restated to the consolidated statement of net income in the comparative period. Under IAS 39, if a hedged forecast transaction subsequently resulted in the recognition of a non-financial asset or non-financial liability, the Company reclassified that amount and included 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 is required to remove the basis adjustment related to non-financial instruments directly from accumulated other comprehensive income as it is not considered a reclassification adjustment and therefore will no longer impact other comprehensive income. The impact of IFRS 9 on the comparative periods in the consolidated financial statements is shown in the tables on pages 12 – 13. The Company’s accounting policy for Financial Instruments is disclosed in Note 8. 11 Finning International Inc. 2018 Annual Results Notes to the Consolidated Financial Statements The impact of IFRS 15 on the statement of financial position for January 1, 2017 is presented below. IFRS 9 did not impact the statement of financial position for January 1, 2017. January 1, 2017 ($ millions) Accounts receivable Unbilled work in progress Inventories Other assets (non-current) Total assets Deferred revenue Other liabilities (non-current) Total liabilities Retained earnings Shareholders' equity Previously reported Adjustments for Adjustments for IFRS 15 IFRS 9 Restated $ $ $ $ $ $ $ $ $ $ 869 101 1,601 186 4,910 231 205 3,009 1,083 1,901 $ $ $ $ $ $ $ $ $ $ (55) 76 (4) (34) (17) 2 (33) (31) 14 14 $ $ $ $ $ $ $ $ $ $ — — — — — — — — — — $ $ $ $ $ $ $ $ $ $ 814 177 1,597 152 4,893 233 172 2,978 1,097 1,915 The impact of IFRS 15 and IFRS 9 on the statement of financial position for December 31, 2017 is as follows: December 31, 2017 ($ millions) Accounts receivable Unbilled work in progress Inventories Other assets (non-current) Total assets Deferred revenue Other liabilities (non-current) Total liabilities Accumulated other comprehensive income Retained earnings Shareholders' equity Previously reported Adjustments for Adjustments for IFRS 15 IFRS 9 Restated $ $ $ $ $ $ $ $ $ $ $ 957 124 1,705 194 5,092 291 215 3,129 193 1,190 1,963 $ $ $ $ $ $ $ $ $ $ $ (23) 38 3 (41) (23) 5 (39) (34) $ $ $ $ $ $ $ $ — $ $ 11 $ 11 — — — — — — — — 2 (2) — $ $ $ $ $ $ $ $ $ $ $ 934 162 1,708 153 5,069 296 176 3,095 195 1,199 1,974 The impact of IFRS 15 and IFRS 9 on the statement of net income and comprehensive income for the year ended December 31, 2017 is as follows: For year ended December 31, 2017 ($ millions) Previously reported Adjustments for Adjustments for IFRS 15 IFRS 9 Restated New equipment revenue Product support revenue Total revenue Cost of sales Gross profit Selling, general, and administrative expenses Earnings before finance costs and income taxes Provision for income taxes Net income Other comprehensive income Comprehensive income $ $ $ $ $ $ $ $ $ $ $ 2,169 3,496 6,265 (4,608) 1,657 (1,267) 399 (78) 221 (35) 186 $ $ $ $ $ $ $ $ $ $ $ 6 (15) (9) 6 (3) $ $ $ $ $ — $ (3) $ — $ $ (3) — $ $ (3) — — — — — (4) (4) 2 (2) (1) (3) $ $ $ $ $ $ $ $ $ $ $ 2,175 3,481 6,256 (4,602) 1,654 (1,271) 392 (76) 216 (36) 180 12 Finning International Inc. 2018 Annual Results Notes to the Consolidated Financial Statements The impact on basic and diluted earnings per share (EPS) for the year ended December 31, 2017 is as follows: For year ended December 31, 2017 Previously reported Adjustments for Adjustments for IFRS 15 IFRS 9 Restated Basic and Diluted EPS $ 1.31 $ (0.01) $ (0.02) $ 1.28 (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. This IFRIC clarifies the exchange rate used to translate deposits made on inventory purchases or advances received for equipment sales denominated in a foreign currency. Management elected to apply this interpretation prospectively to all in-scope assets, expenses, and income recognized on or after January 1, 2018. (e) Future Accounting Pronouncements The Company has not applied the following new standard and interpretation that have been issued but are not yet effective: (cid:120) 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 higher non-current assets and current and non-current liabilities in the consolidated statement of financial position in all reporting segments, primarily in the Canadian segment. The categories of assets expected to be most impacted are properties and vehicles. 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. Although total cash movement will be unchanged, the presentation in the statement of cash flows will look different under the new standard. There will be an increase in cash flows provided by operating activities offset by an increase in cash flows used within financing activities, as the principal component of lease payments currently accounted for as an operating activity will be presented as a financing activity. The Company will apply IFRS 16 retrospectively and recognize the cumulative effect of initial application on January 1, 2019, on the statement of financial position, subject to permitted and elected practical expedients. This method of application will not result in a restatement of amounts reported in periods prior to January 1, 2019. The Company will measure the right-of-use asset at an amount equal to the lease liability on January 1, 2019 and apply a single discount rate to leases with a similar remaining lease term for similar classes of underlying assets. The Company will not apply this standard to short-term leases and leases for which the underlying asset is of low value. Management expects there will be a difference between operating lease commitments disclosed in Note 27 and lease liabilities included in the statement of financial position at January 1, 2019. The difference is primarily due to discounting gross lease commitments and changes in determining lease terms, including the impact of extension options reasonably expected to be exercised. (cid:120) 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 has assessed the interpretation and expects there to be no impact. 13 Finning International Inc. 2018 Annual Results Notes to the Consolidated Financial Statements 3. SEGMENTED INFORMATION (cid:3) 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 (CODM) for the purposes of resource allocation and assessment of segment performance primarily focuses on the dealership territories in which the Company operates. The CODM considers earnings before finance costs, income taxes, depreciation and amortization (EBITDA) as the primary measure of segment profit and loss. In the prior year, earnings before finance costs and income taxes (EBIT) was considered the primary measure. 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 reportable segment For year ended December 31, 2018 ($ millions) Revenue New equipment Used equipment Equipment rental Product support Other Total revenue Operating costs (1) Equity earnings (loss) of joint ventures and associate Other expenses (Note 6b) EBITDA Depreciation and amortization EBIT Finance costs Provision for income taxes Net income Invested capital (2) Capital and rental equipment (3) Gross capital expenditures (4) Gross rental asset expenditures (4) Canada South America UK & Ireland Other Consolidated $ $ $ $ $ $ $ $ 1,288 $ 233 154 1,997 2 3,674 $ (3,297) 16 — 393 $ (96) 297 $ 714 $ 54 50 1,348 4 2,170 $ (1,966) — — 204 $ (62) 142 $ 738 $ 84 35 287 8 1,152 $ (1,073) — — 79 $ (28) 51 $ 1,675 $ 627 $ 61 $ 213 $ 1,190 $ 476 $ 109 $ 54 $ 336 $ 125 $ 9 $ 39 $ — $ — — — — — $ (32) (4) (30) (66) $ (1) (67) $ $ (38) $ 34 $ 25 $ — $ 2,740 371 239 3,632 14 6,996 (6,368) 12 (30) 610 (187) 423 (76) (115) 232 3,163 1,262 204 306 (1) Operating costs are calculated as cost of sales and selling, general, and administration expenses less depreciation and (2) amortization.(cid:3) Invested capital is calculated as total assets less total liabilities, excluding net debt. Net debt is calculated as short-term debt and long-term debt, net of cash. (cid:3) (3) Capital includes property, plant and equipment, and intangible assets(cid:3) (4) Includes finance leases and borrowing costs capitalized and excludes additions through business acquisitions(cid:3) 14  For year ended December 31, 2017 ($ millions) (Restated - Note 2) Revenue New equipment Used equipment Equipment rental Product support Other Total revenue Operating costs (1) Equity earnings (loss) of joint venture and associate Other income (Note 6a) EBITDA Depreciation and amortization EBIT Finance costs Provision for income taxes Net income Invested capital (2) Capital and rental equipment (3) Gross capital expenditures (4) Gross rental asset expenditures (4) Finning International Inc. 2018 Annual Results Notes to the Consolidated Financial Statements Canada South America UK & Ireland Other Consolidated $ $ $ $ $ $ $ $ 873 $ 236 147 1,814 2 3,072 $ (2,760) 12 — 324 $ (99) 225 $ 645 $ 53 50 1,405 4 2,157 $ (1,915) — — 242 $ (58) 184 $ 657 $ 70 31 262 7 1,027 $ (964) — — 63 $ (26) 37 $ 1,621 $ 557 $ 32 $ 228 $ 983 $ 370 $ 77 $ 45 $ 250 $ 137 $ 6 $ 34 $ — $ — — — — — $ (50) (5) 2 (53) $ (1) (54) $ $ (24) $ 10 $ 7 $ — $ 2,175 359 228 3,481 13 6,256 (5,689) 7 2 576 (184) 392 (100) (76) 216 2,830 1,074 122 307 (1) Operating costs are calculated as cost of sales and selling, general, and administration expenses less depreciation and (2) amortization.(cid:3) Invested capital is calculated as total assets less total liabilities, excluding net debt. Net debt is calculated as short-term debt and long-term debt, net of cash.