2019
FINNING INTERNATIONAL INC.
Financial report
Finning International Inc.
2019 Annual Results
February 11, 2020
MANAGEMENT’S DISCUSSION AND ANALYSIS
This MD&A of Finning should be read in conjunction with the Annual Financial Statements and the accompanying
notes thereto for the year ended December 31, 2019, 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 and in the investors section of the Company’s website at www.finning.com.
Finning (TSX:FTT) is the world’s largest Caterpillar equipment dealer delivering service to customers for over 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.
Effective January 1, 2019, the Company adopted IFRS 16, Leases. Details of the impact of IFRS 16 for the date of initial
application at January 1, 2019 can be found in Note 2 of the Company’s Annual Financial Statements. The 2018
comparative results described in this MD&A have not been restated for the adoption of this standard.
Effective February 1, 2019, the Company acquired 4Refuel and includes 4Refuel’s results in the Company’s Canadian
reportable segment. For additional information regarding the acquisition, see the heading “Acquisition” on page 11 of this
MD&A. The results described in this MD&A include the results of 4Refuel from the acquisition date.
Following the acquisition of 4Refuel, management views total revenue less cost of fuel (net revenue (2)) as more
representative in assessing the performance of the business as the cost of fuel is fully passed through to the customer and
is not in the Company’s control. The Company’s results and non-GAAP financial measures, including KPIs and ratios,
previously reported or calculated using total revenue now use net revenue in this MD&A. For 2019 results of the
Company’s South American and UK & Ireland operations, net revenue is the same as total revenue. For 2018 results of all
operations in this MD&A, net revenue is the same as total revenue.
A glossary of defined terms is included on page 54. The first time a defined term is used, it is shown in bold
italics.
2019 Annual Highlights
(cid:120) Basic EPS in 2019 was $1.48 per share and in 2018 was $1.38 per share. Results in both years include items
which management does not consider indicative of operational and financial trends. In 2019, these items
included severance and restructuring costs, tax impact of the significant devaluation of the ARS, and acquisition
costs related to 4Refuel. In 2018, these items included 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. Excluding these items, which are described on pages 5 and 6, Adjusted basic EPS (1)(2) of $1.65 per
share in 2019 was the same as in 2018.
(cid:120) Revenue was $7.8 billion in 2019 and $7.0 billion in 2018. Net revenue of $7.3 billion was up 4% from 2018,
primarily due to higher product support revenue in all of the Company’s operations and higher new equipment
sales in the Company’s Canadian operations.
(cid:120) 2019 EBIT was $425 million and in 2018 was $423 million. Adjusted EBIT (1)(2) of $457 million in 2019 was 2%
higher than Adjusted EBIT of $446 million in 2018. The improvement in Adjusted EBIT was primarily due to the
Company’s Canadian operations.
(cid:120) Adjusted EBITDA (1)(2) of $750 million was 19% higher than 2018 Adjusted EBITDA of $633 million. The increase
in Adjusted EBITDA was largely due to the Company’s adoption of IFRS 16. Adjusted EBITDA as a percentage
of net revenue (1)(2) in 2019 of 10.3% was higher than the 2018 Adjusted EBITDA as a percentage of net
revenue of 9.0%.
(cid:120) 2019 Adjusted ROIC (1)(2) of 12.0% was lower than 2018 Adjusted ROIC of 13.5% primarily due to lower invested
capital turnover in all of the Company’s operations.
(1) Certain 2019 and 2018 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 5 and 6 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” on pages 38 - 49 of this MD&A.
1
Finning International Inc.
2019 Annual Results
Table of Contents
Strategic Framework .................................................................................................................................................... 3
2019 Annual Overview ................................................................................................................................................ 4
Adjusted Metrics .......................................................................................................................................................... 5
Annual Key Performance Measures ............................................................................................................................ 7
Annual Results ............................................................................................................................................................. 9
Acquisition ................................................................................................................................................................. 11
Invested Capital ......................................................................................................................................................... 12
Adjusted Return on Invested Capital and Invested Capital Turnover ....................................................................... 13
Annual Results by Reportable Segment.................................................................................................................... 14
2019 Fourth Quarter Highlights ................................................................................................................................. 19
2019 Fourth Quarter Overview .................................................................................................................................. 19
Quarterly Key Performance Measures ...................................................................................................................... 20
2019 Fourth Quarter Results .................................................................................................................................... 22
Outlook ...................................................................................................................................................................... 26
Liquidity and Capital Resources ................................................................................................................................ 27
Accounting and Estimates ......................................................................................................................................... 30
Risk Factors and Management .................................................................................................................................. 33
Contingencies and Guarantees ................................................................................................................................. 36
Outstanding Share Data ............................................................................................................................................ 36
Controls and Procedures Certification ....................................................................................................................... 37
Description of Non-GAAP Financial Measures and Reconciliations ......................................................................... 38
Selected Annual Information ..................................................................................................................................... 50
Selected Quarterly Information .................................................................................................................................. 51
Forward-Looking Disclaimer ...................................................................................................................................... 52
Glossary of Defined Terms ........................................................................................................................................ 54
2
Finning International Inc.
2019 Annual Results
Strategic Framework
Finning’s customer-centric growth strategy is based on three pillars – Develop, Perform, and Innovate – which
provide a strong foundation for the Company’s five Global Strategic Priorities:
(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 generating 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.
Strategic Focus Areas
In 2019, Finning identified certain focus areas to support our strategy: to capture growth in mining and construction
industries through market leadership and to improve performance through transforming service, accelerating supply
chain capabilities and lowering the cost to serve. Our decisions about capital investments and allocation of
resources are focused on initiatives that we believe best align with our Global Strategic Priorities and our strategic
areas of focus.
Sustainability
Sustainability is an integral part of our business, and is woven through our strategy and operations. We live our
values every day, and they guide our behaviour in every interaction we have. Living our values means that how we
do things is just as important as what we do.
Our approach to sustainability is closely aligned with our purpose and covers all of our material sustainability topics.
In 2018, we conducted a gap analysis of our sustainability practices to make sure they align with our peers, and with
internationally recognized guidelines and best practices. Based on the gap analysis, we defined metrics and focus
areas for the next five years.
The full 2018 Sustainability Report, including the five-year roadmap and performance summary, can be found in the
sustainability section of the Company’s website at www.finning.com.
3
2019 Annual Overview
($ millions, except per share amounts)
Revenue
Net revenue
Gross profit
SG&A
Equity earnings of joint ventures and associate
Other expenses
EBIT
Net income
Basic EPS
EBITDA (2)
Free cash flow (2)
Adjusted EBIT
Adjusted net income (2)(3)
Adjusted basic EPS
Adjusted EBITDA
Gross profit as a % of net revenue (2)
SG&A as a % of net revenue (2)
EBIT as a % of net revenue (2)
EBITDA as a % of net revenue (2)
Adjusted EBIT as a % of net revenue (2)
Adjusted EBITDA as a % of net revenue
Adjusted ROIC
Finning International Inc.
2019 Annual Results
2019
2018 (1)
% change
fav (unfav)
12%
4%
2%
(2)%
21%
n/m
0%
4%
7%
18%
(46)%
2%
(3)%
0%
19%
$
$
$
$
$
$
$
$
$
$
$
$
7,817 $
7,290 $
1,799 $
(1,360)
15
(29)
425 $
242 $
1.48 $
718 $
42 $
457 $
269 $
1.65 $
750 $
24.7%
18.7%
5.8%
9.9%
6.3%
10.3%
12.0%
6,996
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%
6.4%
9.0%
13.5%
(1) Comparative results prior to Q1 2019 have not been restated for the Company’s adoption of IFRS 16, Leases effective for the financial year
beginning January 1, 2019.
(2) These are “non-GAAP financial measures” that do not have a standardized meaning under IFRS, and therefore may not be comparable to
similar measures presented by other issuers. For additional information regarding these financial metrics, including definitions and
reconciliations from each of these non-GAAP financial measures to their most directly comparable measure under GAAP, where available,
see the heading “Description of Non-GAAP Financial Measures and Reconciliations” on pages 38 - 49 of this MD&A.
(3) 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 5 and 6 of this MD&A. Financial metrics that have been
adjusted to take into account these items are referred to as “Adjusted” metrics.
4
Finning International Inc.
2019 Annual Results
Adjusted Metrics
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 are referred to as “Adjusted metrics”. Adjusted
metrics are considered non-GAAP financial measures and 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 Adjusted metrics to
their most directly comparable measure under GAAP, see the heading “Description of Non-GAAP Financial
Measures and Reconciliations” on pages 38 - 49 of this MD&A.
Significant items that affected reported annual 2019 and 2018 results, which are not considered by management to
be indicative of operational and financial trends, either by nature or amount, were:
2019 significant items:
(cid:120) Severance costs related to workforce reductions and restructuring costs related to facility closures in the
Company’s Canadian and South American operations as the Company aligned its cost structure to market
activity to drive improved operating efficiencies.
(cid:120) The ARS experienced a significant devaluation in the third quarter of 2019 reaching a new historic low of $1
USD to 60.1 ARS and losing approximately 35% of its value (annual devaluation of approximately 60%) due to
the economic and business uncertainty following the primary elections in Argentina and the imposition of
restrictive monetary policies by the Argentina government. This devaluation resulted in higher tax expense due
to the revaluation of deferred taxes in September 2019.
(cid:120) Acquisition costs related to the purchase of 4Refuel.
2018 significant items:
(cid:120) Following the Company’s review of its investment in Energyst, it was determined that Energyst was no longer a
strategic fit and it was held-for-sale at September 30, 2018. As a result, the Company wrote off its investment
and also 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 historic low (at that time) of $1 USD to 41.25
ARS in September 2018. This devaluation resulted in higher tax expense primarily relating to the revaluation of
deferred tax balances.
(cid:120)
Insurance proceeds received in 2018 related to the final settlement of the Company’s business interruption
insurance claim resulting from the Alberta wildfires in 2016.
5
The following table shows the magnitude of these significant items and provides reconciliations of the Adjusted
metrics to their most directly comparable GAAP measure:
Finning International Inc.
2019 Annual Results
For year ended December 31, 2019
($ millions, except per share amounts)
EBIT, net income, and basic EPS
Significant items:
Severance costs
Facility closures, restructuring costs, and
impairment losses
Acquisition costs
Tax impact of devaluation of ARS
Adjusted EBIT, Adjusted net income, and
Adjusted basic EPS
For year ended December 31, 2018 (1)
($ millions, except per share amounts)
EBIT, net income, and basic 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 basic EPS
EBIT
Income EPS
Net
South
UK &
Canada America Ireland Consol
$
120 $
296 $
46 $
425 $
Consol
Consol
1.48
242 $
10
10
7
—
—
1
—
—
—
—
—
—
20
8
4
—
14
0.09
5
4
4
0.03
0.03
0.02
$
313 $
131 $
46 $
457 $
269 $
1.65
EBIT
Net
Income EPS
South
UK &
Ireland
Canada America
$
297 $
142 $
Consol
Consol
51 $
423 $
232 $
Consol
1.38
—
—
(7)
—
—
—
—
—
—
30
—
(7)
30
20
(5)
0.18
0.12
(0.03)
$
290 $
142 $
51 $
446 $
277 $
1.65
(1) Comparative results prior to Q1 2019 have not been restated for the Company’s adoption of IFRS 16, Leases effective for
the financial year beginning January 1, 2019.
6
Annual Key Performance Measures
The Company utilizes the following KPIs to enable consistent measurement of performance across the organization.
For years ended December 31
2019
2018 (1)
2017
(Restated) (1)(2)
2016 (1)
2015 (1)
Finning International Inc.
2019 Annual Results
423
297
142
51
392
225
184
37
165
87
137
(12)
425
296
120
46
5.8%
7.5%
5.4%
4.1%
6.0%
8.1%
6.6%
4.4%
6.3%
7.3%
8.5%
3.6%
(105)
98
(174)
(5)
11.2%
13.7%
9.6%
12.1%
12.8%
16.6%
12.2%
14.2%
13.1%
13.3%
17.8%
12.8%
5.6%
5.3%
13.3%
(4.5)%
2.9%
3.1%
7.4%
(1.1)%
(1.7)%
3.1%
(8.4)%
(0.5)%
(3.0)%
5.5%
(12.8)%
(1.4)%
ROIC (3) (%)
Consolidated
Canada
South America
UK & Ireland
EBIT (3) ($ millions)
Consolidated
Canada
South America
UK & Ireland
EBIT as a % of net revenue (3)
Consolidated
Canada
South America
UK & Ireland
EBITDA (3) ($ millions)
Consolidated
Canada
South America
UK & Ireland
EBITDA as a % of net revenue (3)
Consolidated
Canada
South America
UK & Ireland
Invested Capital (4) ($ millions)
Consolidated
Canada
South America
UK & Ireland
Invested Capital Turnover (4) (times)
1.78x
Consolidated
1.74x
Canada
1.52x
South America
2.93x
UK & Ireland
1,800
Inventory ($ millions)
Inventory Turns (Dealership) (4) (times)
2.38x
Working Capital (4) to Net Revenue (4)
32.2%
325
Free Cash Flow ($ millions)
Net Debt (4) to EBITDA Ratio (3)(4)
9.5
(1) Comparative results prior to Q1 2019 have not been restated for the Company’s adoption of IFRS 16, Leases effective for the financial year
1.92x
1.81x
1.78x
2.98x
1,990
2.53x
27.8%
42
2.1
1.90x
1.70x
1.80x
3.54x
1,601
2.49x
30.4%
370
2.5
2.09x
1.82x
2.09x
3.56x
1,708
2.82x
27.4%
165
1.5
2.12x
2.05x
1.86x
3.22x
2,061
2.68x
26.6%
78
1.7
3,591
2,026
1,192
361
2,797
1,595
996
216
2,830
1,621
983
250
3,163
1,675
1,190
336
2.0%
7.0%
(3.3)%
2.3%
9.2%
10.6%
11.2%
6.1%
8.7%
10.7%
9.4%
6.9%
9.9%
12.0%
9.0%
7.2%
6.3%
6.6%
10.7%
2.0%
3,240
1,760
1,122
321
718
470
201
82
357
187
199
18
576
324
242
63
610
393
204
79
126
219
(92)
23
beginning January 1, 2019.
(2) The 2017 comparative results 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.
(3) Certain of these reported financial metrics have been impacted in some years in this table by significant items management does not
consider indicative of operational and financial trends either by nature or amount. Financial metrics that have been adjusted to take into
account these items are referred to as “Adjusted” metrics and are summarized on page 8 of this MD&A.
(4) 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” on pages 38 - 49 of this MD&A.
7
Annual Adjusted KPIs
KPIs may be impacted by significant items described on pages 5 and 6 and 39 - 42 of this MD&A. KPIs that have
been adjusted to take these items into account are referred to as “Adjusted” KPIs and were as follows:
For years ended December 31
2019
2018 (1)
2017
(Restated) (1)(2)
2016 (1)
2015 (1)
Finning International Inc.
