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
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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.
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