(cid:3) (3) Capital includes property, plant and equipment, and intangible assets(cid:3) (4) Includes finance leases and borrowing costs capitalized and excludes additions through business acquisitions(cid:3) Revenue and non-current assets (1) by location of operations Revenues Year ended December 31 Non-current assets (1) As at December 31 2018 2017 (Restated - Note 2) 2018 2017 (Restated - Note 2) $ $ $ $ $ 3,674 1,730 1,015 362 215 $ $ $ $ $ 3,072 1,503 919 545 217 $ $ $ $ $ 966 359 255 109 24 $ $ $ $ $ 875 267 202 103 22 ($ millions) Canada Chile United Kingdom Argentina Other countries (1) Non-current assets exclude deferred tax assets(cid:3) 15 Finning International Inc. 2018 Annual Results Notes to the Consolidated Financial Statements 4. REVENUE Revenue Recognition Revenue is recognized when or as the Company transfers control of goods or services to a customer at the amount to which the Company expects to be entitled. Revenue is recognized when control of the goods is transferred to the customer at a point-in-time for the following revenue streams: (2) Revenue from sales of new and used equipment (except for complex power and energy systems) is presented as new equipment revenue and used equipment revenue, respectively. Revenue is recognized when control passes to the customer, which is generally at the time of shipment of the equipment to the customer or when commissioning of equipment is complete. Revenue is recorded at the estimated amount of consideration to which the Company expects to be entitled, including any non-cash consideration when used equipment is accepted for trade-in value. (3) Revenue from sales of parts inventory is presented as product support revenue and recognized when control of the part is transferred to the customer, which is generally upon shipment to the customer or when the customer collects their purchase from one of the Company’s locations. Revenue from the sales of parts inventory is initially recorded at the estimated amount of consideration to which the Company expects to be entitled. If applicable, management recognizes an obligation for items such as refunds, incentives, and discounts with a corresponding reduction in product support revenue. The value of the obligation is estimated based on the terms of the contract, customary business practices, and historical experience. Revenue is recognized in a manner that best reflects the Company’s performance over-time for the following revenue streams: (cid:120) Revenue from sales of complex power and energy systems involving the design, installation, and assembly of power and energy systems is presented as new equipment revenue and estimated as the amount of consideration to which the Company expects to be entitled. Revenue is recognized on a percentage of completion basis proportionate to the work that has been completed and is based on associated costs incurred. (cid:120) Revenue from sales of parts and labour when servicing equipment both under and not under a long-term contract is presented as product support revenue. For sale of parts through servicing of equipment, revenue is recognized as the service work is performed based on parts list price and standard billing labour rates. Product support is also offered to customers in the form of long-term contracts. For these contracts, revenue is recognized on a basis proportionate to the service work that has been performed based on associated costs incurred. For certain long-term product support contracts where flat-rate labour or a monthly subscription service is provided, the Company recognizes revenue for labour on a straight-line basis. Revenue from product support under long-term contracts is estimated based on the number and types of services expected to be performed using the pricing terms set out in the contract. (cid:120) Revenue from equipment rentals and operating leases is presented as equipment rental revenue and in accordance with the terms of the relevant agreement with the customer, either recognized evenly over the term of that agreement or on a usage basis such as the number of hours that the equipment is used. Periodically, revenue from customers under long-term contracts may be recognized in advance of billing the customer. To the extent the Company has a right to receive consideration for the good or service transferred to the customer, the Company recognizes a contract asset. Similarly, amounts may be received from customers under long-term contracts in advance of the work being performed and the Company recognizes a contract liability. These amounts are recorded on the consolidated statement of financial position as Unbilled Work in Progress and Deferred Revenue, respectively. If it is expected that the unavoidable costs required to satisfy the remaining performance obligations of a revenue contract will exceed its expected economic benefits, the Company recognizes an onerous provision with a corresponding loss in the consolidated statement of net income. 16 Finning International Inc. 2018 Annual Results Notes to the Consolidated Financial Statements Areas of Estimation Uncertainty Long-Term Contracts Where the outcome of performance obligations for long-term contracts (primarily sales of complex power and energy systems and sales of parts and labour when servicing equipment) can be estimated reliably, revenue is recognized. Revenue 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 performance obligations for long-term contracts cannot be reliably measured, contract revenue is recognized in the current period to the extent that costs have been incurred until such time that the outcome of the performance obligations can be reasonably measured. Significant estimation assumptions are required to estimate total contract costs, which 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. Areas of Significant Judgment Repurchase Commitments The Company enters into contracts with rights of return (at the customer’s discretion), 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. At the inception of the contract, the Company is required to make judgments as to whether the customer has a significant economic incentive to exercise its right of return. When no such incentive is expected, revenue is recognized upon the sale of equipment but when a significant incentive is expected, revenue is recognized over the term of the repurchase commitment. Significant assumptions are made in estimating residual values and are assessed based on past experience and taking into account expected future market conditions and projected disposal values. 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 control related to the underlying assets have been transferred in such circumstances. The level of residual value risk retained by the Company, the continuing managerial ability to direct the use of, and obtain substantially all of the remaining benefits from the assets are all considered when assessing whether control has been transferred to third parties and hence whether revenue should be recognized on the sale of the assets and associated rental contracts. 17 The Company derives revenue from the transfer of goods and services over time and at a point-in-time in the following lines of business:(cid:3) Finning International Inc. 2018 Annual Results Notes to the Consolidated Financial Statements For year ended December 31, 2018 ($ millions) New equipment revenue Used equipment revenue Rental revenue Product support revenue Other revenue Total revenue For year ended December 31, 2017 ($ millions) (Restated - Note 2) New equipment revenue Used equipment revenue Rental revenue Product support revenue Other revenue Total revenue Point-in-time 2,459 $ 371 — — — 2,830 $ Point-in-time 1,925 359 — — — 2,284 $ $ Over-time 281 — 239 3,632 14 4,166 Over-time 250 — 228 3,481 13 3,972 $ $ $ $ The Company has recorded the following contract assets related to contracts with customers:(cid:3) For years ended December 31 ($ millions) Product support Complex power and energy systems Total unbilled work in progress 2018 $ $ 129 23 152 Total 2,740 371 239 3,632 14 6,996 Total 2,175 359 228 3,481 13 6,256 2017 (Restated - Note 2) 129 33 162 $ $ $ $ $ $ Invoices for sales of complex power and energy systems are issued in accordance with milestone payments agreed within each sales contract with the customer. Invoices for sales of parts and labour when servicing equipment under long-term contracts are issued in accordance with the billing arrangement over the contract term. Invoices for sales of parts and labour when servicing equipment not under long-term contracts are issued when the work is complete. The Company recognizes unbilled work in progress for sales of complex power and energy systems and sales of parts and labour when servicing equipment when revenue recognition criteria are met, and the Company has the right to receive amounts from customers but invoices have not yet been issued.