2019 Annual Results
Adjusted ROIC (%)
Consolidated
Canada
South America
UK & Ireland
Adjusted EBIT ($ millions)
Consolidated
Canada
South America
UK & Ireland
Adjusted EBIT as a % of net revenue
Consolidated
Canada
South America
12.0 %
14.4 %
10.5 %
12.1 %
457
313
131
46
13.5 %
16.2 %
12.2 %
14.2 %
446
290
142
51
13.1 %
13.2 %
18.1 %
12.8 %
393
224
186
37
9.3 %
9.3 %
15.0 %
5.9 %
273
154
155
16
10.9 %
10.6 %
14.0 %
9.0 %
383
189
190
33
6.3 %
8.0 %
5.9 %
4.1 %
6.4 %
7.9 %
6.6 %
4.4 %
6.3 %
7.3 %
8.7 %
3.6 %
4.9 %
5.5 %
8.4 %
1.8 %
6.1 %
6.1 %
9.2 %
3.1 %
UK & Ireland
Adjusted EBITDA ($ millions)
Consolidated
Canada
South America
UK & Ireland
Adjusted EBITDA as a % of net revenue
9.6 %
Consolidated
9.8 %
Canada
12.9 %
South America
5.7 %
UK & Ireland
Net Debt to Adjusted EBITDA Ratio (3)(4)(5)
2.0
(1) Comparative results prior to Q1 2019 have not been restated for the Company’s adoption of IFRS 16, Leases effective for the financial year
10.3 %
12.4 %
9.5 %
7.2 %
2.0
9.0 %
10.5 %
9.4 %
6.9 %
1.7
9.2 %
10.5 %
11.3 %
6.1 %
1.5
8.3 %
9.0 %
11.7 %
4.8 %
1.9
633
386
204
79
750
487
212
82
465
254
217
46
577
323
244
63
604
305
267
61
beginning January 1, 2019.
(2) The 2017 comparative results 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.
(3) 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 39 - 42 of this MD&A. Financial metrics that have been
adjusted to take into account these items are referred to as “Adjusted” metrics.
(4) Of the significant items described on pages 39 - 42 of this MD&A, $10 million was recorded in depreciation and amortization expense in
2015.
(5) These financial metrics, referred to as “non-GAAP financial measures” do not have a standardized meaning under IFRS, which are also
referred to herein as GAAP, and therefore may not be comparable to similar measures presented by other issuers. For additional
information regarding these financial metrics, including definitions and reconciliations from each of these non-GAAP financial measures to
their most directly comparable measure under GAAP, where available, see the heading “Description of Non-GAAP Financial Measures and
Reconciliations” on pages 38 - 49 of this MD&A.
(cid:3)
8
Finning International Inc.
2019 Annual Results
Annual Results
Revenue
Net Revenue by Line of Business and by Operation
For years ended December 31
($ millions)
Net Revenue by Line of Business
2019
2018
3,800
1,900
6
7
7
,
2
0
4
7
,
2
3
9
7
,
3
2
3
6
,
3
1
6
3
1
7
3
6
4
2
9
3
2
4
1
1
4
1
0
New
equipment
Used
equipment
Equipment
rental
Product
support
Fuel and
other
4,000
2,000
0
Net Revenue by Operation
2019
2018
7
2
9
,
3
4
7
6
,
3
6
2
2
,
2
0
7
1
,
2
7
3
1
,
1
2
5
1
,
1
Canada
South America
UK & Ireland
The Company generated revenue of $7.8 billion and net revenue of $7.3 billion during 2019. Net revenue increased
4% from the prior year primarily due to higher revenues in the Company’s Canadian operations, contributing over
85% of the overall revenue growth.
Product support revenue was 4% higher compared to 2018, up in all operations, driven primarily by the Company’s
South American and Canadian operations, with strong activity in the mining sector partially offset by lower demand
in the construction sector.
New equipment revenue also increased from 2018, mostly due to higher revenue in the Company’s Canadian
operations, partially offset by lower new equipment sales in the Company’s South American and UK & Ireland
operations. Higher new equipment revenue in 2019 reflected increased volumes in the mining sectors across all of
the Company’s operations partially offset by lower demand in the power systems sectors of the Company’s South
American and UK & Ireland operations.
Equipment backlog (1) was approximately $700 million at December 31, 2019, down from $1.3 billion at December
31, 2018 reflecting strong equipment deliveries that exceeded order intake, particularly in the Company’s Canadian
operations.
EBIT and EBITDA
2019 gross profit of $1.8 billion was up 2% compared to 2018, in line with higher volumes from improved market
activity. Gross profit as a percentage of net revenue of 24.7% was slightly lower than the 25.3% earned in 2018, due
to lower margins in most lines of business.
SG&A of $1.4 billion in 2019 included $3 million of severance and restructuring costs recorded in the Company’s
South American operations. 2018 SG&A of $1.3 billion included $7 million of insurance proceeds received by the
Company’s Canadian operations in relation to the business interruption insurance claim resulting from the Alberta
wildfires. Excluding the severance and restructuring costs and the insurance proceeds, 2019 SG&A was up 2% from
2018 on 4% higher net revenues, largely due to additional SG&A from 4Refuel partially offset by lower SG&A from
the Company’s South American operations.
(1) These are non-GAAP financial measures that do not have a standardized meaning under IFRS, and therefore may not be comparable to
similar measures presented by other issuers. For additional information regarding these financial metrics, including definition, see the heading
“Description of Non-GAAP Financial Measures and Reconciliations” on pages 38 - 49 of this MD&A.
9
Finning International Inc.
2019 Annual Results
Adjusted EBIT and Adjusted EBITDA by Operation (1)(2)
For years ended December 31
($ millions)
Adjusted EBIT
2019
2018
3
1
3
0
9
2
1
3
1
2
4
1
6
4
1
5
400
200
0
Adjusted EBITDA
2018
2019
7
8
4
6
8
3
2
1
2
4
0
2
2
8
9
7
500
250
0
Canada
South America
UK & Ireland
Canada
South America
UK & Ireland
(1) Excluding Other Operations
(2) Comparative results prior to Q1 2019 have not been restated for the Company’s adoption of IFRS 16, Leases effective for the financial year
beginning January 1, 2019.
The Company reported EBIT of $425 million in 2019 compared to $423 million earned in 2018. EBIT as a
percentage of net revenue was 5.8% in 2019 compared to 6.0% in 2018. Results were affected by significant items
management does not consider indicative of operational and financial trends as described on pages 5 and 6 of this
MD&A. Excluding these significant items, 2019 Adjusted EBIT was $457 million and Adjusted EBIT as a percentage
of net revenue was 6.3%, higher than Adjusted EBIT of $446 million and slightly lower than Adjusted EBIT as a
percentage of net revenue of 6.4% in the prior year.
2019 Adjusted EBITDA was $750 million and Adjusted EBITDA as a percentage of net revenue was 10.3%, higher
than Adjusted EBITDA of $633 million and Adjusted EBITDA as a percentage of net revenue of 9.0% for the prior
year. Adjusted EBITDA was higher by approximately $85 million due to the Company’s adoption of IFRS 16
because lease costs previously recognized as operating expense are now recorded as depreciation and interest
expense, as well as from the contribution from 4Refuel.
The net debt to Adjusted EBITDA ratio at December 31, 2019 was 2.0x, higher compared to net debt to Adjusted
EBITDA ratio of 1.7x at December 31, 2018 due to higher average net debt levels.
Finance Costs
Finance costs in 2019 were $107 million, higher than the $76 million reported in 2018 due to higher average short-
term debt levels in part to fund the acquisition of 4Refuel as well as approximately $10 million higher interest on
lease liabilities from the Company’s adoption of IFRS 16 in 2019.
Provision for Income Taxes
Income tax expense for the year ended December 31, 2019 was $76 million compared to $115 million in 2018. The
effective income tax rate for 2019 was 24.0%, compared to 33.1% in the prior year. The higher tax rate in 2018 was
primarily due to the non-deductibility, for tax purposes, of the write-off and foreign translation losses related to the
Company’s investment in Energyst. In addition, tax expense was higher in both years due to 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 income tax rate would have been 23.0% and 25.0% for 2019 and 2018,
respectively. This lower effective income tax rate in 2019 was primarily due to tax rate changes announced in
Alberta in May 2019 resulting in a one-time positive revaluation of the Company’s deferred tax balances.
Management expects the Company’s effective tax rate generally to be within the 25-30% range on an annual basis.
The rate may fluctuate from period to period as a result of changes in the source of income from various
jurisdictions, relative income from the various jurisdictions in which the Company carries on business, changes in
the estimation of tax reserves, outcomes of any tax audits, and changes in tax rates and tax legislation.
Net Income and Basic EPS
Net income was $242 million and basic EPS was $1.48 per share in 2019 compared to $232 million and $1.38 per
share, respectively, in 2018. Excluding the significant items noted on pages 5 and 6, Adjusted basic EPS in 2019 of
$1.65 per share was the same as in 2018.
10
Finning International Inc.
2019 Annual Results
Acquisition
On February 1, 2019, the Company acquired the Canadian and US operations of 4Refuel. 4Refuel is a mobile on-
site refueling service provider with operations in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario,
Quebec, New Brunswick and Nova Scotia, as well as in Texas, US. This acquisition is aligned with the Company’s
strategic objective of growth and diversification and is expected to generate synergies by providing the Company’s
Canadian dealership operations with opportunities to sell, rent, and service a new customer base and 4Refuel with
opportunities to sell to an expanded customer base and improve customer service.
Cash consideration of $241 million was paid for the acquisition. The Company funded the transaction with cash on
hand and from existing credit facilities. Effective February 1, 2019, the Company acquired $44 million of net working
capital (1), $42 million of property, plant, and equipment, and $215 million of intangible assets and goodwill and
assumed $60 million of lease liabilities and deferred tax liabilities.
Acquisition costs of approximately $4 million are included in the annual 2019 results.
The results of the acquired business since the date of acquisition have been included in the Company’s Canadian
operations reportable segment. 4Refuel contributed approximately $635 million of revenue ($108 million of net
revenue) in the year ended December 31, 2019.
(1) Net working capital acquired from the acquisition of 4Refuel comprises cash, receivables, other assets, and payables
11
Finning International Inc.
2019 Annual Results
Invested Capital
($ millions,
unless otherwise stated)
Consolidated
Canada
South America
UK & Ireland
South America (USD)
UK & Ireland (GBP)
December 31, September 30,
2019
2019
Decrease from
Increase from
September 30, December 31, December 31,
2018
2019
2018
$
$
$
$
$
£
3,591 $
2,026 $
1,192 $
361 $
918 $
210 £
3,907
2,209
1,276
416
964
256
$
$
$
$
$
£
(316) $
(183) $
(84) $
(55) $
(46) $
(46) £
3,163
1,675
1,190
336
872
193
$
$
$
$
$
£
428
351
2
25
46
17
Compared to September 30, 2019:
The $316 million decrease in consolidated invested capital from September 30, 2019 to December 31, 2019
includes a foreign exchange impact of approximately $5 million in translating the invested capital balances of the
Company’s South American and UK & Ireland operations. The foreign exchange impact was primarily the result of
the 2% stronger CAD relative to the USD partially offset by the 5% weaker CAD relative to the GBP at December
31, 2019 compared to the rates at September 30, 2019.
Excluding the impact of foreign exchange, consolidated invested capital decreased by $310 million from September
30, 2019 to December 31, 2019 reflecting:
(cid:120) a decrease in inventory in all operations, particularly new equipment inventory in the Company’s Canadian
and UK & Ireland operations and parts inventory in the Company’s South American operations; and,
lower accounts receivables, particularly in the Company’s South American operations.
(cid:120)
Compared to December 31, 2018:
The increase of $428 million in consolidated invested capital from December 31, 2018 to December 31, 2019
includes a foreign exchange impact of approximately $65 million in translating the invested capital balances of the
Company’s South American and UK & Ireland operations. The foreign exchange impact was primarily the result of
the 5% stronger CAD relative to the USD at December 31, 2019 compared to the rates at December 31, 2018.
Excluding the impact of foreign exchange, consolidated invested capital increased by $495 million from December
31, 2018 to December 31, 2019 reflecting:
(cid:120) an increase in net assets from the 2019 acquisition of 4Refuel;
(cid:120) higher unbilled receivables, primarily in the Company’s South American operations; and,
(cid:120) a decline in deferred revenues, primarily in the Company’s Canadian and UK & Ireland operations;
(cid:120) partially offset by higher accounts payable, particularly in the Company’s Canadian and UK & Ireland
operations.
12
Adjusted ROIC and Invested Capital Turnover
Finning International Inc.
2019 Annual Results
December 31, September 30, December 31,
2019
2018 (1)
2019
Adjusted ROIC
Consolidated
Canada
South America
UK & Ireland
Invested Capital Turnover (times)
Consolidated
Canada
South America
UK & Ireland
12.0 %
14.4 %
10.5 %
12.1 %
1.92x
1.81x
1.78x
2.98x
12.2 %
15.0 %
9.0 %
14.1 %
1.99x
1.91x
1.77x
3.18x
13.5 %
16.2 %
12.2 %
14.2 %
2.12x
2.05x
1.86x
3.22x
(1) Comparative results prior to Q1 2019 have not been restated for the Company’s adoption of IFRS 16, Leases effective for
the financial year beginning January 1, 2019.
Adjusted ROIC
On a consolidated basis, Adjusted ROIC at December 31, 2019 of 12.0% was lower than Adjusted ROIC at
December 31, 2018 of 13.5% and was down across all operations.
Canadian Operations
(cid:120) Adjusted ROIC at December 31, 2019 in the Company’s Canadian operations was lower than December 31,
2018 levels as growth in Adjusted EBIT in 2019 was outpaced by the growth in average invested capital levels
in the twelve-month period.
South American Operations
(cid:120) Lower Adjusted ROIC at December 31, 2019 compared to December 31, 2018 levels reflects lower earnings
primarily in the first half of 2019 with slightly higher average invested capital levels.
UK & Ireland Operations
(cid:120) Adjusted ROIC at December 31, 2019 in the Company’s UK & Ireland operations was lower than December 31,
2018 levels due to slightly lower Adjusted EBIT from operating results as well as higher average invested capital
levels.
Invested capital turnover
Consolidated invested capital turnover at December 31, 2019 was 1.92 times, down from 2.12 times at December
31, 2018, driven by an increase in average invested capital levels, which outpaced net revenue growth in the
Company’s Canadian and South American operations. Average invested capital levels increased with relatively flat
net revenues in 2019 compared to 2018 in the Company’s UK & Ireland operations.
13
Finning International Inc.
2019 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 described on pages 15 - 18. Finning’s
reportable segments are Canada, South America, UK & Ireland, and Other operations.
The table below provides details of net revenue by lines of business for the Canadian, South American, and UK &
Ireland operations.
For year ended December 31, 2019
($ millions)
New equipment
Used equipment
Equipment rental
Product support
Fuel and other
Net revenue
Net revenue % by operation
For year ended December 31, 2018
($ millions)
New equipment
Used equipment
Equipment rental
Product support
Other
Net revenue
Net revenue % by operation
Canada
South
America
UK
& Ireland
Consol
Net Revenue
%
$
$
1,375 $
224
164
2,054
110
3,927 $
54%
685 $
47
47
1,447
—
2,226 $
30%
716 $
90
35
292
4
1,137 $
16%
2,776
361
246
3,793
114
7,290
100%
38%
5%
3%
52%
2%
100%
Canada
South
America
UK
& Ireland
Consol
Net Revenue
%
$
$
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%
39%
5%
4%
52%
—
100%
14
Finning International Inc.
2019 Annual Results
Canada Operations
The Canadian reporting segment includes Finning (Canada), OEM, and a 25% interest in PLM, as well as 4Refuel
since the acquisition date of February 1, 2019. 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, and also provide mobile refueling services in British Columbia, Alberta, Saskatchewan, Manitoba,
Ontario, Quebec, New Brunswick and Nova Scotia and in Texas, US. The Canadian operations’ markets include
mining (including the oil sands), construction, conventional oil and gas, forestry, and power systems.