(cid:3) (cid:3) 18 The Company has recorded the following contract liabilities related to contracts with customers:(cid:3) Finning International Inc. 2018 Annual Results Notes to the Consolidated Financial Statements December 31, 2018 ($ millions) Product support Deposits from customers for new equipment Complex power and energy systems Extended warranty New equipment sales under repurchase commitments Other Total deferred revenue December 31, 2017 ($ millions) (Restated - Note 2) Product support Deposits from customers for new equipment Complex power and energy systems Extended warranty New equipment sales under repurchase commitments Other Total deferred revenue $ $ $ $ Current 208 233 46 25 3 2 517 $ Non-current $ 6 — — 40 3 — 49 Current Non-current 153 85 28 21 7 2 296 $ $ — — — 33 1 — 34 Total 214 233 46 65 6 2 566 Total 153 85 28 54 8 2 330 $ $ $ $ The Company recognizes deferred revenue when cash has been collected from the customer but control of the goods or services has not yet been transferred to the customer. Deferred revenue is recorded in respect of sales of parts and labour when servicing equipment, complex power and energy systems, and extended warranty. Deferred revenue is also recorded in respect of sales of new equipment where the Company has issued a repurchase guarantee and management has determined that it has not transferred control of the equipment, and deposits from customers for new equipment sales. Cash is typically collected up front for sales of new equipment under repurchase guarantees and extended warranty while revenue is deferred and recognized evenly over the term of the contract, which can extend beyond one year. The majority of revenue related to long-term product support contracts is recognized within one year of collecting cash from the customer. All other streams of revenue are recognized within one year of recording deferred revenue.(cid:3) 19 Finning International Inc. 2018 Annual Results Notes to the Consolidated Financial Statements 5. EARNINGS PER SHARE Accounting Policy Basic 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. (cid:3) For year ended December 31, 2018 ($ 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, 2017 (Restated - Note 2) 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 232 — 167,997,608 546,705 232 168,544,313 216 — 168,131,542 413,442 216 168,544,984 $ $ $ $ 1.38 — 1.38 1.28 — 1.28 At December 31, 2018, insignificant share options (2017: 1 million) were excluded from the diluted weighted- average number of ordinary shares calculation because their effect would have been anti-dilutive. (cid:3) 6. OTHER INCOME AND OTHER EXPENSES For years ended December 31 ($ millions) Gain on investment (a) Total other income 2018 2017 $ $ — — $ $ 2 2 (a) In June 2017, the Company received proceeds of $7 million and recognized a gain of $2 million upon the disposal of its investment in IronPlanet Holdings, Inc. For years ended December 31 ($ millions) Write-off and loss related to investment (b) Total other expenses 2018 2017 $ $ (30) (30) $ $ — — (b) The Company recorded a charge of $30 million comprising the investment write-off of $19 million and a reclassification of cumulative foreign translation losses of $11 million from accumulated other comprehensive income to the statement of net income upon Energyst B.V.’s (Energyst’s) sale of its wholly-owned subsidiary in Argentina (Note 15). 20 7. SHORT-TERM AND LONG-TERM DEBT AND FINANCE COSTS December 31 ($ millions) Short-term debt Long-term debt 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. 2018 Annual Results Notes to the Consolidated Financial Statements 2018 2017 $ 154 $ 18 200 200 149 136 136 68 68 273 122 2 1,354 1,354 $ $ 200 200 149 125 125 63 63 250 118 3 1,296 1,296 The Company has an unsecured syndicated committed credit facility of $1.3 billion. In December 2018, the Company amended its previous $1 billion credit facility which was set to fully mature in October 2022 by, among other things, extending the maturity date to December 2023 and increasing the credit facility commitment to $1.3 billion. The facility is available in multiple borrowing jurisdictions and may be drawn by a number of the Company’s principal wholly owned subsidiaries. Borrowings under this facility are available in multiple currencies and at various floating rates of interest.(cid:3) Covenant(cid:3) The Company is subject to certain covenants within its syndicated committed credit facility. As at December 31, 2018 and 2017, the Company was in compliance with these covenants. (cid:3) Short-Term Debt(cid:3) At December 31, 2018, short-term debt includes $150 million drawn on the Company’s syndicated committed credit facility and local bank borrowings in the Company’s Argentina operations of $4 million (2017: short-term debt is local bank borrowings in the Company’s Argentina operations of $18 million). (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 $1.3 billion syndicated committed credit facility. There was no commercial paper outstanding at December 31, 2018 or December 31, 2017. In addition, the Company maintains other 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 2018 was 5.8% (2017: 6.4%).(cid:3) Long-Term Debt(cid:3) The Company's CAD denominated Medium Term Notes (MTN), USD denominated Senior Notes, and GBP denominated Senior Notes are unsecured, and interest is payable semi-annually with the principal due on maturity. (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% MTNs due June 1, 2018. The total redemption price included an early redemption premium of approximately $9 million which was recorded in other finance related expenses.(cid:3) The average interest rate applicable to the consolidated long-term debt for 2018 was 3.9% (2017: 4.4%).(cid:3) (cid:3) 21 Long-Term Debt Repayments(cid:3) Principal repayments of long-term debt (carrying amount) in each of the next five years and thereafter are as follows:(cid:3) Finning International Inc. 2018 Annual Results Notes to the Consolidated Financial Statements December 31 ($ millions) 2019 2020 2021 2022 2023 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 $ $ 2018 15 52 67 1 8 76 $ $ $ $ — 200 201 205 122 626 1,354 2017 9 64 73 1 26 100 22 Finning International Inc. 2018 Annual Results Notes to the Consolidated Financial Statements 8. 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 amortized cost and measured using the effective interest method. Financial assets classified as amortized cost are assessed for impairment at the end of each reporting period and a loss allowance is measured by estimating the lifetime expected credit losses. 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. Estimates of expected credit losses take into account 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 and forecasts of future 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 the consolidated statement of 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 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 are expected to occur. The collective loss allowance is estimated based on historical data of payment statistics for similar financial assets, adjusted for current and forecasts of future economic conditions. 23 Finning International Inc. 2018 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, receivables from customers and suppliers, instalment and other notes receivable, and derivative assets. Exposure to Credit Risk 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 Total exposure to credit risk 2018 2017 (Restated - Note 2) $ $ 454 $ 908 61 152 83 32 7 1,697 $ 458 895 39 162 104 44 1 1,703 Cash and Cash Equivalents, and Derivative Assets(cid:3) Credit risk associated with cash and cash equivalents is managed by ensuring that these financial assets are held with major financial institutions with strong investment grade ratings and by 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 and/or A by Fitch. (cid:3) Accounts Receivable, Unbilled Work in Progress, Supplier Claims Receivable, and Instalment Notes Receivable(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 accounts receivables, unbilled work in progress, and instalment notes receivable from customers is minimized because of the diversification of the Company’s operations as well as its large customer base and its geographical dispersion. The Company is exposed to risk on supplier claims receivable, primarily from Caterpillar Inc. (Caterpillar), with whom Finning has an ongoing relationship with since 1933.(cid:3) (cid:3) 24 The maximum exposure to credit risk for trade receivables at the reporting date by geographic location of customer was:(cid:3) Finning International Inc. 2018 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 2018 Allowance $ Gross 556 204 97 26 67 950 $ $ $ — — 1 5 36 42 2018 2017 415 266 92 82 40 895 409 259 109 75 56 908 $ $ 2017 Gross 699 119 64 9 39 930 Allowance — — — 1 34 35 $ $ $ $ $ $ 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 rate changes Balance, end of year 2018 2017 $ $ 35 16 (13) 4 42 $ $ 37 19 (20) (1) 35 The carrying amount of unbilled work in progress, supplier claims receivable, and instalment notes receivable represents the Company’s maximum exposure to credit risk for these balances.(cid:3) 25 Finning International Inc. 2018 Annual Results Notes to the Consolidated Financial Statements (b) Financial Liabilities and Liquidity Risk Accounting Policy Classification and measurement Accounts Payable and accruals and short-term and long-term debt are classified as amortized cost and are measured 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 bank credit facilities, continuously monitors actual and forecast cash flows, and manages maturity profiles of financial liabilities. At December 31, 2018, the Company had approximately $2.2 billion (2017: $1.7 billion) of unsecured credit facilities. Included in this amount is a syndicated committed credit facility totalling $1.3 billion (2017: $1.0 billion) with various Canadian and global financial institutions. At December 31, 2018, $1.2 billion (2017: $1.0 billion) was available under this syndicated committed credit facility. For more information on this $1.3 billion credit facility, please see Note 7. The following are the contractual maturities of non-derivative financial liabilities and derivative financial instruments. The amounts presented represent the future undiscounted principal and interest cash flows, and therefore, do not equate to the carrying amount on the consolidated statement of financial position. ($ millions) Carrying amount December 31, 2018 2019 Contractual cash flows 2020-2021 2022-2023 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 obligations) Total non-derivative financial liabilities Derivative financial (liabilities) assets Forward foreign currency contracts and swaps Sell CAD Buy USD Sell CLP (1) Buy USD Buy USD Sell CLP Sell DKK (1) Buy EUR Total derivative assets (1) Chilean Peso (CLP), Danish Krone (DKK) $ $ $ $ (154) $ (549) (681) (122) (2) (30) (154) $ (20) (29) (4) (1) (7) — $ (433) (59) (8) (1) (15) — $ (15) (251) (128) (1) (9) — (291) (525) — — (10) (1,215) (2,753) $ (1,215) (1,430) $ — (516) $ — (404) $ — (826) — $ 7 — — — — — — 7 $ (175) $ 182 (7) 7 11 (11) (22) 22 7 $ — $ — — — — — — — — $ — $ — — — — — — — — $ — — — — — — — — — 26 Finning International Inc. 2018 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 exposures. 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, specific firm commitments, or forecasted transactions. For hedges designated as such for accounting purposes, at inception, the Company documents the hedging relationship, its risk management objective and strategy for undertaking the hedge, and how the Company will assess whether the Company meets the hedge effectiveness requirements. 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 the consolidated statement of net income. Gains and losses relating to derivative financial instruments 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. 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. The Company may also use other derivative instruments such as swaps, rate locks, and options to hedge its interest rate exposure. 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 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 net income. When a hedging instrument expires or is sold, or when a hedge 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 net 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 net income. Net Investment Hedges The Company 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 the consolidated statement of net income upon the disposal of a foreign operation, 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. Areas of Estimation Uncertainty Fair Value The fair value of derivative financial instruments that are not traded in an active market is determined using valuation techniques. The Company uses its judgement to select a valuation method and makes assumptions that are mainly based on market conditions existing at the end of each reporting period. 27 Finning International Inc. 2018 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 CAD, 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 $842 million (2017: $813 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, 2018 the Company entered into forward exchange contracts for inventory purchases of U.S. $286 million (2017: $319 million) of which approximately U.S. $36 million (2017: $19 million) related to forecast transactions that were no longer expected to occur. These hedges were discontinued and the ineffective portion of $1 million (2017: $(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 assets designated as cash flow hedging instruments is $5 million (2017: $2 million liability). 28 Exposure to Foreign Exchange Risk The currencies of the Company’s significant financial instruments were as follows: Finning International Inc. 2018 Annual Results Notes to the Consolidated Financial Statements December 31, 2018 (millions) Cash and cash equivalents Accounts receivable – trade Short-term and long-term debt Accounts payable and accruals Net statement of financial position exposure December 31, 2017 (millions) Cash and cash equivalents Accounts receivable – trade Short-term and long-term debt Accounts payable and accruals Net statement of financial position exposure Sensitivity Analysis to Foreign Exchange Risk(cid:3) CAD USD GBP — 322 (699) (399) (776) 284 219 (499) (368) (364) 50 67 (71) (90) (44) CAD USD GBP 6 335 (549) (342) (550) 110 173 (499) (438) (654) 43 58 (71) (62) (32) CLP 11,577 142,603 — (84,311) 69,869 CLP 98,982 115,252 — (48,066) 166,168 ARS 63 — (353) (4,570) (4,860) ARS 58 — (266) (405) (613) As a result of foreign exchange gains or losses on the translation of foreign currency denominated financial instruments, a weakening of the CAD against the following currencies would increase (decrease) pre-tax income and other comprehensive income by the amounts shown below. This analysis uses estimated forecast foreign exchange rates for the upcoming year and assumes that all other variables, in particular volumes, relative pricing, interest rates, and hedging activities are unchanged. (cid:3) December 31, 2018 ($ millions) USD/CAD GBP/CAD CLP/CAD ARS/CAD Weakening of CAD 10% 20% 10% 30% Pre-tax Income (Loss) $ $ $ $ 10 1 14 (15) Other Comprehensive Loss $ $ $ $ (59) (24) — — A strengthening of the CAD against the above currencies relative to the December 31, 2018 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) 29 Finning International Inc. 2018 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 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. (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 2018 2017 $ $ $ $ 32 (1,384) 454 (154) $ $ $ $ 44 (1,330) 458 (18) Fair Value Sensitivity Analysis for Fixed Rate Instruments(cid:3) The Company does not account for any fixed rate financial assets or financial 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) $3 million with a 1.0% decrease having the opposite effect. This analysis assumes that all other variables, in particular foreign currency exchange rates, remain constant. (cid:3) 30 Finning International Inc. 2018 Annual Results Notes to the Consolidated Financial Statements (d) Fair Values Financial instruments measured at fair value are grouped into Levels 1 to 3 based on the degree to which fair value is observable: Level 1 – quoted prices in active markets for identical securities Level 2 – significant observable inputs other than quoted prices included in Level 1 Level 3 – significant unobservable inputs The Company’s only financial instruments measured at fair value are derivative instruments, and contingent consideration. All of the derivative instruments are measured at fair value using Level 2 inputs. Contingent consideration is measured at fair value using Level 3 inputs. The Company did not move any instruments between levels of the fair value hierarchy during the years ended December 31, 2018 and 2017. Derivative Instruments (Level 2) The fair value of foreign currency forward contracts is determined by discounting contracted future cash flows using a discount rate derived from interest rate curves and observed forward prices for comparable assets and liabilities. Where appropriate, fair values are adjusted for credit risk based on observed credit default spreads or market yield spreads for counterparties for financial assets and based on the Company’s credit risk for financial liabilities. The Company’s credit risk is derived from yield spreads on the Company’s market quoted debt. Long-Term Debt (Level 2) The carrying value and fair value of the Company’s long-term debt is estimated as follows: December 31 ($ millions) Long-term debt 2018 Carrying Value $ 1,354 $ Fair Value Carrying Value Fair Value 1,569 $ 1,296 $ 1,397 2017 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.(cid:3) Assets Held-For-Sale and Contingent Consideration (Level 3)(cid:3) The fair value of the Company’s 28.8% investment in Energyst, which was considered held-for-sale at September 30, 2018, and remained held-for-sale at December 31, 2018, was estimated by applying a multiple of Energyst’s book value (Enterprise Value to EBITDA ratio). The fair value is estimated to be trivial and therefore recorded at $nil.(cid:3) 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) at December 31, 2017 was estimated by discounting cash flows based on the probability-adjusted profit in the acquired business. The Company settled this contingent consideration in February 2018.(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) 31 Finning International Inc. 2018 Annual Results Notes to the Consolidated Financial Statements 9. 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 May 2018, the Company renewed its normal course issuer bid (NCIB) which enables the Company to purchase its common shares for cancellation. In November 2018, the Company amended the NCIB to increase the number of shares available for purchase for cancellation from 3 million to 5.3 million. In December 2018, the Company further amended the NCIB to put in place an automatic share purchase plan with a designated broker, to enable continued share purchases for cancellation during the Company’s regular blackout period. During 2018, the Company repurchased 4,128,053 Finning common shares for cancellation at an average cost of $26.41 per share (2017: 89,900 Finning common shares were repurchased for cancellation at an average cost of $25.45 per share). The Company monitors net debt to EBITDA to assess operating leverage and ability to repay debt. This ratio approximates the length of time, in years, that it would take the Company to repay its debt, with net debt and EBITDA held constant. Previously, the Company managed its capital structure by monitoring net debt to invested capital, but in line with management’s focus on EBITDA as a key financial measure, management believes utilizing net debt to EBITDA as a metric provides a better measurement of the Company’s management of capital. December 31 Net debt to EBITDA Ratio Company long-term target < 3.0 2018 2017 (Restated - Note 2) 1.7 1.5 Net debt to EBITDA is calculated as net debt divided by EBITDA for the last twelve months. Net debt is calculated as short-term and long-term debt, net of cash. EBITDA is calculated by adding depreciation and amortization to earnings before finance costs and income taxes, as calculated in Note 3.