The table below provides details of the results from the Canadian operations:
For years ended December 31
($ millions)
Net revenue
Operating costs
Equity earnings of joint ventures
Other expenses
EBITDA
Depreciation and amortization
EBIT
EBITDA as a % of net revenue
EBIT as a % of net revenue
Adjusted EBITDA
Adjusted EBITDA as a % of net revenue
Adjusted EBIT
Adjusted EBIT as a % of net revenue
2019
2018 (1)
$
$
$
$
$
3,927
(3,455)
15
(17)
470
(174)
296
12.0%
7.5%
487
12.4%
313
8.0%
$
$
$
$
$
3,674
(3,297)
16
—
393
(96)
297
10.7%
8.1%
386
10.5%
290
7.9%
(1) Comparative results prior to Q1 2019 have not been restated for the Company’s adoption of IFRS 16, Leases effective for the financial year
beginning January 1, 2019.
Net revenue of $3.9 billion in 2019 increased 7% from last
year, primarily driven by higher new equipment and
product support revenues, as well as the $108 million
contribution from 4Refuel. The net revenue increase was
primarily driven by higher activity in the mining sector
partially offset by lower demand for product support in the
construction sector.
New equipment revenue in 2019 was up 7% from 2018,
due to increased demand from mining and construction
customers. Significant equipment deliveries in 2019
exceeded order intake (1) in the year resulting in lower
equipment backlog levels at December 31, 2019 than
December 31, 2018.
Product support revenue was 3% higher than last year,
driven by increased activity in the mining sector in the first
half of 2019, partially offset by lower demand in the
construction sector due to fewer major projects
commencing in 2019.
Canada – Net Revenue by Line of Business
For years ended December 31
($ millions)
2,100
2019
2018
4
5
0
,
2
7
9
9
,
1
1,050
5
7
3
,
1
8
8
2
,
1
4
2
2
3
3
2
4
6
1
4
5
1
0
1
1
2
0
New
equipment
Used
equipment
Equipment
rental
Product
support
Fuel and
other
Gross profit in 2019 was higher than the prior year, reflecting strong product support and new equipment volumes.
Overall gross profit as a percentage of net revenue in 2019 was comparable to the same prior year period on a
similar revenue mix.
(1) 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” on pages 38 - 49 of this MD&A.
15
Finning International Inc.
2019 Annual Results
SG&A in 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. Excluding this
significant item, SG&A in 2019 was 7% higher compared to the same period in 2018 due to additional SG&A from
4Refuel. SG&A relative to net revenue in the Company’s Canadian operations was comparable to 2018. In Finning
(Canada), SG&A was slightly lower on 4% higher net revenues through effective cost management and disciplined
spending, as well as lower people-related costs from restructuring initiatives commencing in Q1 2019.
Adjusted EBITDA of $487 million in 2019 increased from $386 million earned in the prior year. 2019 Adjusted
EBITDA included approximately $60 million from the Company’s adoption of IFRS 16, a positive contribution from
4Refuel, and higher operating results from Finning (Canada). Adjusted EBITDA as a percentage of net revenue was
12.4% in 2019, an improvement of 190 basis points from 10.5% in 2018.
South America Operations
Finning’s South American operations sell, service, and rent mainly Caterpillar equipment and engines in Chile,
Argentina, and Bolivia. The South American operations’ markets include mining, construction, forestry, and power
systems.
The table below provides details of the results from the South American operations:
For years ended December 31
($ millions)
Net revenue
Operating costs
Other expenses
EBITDA
Depreciation and amortization
EBIT
EBITDA as a % of net revenue
EBIT as a % of net revenue
Adjusted EBITDA
Adjusted EBITDA as a % of net revenue
Adjusted EBIT
Adjusted EBIT as a % of net revenue
2019
2018 (1)
$
$
$
$
$
2,226
(2,017)
(8)
201
(81)
120
9.0%
5.4%
212
9.5%
131
5.9%
$
$
$
$
$
2,170
(1,966)
—
204
(62)
142
9.4%
6.6%
204
9.4%
142
6.6%
(1) Comparative results prior to Q1 2019 have not been restated for the Company’s adoption of IFRS 16, Leases effective for the financial year
beginning January 1, 2019.
Net revenue of $2.2 billion for the year ended December 31,
2019 was up 3% from the prior year (comparable year over
year in functional currency). Higher product support revenue
was partially offset by lower new equipment revenue.
The weaker CAD relative to the USD on average in 2019
compared to 2018 had a favourable foreign currency
translation impact on net revenue of approximately $50
million and was not significant at the EBITDA level.
Product support revenue was up 7% compared to last year
(up 5% in functional currency) primarily due to increased
demand in the Chile mining sector as well as in Argentina
despite its challenging economic environment.
South America – Net Revenue by Line of Business
For years ended December 31
($ millions)
2019
2018
7
4
4
,
1
8
4
3
,
1
1,450
725
5
8
6
4
1
7
7
4
4
5
7
4
0
5
0
4
2019 new equipment revenue was 4% lower than 2018
(down 6% in functional currency), predominantly driven by
lower new equipment sales in Argentina partially offset by
higher activity in the mining and construction sectors in Chile. Equipment backlog at December 31, 2019 was up
from December 31, 2018 primarily in the construction and mining sectors, with order intake outpacing deliveries in
2019.
Equipment
rental
Used
equipment
New
equipment
Product
support
Fuel and
other
0
Gross profit and gross profit as a percentage of net revenue were lower than 2018, largely driven by higher costs to
meet customer requirements during the post-ERP implementation period.
16
Finning International Inc.
2019 Annual Results
In functional currency, SG&A for 2019 was 7% lower compared to 2018. Excluding severance and restructuring
costs described on pages 5 and 6, SG&A in 2019 was 8% lower and SG&A relative to net revenue was down 160
basis points compared to the same period in 2018. The decrease was due in large part to effective cost
management, the realization of benefits from restructuring activities undertaken in the year, and the benefit of a
weaker CLP and ARS relative to the USD when translating local currency costs to USD in 2019.
For 2019, the Company’s South American operations contributed Adjusted EBITDA of $212 million and Adjusted
EBITDA as a percentage of net revenue of 9.5% compared to $204 million and 9.4% respectively in 2018. In
functional currency, Adjusted EBITDA for 2019 was 1% higher than the same period in the prior year in spite of
challenges faced by the Company in the first half of 2019 from the ERP implementation and the impact of social
unrest in Chile in the fourth quarter. 2019 EBITDA includes a $10 million benefit from the Company’s adoption of
IFRS 16.
UK & Ireland Operations
The Company’s UK & Ireland operations sell, service, and rent mainly Caterpillar equipment and engines in
England, Scotland, Wales, Northern Ireland, and the Republic of Ireland. The UK & Ireland operations’ markets
include quarrying, construction, power systems, and mining.
The table below provides details of the results from the UK & Ireland operations:
For years ended December 31
($ millions)
Net revenue
Operating costs
EBITDA
Depreciation and amortization
EBIT
EBITDA as a % of net revenue
EBIT as a % of net revenue
2019
2018 (1)
$
$
$
1,137
(1,055)
82
(36)
46
7.2%
4.1%
$
$
$
1,152
(1,073)
79
(28)
51
6.9%
4.4%
(1) Comparative results prior to Q1 2019 have not been restated for the Company’s adoption of IFRS 16, Leases effective for the financial year
beginning January 1, 2019.
Net revenue in 2019 of $1.1 billion was down 1% from 2018
(slightly up in functional currency). In functional currency,
higher product support and used equipment revenue were
partially offset by lower new equipment revenue.
The stronger CAD relative to the GBP on average in 2019
compared to last year when translating results to CAD had
an unfavourable foreign currency translation impact on net
revenue of approximately $25 million and was not
significant at the EBITDA level.
Product support revenue was 2% higher than last year (4%
higher in functional currency), driven by higher demand in
the power systems and construction sectors.
Used equipment revenue increased 8% compared to 2018
(10% in functional currency) reflecting management’s focus
on selling used equipment inventory to the construction
sector.
UK & Ireland – Net Revenue by Line of Business
For years ended December 31
($ millions)
2019
2018
750
375
0
6
1
7
8
3
7
0
9
4
8
5
3
5
3
2
9
2
7
8
2
New
equipment
Used
equipment
Equipment
rental
Product
support
4
8
Fuel and
other
2019 new equipment revenue decreased 3% (1% decrease in functional currency) from 2018 largely due to lower
power systems sales. Equipment backlog at December 31, 2019 was lower than December 31, 2018, particularly in
the construction sector, as deliveries outpaced order intake particularly in the second half of 2019.
Gross profit and gross profit as a percentage of net revenue in 2019 were comparable to 2018 in functional
currency. Gross profit as a percentage of net revenue was positively impacted by a mix shift to higher product
support revenue partially offset by lower profitability on used equipment revenue.
17
Finning International Inc.
2019 Annual Results
SG&A for 2019 was up 2% in functional currency, primarily due to higher operating costs including salary inflation
increases. SG&A relative to net revenue was up slightly from 2018.
The UK & Ireland operations contributed EBITDA of $82 million, an increase from EBITDA of $79 million in 2018
(6% higher in functional currency). EBITDA was higher by approximately $15 million from the Company’s adoption
of IFRS 16 partially offset by lower operating earnings. EBITDA as a percentage of net revenue was 7.2%, up from
6.9% in 2018 reflecting the Company’s ability to manage uncertainty related to Brexit.
Other Operations
The Company’s Other operations includes corporate operating costs.
2019 EBITDA of this segment was a loss of $35 million compared to a loss of $66 million in 2018. In 2018, the
Company conducted a review of its investment in Energyst and determined that it was no longer a strategic fit. As a
result, the Company decided that Energyst was held-for-sale and adjusted the value of this investment to its
estimated fair value ($nil) and recorded a $30 million loss. In 2019, EBITDA included $4 million of acquisition costs
related to 4Refuel. Excluding the 2018 loss related to Energyst and the 2019 acquisition costs, the 2019 EBITDA
loss of $31 million for this segment was lower than the prior year primarily due to lower operating costs partially
offset by higher long-term incentive plan costs due to the increase in the Company’s share price.
18
Finning International Inc.
2019 Annual Results
2019 Fourth Quarter Highlights
(cid:120) Revenue was $1.9 billion in Q4 2019. Net revenue of $1.8 billion in Q4 2019 was 5% lower than Q4 2018
reflecting a decrease in new equipment sales partially offset by an increase in product support revenue. New
equipment revenue was 21% lower, down across all of the Company’s operations, particularly in all market
segments of the Company’s South American operations which was impacted by social unrest in Chile in Q4
2019. The 11% increase in product support revenue in Q4 2019 was due to the Company’s South American
operations, particularly in Chile, driven by the recovery of product support activity since the launch of the ERP
system in Q4 2018.
(cid:120) EBIT of $97 million and EBIT as a percentage of net revenue of 5.5% in Q4 2019 were higher than the $91
million and 4.9% earned in Q4 2018 despite lower consolidated net revenue and the impact of social unrest in
Chile.
(cid:120) EBITDA of $170 million and EBITDA as a percentage of net revenue of 9.7% in Q4 2019 were higher than the
$140 million and 7.6% earned in Q4 2018. EBITDA was higher due to the recovery of product support activity in
Chile in 2019 partially offset by social unrest, in Q4 2019, as well as higher by approximately $20 million from the
Company’s adoption of IFRS 16. EBITDA as a percentage of net revenue was higher mainly due to higher gross
profit as a percentage of net revenue from a revenue mix shift to product support revenue partially offset by
higher SG&A relative to net revenue.
(cid:120) Basic EPS earned in the fourth quarter of 2019 was $0.31 per share. The Company estimates that the social
unrest in Chile and subsequent devaluation of the CLP reduced Q4 2019 basic EPS by approximately $0.05 per
share. Q4 2019 product support revenue in the Company’s South American operations was up 36% over Q4
2018.
(cid:120) Free cash flow was strong at $386 million in Q4 2019 with a $225 million reduction in inventory.
2019 Fourth Quarter Overview
($ millions, except per share amounts)
Revenue
Net revenue
Gross profit
SG&A
Equity earnings of joint ventures and associate
EBIT
Net income
Basic EPS
EBITDA
Free cash flow
Gross profit as a % of net revenue
SG&A as a % of net revenue
EBIT as a % of net revenue
EBITDA as a % of net revenue
Q4 2019
Q4 2018 (1)
% change
fav (unfav)
$
$
$
$
$
$
$
$
1,911 $
1,757 $
428 $
(334)
3
97 $
50 $
0.31 $
170 $
386 $
24.3%
19.0%
5.5%
9.7%
1,842
1,842
413
(324)
2
91
55
0.33
140
418
22.4%
17.6%
4.9%
7.6%
4%
(5)%
4%
(3)%
n/m
6%
(10)%
(8)%
21%
(7)%
(1) Comparative results prior to Q1 2019 have not been restated for the Company’s adoption of IFRS 16, Leases effective for the financial year
beginning January 1, 2019.
There were no significant items identified by management that affected the results of the Company for the three
months ended December 31, 2019 or December 31, 2018.
19
Quarterly Key Performance Measures
The Company utilizes the following KPIs to enable consistent measurement of performance across the organization.
2019
2018 (1)
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
2017 (1)(2)
Q4
Finning International Inc.
2019 Annual Results
91
71
12
12
93
78
37
15
97
72
31
5
62
50
6
13
170
114
51
15
129
82
42
14
137
92
41
14
126
77
47
14
109
67
50
8
113
71
46
10
6.3 %
7.8 %
8.6 %
3.0 %
3.6 %
5.5 %
1.2 %
4.4 %
7.1 %
8.5 %
7.3 %
5.1 %
6.9 %
8.5 %
6.5 %
4.8 %
6.8 %
8.4 %
8.4 %
3.7 %
4.9 %
7.1 %
2.5 %
3.7 %
7.3 %
8.5 %
8.5 %
5.3 %
5.3 %
8.6 %
6.7 %
5.1 %
5.5 %
7.4 %
6.0 %
1.9 %
11.2 %
13.7 %
9.6 %
12.1 %
12.8 %
16.6 %
12.2 %
14.2 %
11.3 %
14.2 %
8.1 %
14.1 %
10.7 %
14.5 %
7.9 %
14.5 %
10.8 %
14.6 %
8.6 %
14.8 %
13.1 %
13.3 %
17.8 %
12.8 %
13.7 %
14.5 %
17.6 %
13.4 %
14.3 %
15.5 %
17.5 %
13.2 %
13.7 %
16.4 %
16.2 %
14.0 %
ROIC (3)
Consolidated
Canada
South America
UK & Ireland
EBIT (3) ($ millions)
Consolidated
Canada
South America
UK & Ireland
EBIT as a % of net revenue (3)
Consolidated
Canada
South America
UK & Ireland
EBITDA (3) ($ millions)
Consolidated
Canada
South America
UK & Ireland
EBITDA as a % of net revenue (3)
Consolidated
Canada
South America
UK & Ireland
Invested Capital ($ millions)
Consolidated
Canada
South America
UK & Ireland
Invested Capital Turnover (times)
Consolidated
2.09x
Canada
1.82x
South America
2.09x
UK & Ireland
3.56x
Inventory ($ millions)
1,708
Inventory Turns (Dealership) (times)
2.82x
Working Capital to Net Revenue
27.4 %
Free Cash Flow ($ millions)
350
Net Debt to EBITDA Ratio (3)
1.5
(1) Comparative results prior to Q1 2019 have not been restated for the Company’s adoption of IFRS 16, Leases effective for the financial year
2.06x
1.98x
1.78x
3.25x
2,356
2.46x
26.7 %
(347)
2.9
2.13x
1.87x
2.08x
3.65x
1,906
2.80x
27.1 %
(263)
1.9
2.12x
2.05x
1.86x
3.22x
2,061
2.68x
26.6 %
418
1.7
2.13x
1.92x
2.05x
3.44x
1,968
2.57x
26.9 %
(28)
2.0
2.14x
1.98x
2.01x
3.30x
2,017
2.58x
26.7 %
(49)
2.1
2.04x
1.95x
1.80x
3.27x
2,366
2.36x
26.7 %
(162)
3.0
1.99x
1.91x
1.77x
3.18x
2,215
2.49x
26.9 %
165
2.6
1.92x
1.81x
1.78x
2.98x
1,990
2.53x
27.8 %
386
2.1
8.9 %
10.6 %
11.0 %
5.2 %
10.7 %
12.9 %
9.8 %
7.7 %
9.4 %
10.9 %
11.1 %
6.3 %
9.9 %
11.0 %
11.2 %
7.9 %
8.1 %
11.4 %
9.3 %
7.7 %
11.1 %
12.8 %
10.8 %
8.3 %
7.8 %
10.2 %
5.2 %
7.3 %
9.7 %
11.8 %
10.0 %
5.4 %
3,753
2,148
1,243
361
3,226
1,778
1,140
322
7.6 %
9.7 %
5.8 %
5.7 %
2,830
1,621
983
250
3,362
1,840
1,172
372
3,431
1,889
1,173
404
3,964
2,285
1,287
390
3,163
1,675
1,190
336
3,591
2,026
1,192
361
3,907
2,209
1,276
416
134
93
26
22
157
93
61
17
154
91
65
14
171
99
62
21
142
104
52
23
213
138
62
23
140
97
29
18
201
125
62
22
beginning January 1, 2019.