(cid:3) Net Debt is calculated as follows: (cid:3) December 31 ($ millions) Cash and cash equivalents Short-term debt Long-term debt Net debt 2018 2017 (Restated - Note 2) (454) 154 1,354 1,054 $ $ (458) 18 1,296 856 $ $ 32 Finning International Inc. 2018 Annual Results Notes to the Consolidated Financial Statements 10. 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. 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, 2018 and 2017. 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 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) 33 Finning International Inc. 2018 Annual Results Notes to the Consolidated Financial Statements 11. 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. 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 the Black-Scholes option pricing model 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. 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 estimates of inputs to the model 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 2018 and 2017, long-term incentives for executives and senior management were a combination of share options, deferred share units, performance share units, and restricted share units. Share Options The Company has one share option plan (Stock Option Plan) for certain employees. Options granted under the Stock Option 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, 2018 and 2017, approximately 2 million common shares remained eligible to be issued in connection with future grants. In 2018, the Company granted 358,755 common share options to senior executives and management of the Company (2017: 440,238 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 2018 comprised both cash and cashless exercises. 1,032,718 options were exercised in 2018 resulting in 243,438 common shares being issued; 789,280 options were withheld and returned to the option pool for future issues/grants (2017: 1,007,594 options were exercised resulting in 189,280 common shares being issued; 818,314 options were withheld and returned to the option pool for future issues/grants). 34 Finning International Inc. 2018 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 3,864,338 358,755 (1,032,718) (23,673) (2,350) 3,164,352 Exercisable, end of year 2,363,029 2018 Weighted Average Exercise Price 25.45 33.62 25.85 28.25 28.29 26.22 Options 4,563,871 440,238 (1,007,594) (132,177) — 3,864,338 25.33 2,641,850 $ $ $ $ $ $ $ 2017 Weighted Average Exercise Price $ $ $ $ $ $ $ 25.20 26.84 24.71 27.10 — 25.45 25.66 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 2018 Grant 2017 Grant 2.80% 27.13% 2.31% 5.38 years $ 33.62 $ 2.72% 29.32% 1.10% 5.55 years 26.84 (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 $6.85 (2017: $5.49). (cid:3) The following table summarizes information about share options outstanding at December 31, 2018:(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 - $27.98 $27.99 - $33.68 653,209 192,357 939,940 492,603 886,243 3,164,352 3.39 years 1.37 years 3.36 years 4.72 years 3.99 years 3.63 years Weighted Average Exercise Price $ $ $ $ $ $ 21.78 22.30 25.44 26.59 30.96 26.22 Number outstanding 498,607 192,357 939,940 200,644 531,481 2,363,029 Weighted Average Exercise Price 21.77 22.30 25.44 26.33 29.20 25.33 $ $ $ $ $ $ The following table summarizes information about share options outstanding at December 31, 2017: Options Outstanding Options Exercisable Range of Number exercise prices outstanding 693,098 $19.53 - $22.15 375,194 $22.16 - $24.97 1,127,110 $24.98 - $25.47 861,474 $25.48 - $27.46 807,462 $27.47 - $32.38 3,864,338 Weighted Average Remaining Life 4.44 years 2.33 years 4.36 years 4.32 years 3.01 years 3.89 years Weighted Average Exercise Price Number outstanding Weighted Average Exercise Price $ $ $ $ $ $ 21.79 22.40 25.44 26.27 29.14 25.45 370,186 375,194 688,316 406,124 802,030 2,641,850 $ $ $ $ $ $ 21.81 22.40 25.44 25.72 29.12 25.66 35 Other Share-Based Payment Plans(cid:3) 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) Finning International Inc. 2018 Annual Results Notes to the Consolidated Financial Statements 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 non-employee members of the Board of Directors. Under the DDSU Plan A, 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) Non-employee Directors of the Company were granted a total of 49,265 share units in 2018 (2017: 55,698 share units), which were expensed over the calendar year as the units were issued. An additional 21,780 (2017: 22,410) DDSUs were issued in lieu of cash compensation payable for service as a Director. A further 10,494 (2017: 10,467) DDSUs were granted to Directors during 2018 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 deferred share units based on the dividends paid on the Company’s common shares.(cid:3) Executives were granted a total of 20,357 deferred share units in 2018 (2017: 9,589) in lieu of their annual bonus payment and 1,097 deferred share units (2017: 878 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 2018, 3,229 (2017: 4,263) 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 performance share units based on the dividends paid on the Company’s common shares. All PSUs granted in 2018 and 2017 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) 36 Finning International Inc. 2018 Annual Results Notes to the Consolidated Financial Statements 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 375,332 performance share units in 2018, based on 100% vesting (2017: 448,782 performance share units) and 35,000 dividend equivalent units were recorded in relation to the 2016 grant as the expected payout (2017: 14,000 dividend equivalent units were recorded in relation to the 2015 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) The specified levels and respective vesting percentages for the 2018 and 2017 grants are as follows: (cid:3) TSR PSUs 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 2018 grants were as follows: Performance Level Below Threshold Threshold Target Maximum Average Return on Invested Capital (over three-year period) < 11.5% 11.5% 15.5% 19.5% or more Proportion of PSUs Vesting Nil 50% 100% 200% The specified levels and respective vesting percentages for the 2017 grant are as follows: Performance Level Below Threshold Threshold Target Maximum Restricted Share Unit (RSU) Plan 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% Under the RSU Plan, executives of the Company may be awarded restricted share units as approved by the Board of Directors. 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, 2018, 167,052 units were granted to Executives (2017: 197,709 units) and 14,892 notional units (2017: 10,915 notional units) are issuable as payment for dividends upon vesting. (cid:3) 37 Details of the DSU, PSU, and RSU plans are as follows: For year ended December 31, 2018 Units Exec DSU DSU-B DDSU PSU RSU Total Finning International Inc. 2018 Annual Results Notes to the Consolidated Financial Statements 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 (Recovery) expensed Exercised Forfeited Balance, end of year For year ended December 31, 2017 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 35,356 122,543 418,284 1,304,458 448,080 2,328,721 21,454 545,717 (6,646) (269,333) — (64,836) 50,164 125,772 419,765 1,339,214 605,354 2,540,269 257,551 181,944 — (182,629) (24,670) (40,166) 81,539 (80,058) — 3,229 — — 35,356 122,543 418,284 21,454 81,539 (6,646) (80,058) 50,164 125,772 419,765 3,229 — 173,111 481,968 (182,629) 472,450 749,294 — 588,190 — — (269,333) — 1,068,151 $ $ 1 $ — — — 1 $ 4 $ (1) — — 3 $ 13 $ (1) (2) — 10 $ 25 $ 5 (6) (1) 23 $ 7 $ 3 — (1) 9 $ 50 6 (8) (2) 46 Exec DSU DDSU DSU-B 24,889 191,467 368,366 88,575 10,467 (38,657) — — — PSU 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) — RSU Total 24,889 187,201 368,366 88,575 10,467 (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 38 Finning International Inc. 2018 Annual Results Notes to the Consolidated Financial Statements The fair value of the DSUs, ROIC PSUs, and RSUs outstanding as at December 31, 2018 has been estimated using the period-end closing share price of $23.80 (December 31, 2017: $31.72). The impact of the share-based payment plans on the Company’s financial statements was as follows: For years ended December 31 ($ millions) Consolidated Statements of Net Income Compensation expense arising from equity-settled share option incentive plan Compensation expense arising from cash-settled share based payments Consolidated Statements 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) 2018 2017 $ $ $ $ 3 4 7 16 30 $ $ $ $ 3 29 32 5 45 The total intrinsic value of vested but not settled share-based payments was $25 million (2017: $24 million). 