(2) The 2017 comparative results 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.
(3) Certain of these reported financial metrics have been impacted in some quarters in this table by significant items management does not
consider indicative of operational and financial trends either by nature or amount. Financial metrics that have been adjusted to take into
account these items are referred to as “Adjusted” metrics and are summarized on page 21 of this MD&A.
20
Quarterly Adjusted KPIs
KPIs may be impacted by significant items described on pages 39 - 42 of this MD&A. KPIs that have been adjusted
to take these items into account are referred to as Adjusted KPIs and were as follows:
2019
2018 (1)
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
2017 (1)(2)
Q4
Finning International Inc.
2019 Annual Results
Adjusted ROIC
Consolidated
Canada
South America
UK & Ireland
Adjusted EBIT ($ millions)
Consolidated
Canada
South America
UK & Ireland
Adjusted EBIT as a % of net revenue
Consolidated
Canada
South America
UK & Ireland
Adjusted EBITDA ($ millions)
Consolidated
Canada
South America
UK & Ireland
Adjusted EBITDA as a % of net revenue
Consolidated
Canada
South America
UK & Ireland
Net Debt to Adjusted EBITDA Ratio
12.0 % 12.2 % 12.3 % 12.5 %
14.4 % 15.0 % 15.4 % 15.5 %
10.5 %
9.2 %
12.1 % 14.1 % 14.5 % 14.8 %
9.0 %
8.5 %
13.5 % 14.5 % 14.2 % 13.5 %
16.2 % 16.0 % 15.1 % 14.0 %
12.2 % 16.4 % 17.7 % 17.8 %
14.2 % 14.0 % 13.2 % 13.4 %
13.1 %
13.2 %
18.1 %
12.8 %
97
72
31
5
132
82
45
14
137
92
41
14
91
67
14
13
91
71
12
12
123
78
37
15
126
77
47
14
106
64
46
10
110
66
52
8
5.5 %
7.4 %
6.0 %
1.9 %
7.3 %
8.5 %
7.8 %
5.1 %
6.9 %
8.5 %
6.5 %
4.8 %
5.3 %
7.4 %
2.7 %
4.4 %
4.9 %
7.1 %
2.5 %
3.7 %
7.0 %
8.6 %
6.7 %
5.1 %
7.3 %
8.5 %
8.5 %
5.3 %
6.4 %
7.5 %
8.4 %
3.7 %
6.4 %
7.6 %
9.1 %
3.0 %
170
114
51
15
204
125
65
22
213
138
62
23
163
110
34
22
140
97
29
18
172
104
52
23
171
99
62
21
150
86
61
17
155
90
67
14
9.7 % 11.2 % 10.7 %
9.4 %
11.8 % 12.8 % 12.9 % 12.1 %
10.0 % 11.2 %
6.7 %
7.3 %
8.3 %
2.6
2.5
9.8 %
7.7 %
2.8
5.4 %
2.0
9.7 %
9.9 %
7.6 %
9.0 %
9.7 % 11.4 % 11.0 % 10.1 %
9.3 % 11.2 % 11.1 %
5.8 %
6.3 %
7.9 %
7.7 %
5.7 %
2.0
2.0
2.0
1.7
9.0 %
10.5 %
11.4 %
5.2 %
1.5
(1) Comparative results prior to Q1 2019 have not been restated for the Company’s adoption of IFRS 16, Leases effective for the financial
year beginning January 1, 2019.
(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.
21
Finning International Inc.
2019 Annual Results
2019 Fourth Quarter Results
Revenue
Net Revenue by Line of Business and by Operation
3 months ended December 31
($ millions)
Net Revenue by Line of Business
Net Revenue by Operation
950
2
2
8
475
9
4
6
2019
2018
2
2
9
4
3
8
9
1
1
9
9
5
5
4
6
2
3
3
0
New
equipment
Used
equipment
Equipment
rental
Product
support
Fuel and
other
1,050
525
0
2019
2018
8
6
9
5
0
0
,
1
8
1
5
9
0
5
1
7
2
8
2
3
Canada
South America
UK & Ireland
The Company generated revenue of over $1.9 billion and net revenue of $1.8 billion during the three months ended
December 31, 2019. Net revenue decreased 5% over the same period last year, primarily due to lower net revenues
in the Company’s UK & Ireland and Canadian operations.
New equipment revenue decreased 21% compared to the same period in 2018, down in all of the Company’s
operations with lower sales in all of the market sectors in the Company’s South American and UK & Ireland
operations. Q4 2019 new equipment revenue in the Company’s Canadian operations decreased from the prior year
period primarily due to lower activity in the construction sector.
Product support revenue increased by 11% as higher revenues in the Company’s South American operations were
driven by the recovery in parts velocity since the launch of the ERP system in Q4 2018. Partially offsetting this
increase was lower product support revenues in the Company’s Canadian and UK & Ireland operations.
Used equipment revenue and rental revenue in the Company’s Canadian operations were each down from Q4
2018, largely driven by lower activity in the construction sector.
EBIT and EBITDA
Gross profit of $428 million in the last three months of 2019 was up 4% compared to the same prior year period in
spite of lower net revenues. Q4 2019 gross profit as a percentage of net revenue improved by 190 basis points from
the fourth quarter of 2018 largely due to a shift in revenue mix to product support and improved gross margins. Q4
2019 product support revenue as a percentage of overall net revenue was 52% compared to 45% in the prior year
period.
SG&A in the fourth quarter of 2019 was 3% higher than the prior year comparative period due to additional SG&A
from 4Refuel partially offset by lower SG&A in the Company’s South American operations. In addition, Q4 2019
long-term incentive plan costs were higher reflecting an increase in the Company’s share price. As a percentage of
net revenue, SG&A was up by 140 basis points over the same period of the prior year. SG&A relative to net revenue
was higher in the Company’s Canadian and UK & Ireland operations but lower in the Company’s South American
operations.
22
Finning International Inc.
2019 Annual Results
EBIT and EBITDA by Operation (1)(2)
3 months ended December 31
($ millions)
EBIT
2019
2018
2
7
1
7
1
3
2
1
2
1
5
80
40
0
EBITDA
2019
2018
4
1
1
7
9
1
5
9
2
5
1
8
1
120
60
0
Canada
South America
UK & Ireland
Canada
South America
UK & Ireland
(1) Excluding Other Operations
(2) Comparative results prior to Q1 2019 have not been restated for the Company’s adoption of IFRS 16, Leases effective for the financial year
beginning January 1, 2019.
The Company reported EBIT of $97 million in the fourth quarter of 2019 compared to $91 million in the fourth quarter
of 2018, primarily due to higher EBIT from the Company’s South American operations partially offset by lower EBIT
in the Company’s UK & Ireland operations.
EBITDA for the fourth quarter of 2019 was $170 million and EBITDA as a percentage of net revenue was 9.7%,
higher than Q4 2018 EBITDA of $140 million and EBITDA as a percentage of net revenue of 7.6%. EBITDA was
higher due to the recovery in the Company’s South American operations following the ERP implementation partially
offset by the impact of social unrest in Chile. Q4 2019 EBITDA included approximately $20 million from the
Company’s adoption of IFRS 16 as well as the contribution from 4Refuel. The increase in EBITDA as a percentage
of net revenue in Q4 2019 was primarily due to improved profitability in the Company’s South American operations.
Finance Costs
Finance costs in the three months ended December 31, 2019 were $30 million, higher than the $20 million reported
in the same period in 2018 mostly due to higher average short-term debt levels.
Provision for Income Taxes
Income tax expense for Q4 2019 was $17 million (Q4 2018: $16 million) and the effective income tax rate was
25.2%. The effective income tax rate in Q4 2019 was higher than the 22.2% in Q4 2018 primarily due to a lower
proportion of earnings in lower tax jurisdictions.
Net Income and Basic EPS
Net income was $50 million and basic EPS was $0.31 per share in the fourth quarter of 2019 compared to $55
million net income and $0.33 basic EPS earned in the same period last year. Q4 2019 basic EPS was positively
impacted by improved profitability in the Company’s South American operations driven by product support growth
offset by approximately $0.05 per share estimated negative impact from social unrest in Chile as well as higher long-
term incentive plan and finance costs.
23
The table below provides details of net revenue by operation and lines of business and results by operations.
Finning International Inc.
2019 Annual Results
For 3 months ended
December 31, 2019 ($ millions)
New equipment
Used equipment
Equipment rental
Product support
Fuel and other
Net revenue
Operating costs
Equity earnings
EBITDA
Depreciation and amortization
EBIT
Net revenue percentage by operation
EBITDA as a % of net revenue
EBIT as a % of net revenue
For 3 months ended
December 31, 2018 (1) ($ millions)
New equipment
Used equipment
Equipment rental
Product support
Other
Net revenue
Operating costs
Equity earnings
EBITDA
Depreciation and amortization
EBIT
Net revenue percentage by operation
EBITDA as a % of net revenue
EBIT as a % of net revenue
Consol
Net Revenue
%
37%
6%
3%
52%
2%
100%
South
UK
Canada America & Ireland Other
130 $
$
10
11
367
—
518 $
(467)
—
51 $
(20)
31 $
357 $
58
35
487
31
968 $
(857)
3
114 $
(42)
72 $
162 $
31
9
68
1
271 $
(256)
—
15 $
(10)
5 $
$
$
$
55%
11.8%
7.4%
30%
10.0%
6.0%
15%
5.4%
1.9%
649
— $
99
—
55
—
922
—
—
32
— $ 1,757
(1,590)
(10)
3
—
170
(10) $
(1)
(73)
97
(11) $
100%
—
9.7%
5.5%
Canada
South
America & Ireland Other
UK
Consol
Net Revenue
%
45%
7%
3%
45%
—
100%
$
390 $
73
45
496
1
$ 1,005 $
$
$
(910)
2
97 $
(26)
71 $
54%
9.7%
7.1%
218 $
11
11
269
—
509 $
(480)
—
29 $
(17)
12 $
28%
5.8%
2.5%
214 $
35
8
69
2
328 $
(310)
—
18 $
(6)
12 $
18%
5.7%
3.7%
822
— $
119
—
64
—
834
—
—
3
— $ 1,842
(1,704)
(4)
2
—
140
(4) $
(49)
—
91
(4) $
100%
—
7.6%
4.9%
(1) Comparative results prior to Q1 2019 have not been restated for the Company’s adoption of IFRS 16, Leases effective for the financial year
beginning January 1, 2019.
24
Finning International Inc.
2019 Annual Results
Canada Operations
Q4 2019 net revenue of $968 million was 4% lower than Q4 2018, down in most lines of business. The decrease in
net revenue was due to softening market conditions in Q4 2019 compared to the same prior year period. New
equipment revenue was down 8% in Q4 2019 mainly in the construction sector due to significant deliveries in Q4
2018 as well as a softer construction market in 2019, particularly in Alberta. Used equipment revenue and rental
revenue were each down slightly more than 20% from Q4 2018, largely driven by lower activity in the construction
sector. Product support revenue was 2% below Q4 2018 which benefited from higher service revenue related to a
large scale dragline maintenance project during that period.
Gross profit in Q4 2019 and gross profit as a percentage of net revenue increased in Q4 2019 from the comparable
period in 2018, due to higher gross margins in most lines of business as well as the contribution from 4Refuel.
SG&A was 8% higher in Q4 2019 compared to the same period in the prior year, primarily due to additional SG&A
from 4Refuel partially offset by lower people-related costs in Finning (Canada) from restructuring initiatives. SG&A
relative to net revenue for Finning (Canada) was up 130 basis points primarily due to lower fixed cost absorption
with net revenues down 7%.
Q4 2019 EBITDA was $114 million compared to $97 million in Q4 2018. Q4 2019 EBITDA included approximately
$15 million from the Company’s adoption of IFRS 16. EBITDA as a percentage of net revenue was 11.8%, up from
9.7% earned in the same period in 2018.
South America Operations
Q4 2019 net revenue of $518 million was 2% higher than Q4 2018, reflecting higher product support revenues
largely offset by lower new equipment revenue. Q4 2019 product support revenue increased 36% in functional
currency from Q4 2018 reflecting the return to normal parts flow with the prior year impacted by business process
velocity issues following the launch of the new ERP system. New equipment sales in the Company’s South
American operations were down 40% in functional currency across all market sectors, particularly in the mining
sector in Chile due to significant equipment deliveries in Q4 2018 as well as disruptions in Q4 2019 related to social
unrest in Chile.
Gross profit and gross profit as a percentage of net revenue in Q4 2019 were higher than Q4 2018 primarily due to a
revenue mix shift to a higher proportion of product support. Product support revenue comprised 71% of total net
revenue in Q4 2019, compared to 53% in Q4 2018 when the Company was dealing with parts velocity issues
following the implementation of the new ERP system.
SG&A in Q4 2019 decreased by 8% in functional currency compared to the same period in the prior year. Lower
SG&A in Q4 2019 was primarily due to effective cost management, lower people-related costs from the benefit of
previous cost reduction measures taken, as well as the devaluation of the CLP and ARS relative to the USD. SG&A
relative to net revenue was down compared to the same prior year period.
Q4 2019 EBITDA was $51 million compared to $29 million in Q4 2018. EBITDA as a percentage of revenue was
10.0%, up from 5.8% earned in the same period of 2018 due to higher gross profit as a percentage of net revenue,
higher product support activity, as well as lower SG&A relative to net revenue achieved in the current year period.
UK & Ireland Operations
Fourth quarter 2019 net revenue of $271 million was down 17% compared to the fourth quarter of 2018, driven
primarily by lower new equipment sales in Q4 2019 related to project deliveries to the electricity capacity market
which were particularly strong in the second half of 2018. Q4 2019 net revenue to the construction sector was
slightly below the prior year period as equipment markets softened reflecting continued uncertainty related to Brexit
and slower economic growth in the UK in Q4 2019.
Q4 2019 gross profit was lower than the prior year period in line with the decrease in net revenue. Gross profit as a
percentage of net revenue was up slightly from the same period in the prior year due to a higher proportion of
product support in the revenue mix.
SG&A in Q4 2019 decreased by 3% in functional currency compared to the same period in the prior year primarily
reflecting robust cost management and lower people-related costs despite salary inflation. SG&A relative to net
revenue in the fourth quarter of 2019 increased over the comparable period in 2018 due to lower fixed cost
absorption with net revenues down 17%.
Q4 2019 EBITDA was lower than in Q4 2018 due to lower net revenues. EBITDA as a percentage of revenue was
5.4% in Q4 2019, down slightly from the 5.7% earned in Q4 2018, primarily due to higher SG&A relative to net
revenue.
25
Finning International Inc.
2019 Annual Results
Outlook
Canadian Operations
In the oil sands, government-imposed production curtailments have been extended into 2020 due to a continued
shortage of pipeline capacity. However, steady oil production levels and an aging equipment population are
expected to support strong demand for parts and service, including component and machine rebuilds.
Outlook for other mining segments in Western Canada is mixed. Coal mining activity has declined significantly in the
second half of 2019 and is projected to remain weak as customers are reducing costs and capital spending in
response to a lower coal price. Copper and metals mining activity is expected to remain robust and provide
opportunities for equipment and product support.
Construction markets in Alberta are expected to remain soft mostly due to uncertainty around timing of some
infrastructure projects. In British Columbia, construction activity is projected to be healthy, with large infrastructure
projects, including Trans Mountain Pipeline and LNG Canada, creating additional demand for equipment and
product support in the near future. The Company is gaining share in competitive construction markets and is well
positioned to leverage its digital capabilities to capture product support opportunities.
Forestry activity in Western Canada has been reduced substantially with the decline in lumber prices, and is
expected to remain slow in 2020.
In power systems segments, the Company expects to benefit from continued strong demand for prime and standby
electric power for large infrastructure and gas projects.
South American Operations
Activity in construction and power systems markets in Chile has been negatively impacted by the social unrest and
subsequent devaluation of the Chilean peso. While the social situation has stabilized, the Company expects a higher
level of political uncertainty in the country to continue to impact customer confidence and lead to slower economic
growth in the near term. The potential impact of the government’s social reform agenda on the Chilean economy
and the cost structure of the Company and its customers is unknown. The Company is focused on growing its
product support business in the construction and power systems markets.
Global miners are intending to make investments in Chile as evidenced by an increase in requests for quotations for
large mining equipment. While social and political stability in the country continues to pose a risk, international trade
tensions are softening and the Company is constructive on the outlook for copper. Increased copper production is
expected to have a positive impact on demand for mining equipment and product support.
In Argentina, the new government assumed office in December 2019 and implemented new measures related to
capital and import controls, incentives to switch financial investments to local currency, as well as tax increases to
control currency devaluation and inflation. Continued restrictive monetary policies and capital controls are expected
to limit the Company’s growth opportunities for the near future. The Company is focused on delivering product
support to customers, while managing its exposure to the ARS.
UK and Ireland Operations
The UK left the European Union on January 31, 2020 with a withdrawal agreement and is currently in a transition
period until December 30, 2020. The Company has developed an action plan with Caterpillar to manage the impact
on the supply chain during this transition. Construction equipment markets have slowed in the second half of 2019
and demand is expected to remain soft following a prolonged period of uncertainty. To help offset reduced business
confidence, the U.K. government has committed to accelerating infrastructure investment. Recent announcements
with respect to the impending governmental budget and infrastructure spend, including HS2, should have a positive
impact on customer activity in the construction and plant hire sectors. In power systems, the Company continues to
see significant opportunities in the electric power capacity, combined heat & power, and data centre markets.
Cost and Capital Focus
In 2019, the Company recovered from parts velocity issues following the ERP implementation which reduced 2019
basic EPS by an estimated $0.20 per share. In 2020, the Company expects to benefit from several profitability
drivers including improved execution in South America, a lower cost base in Canada, and reduced finance costs.
The Company expects to generate strong annual free cash flow in 2020 and prioritize maintaining a strong balance
sheet and returning capital to shareholders through dividends and share repurchases.
Foreign Exchange Exposure
The Company expects ongoing volatility in foreign exchange markets to continue to impact its results. Any
devaluation of the CAD increases earnings translated from the Company’s foreign subsidiaries. The opposite is true
for any appreciation of the CAD. Transactional gains or losses are dependent on the Company’s hedging activities
and general market conditions.
26
Finning International Inc.
2019 Annual Results
Liquidity and Capital Resources
Management assesses liquidity in terms of the Company’s ability to generate sufficient cash flow, along with other
sources of liquidity including cash and borrowings, to fund its operations and growth in operations. Liquidity is
affected by operating, investing, and financing activities.
The magnitude of cash flows provided by (used in) each of these items is shown in the following table:
($ millions)
Operating activities
Investing activities
Financing activities
Free Cash Flow
3 months ended
December 31
Years ended
December 31
2018 (1)
(Decrease)
Increase
2018 (1)
(Decrease)
Increase
2019
2019
$
$
$
$
438 $ 490 $
(73) $
(52) $
(199) $
(361) $
386 $ 418 $
(52) $
21 $
(162) $
(32) $
191 $
(378) $
23 $
42 $
260 $
(184) $
(107) $
78 $
(69)
(194)
130
(36)
(1) Comparative results prior to Q1 2019 have not been restated for the Company’s adoption of IFRS 16, Leases effective for the financial year
beginning January 1, 2019.
The most significant contributors to the changes in cash flows for 2019 over 2018 were as follows (all events
described were in the current quarter or annual period, unless otherwise stated):
Quarter over Quarter
Year over Year
(cid:120) lower customer deposits received in the
Company’s Canadian and UK & Ireland
operations
(cid:120) lower customer deposits received in the
Company’s Canadian and UK & Ireland
operations
(cid:120) higher payments to suppliers in the Company’s
(cid:120) partially offset by the monetization and
South American operations
(cid:120) partially offset by lower spend on equipment
inventory in the Company’s Canadian
operations and parts inventory in the
Company’s South American operations
management to lower equipment inventory
levels in all of the Company’s operations,
particularly in Canada
(cid:120) lower capital expenditures in 2019 as 2018
(cid:120) $229 million net cash consideration to acquire
included the investment in the ERP system in
the Company’s South American operations
4Refuel
(cid:120) lower capital expenditures in 2019 as 2018
included the investment in the ERP system in
the Company’s South American operations
Cash
provided by
operating
activities
Cash used
in investing
activities
(cid:120) approximately $300 million cash used to repay
short-term debt in 2019 compared with
approximately $70 million in 2018
(cid:120) approximately $200 million additional cash
provided by issuance of unsecured senior
notes
(cid:120) approximately $20 million higher use of cash
(cid:120) approximately $60 million lower cash provided
Cash used
in financing
activities
related to lease payments presented as
financing cash outflows following the adoption
of IFRS 16 (presented as operating cash
outflows in Q4 2018)
(cid:120) $95 million use of cash in 2018 to repurchase
common shares
by short-term debt in 2019
(cid:120) approximately $85 million higher use of cash
related to lease payments presented as
financing cash outflows following the adoption
of IFRS 16
(cid:120) approximately $75 million less cash used to
repurchase common shares
Free cash
flow
generation
(cid:120) lower cash generated from operating activities
(cid:120) lower cash generated from operating activities
for the reasons outlined above
for the reasons outlined above
27
Finning International Inc.
2019 Annual Results
Capital resources and management
The Company’s cash and cash equivalents balance at December 31, 2019 was $268 million (December 31, 2018:
$454 million). To complement internally generated funds from operating and investing activities, the Company has
$2.0 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 $1.1 billion was available at December
31, 2019.
In December 2019, the Company amended the syndicated committed credit facility which was set to fully mature in
December 2023 by, among other things, extending the maturity date to December 2024. This 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.
In August 2019, the Company issued $200 million of 2.626% senior unsecured notes due August 14, 2026, which
rank pari passu with existing senior unsecured obligations. Proceeds of the issuance were used to reduce the
outstanding short-term debt under the Company’s syndicated committed credit facility.
Based on the availability of these facilities, the Company’s business operating plans, and the discretionary nature of
certain 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,
2019 and 2018, the Company was in compliance with these covenants.
The Company is rated (1) by both DBRS and S&P as follows:
December 31
DBRS
S&P
Long-term debt
Short-term debt
2019
BBB (high)
BBB+
2018
BBB (high)
BBB+
2019
R-2 (high)
n/a
2018
R-2 (high)
n/a
In September 2019, DBRS reconfirmed the Company’s BBB (high) long-term rating as well as its short-term debt
rating at R-2 (high), reflecting the Company’s strong business profile, supportive market conditions, and diversified
operations.
In August 2019, 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 2019, the Company renewed its NCIB (2) to enable the purchase of its common shares for cancellation.
During 2019, the Company repurchased 1,073,354 common shares for cancellation at an average cost of $24.75
per share (total cost: $27 million). During 2018, the Company repurchased 4,128,053 common shares for
cancellation at an average cost of $26.41 per share (totalling $109 million).
The NCIB is in place to take advantage of Finning’s strong balance sheet and cash balances in periods of broader
market volatility and the resulting negative impact on the Company’s share price. Execution of the NCIB is governed
by rules established by the Toronto Stock Exchange.
(1) A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the
rating organization.
(2) A copy of the NCIB notice is available on request from the Company. Direct your request to the Corporate Secretary, 300 – 565 Great
Northern Way, Vancouver, BC V5T 0H8.
28
Net Debt to Adjusted EBITDA
The Company monitors net debt to Adjusted EBITDA to assess its operating leverage and ability to repay debt. This
ratio approximates the length of time, in years, that it would take the Company to repay its debt, with net debt and
Adjusted EBITDA held constant.
Finning International Inc.
2019 Annual Results
2018 (1)
December 31
Net debt to Adjusted EBITDA Ratio
1.7
(1) Comparative results prior to Q1 2019 have not been restated for the Company’s adoption of IFRS 16, Leases effective for the financial year
2019
2.0
Company
long-term target
< 3.0
beginning January 1, 2019.
Contractual Obligations
Payments on contractual obligations in each of the next five years and thereafter are as follows:
($ millions)
Short-term debt
2020
2021
2022
2023
2024
Thereafter
Total
- principal repayment
$
226 $ — $ — $ — $ —
$
— $
226
Long-term debt
- principal repayment
- interest
Leases
Total contractual obligations
200
57
95
200
51
82
196
41
66
121
34
44
$
578 $
333 $
303 $
199 $
195
29
30
254
$
610
173
71
1,522
385
388
854 $ 2,521
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 2019, the Company contributed $14 million
towards the defined benefit pension plans. Based on the most recent valuations completed, the Company expects to
contribute approximately $16 million to the defined benefit pension plans during the year ended December 31, 2020.
Capital and Rental Expenditures
The Company’s net spend on capital expenditures and rental fleet additions during the year ended December 31,
2020 is expected to be in the range of $200 million to $250 million depending on 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, 2019, approximately 65%, 75% 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,
2019, approximately 30% 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, 2019, approximately 15% of
eligible employees in Finning (Ireland) were contributing to this plan.
The Company may cancel these plans at any time.
29
Finning International Inc.
2019 Annual Results
Accounting and Estimates
The Company employs professionally qualified accountants throughout its finance group globally 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, the SVP,
Corporate Controller, and the 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, 2019. 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 critical estimates and judgments were:
(cid:120) determination of the functional currency of each entity of the Company;
(cid:120)
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 repurchase commitments or rental equipment with
purchase options;
(cid:120)
the fair value of derivative financial instruments;
inputs to the models to determine the fair value of certain share-based payments;
(cid:120) allowance for doubtful accounts;
(cid:120)
(cid:120)
(cid:120) provisions for slow-moving and obsolete inventory;
(cid:120) provisions for income tax;
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120) provisions for warranty; and,
(cid:120)
the determination of post-employment benefits.
the useful lives and residual values of property, plant, and equipment, rental equipment, and intangible assets;
the determination of lease term;
identifying the CGU to which assets should be allocated for impairment testing;
recoverable values for goodwill and other indefinite-lived intangible assets;
For additional information on the above judgments, estimates, and assumptions made, please refer to the Annual
Financial Statements for the year ended December 31, 2019.
30
Finning International Inc.
2019 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
an 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. 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, 2019 and 2018. 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, 2019 and 2018. Refer to note 21 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 which 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 a 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 receivables, supplier claims receivable, and instalment
and other notes receivable are classified and measured at amortized cost using the effective interest method.
Derivative financial instruments 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, accounts payable and accruals, and lease liabilities are classified and measured at
amortized cost using the effective interest method.
31
Finning International Inc.
2019 Annual Results
Related Party Transactions
Related party transactions 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
Financial Statements. Compensation of key management personnel is disclosed in note 28 of the Annual Financial
Statements.
New Accounting Pronouncements
Changes in the rules or standards governing accounting can impact Finning’s results or 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 standard and interpretation:
(cid:120)
(cid:120)
IFRS 16, Leases (effective for the financial year beginning January 1, 2019) introduced new requirements for
the classification and measurement of leases. Under IFRS 16, a lessee no longer classifies leases as operating
or financing and records all leases on the condensed consolidated statement of financial position. The Company
applied this standard retrospectively and recognized the cumulative effect of initial application on January 1,
2019, on the consolidated statement of financial position.
IFRIC 23, Uncertainty over Income Tax Treatments (effective for the financial year beginning 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. This interpretation did not have an
impact on the Company’s consolidated financial statements.
The Company has not applied the following amendments that have been issued but are not yet effective:
(cid:120) Amendments to IFRS 3, Business Combinations (effective for the financial year beginning January 1, 2020)
assist in determining whether a transaction should be accounted for as a business combination or an asset
acquisition. It amends the definition of a business to include an input and a substantive process that together
significantly contribute to the ability to create goods and services provided to customers, generating investment
and other income, and it excludes returns in the form of lower costs and other economic benefits. The Company
has not elected to apply this amendment early.
(cid:120) Amendments to IFRS 9, Financial Instruments and IFRS 7, Financial Instruments: Disclosures (effective for the
financial year beginning January 1, 2020) will affect entities that apply the hedge accounting requirements to
hedging relationships directly affected by the interest rate benchmark reform. The amendments modify specific
hedge accounting requirements, so that entities would apply those hedge accounting requirements assuming
that the interest rate benchmark is not altered as a result of the interest rate benchmark reform. If a hedging
relationship no longer meets the requirements for hedge accounting for reasons other than those specified by
the amended Standards, then discontinuation of hedge accounting is still required. This amendment is not
expected to have any impact on the Company’s consolidated financial statements.
32
Finning International Inc.
2019 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 these risks are identified, managed,
and reported. The ERM framework assists the Company in managing risks and business activities to mitigate them
across the organization in order to achieve the Company’s strategic objectives.
The Company maintains a strong risk management culture to protect and enhance shareholder value. On a
quarterly basis, Board level committees review the Company’s processes for business risk assessment and the
management of key business risks, any changes to key risks and exposures, and the steps taken to monitor and
control such exposures. These reviews are reported to the Board quarterly. The Board reviews, in detail, all material
risks on an annual basis. The Board also reviews the adequacy of disclosures of key risks in the Company’s AIF,
MD&A, and financial statements on a quarterly and annual basis. 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 financial risks, and relevant financial 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 net 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 the functional currency 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 hedged a portion of its foreign investments with
foreign currency denominated loans. The currency translation loss of $83 million recorded in 2019 resulted primarily
from the 5% stronger CAD relative to the USD as well as the 2% stronger CAD relative to the GBP at December 31,
2019 compared to December 31, 2018. This was partially offset by a $35 million unrealized foreign exchange gain
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 that are made in USD
and the ultimate sale to customers made in CAD. 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 and new equipment sales in its Canadian and UK operations, respectively.