12. INVENTORIES Accounting Policy Inventories are assets held for sale in the ordinary course of business, in the process of production for sale, or in the form of materials or supplies to be consumed in the production process or in the rendering of services. Inventories are stated at the lower of cost and net realizable value. Cost is determined on a specific item basis for on-hand equipment and internal service work in progress, and on a weighted average cost basis for parts and supplies. The cost of inventories includes all costs of purchase, conversion costs, other costs incurred in bringing inventories to their existing location and condition, and an appropriate share of overhead costs based on normal operating capacity. Areas of Estimation Uncertainty The Company makes estimates of the provision required to reflect slow-moving and obsolete inventory. These estimates are determined on the basis of age, redundancy, and stock levels. For equipment inventory, estimates are determined on a specific item basis. (cid:3) December 31 ($ millions) On-hand equipment Parts and supplies Internal service work in progress Total inventory 2018 2017 (Restated - Note 2) $ $ 1,036 716 309 2,061 $ $ 753 595 360 1,708 For the year ended December 31, 2018, on-hand equipment, parts, supplies, and internal service work in progress recognized as an expense in cost of sales amounted to $4.8 billion (2017: $4.2 billion). For the year ended December 31, 2018, the write-down of inventories to net realizable value, included in cost of sales, amounted to $43 million (2017: $50 million).(cid:3) 39 Finning International Inc. 2018 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 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. 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. (cid:3) 40 Finning International Inc. 2018 Annual Results Notes to the Consolidated Financial Statements For year ended December 31, 2018 ($ millions) Current Adjustment for prior periods recognized in the current year Total current tax expense 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 expense Provision for income taxes For year ended December 31, 2017 ($ millions) (Restated - Note 2) Current Adjustment for prior periods recognized in the current year Total current tax expense 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 expense (recovery) Provision for income taxes Canada 47 (3) 44 5 — 4 9 53 Canada 18 — 18 6 — 1 7 25 $ $ $ $ International 74 $ (17) 57 (13) 1 17 5 62 $ International $ 59 (2) 57 (6) (4) 4 (6) 51 $ $ $ $ $ Total 121 (20) 101 (8) 1 21 14 115 Total 77 (2) 75 — (4) 5 1 76 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 2018 2017 (Restated - Note 2) the statutory tax rate $ 94 27.0 % $ 78 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 Non-taxable/non-deductible foreign exchange in Argentina Inflationary adjustment Non-deductible write-off and loss related to investment Other Provision for income taxes $ (11) (6) 2 1 31 (8) 9 3 115 (3.2)% (1.7)% 0.6 % 0.3 % 8.9 % (2.3)% 2.6 % 0.9 % 33.1 % $ (7) (4) (4) 1 12 (8) — 8 76 (2.3)% (1.3)% (1.3)% 0.3 % 3.9 % (2.5)% — 2.5 % 26.1 % 41 Finning International Inc. 2018 Annual Results Notes to the Consolidated Financial Statements The Company recognized the impact of the following enacted corporate income tax rate changes:(cid:3) (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 (PLM). (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 $ 2018 $ 82 $ 2017 (Restated - Note 2) 59 12 11 3 85 (31) (11) (5) (47) 38 1 9 3 95 (62) (12) (3) (77) 18 $ Deferred taxes are not recognized on retained profits of approximately $1.8 billion (2017: $1.6 billion) of foreign subsidiaries, as it is the Company’s intention to invest these profits to maintain and expand the business of the relevant companies. (cid:3) The Company has recognized the benefit of the following tax loss carry-forwards available to reduce future taxable income, which do not expire.(cid:3) December 31 ($ millions) International 2018 2017 $ 12 $ 14 As at December 31, 2018, the Company has unrecognized capital and non-capital loss carry-forwards of $79 million to reduce future taxable income. These amounts do not expire. (cid:3) The tax expense relating to components of other comprehensive income is as follows: For years ended December 31 ($ millions) Current tax Deferred tax expense Provision for income taxes recognized in other comprehensive income 2018 $ $ 1 $ 14 15 $ 2017 (Restated - Note 2) — 3 3 42 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. 2018 Annual Results Notes to the Consolidated Financial Statements 2018 2017 $ $ $ $ 83 78 70 29 6 7 7 4 — 4 288 2018 59 14 28 87 8 7 203 $ $ $ $ 104 23 52 40 14 18 1 6 10 1 269 2017 (Restated - Note 2) 69 21 23 21 11 8 153 (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 2018 (2017: $7 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. In 2018, the Company’s South American operations received final payment of $15 million (U.S. $11 million) in settlement of Caterpillar’s indemnification on these long-term contracts and will be released from deferred revenue to net income over the remaining term of these long-term contracts. The indemnification asset and related liability for the South American long-term contracts of $3 million (U.S $2 million) were derecognized in 2018 accordingly. 43 Finning International Inc. 2018 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 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 $3 million. Agriterra, an Alberta based company, is a consolidation of equipment dealers providing customers with agriculture and consumer products. Energyst is a pan-European company formed by Caterpillar and ten of its dealers to be the exclusive Caterpillar dealer in Europe for rental power and temperature control solutions. Energyst provides coverage worldwide by collaborating with local Caterpillar dealers. During 2018, the Company conducted a review of its 28.8% investment in Energyst and determined that Energyst was no longer a strategic fit. The Company decided that Energyst was held-for-sale resulting in a write-down of its investment to its estimated fair value ($nil). 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 2018 2017 25.0% 20.0% 28.8% 25.0% 20.0% 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, 2018 ($ 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 (2) 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 (2) $ $ $ $ PLM Agriterra $ — — 16 — Energyst (1) $ (4) $ (2) 82 $ 5 $ — $ Total PLM Agriterra Energyst Total $ 12 (2) $ — — (5) $ (1) 65 $ 3 $ 24 $ 12 (2) 87 7 (3) 92 (1) Effective September 30, 2018, Energyst was classified as held-for-sale and the Company did not record any (2) further equity earnings or losses from Energyst since that date. Included in the investment in joint venture in 2018 was an advance of $2 million to Agriterra, bearing interest at prime rate + 2%, due in 2019. Included in the investment in associate in 2017 was an advance of $2 million to Energyst, bearing interest at 6.5% + 3 month Eurobor, due in 2020. 44 Finning International Inc. 2018 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. Where significant components of an asset have different useful lives, depreciation is calculated on each separate component. Rental equipment includes units transferred from inventory and excludes units transferred to inventory when the rental equipment becomes available for sale. 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 leases are depreciated over the lesser of their useful life or the term of the relevant lease. Property, plant, and equipment and rental equipment are reviewed for indicators of 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. (cid:3) 45 Finning International Inc. 2018 Annual Results Notes to the Consolidated Financial Statements December 31, 2018 ($ millions) Land Buildings Vehicles and Equipment Total Rental Equipment Cost Balance, beginning of year Additions Transfers from inventory Disposals Foreign exchange rate changes Balance, end of year $ $ December 31, 2018 ($ millions) Accumulated depreciation and impairment losses Balance, beginning of year Depreciation for the year Disposals Foreign exchange rate changes Balance, end of year December 31, 2018 ($ millions) Net book value Balance, beginning of year Balance, end of year $ $ $ $ 75 $ — — (1) 4 78 $ 715 $ 47 — (21) 21 762 $ 347 $ 73 4 (36) 16 404 $ 1,137 $ 120 4 (58) 41 1,244 $ 589 281 25 (261) 14 648 Land Buildings Vehicles and Equipment Total Rental Equipment (10) $ — — — (10) $ (283) $ (28) 15 (9) (305) $ (272) $ (25) 24 (11) (284) $ (565) $ (53) 39 (20) (599) $ (204) (97) 99 (5) (207) Land Buildings Vehicles Equipment Total Rental Equipment 65 $ 68 $ 432 $ 457 $ 75 $ 120 $ 572 $ 645 $ 385 441 46 Finning International Inc. 2018 Annual Results Notes to the Consolidated Financial Statements Land Buildings Vehicles and Equipment Total Rental Equipment $ 80 $ 1 722 $ 31 — — (3) — (3) 75 $ (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 and Equipment Total Rental Equipment 70 $ 65 $ 457 $ 432 $ 79 $ 75 $ 606 $ 572 $ 363 385 December 31, 2017 ($ millions) Cost Balance, beginning of year Additions Additions through business 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 Assets held under finance leases(cid:3) $ $ $ $ Land, buildings, and equipment under finance leases of $3 million (2017: $4 million), which are net of accumulated depreciation and impairment losses of $11 million (2017: $11 million), are included above. There were no finance leases related to land, buildings, or equipment acquired during 2018 and 2017. (cid:3) Rental equipment under finance leases of $23 million (2017: $27 million), which are net of accumulated depreciation of $13 million (2017: $11 million), are included above. There were no finance leases related to rental equipment acquired during 2018 and 2017.