33
Finning International Inc.
2019 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 certain 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. These impacts are partially
offset by the Company’s hedging programs.
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
December 31 – average
December 31 – average
3 months ended
12 months ended
2019
1.2988
1.7174
744.62
59.89
2018 Change 2019
1.3642
1.7439
695.69
37.70
5 %
2 %
(7)%
(59)%
1.3200
1.6994
753.41
59.34
2018 Change 2019
1.3204
1.6989
679.28
37.07
0 %
(0)%
(11)%
(60)%
1.3269
1.6945
700.61
46.77
2018 Change
(2)%
1.2957
2 %
1.7299
(9)%
639.90
(78)%
26.23
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. The Company’s
floating-rate financial assets comprise cash and cash equivalents. Due to the short-term nature of cash and cash
equivalents, the impact of fluctuations in fair value are limited 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.
34
Finning International Inc.
2019 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 achieve an adequate and timely supply of product
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,
receivables from customers, receivables from suppliers, 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 a large, diversified customer base, and is not dependent on any single customer or group of
customers. Credit risk associated with accounts receivables, unbilled receivables, 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, with whom Finning has
had an ongoing relationship since 1933.
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.
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.
35
Finning International Inc.
2019 Annual Results
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 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.
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, incomplete factual records and uncertainty concerning procedures
and their resolution by the courts, customs, or tax authorities. However, subject to these limitations, management is
of the opinion, based on legal assessments and information presently available, that, except as stated below, it is
not likely that any liability would have a material effect on the Company’s financial position or results of operations.
Finning’s South American operations began to export an agricultural animal feed product from Argentina in the third
quarter of 2012 in response to the Argentine government’s efforts to balance imports and exports and to manage
access to foreign currency. 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 Argentina Customs Authority has made a
number of claims against Finning associated with the export of this agricultural product over this period and has also
issued an order that could result in up to a one-year suspension of imports into Argentina by a portion of the
business. The Company is appealing these claims and the order, believes they are without merit, and is confident in
its position. Mitigation measures are also available to the Company. These pending matters may take a number of
years to resolve. Should the ultimate resolution of these matters differ from management’s assessment and the
mitigation measures not be effective, this could result in a material negative impact on 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, 2019, the total estimated value of these contracts
outstanding is $148 million (2018: $130 million) coming due at periods ranging from 2020 to 2025. The Company’s
experience to date has been that the estimated fair value of the equipment at the exercise date of the contract is
generally greater than the repurchase price, 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, 2019 and
December 31, 2018 is $1 million.
For further information on the Company’s contingencies, commitments, guarantees, and indemnifications, refer to
notes 29 and 30 of the notes to the Annual Financial Statements.
Outstanding Share Data
As at February 7, 2020
Common shares outstanding
Options outstanding
163,319,120
3,395,440
36
Finning International Inc.
2019 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 Corporate 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 Corporate 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, including 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, subject to legal
requirements applicable to disclosure of material information.
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, 2019, that would materially affect, or is reasonably likely to materially affect, the Company’s internal control over
financial reporting. Management employed 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 in the
second half of 2018. Management also performed additional account reconciliations and other analytical substantive
procedures to mitigate any financial risks from the introduction of the new system.
On February 1, 2019, the Company acquired 4Refuel. As part of the post-closing integration, the Company is
engaged in harmonizing the internal controls and processes of the acquired business with those of the Company. In
keeping with scope limitation provisions of applicable securities laws, management intends to exclude the design
and operating effectiveness assessment of internal control over financial reporting of 4Refuel from its annual
assessment of the effectiveness of the Company’s internal control over financial reporting for 2019. Additional
information regarding the acquisition can be found on page 11 of this MD&A.
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 systems 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, 2019, 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, excluding the disclosure controls and procedures and internal control over financial
reporting of 4Refuel, 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, 2019.
37
Finning International Inc.
2019 Annual Results
Description of Non-GAAP Financial Measures and Reconciliations
Non-GAAP Financial Measures
Management believes that providing certain non-GAAP financial measures provide 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. 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. 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.
Management uses KPIs to consistently measure performance against the Company’s priorities across the
organization. KPIs, including those that are expressed as ratios, are non-GAAP financial measures.
There may be significant items that management does not consider indicative of future operational and financial
trends of the Company either by nature or amount. Management excludes these items when evaluating its operating
financial performance. These items may not be non-recurring, but management believes that excluding these
significant items from GAAP results provides a better understanding of the Company’s financial performance when
considered in conjunction 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 non-GAAP financial measures and
are intended to provide additional information to users of the MD&A.
A description of the non-GAAP financial measures used by the Company in this MD&A is set out below. A
quantitative reconciliation from each non-GAAP financial measure to their most directly comparable measure, where
available, specified, defined, or determined under GAAP and used in the Company’s consolidated financial
statements (GAAP measures) can be found on pages 39 - 49 of this MD&A.
Adjusted net income and Adjusted basic EPS
Adjusted net income excludes from net 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 basic 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 basic EPS (the most directly comparable GAAP measure) and Adjusted
net income and Adjusted basic EPS can be found on page 6 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 reportable segments. Management believes
that EBITDA improves comparability between periods by eliminating the impact of finance costs, income taxes,
depreciation, and amortization.
Adjusted EBIT and Adjusted EBITDA 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 directly comparable GAAP measure to EBITDA is EBIT.
38
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(
Selected Annual Information
($ millions, except for share and option data)
Revenue from operations
Canada (3)
South America
UK & Ireland
Total revenue
Net income (3)(4)
Earnings Per Share (3)(4)
Basic EPS
Diluted EPS
Total assets (3)
Long-term debt
Current
Non-current
Total long-term debt (5)
Cash dividends declared per common share
Finning International Inc.
2019 Annual Results
2019
2018 (1)
2017 (1)(2)
$
$
$
$
$
$
$
$
$
4,454 $
2,226
1,137
7,817 $
242 $
3,674 $
2,170
1,152
6,996 $
232 $
1.48 $
$
1.48
5,990 $
1.38 $
$
1.38
5,696 $
3,072
2,157
1,027
6,256
216
1.28
1.28
5,069
200 $
1,318
1,518 $
$
0.815
— $
1,354
1,354 $
$
0.79
—
1,296
1,296
0.745
(1) Comparative results prior to Q1 2019 have not been restated for the Company’s adoption of IFRS 16, Leases effective for
the financial year beginning January 1, 2019.
(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 2018 Annual Financial Statements.
In February 2019, the Company acquired 4Refuel in its Canadian reportable segment. The results of operations and financial
position of this acquired business have been included in the figures since the date of acquisition.
(3)
(4) Results in 2019, 2018, and 2017 were impacted by the following significant items:
($ millions except per share amounts)
Severance costs
Facility closures, restructuring costs, and impairment losses
Acquisition costs related to 4Refuel
Write-off and loss related to Energyst
Insurance proceeds from Alberta wildfires
Impact of significant items on EBIT
Significant items impacting EBIT - impact on basic EPS
Significant items impacting net income only - impact on basic EPS:
Tax impact of devaluation of ARS (a)
Redemption costs on early repayment of long-term debt ($7 million after tax)
Impact of significant items on basic EPS:
(a) Tax impact of devaluation of ARS in 2019 ($4 million) and 2018 ($20 million).
$
$
$
$
2019
2018
2017
$
20
$
8
4
—
—
32
0.15
$
$
—
—
—
30
(7)
23
0.15
$
$
$
0.02
$
0.12
$
—
—
0.17
$
0.27
$
5
—
—
—
(4)
1
0.01
—
0.04
0.05
(5)
In August 2019, the Company issued $200 million of 2.626% senior unsecured notes due August 14, 2026. Proceeds of the
issuance were used to reduce outstanding short-term debt under the Company’s syndicated committed credit facility.
In December 2019, the Company amended the credit facility which was set to fully mature in December 2023 by, among
other things, extending the maturity date to December 2024.
50
Selected Quarterly Information
Finning International Inc.
2019 Annual Results
($ millions, except for share,
per share, and option
amounts)
Revenue from operations
Canada (2)
South America
UK & Ireland
Total revenue
Net income(2)(3)
Earnings Per Share (2)(3)
Basic EPS
Diluted EPS
Total assets (2)
Long-term debt
Current
Non-current
Total long-term debt (4)
Cash dividends paid per
common share
Common shares
outstanding (000’s)
Options outstanding (000’s)
2019
2018 (1)
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
518
271
$ 1,122 $ 1,118 $ 1,216 $
852
552
266
$ 1,911 $ 1,959 $ 2,137 $ 1,810 $ 1,842 $ 1,755 $ 1,729 $ 1,670
71
28 $
$
998 $ 1,005 $
505
307
910 $
558
287
907 $
551
271
577
264
626
295
509
328
50 $
81 $
55 $
76 $
25 $
88 $
0.31 $
0.31 $
0.42
$
0.42
$
$ 5,990 $ 6,253 $ 6,473 $ 6,459 $ 5,696 $ 5,413 $ 5,457 $ 5,254
0.17 $
0.17 $
0.33 $
0.33 $
0.48 $
0.48 $
0.15 $
0.15 $
0.54 $
0.54 $
0.46 $
0.46 $
$
200 $
200 $
—
1,322
$ 1,518 $ 1,525 $ 1,321 $ 1,341 $ 1,354 $ 1,315 $ 1,330 $ 1,322
1,341
— $
1,354
1,315
1,330
1,321
1,325
1,318
— $
— $
— $
— $
20.5¢
20.5¢
20.5¢
20.0¢
20.0¢
20.0¢
20.0¢
19.0¢
163,319 163,310 163,310 163,310
3,055
3,547
3,550
3,416
164,382 168,191 168,184 168,401
3,301
3,241
3,164
3,226
(1) Comparative results prior to Q1 2019 have not been restated for the Company’s adoption of IFRS 16, Leases effective for
the financial year beginning January 1, 2019.
(2)
In February 2019, the Company acquired 4Refuel in its Canadian reportable segment. The results of operations and financial
position of this acquired business have been included in the figures since the date of acquisition.
(3) Results were impacted by the following significant items:
($ millions except per share amounts)
Severance costs
Facility closures, restructuring costs, and impairment losses
Acquisition costs related to 4Refuel
Write-off and loss related to Energyst
Insurance proceeds from Alberta wildfires
Impact of significant items on EBIT:
Significant items impacting EBIT - impact on basic EPS (b)
Significant items impacting net income only - impact on basic EPS (b):
Tax impact of devaluation of ARS (c)
Impact of significant items on basic EPS:
2019 (a)
2018 (a)
Q3
Q1
Q3
Q1
$
2 $
18
$
— $
1
—
—
—
3 $
7
4
—
—
29
0.01 $
0.13
0.02 $
—
0.03 $
0.13
$
$
$
$
$
$
$
$
—
—
30
—
30 $
—
—
—
—
(7)
(7)
0.18 $
(0.03)
0.12 $
—
0.30 $
(0.03)
(a) There were no significant items in Q4 2019, Q2 2019, Q4 2018, and Q2 2018.
(b) The per share impact for each quarter has been calculated using the weighted average number of shares issued and outstanding
during the respective quarters; therefore, quarterly amounts may not add to the annual or year to date total.
(c) Tax impact of devaluation of ARS in Q3 2019 ($4 million) and Q3 2018 ($20 million)
(4)
In August 2019, the Company issued $200 million of 2.626% senior unsecured notes due August 14, 2026. Proceeds of the
issuance were used to reduce outstanding short-term debt under the Company’s syndicated committed credit facility.
In December 2019, the Company amended the credit facility which was set to fully mature in December 2023 by, among
other things, extending the maturity date to December 2024.
51
Finning International Inc.
2019 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; expected
results from execution of the Company’s strategic framework, including the Company’s Global Strategic Priorities,
strategic pillars, and strategic focus areas; that the Company’s effective tax rate will generally be within the 25-30%
range on an annual basis; expected synergies from the acquisition of 4Refuel, including sales, rental and service
opportunities for the Canadian operations and sales and customer service opportunities for 4Refuel; the Company’s
outlook for Canada, including that steady oil production levels and an aging equipment population are expected to
support strong demand for parts and service, including component and machine rebuilds, weak coal mining activity
and a lower coal price, robust copper and metals mining activity which should provide opportunities for equipment
and product support, continued soft Alberta construction markets due to uncertainty around timing of infrastructure
projects, projected healthy construction activity in British Columbia with large infrastructure projects, including Trans
Mountain Pipeline and LNG Canada, creating additional demand for equipment and product support, that the
Company will continue to gain share in construction markets, that the Company will leverage its digital capabilities to
capture product support opportunities, that forestry activity will remain slow in Western Canada in 2020, and that
strong demand for prime and standby electric power from large infrastructure and gas projects will continue and that
the Company will benefit from such demand; the Company’s outlook for South America, including that there will be a
higher level of political uncertainty in Chile that will impact customer confidence and lead to slower economic growth
in the near term; that the Company is constructive on the outlook for copper and expects increased copper
production to have a positive impact on demand for mining equipment and product support; that restrictive monetary
policies and capital controls will limit the Company’s growth opportunities for the near future; the Company’s outlook
for the UK & Ireland, including that demand is expected to remain soft in the construction equipment markets, the
expected positive on impact on future customer activity in the construction and plant hire sectors due to recent
announcements about the impending government budget and infrastructure spend and significant opportunities in
the electric power capacity, combined heat and power and data centre markets; the Company’s outlook for revenue
and earnings, including the expectation that in 2020 the Company expects to benefit from several profitability
drivers, including improved execution in South America, a lower cost base in Canada, and reduced finance costs
and expects to generate strong annual free cash flow and prioritize maintaining a strong balance sheet and returning
capital to shareholders through dividends and share repurchases; the impact on results of expected ongoing
volatility in foreign exchange markets; Finning’s belief that it continues to have sufficient liquidity to meet operational
needs and planned growth and development; the Company’s expectation to contribute approximately $16 million to
its defined benefit pension plans in 2020; the Company’s expectation of a net spend on capital expenditures and
rental fleet additions during 2020 to be in the range of $200 million to $250 million, depending on market conditions;
the expected impact of recently adopted accounting standards and interpretation or future expected changes; and
Finning’s plans to manage its financial risks and uncertainties. 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, the Company
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 actual impact of Brexit and changes in the trade relationship with the European Union; the level of
customer confidence and spending, and the demand for, and prices of, Finning’s products and services; Finning’s
ability to maintain its relationship with Caterpillar; Finning’s dependence on the continued market acceptance of its
products, including Caterpillar products, and the timely supply of parts and equipment; Finning’s ability to continue to
improve productivity and operational efficiencies while continuing to maintain customer service; Finning’s ability to
manage cost pressures as growth in revenue occurs; Finning’s ability to negotiate satisfactory purchase or
investment terms and prices, obtain necessary approvals, and secure financing on attractive terms or at all;
Finning’s ability to manage its growth strategy effectively; Finning’s ability to effectively price and manage long-term
52
Finning International Inc.