(cid:3) 47 Finning International Inc. 2018 Annual Results Notes to the Consolidated Financial Statements 17. GOODWILL Accounting Policy Goodwill represents the excess of the acquisition-date fair value of consideration transferred over the fair value of the identifiable net assets acquired in a business combination. Goodwill is not amortized. Refer to Note 20 for the Company’s policy on impairment reviews. (cid:3) December 31, 2018 ($ millions) Balance, beginning of year Foreign exchange rate changes Balance, end of year December 31, 2017 ($ millions) Balance, beginning of year Foreign exchange rate changes Balance, end of year 18. DISTRIBUTION NETWORK Accounting Policy Canada South America $ $ $ $ 81 — 81 Canada 81 — 81 $ $ $ $ UK & Ireland 33 $ 1 34 $ 5 — 5 South America UK & Ireland 5 — 5 $ $ 32 1 33 Total 119 1 120 Total 118 1 119 $ $ $ $ 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. (cid:3) December 31, 2018 ($ millions) Balance, beginning of year Balance, end of year December 31, 2017 ($ millions) Balance, beginning of year Balance, end of year Canada 98 98 UK & Ireland 2 $ 2 $ Canada UK & Ireland 98 98 $ $ 2 2 $ $ $ $ Total 100 100 Total 100 100 $ $ $ $ 48 Finning International Inc. 2018 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. Intangible assets are reviewed for indicators of 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 intangible asset, the asset is reviewed for possible reversal of the impairment at the end of each subsequent reporting period. (cid:3) December 31, 2018 ($ millions) Cost Balance, beginning of year Additions Disposals Foreign exchange rate changes Balance, end of year December 31, 2018 ($ millions) Accumulated depreciation Balance, beginning of year Amortization for the year Disposals Foreign exchange rate changes Balance, end of year December 31, 2018 ($ millions) Net book value Balance, beginning of year Balance, end of year Contracts and Customer relationships Software and Technology Total $ $ 155 6 — 11 172 $ $ 166 75 (4) 7 244 Contracts and Customer relationships Software and Technology $ $ (118) (13) — (9) (140) $ $ (86) (17) 4 (1) (100) $ $ $ $ 321 81 (4) 18 416 Total (204) (30) 4 (10) (240) Contracts and Customer relationships Software and Technology Total $ $ 37 32 $ $ 80 144 $ $ 117 176 49  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 Finning International Inc. 2018 Annual Results Notes to the Consolidated Financial Statements Contracts and Customer relationships Software and Technology Total $ $ 148 15 — (8) 155 Contracts and Customer relationships $ $ (110) (14) 6 (118) $ $ $ $ 109 61 (1) (3) 166 Software and Technology (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, 2018 were $1 million (2017: $1 million). The average rate used for capitalization of borrowing costs was 3.7% (2017: 4.6%).(cid:3) 50 Finning International Inc. 2018 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. 51 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. 2018 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) 2018 2017 Post-tax WACC rate Growth rate Post-tax WACC rate Growth rate 8% 9% 8% 9% 2% 1% 3% 2% 9% 9% 9% 9% 2% 1% 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 intangible assets with indefinite lives and goodwill.(cid:3) Overview of annual impairment tests(cid:3) There were no impairment losses recognized in 2018 or 2017 related to CGUs, goodwill, or distribution networks. There were no impairment reversals in 2018 or 2017 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 (Note 4) Deferred tax liabilities (Note 13) Liability for long-term contracts (Note 14b) Finance lease liabilities (a) (Note 27) Onerous contracts Share-based payments (Note 11) Provisions (Note 22) Other Total other liabilities – non-current 2018 2017 $ $ $ $ 55 — 55 2018 49 41 14 25 8 30 2 — 169 $ $ $ $ 28 8 36 2017 (Restated - Note 2) 34 31 21 29 10 45 4 2 176 (a) Finance leases were issued at varying rates of interest from 2% (cid:2163) 10% and mature on various dates up to 2078. 52 Finning International Inc. 2018 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 standard 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. (cid:3) For year ended December 31, 2018 ($ 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, 2017 ($ millions) (Restated - Note 2) 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 $ $ $ $ $ $ $ $ 28 50 (42) 2 38 38 — Warranty Claims 31 30 (32) (1) 28 28 — $ $ $ $ $ $ $ $ 11 45 (46) — 10 8 2 Other 19 24 (32) — 11 7 4 $ $ $ $ $ $ $ $ 39 95 (88) 2 48 46 2 50 54 (64) (1) 39 35 4 Total 53 Finning International Inc. 2018 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 the Company’s Canadian operations, 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) The Company’s UK operations 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 the Company’s Canadian operations, 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 Company’s UK operations, 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. 54 Finning International Inc. 2018 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. 55 The net benefit cost (recovery) and actuarial loss (gain) for the Company’s post-employment benefit plans are as follows: Finning International Inc. 2018 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 2018 2017 Canada South UK & Ireland America South Total Canada Ireland America UK & Total $ 35 $ 9 $ — $ 44 $ 32 $ 9 $ — $ 41 6 — 1 — 7 — 3 1 — 4 8 — — 1 9 14 3 2 1 20 6 — 1 — 7 — (10) 2 — (8) 11 — — 1 12 17 (10) 3 1 11 in net income $ 42 $ 13 $ 9 $ 64 $ 39 $ 1 $ 12 $ 52 Actuarial loss (gain) on plan assets (2) Actuarial (gain) loss on plan liabilities Total actuarial loss (gain) recognized in other comprehensive income $ 19 $ 23 $ — $ 42 $ (16) $ (38) $ — $ (54) (14) (86) (8) (108) 21 17 (2) 36 $ 5 $ (63) $ (8) $ (66) $ 5 $ (21) $ (2) $ (18) (1) In October 2018, the High Court in the U.K. rendered a decision requiring equalization between males and females of Guaranteed Minimum Pension (GMP) benefits earned between 1990 and 1997. A one-time expense of $3 million (£2 million) was recorded to reflect the current estimate of additional costs that will be associated with GMP equalization for the Finning UK defined benefit pension plan.(cid:3) 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 statements of net income and other comprehensive income, respectively. (cid:3) (2) 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 $8 million that was recognized in the statement of other comprehensive income. (cid:3) 56 Other financial information about the Company’s defined benefit pension plans in Canada and UK and other post- employment benefit plans in South America is as follows: Finning International Inc. 2018 Annual Results Notes to the Consolidated Financial Statements For years ended December 31 ($ millions) Accrued benefit obligation Balance, beginning of year Current service cost Past service cost Interest cost Benefits paid Remeasurements: - Actuarial (gain) loss from change in demographic 2018 South America Canada UK Total Canada UK 2017 South America Total $ 531 $ 7 — 18 (26) 701 $ — 3 18 (46) 57 $ 1,289 15 3 37 (81) 8 — 1 (9) $ 514 $ 700 $ 7 — 18 (29) — (10) 18 (41) 50 $ 1,264 11 18 (10) — 1 37 (74) (4) assumptions — (29) (9) (38) 3 — 2 5 - Actuarial (gain) loss from change in financial assumptions Experience loss (gain) 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 (loss) 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) (19) 5 — $ 516 $ (50) (7) 18 608 $ (68) 1 (2) — (1) 17 48 $ 1,172 $ 510 $ 722 $ — $ 1,232 20 (2) — 14 3 17 531 $ 701 $ (2) (2) 1 32 (1) 18 57 $ 1,289 494 $ 686 $ — $ 1,180 $ $ 18 18 — 36 18 18 — 36 (19) 9 1 (26) (1) — $ 492 $ (23) 6 — (46) (1) 19 695 $ (42) — 24 9 1 — (81) (9) (2) — 19 — — $ 1,187 $ 24 $ (87) $ 48 $ (15) $ $ 16 11 1 (29) (1) — 54 20 1 (74) (3) 18 510 $ 722 $ — $ 1,232 38 5 — (41) (2) 18 — 4 — (4) — — 21 $ (21) $ 57 $ 57 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: 2018 2017 For years ended December 31 ($ millions) Accrued benefit obligation Fair value of plan assets Funded status - plan deficit Canada $ 512 $ — $ UK 485 — $ 27 $ — $ South America 48 $ — 48 $ 560 485 75 $ $ Total Canada South America UK 62 $ — $ 37 25 $ — $ — 57 $ — 57 $ Total 119 37 82 57 Finning International Inc. 2018 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 in Canada and UK and other post-employment benefit plans in South America 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 Rate of compensation increase – obligation Canada 3.7% 3.4% n/m (2) n/m (2) n/m (2) n/m (2) 2018 South 2017 UK America Canada UK 2.9% 2.5% 3.3% 3.3% n/m (2) n/a (2) 1.5% 1.8% n/a (2) n/a (2) 13.6% 3.0% 3.4% 3.7% n/m (2) n/m (2) n/m (2) n/m (2) 2.5% 2.7% 3.3% 3.4% n/m (2) n/a (2) South America 1.8% 1.3% n/a (2) n/a (2) 10.4% 3.0% (1) Used to determine the net interest cost and expense for the years ended December 31, 2018 and December 31, 2017. (2) n/m – not a material assumption used in the valuation. n/a – not applicable. 