2019 Annual Results
product support contracts with its customers; Finning’s ability to reduce costs in response to slowing activity levels;
Finning’s ability to attract sufficient skilled labour resources as market conditions, business strategy or technologies
change; Finning’s ability to negotiate and renew collective bargaining agreements with satisfactory terms for
Finning’s employees and the Company; the intensity of competitive activity; Finning’s ability to maintain a safe and
healthy work environment across all regions, Finning’s ability to raise the capital needed to implement its business
plan; regulatory initiatives or proceedings, litigation and changes in laws, regulations, or policies; stock market
volatility; changes in political and economic environments in the regions where Finning carries on business;
Finning’s ability to respond to climate change-related risks; the occurrence of one or more natural disasters,
pandemic outbreaks, geo-political events, acts of terrorism or similar disruptions; fluctuations in defined benefit
pension plan contributions and related pension expenses; the availability of insurance at commercially reasonable
rates; the adequacy of insurance to cover all liability or loss incurred by Finning; the potential of warranty claims
being greater than Finning anticipates; the integrity, reliability and availability of, and benefits from, information
technology and the data processed by that technology; and Finning’s ability to protect itself from cybersecurity
threats or incidents. Forward-looking statements are provided in this report for the purpose of giving information
about management’s current expectations and plans and allowing investors and others to get a better understanding
of Finning’s operating environment. However, readers are cautioned that it may not be appropriate to use such
forward-looking statements for any other purpose.
Forward-looking statements made in this report are based on a number of assumptions that the Company believed
were reasonable on the day the Company made the forward-looking statements including but not limited to (i) that
general economic and market conditions will be maintained; (ii) that the level of customer confidence and spending,
and the demand for, and prices of, Finning’s products and services will be maintained; (iii) Finning’s ability to
successfully execute its plans and intentions; (iv) Finning’s ability to successfully attract and retain skilled staff; (v)
market competition will remain at similar levels; (vi) the products and technology offered by the Company’s
competitors will be as expected; and (vii) that our current good relationships with Caterpillar and with our suppliers,
service providers and other third parties will be maintained. Refer in particular to the Outlook section of this MD&A
for forward-looking statements. Some of the assumptions, risks, and other factors which could cause results to differ
materially from those expressed in the forward-looking statements contained in this report are discussed in Section
4 of the Company’s current AIF and in the annual MD&A for the financial risks.
Finning cautions readers that the risks described in the MD&A and the AIF are not the only ones that could impact
the Company. Additional risks and uncertainties not currently known to the Company or that are currently deemed to
be immaterial may also have a material adverse effect on Finning’s business, financial condition, or results of
operation.
Except as otherwise indicated, forward-looking statements do not reflect the potential impact of any non-recurring or
other unusual items or of any dispositions, mergers, acquisitions, other business combinations or other transactions
that may be announced or that may occur after the date of this report. The financial impact of these transactions and
non-recurring and other unusual items can be complex and depends on the facts particular to each of them. The
Company therefore cannot describe the expected impact in a meaningful way or in the same way the Company
presents known risks affecting its business.
53
Glossary of Defined Terms
4Refuel
AIF
Annual Financial Statements
ARS
Audit Committee
Board
Brexit
CAD
Caterpillar
CEO
CFO
CGU
CLP
Company
Consol
COSO
DBRS
EBIT
EBITDA
Energyst
EPS
ERM
ERP
fav
Finning
Finning (Canada)
Fitch
GAAP
GBP
IFRIC
IFRS
KPI
MD&A
Moody’s
n/a
n/m
NCIB
OEM
PLM
ROIC
S&P
SEDAR
SG&A
SVP
TSX
UK
unfav
US
USD
Finning International Inc.
2019 Annual Results
4Refuel Canada and 4Refuel US
Annual Information Form
Audited annual consolidated financial statements
Argentine peso
Audit Committee of the Board of Directors
Board of Directors of Finning
Withdrawal of the UK from the European Union
Canadian dollar
Caterpillar Inc.
Chief Executive Officer
Chief Financial Officer
Cash-generating unit
Chilean peso
Finning International Inc.
Consolidated (comprises Canada, South America, UK & Ireland, and Other operations)
Committee of Sponsoring Organizations of the Treadway Commission
Dominion Bond Rating Service
Earnings (loss) before finance costs and income tax
Earnings (loss) before finance costs, income tax, depreciation, and amortization
Energyst B.V.
Earnings per share
Enterprise risk management
Enterprise resource planning
Favourable
Finning International Inc.
A division of Finning, servicing Western Canada
Fitch Rating Inc.
Generally accepted accounting principles
UK pound sterling
International Financial Reporting Standards Interpretations Committee
International Financial Reporting Standards
Key performance indicator
Management Discussion and Analysis
Moody’s Corporation
not applicable
% change not meaningful
Normal course issuer bid
OEM Remanufacturing Company Inc.
PipeLine Machinery International
Return on invested capital
Standard and Poor’s
System for electronic document analysis
Selling, general, and administrative costs
Senior Vice President
Toronto Stock Exchange
United Kingdom
Unfavourable
United States
US dollar
54
Finning International Inc.
2019 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 2019.
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 11, 2020
300-565 Great Northern Way, Vancouver, BC, V5T 0H8, Canada
(cid:3)
1
Finning International Inc.
2019 Annual Results
INDEPENDENT AUDITOR’S REPORT
To the Shareholders and the Board of Directors of
Finning International Inc.:
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, 2019 and 2018,
and the consolidated statements of net income, comprehensive income, changes in equity and cash flows for the
years then ended, 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, 2019 and 2018, and its financial performance and its cash flows for the years then
ended 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.
2019 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 11, 2020
3
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
December 31
(Canadian $ millions)
ASSETS
Current assets
Cash and cash equivalents (Note 25)
Accounts receivable (Note 8)
Unbilled receivables (Note 4)
Inventories (Note 12)
Other assets (Note 14)
Total current assets
Property, plant, and equipment (Note 16)
Rental equipment (Note 16)
Goodwill (Note 18)
Intangible assets (Note 20)
Distribution network (Note 19)
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 23)
Current portion of long-term debt (Note 7)
Other liabilities (Note 22)
Total current liabilities
Long-term debt (Note 7)
Long-term lease liabilities (Note 17)
Net post-employment obligation (Note 24)
Other liabilities (Note 22)
Total liabilities
Commitments and contingencies (Note 29)
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 11, 2020
Finning International Inc.
2019 Annual Results
Consolidated Financial Statements
2019
2018
$
$
$
$
268
919
246
1,990
236
3,659
971
457
204
321
100
94
184
5,990
226
1,169
360
57
200
14
2,026
1,318
273
76
182
3,875
570
2
228
1,315
2,115
5,990
$
$
$
$
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
25
72
144
3,587
573
—
282
1,254
2,109
5,696
/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
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
Fuel and 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 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
Weighted average number of shares outstanding (Note 5)
Basic
Diluted
Finning International Inc.
2019 Annual Results
Consolidated Financial Statements
2019
2018
$
$
$
$
2,776
361
246
3,793
641
7,817
(6,018)
1,799
(1,360)
15
(29)
425
(107)
318
(76)
242
1.48
1.48
$
$
$
$
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
163,427,006
163,499,026
167,997,608
168,544,313
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)
Gain (loss) on net investment hedges
Impact of foreign currency translation and net investment hedges, net of income tax
(Loss) gain on cash flow hedges
Gain on cash flow hedges, reclassified to statement of net income
Recovery of (provision for) income taxes on cash flow hedges
Impact of cash flow hedges, net of income tax
Items that will not be subsequently reclassified to net income:
Actuarial (loss) gain (Note 24)
Recovery of (provision for) income taxes on actuarial (loss) gain
Actuarial (loss) gain, net of income tax
Total comprehensive income
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Finning International Inc.
2019 Annual Results
Consolidated Financial Statements
2019
2018
$
242
$
232
(83)
(1)
—
35
(49)
(3)
(1)
1
(3)
(29)
4
(25)
165
$
133
(2)
11
(58)
84
7
—
(4)
3
66
(11)
55
374
$
Share Capital
Accumulated Other
Comprehensive Income
(Loss)
(Canadian $ millions,
except number of shares)
Balance, January 1, 2018
Net income
Other comprehensive income
Total comprehensive income
Exercise of share options
Share option expense
Repurchase of common shares (Note 9)
Dividends on common shares
Balance, December 31, 2018
Net income
Other comprehensive loss
Total comprehensive (loss) income
Exercise of share options
Share option expense
Hedging gain transferred to
statement of financial position
Repurchase of common shares (Note 9)
Dividends on common shares
Balance, December 31, 2019
Impact of
Foreign
Currency
Translation
and Net
Investment
Hedges
$
Contributed
Surplus
$
—
—
—
—
(3)
3
—
—
—
—
—
—
(1)
3
195
—
84
84
—
—
—
—
279
—
(49)
(49)
—
—
Number of
Shares
168,266,582
—
—
—
243,438
—
(4,128,053)
—
164,381,967
—
—
—
10,507
—
Amount
580
$
—
—
—
7
—
(14)
—
573
—
—
—
1
—
$
Impact of
Cash Flow
Hedges
$
Retained
Earnings
$
Total
Shareholders'
Equity
—
—
3
3
—
—
—
—
3
—
(3)
(3)
—
—
$
$
1,199
232
55
287
(4)
—
(95)
(133)
1,254
242
(25)
217
—
—
$
$
$
$
—
(1,073,354)
—
163,319,120
$
—
(4)
—
570
$
—
—
2
$
—
—
—
230
$
(2)
—
—
(2) $
—
(23)
(133)
1,315
$
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements
1,974
232
142
374
—
3
(109)
(133)
2,109
242
(77)
165
—
3
(2)
(27)
(133)
2,115
6
CONSOLIDATED STATEMENTS OF CASH FLOW
For years ended December 31
(Canadian $ millions)
OPERATING ACTIVITIES
Net income
Adjusting for:
Depreciation and amortization
Gain on disposal of rental equipment and property, plant, and equipment
Write-off and loss related to investment (Note 6b)
Impairment of long-lived assets (Note 16)
Equity earnings of joint ventures and associate (Note 15)
Share-based payment expense (Note 11)
Provision for income taxes (Note 13)
Finance costs (Note 7)
Net benefit cost of post-employment benefit plans in selling, general, and
administrative expenses (Note 24)
Changes in operating assets and liabilities (Note 25)
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
Consideration paid for business acquisition, net of cash acquired (Note 26)
Advances to joint venture (Note 15)
Cash flow used in investing activities
FINANCING ACTIVITIES
Increase in short-term debt (Note 7 and Note 25)
Issue of $200 million unsecured senior notes, net of issue costs (Note 7 and 25)
Decrease in lease liabilities (Note 25)
Credit facility fee
Repurchase of common shares
Dividends paid
Cash flow provided by (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 25)
Finning International Inc.
2019 Annual Results
Consolidated Financial Statements
2019
2018
$
242
$
232
293
—
—
5
(15)
13
76
107
16
(219)
(215)
126
(105)
(133)
191
(154)
5
(229)
—
(378)
77
199
(88)
(1)
(31)
(133)
23
(22)
(186)
454
268
$
$
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
7
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements
Finning International Inc.
2019 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 ......................................................................................................................................... 13
4. REVENUE ................................................................................................................................................................... 15
5. EARNINGS PER SHARE ............................................................................................................................................... 19
6. OTHER EXPENSES ..................................................................................................................................................... 19
7. SHORT-TERM AND LONG-TERM DEBT AND FINANCE COSTS .......................................................................................... 20
8. FINANCIAL INSTRUMENTS ............................................................................................................................................ 22
9. MANAGEMENT OF CAPITAL ......................................................................................................................................... 31
10. SHARE CAPITAL ....................................................................................................................................................... 32
11. SHARE-BASED PAYMENTS ....................................................................................................................................... 33
12. INVENTORIES ........................................................................................................................................................... 38
13. INCOME TAXES ......................................................................................................................................................... 39
14. OTHER ASSETS ........................................................................................................................................................ 42
15. JOINT VENTURES AND ASSOCIATE ............................................................................................................................ 43
16. PROPERTY, PLANT AND EQUIPMENT AND RENTAL EQUIPMENT ................................................................................... 44
17. LEASES ................................................................................................................................................................... 47
18. GOODWILL ............................................................................................................................................................... 50
19. DISTRIBUTION NETWORK .......................................................................................................................................... 50
20. INTANGIBLE ASSETS ................................................................................................................................................. 51
21. ASSET IMPAIRMENT .................................................................................................................................................. 53
22. OTHER LIABILITIES ................................................................................................................................................... 54
23. PROVISIONS ............................................................................................................................................................. 55
24. POST-EMPLOYMENT BENEFITS ................................................................................................................................. 56
25. SUPPLEMENTAL CASH FLOW INFORMATION ............................................................................................................... 63
26. ACQUISITION ............................................................................................................................................................ 65
27. ECONOMIC RELATIONSHIPS ...................................................................................................................................... 66
28. RELATED PARTY TRANSACTIONS AND TOTAL STAFF COSTS ....................................................................................... 66
29. COMMITMENTS AND CONTINGENCIES ........................................................................................................................ 66
30. GUARANTEES AND INDEMNIFICATIONS ....................................................................................................................... 67
(cid:3)
(cid:3)
(cid:3)
8(cid:3)
Finning International Inc.
2019 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 for the current
year. The consolidated financial statements were authorized for issuance by the Company’s Board of Directors on
February 11, 2020. 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 2019 or are not yet effective. Where an accounting policy, estimate, or
judgment is applicable to a specific note to the consolidated financial statements, 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, plan assets related to defined benefit pension plans, 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 SA
Finning Argentina SA
Finning Soluciones Mineras SA
Moncouver SA
Finning Bolivia SA
OEM Remanufacturing Company Inc.
Finning (Ireland) Limited
4Refuel Canada LP
Principal place
of business
United Kingdom
Chile
Argentina
Argentina
Uruguay
Bolivia
Canada
Republic of Ireland
Canada
% ownership
100%
100%
100%
100%
100%
100%
100%
100%
100%
Functional
currency (1)
GBP
USD
USD
USD
USD
USD
CAD
EUR
CAD
(1) Canadian dollar (CAD), US dollar (USD), UK 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.
2019 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 are recorded in other comprehensive income. Cumulative foreign
currency translation adjustments are recognized in net income upon the disposal of a foreign operation (i.e. a
disposal of the Company’s entire interest in a foreign operation, or a disposal that involves loss of control of a
subsidiary that includes a foreign operation, loss of joint control over a jointly controlled entity that includes a
foreign operation, or loss of significant influence over an associate that includes a foreign operation).
The Company uses foreign currency debt to hedge foreign currency gains and losses on its long-term net
investments in foreign operations. Foreign exchange gains or losses arising from the translation of these hedging
instruments are recorded in other comprehensive income. 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.
2019 Annual Results
Notes to the Consolidated Financial Statements
(c) New Accounting Standard and Interpretation
The Company has adopted the following new accounting standard and interpretation:
(cid:120)
IFRS 16, Leases (effective January 1, 2019) introduced new requirements for the classification and
measurement of leases. Under IFRS 16, a lessee no longer classifies leases as operating or financing and
records all leases on the consolidated statement of financial position. The adoption of IFRS 16 has resulted 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 most impacted
were buildings and vehicles. Implementation of IFRS 16 results in lower selling, general and administrative
expenses due to lower operating lease expense partially offset by higher depreciation expense and higher
interest expense. Although total cash movement is unchanged, the presentation in the consolidated statement
of cash flows has been revised under the new standard. Cash flows used in operating activities are lower, offset
by an increase in cash flows used in financing activities, as the principal component of lease payments
previously accounted for as operating activities is now presented as financing activities.
The Company has applied IFRS 16 retrospectively and recognized the cumulative effect of initial application on
January 1, 2019, on the consolidated statement of financial position, subject to permitted and elected practical
expedients. This method of application has not resulted in a restatement of amounts reported in periods prior to
January 1, 2019. The Company measured the right-of-use asset at an amount equal to the lease liability on
January 1, 2019 and applied a single discount rate to leases with a similar remaining lease term for similar
classes of underlying assets. The weighted average borrowing rate applied to lease liabilities recognized in the
statement of financial position is approximately 4%. The Company did not apply this standard to short-term
leases and leases for which the underlying asset is of low value. The Company elected to rely on assessments
of whether leases were onerous by applying IAS 37, Provisions, Contingent Liabilities, and Contingent Assets
immediately before the date of initial application as an alternative to performing an impairment review.