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 (1) n/a – not applicable. Canada UK 22 24 23 25 South America n/a (1) n/a (1) n/a (1) n/a (1) 1 1 1 1 22 24 23 25 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 13 years, the U.K. is 20 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 Average staff turnover Rate of compensation increase (1) n/m – not a material assumption used in the valuation. Change in assumption +0.25% +0.25% +0.25% +0.25% n/a – not applicable. $ Increase (decrease) in accrued benefit obligation UK Canada $ $ (17) n/m (1) n/m (1) n/m (1) (28) 20 n/m (1) n/a (1) South America $ $ $ $ (1) n/a (1) (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) 58 Finning International Inc. 2018 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. 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 completed, the Company expects to contribute approximately $20 million to the defined benefit pension plans during the year ended December 31, 2019. 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, 2017 December 31, 2017 December 31, 2017 (1) December 31, 2018 Next Required Actuarial Valuation Date December 31, 2020 December 31, 2020 December 31, 2020 December 31, 2021 (1) The December 31, 2017 actuarial valuation is in progress as at February 20, 2019. 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% — — 56% 1% 5% 12% 9% 17% — — (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, 2018 and 2017. (cid:3) Effective January 1, 2019, the Company will convert the buy-in annuity investments to buy-out annuities. This conversion will settle a portion of the Company’s liability and reduce both the plan assets and the accrued benefit obligation in the Canadian registered defined benefit plan by approximately $280 million.(cid:3) 59 Finning International Inc. 2018 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. 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) 60 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. 2018 Annual Results Notes to the Consolidated Financial Statements December 31, 2018 ($ millions) Less than a year Defined benefit pension plans Other post-employment benefits Total $ $ 26 6 32 Accumulated Remeasurement Losses(cid:3) Between 1-2 years $ Between 2-5 years $ 29 4 33 $ 96 12 108 $ Over 5 years $ $ 1,485 $ $ 54 1 1,539 $ $ Total 1,636 76 1,712 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 $158 million as at December 31, 2018 (December 31, 2017: $213 million).(cid:3) 24. SUPPLEMENTAL CASH FLOW INFORMATION Accounting Policy Cash and cash equivalents comprise cash on hand together with short-term investments, consisting of highly rated and liquid money market instruments with original maturities of three months or less, and are classified and measured as amortized cost. (cid:3) The components of cash and cash equivalents are as follows: December 31 ($ 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 2018 2017 $ $ $ $ 274 180 454 2018 (39) 14 (291) 3 46 164 (103) $ $ $ $ 279 179 458 2017 (Restated Note 2) (144) 14 (154) (43) 234 26 (67) 61 Finning International Inc. 2018 Annual Results Notes to the Consolidated Financial Statements The changes in liabilities arising from financing and operating activities are as follows: ($ millions) Balance, January 1, 2018 Cash flows provided by (used in) Financing activities Operating activities Total cash movements Non-cash changes Interest expense Disposals Foreign exchange rate changes Total non-cash movements Balance, December 31, 2018 ($ 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 $ $ $ $ 18 $ 1,296 $ 34 $ 1,348 136 — 136 — — — — 154 $ $ $ — — — — — 58 58 1,354 $ $ $ (4) (2) (6) 2 (1) 1 2 30 $ $ $ 132 (2) 130 2 (1) 59 60 1,538 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 $0.79 (2017: $0.745) per share were paid during the year. In February 2019, the Board of Directors approved a quarterly dividend of $0.20 per share payable on March 22, 2019 to shareholders of record on March 8, 2019. This dividend will be considered an eligible dividend for Canadian income tax purposes. As at December 31, 2018, the Company has not recognized a liability for this dividend.(cid:3) 62 Finning International Inc. 2018 Annual Results Notes to the Consolidated Financial Statements 25. ECONOMIC RELATIONSHIPS The Company distributes and services heavy equipment, engines, and related products. The Company has dealership agreements with numerous equipment manufacturers, of which the most significant are with subsidiaries of Caterpillar. Distribution and servicing of Caterpillar products account for the major portion of the Company's operations. Finning has a relationship with Caterpillar that has been ongoing since 1933. 26. RELATED PARTY TRANSACTIONS AND TOTAL STAFF COSTS Balances and transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. The remuneration of the Board of Directors during the year was as follows: For years ended December 31 ($ millions) Short-term benefits Share-based payments Total 2018 2017 $ $ 1 (1) — $ $ 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 2018 2017 $ $ 10 $ 1 2 13 $ 1 6 7 9 1 9 19 Total staff costs, including salaries, benefits, pension, share-based payments, termination payments, and commissions are $1.1 billion (2017: $1.2 billion). This amount includes staff costs associated with key management personnel noted above.(cid:3) 63 Finning International Inc. 2018 Annual Results Notes to the Consolidated Financial Statements 27. LEASES Accounting Policy Leases are classified as either finance or operating leases. Leases where substantially all of the benefits and risks of ownership of property rest with the lessee are accounted for as finance leases; all other leases are classified as operating leases. The Company as Lessee Assets held under finance leases are initially recognized as assets of the Company at their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the statement of financial position as a finance lease obligation. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Contingent rental payments are recognized as expenses in the periods in which they are triggered. Operating lease payments are recognized as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. In the event that lease incentives are received to enter into operating leases, such incentives are recognized as a liability. The aggregate benefit of incentives is recognized as a reduction of rental expense on a straight-line basis over the term of the lease, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Future minimum lease payments due under finance lease contracts and payments due under various operating lease contracts are as follows: For years ended December 31 ($ millions) Finance Leases Operating Leases (1) 2019 2020 2021 2022 2023 Thereafter Less imputed interest Total finance lease obligation Less current portion of finance lease obligation Non-current portion of finance lease obligation 74 65 58 41 20 34 292 $ $ $ $ $ 7 8 7 6 3 10 41 (11) 30 (5) 25 (1) Included in accrued liabilities is $2 million and $8 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, 2018 (2017: $17 million). Minimum lease payments recognized as lease expense for the year ended December 31, 2018 is $83 million (2017: $73 million).(cid:3) 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. 64 Finning International Inc. 2018 Annual Results Notes to the Consolidated Financial Statements 29. GUARANTEES AND INDEMNIFICATIONS The Company enters into contracts with rights of return (at the customer’s discretion), 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, 2018, the total estimated value of these contracts outstanding is $130 million (2017: $119 million) coming due at periods ranging from 2019 to 2025. The Company’s experience to date has been that the equipment fair value 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 at December 31, 2018 and 2017 is $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, 2018, 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 2022. As at December 31, 2018 and 2017, the Company has not recognized a liability for these guarantees. The Company has also issued guarantees for certain equipment sold to third parties 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, 2018, the maximum potential amount of future payments that the Company could be required to make under the guarantees is $17 million, covering various periods up to 2024. As at December 31, 2018, the Company has recognized a liability of $4 million for these guarantees (2017: $6 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 2018 or 2017. 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, 2018 was $291 million (2017: $191 million) principally related to performance and advance payment guarantees on delivery for prepaid equipment and other operational commitments in Chile. 30. SUBSEQUENT EVENT On February 1, 2019, the Company completed the acquisition of 4Refuel Canada and 4Refuel US (4Refuel), through the acquisition of all of the outstanding shares of their ultimate parent, Owl Holdco RF Limited. 4Refuel is a mobile on-site refueling company in Canada and in Texas. Acquiring 4Refuel provides opportunities for the Company to sell equipment, product support, and rent to a potentially new customer base. Furthermore, 4Refuel will have the opportunity to sell more fuel services to the Company’s customers and improve customer service. The Company funded the transaction, valued at approximately $260 million, with cash on hand and from existing credit facilities. 65 Finning International Inc.nc ing Internatio g national In Suite te 300 – 565 G Suite 300 – 565 Great Northern WayW yWay Suite 3 5 Great N 5 Great N t Northern Wa couver, British ouv ritish Columb umbia V5T 0H Vancouver, British Columbia V5T 0H8 T 0 ngin finning.com m 

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