The difference between operating lease commitments disclosed in the 2018 annual financial statements and
lease liabilities recorded at January 1, 2019 is due to discounting gross lease commitments, changes in
determining lease terms (estimating extension options reasonably expected to be exercised), and applying this
standard to embedded leases previously considered service arrangements.
Accounting for leases by lessors remains relatively unchanged under IFRS 16.
The impact of IFRS 16 on the statement of financial position for January 1, 2019 was as follows:
($ millions)
Property, plant, and equipment
Rental equipment
Total assets
Accounts payable and accruals
Total current liabilities
Long-term lease liabilities
Total liabilities
Increase
$
$
$
$
$
253
25
278
72
72
206
278
The Company’s accounting policy for leases is disclosed in Note 17.
(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. This interpretation did not have an impact on the Company’s
consolidated financial statements.
11
Finning International Inc.
2019 Annual Results
Notes to the Consolidated Financial Statements
(cid:3)
(e) Future Accounting Pronouncements
The Company has not applied the following amendments that have been issued but are not yet effective:
(cid:120) Amendments to IFRS 3, Business Combinations (effective January 1, 2020) assist in determining whether a
transaction should be accounted for as a business combination or an asset acquisition. It amends the definition
of a business to include an input and a substantive process that together significantly contribute to the ability to
create goods and services provided to customers, generating investment and other income, and it excludes
returns in the form of lower costs and other economic benefits. The Company has not elected to apply this
amendment early.
(cid:120) Amendments to IFRS 9, Financial Instruments and IFRS 7, Financial Instruments: Disclosures (effective
January 1, 2020) will affect entities that apply the hedge accounting requirements to hedging relationships
directly affected by the interest rate benchmark reform. The amendments modify specific hedge accounting
requirements, so that entities would apply those hedge accounting requirements assuming that the interest rate
benchmark is not altered as a result of the interest rate benchmark reform. If a hedging relationship no longer
meets the requirements for hedge accounting for reasons other than those specified by the amended
Standards, then discontinuation of hedge accounting is still required. This amendment is not expected to have
any impact on the Company’s consolidated financial statements.
12
Finning International Inc.
2019 Annual Results
Notes to the Consolidated Financial Statements
3. SEGMENTED INFORMATION
(cid:3)
The Company has operated primarily in one principal business during the year, that being the selling, servicing, and
renting of heavy equipment, engines, and related products.
On February 1, 2019, the Company acquired 4Refuel Canada and 4Refuel US (4Refuel) (Note 26). 4Refuel is a
mobile on-site refuelling company in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, New
Brunswick and Nova Scotia and in Texas, US. The results of 4Refuel are included in the Canada reportable
segment.
The reportable segments, which are the same as the Company’s operating segments, are as follows:
(cid:120) Canadian operations: dealership territories comprising British Columbia, Alberta, Saskatchewan, Yukon, the
Northwest Territories, and portions of Nunavut and mobile refuelling services in the above-listed provinces in
Canada and in Texas, US.
(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.
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 as the primary
measure of segment profit and loss (EBITDA). With the acquisition of 4Refuel, the Company views total revenue
less cost of fuel (net revenue) as more representative in assessing the performance of this business as the cost of
fuel is fully passed through to the customer and is not in the Company’s control.
The Company’s revenue, results, and other information by reportable segment was as follows:
For year ended December 31, 2019
($ millions)
Revenue
New equipment
Used equipment
Equipment rental
Product support
Fuel and other
Total revenue
Cost of fuel
Net revenue
Operating costs (1)
Equity earnings of joint ventures
Other expenses (Note 6)
EBITDA
Depreciation and amortization
Earnings (loss) before finance costs and income taxes
Finance costs
Provision for income taxes
Net income
Invested capital (2)
Capital and rental equipment (3)
Gross capital expenditures (3)(4)
Gross rental fleet expenditures (4)
Gross spend on rental equipment with purchase options (4)
South
Canada America
UK &
Ireland
Other
Total
$
$
$
$
$
$
$
$
$
$
1,375 $
224
164
2,054
637
4,454 $
(527)
3,927 $
(3,455)
15
(17)
470 $
(174)
296 $
685 $
47
47
1,447
—
2,226 $
—
2,226 $
(2,017)
—
(8)
201 $
(81)
120 $
716 $
90
35
292
4
1,137 $
—
1,137 $
(1,055)
—
—
82 $
(36)
46 $
2,026 $
1,045 $
134 $
115 $
44 $
1,192 $
452 $
49 $
28 $
— $
361 $
176 $
11 $
40 $
— $
— $ 2,776
361
—
246
—
3,793
—
—
641
— $ 7,817
—
(527)
— $ 7,290
(6,558)
(31)
—
15
(29)
(4)
718
(35) $
(293)
(2)
425
(37) $
(107)
(76)
242
$
12 $ 3,591
76 $ 1,749
229
35 $
183
— $
44
— $
(1) Operating costs are calculated as cost of sales less cost of fuel plus selling, general, and administration expenses less
(2)
depreciation and 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 leases and borrowing costs capitalized and excludes additions through business acquisitions.(cid:3)
13
For year ended December 31, 2018
($ millions)
Revenue
New equipment
Used equipment
Equipment rental
Product support
Other
Total revenue (1)
Operating costs (2)
Equity earnings (loss) of joint ventures and associate
Other expenses (Note 6b)
EBITDA
Depreciation and amortization
Earnings (loss) before finance costs and income taxes
Finance costs
Provision for income taxes
Net income
Invested capital (3)
Capital and rental equipment (4)
Gross capital expenditures (4)(5)
Gross rental fleet expenditures (5)
Gross spend on rental equipment with purchase options (5)
Finning International Inc.
2019 Annual Results
Notes to the Consolidated Financial Statements
Canada America
South
UK &
Ireland
$
$
$
$
$
$
$
$
$
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 $
167 $
46 $
1,190 $
476 $
109 $
54 $
— $
336 $
125 $
9 $
39 $
— $
Other
Total
— $ 2,740
371
—
—
239
3,632
—
—
14
— $ 6,996
(6,368)
(32)
12
(4)
(30)
(30)
610
(66) $
(187)
(1)
423
(67) $
(76)
(115)
232
$
(38) $ 3,163
34 $ 1,262
204
25 $
260
— $
46
— $
(1) Total revenue is the same as net revenue.(cid:3)
(2) Operating costs are calculated as cost of sales and selling, general, and administration expenses less depreciation and
(3)
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)
(4) Capital includes property, plant, and equipment and intangible assets.(cid:3)
(5)
Includes finance leases and borrowing costs capitalized and excludes additions through business acquisitions.(cid:3)
Revenue and non-current assets (6) by location of operations
($ millions)
Canada
Chile
United Kingdom
Argentina
Other countries
(6) Non-current assets exclude deferred tax assets.(cid:3)
Revenues
Year ended December 31
Non-current assets (6)
As at December 31
2019
2018
2019
2018
$
$
$
$
$
4,346
1,842
1,001
302
326
$
$
$
$
$
3,674
1,730
1,015
362
215
$
$
$
$
$
1,507
350
290
94
33
$
$
$
$
$
966
359
255
109
24
14
Finning International Inc.
2019 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:
(cid:120) 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.
(cid:120) 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.
(cid:120) Revenue from sales of mobile refueling services is presented as fuel and other revenue and recognized upon
delivery to the customer. Revenue is recorded at the estimated amount of consideration to which the Company
expects to be entitled.
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 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 where the Company acts as lessor 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.
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 but has
not yet invoiced the customer, the Company recognizes unbilled receivables. Similarly, consideration may be
received from customers in advance of the work being performed and the Company recognizes deferred revenue.
These amounts are recorded on the consolidated statement of financial position as Unbilled Receivables 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.
15
Finning International Inc.
2019 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 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 in the consolidated statement of net income 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 Equipment with Purchase Options
The Company has 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 these agreements to financial institutions, and makes
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.
16
The Company derived 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.
2019 Annual Results
Notes to the Consolidated Financial Statements
For year ended December 31, 2019
($ millions)
New equipment
Used equipment
Equipment rental
Product support
Fuel and other
Total revenue
For year ended December 31, 2018
($ millions)
New equipment
Used equipment
Equipment rental
Product support
Other
Total revenue
Point-in-time
2,484
$
361
—
1,744
635
5,224
$
Point-in-time
2,459
371
—
1,486
—
4,316
$
$
The Company recorded the following unbilled receivables from customers:(cid:3)
For years ended December 31
($ millions)
Product support
New equipment
Total unbilled receivables
Over-time
292
—
246
2,049
6
2,593
Over-time
281
—
239
2,146
14
2,680
2019
198
48
246
$
$
$
$
$
$
Total
2,776
361
246
3,793
641
7,817
Total
2,740
371
239
3,632
14
6,996
2018
129
23
152
$
$
$
$
$
$
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. Invoices for sales of
complex power and energy systems are issued in accordance with milestone payments agreed within each sales
contract with the customer. The Company recognizes unbilled receivables for sales of new equipment (including
complex power and energy systems) and product support revenue (including 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)
17
The Company recorded the following contract liabilities:(cid:3)
December 31, 2019
($ 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, 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
Finning International Inc.
2019 Annual Results
Notes to the Consolidated Financial Statements
Current
Non-current
Total
$
$
$
$
196
88
46
27
2
1
360
$
$
13
—
—
35
2
—
50
Current
Non-current
208
233
46
25
3
2
517
$
$
6
—
—
40
3
—
49
$
$
$
$
209
88
46
62
4
1
410
Total
214
233
46
65
6
2
566
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 when consideration
is received prior to the transfer of control related to 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 where control has not transferred 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 generally 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)
18
Finning International Inc.
2019 Annual Results
Notes to the Consolidated Financial Statements
5. EARNINGS PER SHARE
Accounting Policy
Basic earnings per share (EPS) is calculated by dividing net income available to common shareholders by the
weighted average number of common shares outstanding during the year. Diluted EPS is determined by dividing
net income available to common shareholders by the weighted average number of common shares outstanding,
adjusted for the effects of all potentially dilutive common shares, which comprise share options granted to
employees.
(cid:3)
For year ended December 31, 2019
($ 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, 2018
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
$
242
—
163,427,006
72,020
$
1.48
—
$
242
163,499,026
$
1.48
$
232
—
167,997,608
546,705
$
1.38
—
$
232
168,544,313
$
1.38
Share options granted to employees that were anti-dilutive were excluded from the weighted average number of
ordinary shares for the purpose of calculating diluted earnings per share. Anti-dilutive share options related to the
year ended December 31, 2019 were 2 million (2018: 0 million). (cid:3)
6. OTHER EXPENSES
For years ended December 31
($ millions)
Severance costs (a)
Impairment of long-lived assets (a)
Provision on onerous contracts (a)
Acquisition costs (Note 26)
Write-off and loss related to investment (b)
Total other expenses
2019
2018
$
$
18
5
2
4
—
29
$
$
—
—
—
—
30
30
(a) As part of actions taken to adjust to market conditions, the Company implemented plans to reduce its workforce
in its Canadian and South American operations and therefore recorded provisions related to the restructuring
plans in 2019. The Company also implemented plans to consolidate certain branches and exit some facilities in
its Canadian operations and therefore has recorded an impairment loss in 2019 on leased properties and any
related equipment and leasehold improvements, as well as provisions for the unavoidable non-lease costs for
these properties.
(b) In 2018, the Company recorded a charge of $30 million comprising the investment write-off of $19 million
relating to Energyst B.V. (Energyst) and a reclassification of cumulative foreign translation losses of $11 million
from accumulated other comprehensive income to the statement of net income upon Energyst’s sale of its
wholly-owned subsidiary in Argentina.
19
7. SHORT-TERM AND LONG-TERM DEBT AND FINANCE COSTS
December 31
($ millions)
Short-term debt
Long-term debt
3.232%, $200 million, due July 3, 2020
2.84%, $200 million, due September 29, 2021
2.626%, $200 million, due August 14, 2026
5.077% $150 million, due June 13, 2042
3.98% USD $100 million, due January 19, 2022, Series A
4.08% USD $100 million, due January 19, 2024, Series B
4.18% USD $50 million, due April 3, 2022, Series C
4.28% USD $50 million, due April 3, 2024, Series D
4.53% USD $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
Current portion of long-term debt
Non-current portion of long-term debt
Finning International Inc.
2019 Annual Results
Notes to the Consolidated Financial Statements
2019
2018
$
226 $
154
200
200
199
149
130
129
65
65
259
120
2
1,518
200
200
—
149
136
136
68
68
273
122
2
1,354
—
$
$ 1,318 $ 1,354
200 $
The Company has an unsecured syndicated committed credit facility of $1.3 billion. In December 2019, the
Company amended the credit facility which was set to fully mature in December 2023 by, among other things,
extending the maturity date to December 2024. 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,
2019 and 2018, the Company was in compliance with these covenants. (cid:3)
Short-Term Debt(cid:3)
At December 31, 2019, short-term debt includes $208 million (USD $160 million) drawn on the Company’s
syndicated committed credit facility and local bank borrowings in the Company’s South American operations of $18
million (2018: short-term debt included $150 million drawn on the Company’s syndicated committed credit facility
and local bank borrowings in the Company’s South American operations of $4 million). (cid:3)
The Company’s principal source of short-term funding is its access to the syndicated committed credit facility. 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, 2019 or December 31, 2018. 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 2019 was 4.5% (2018: 5.8%).(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 August 2019, the Company issued $200 million of 2.626% senior unsecured notes due August 14, 2026, which
rank pari passu with existing senior unsecured obligations. Proceeds of the issuance were used to reduce the
outstanding short-term debt under the Company’s syndicated committed credit facility.(cid:3)
The average interest rate applicable to the consolidated long-term debt for 2019 was 3.5% (2018: 3.9%).(cid:3)
(cid:3)
20
Long-Term Debt Repayments(cid:3)
The carrying amount of principal repayments of long-term debt in each of the next five years and thereafter are as
follows:(cid:3)
Finning International Inc.
2019 Annual Results
Notes to the Consolidated Financial Statements
December 31
($ millions)
2020
2021
2022
2023
2024
Thereafter
Total
Finance Costs
$
200
201
195
120
195
607
$ 1,518
Finance costs as shown on the consolidated statements of net income comprised the following:
For years ended December 31
($ millions)
Interest on short-term debt
Interest on long-term debt
Interest on debt securities
Net interest (recovery) cost on post-employment benefit plans (Note 24)
Interest on lease liabilities
Other finance related expenses
Finance costs
2019
2018
$
33 $
54
87
(1)
11
10
$
107 $
15
52
67
1
2
6
76
21
Finning International Inc.
2019 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 these
risks are identified, managed, and reported. The ERM framework assists the Company in managing risks and
business activities to mitigate them, across the organization in order to achieve the Company’s strategic objectives.
The Company maintains a strong risk management culture to protect and enhance shareholder value. On a
quarterly basis, Board of Directors (Board) level committees review the Company’s processes for business risk
assessment and the management of key business risks, any changes to key risks and exposures and the steps
taken to monitor and control such exposures. These reviews are reported to the Board quarterly. The Board reviews,
in detail, all material risks on an annual basis. The Board 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 on a quarterly and annual basis.
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 receivables, 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. Accounts receivable comprises amounts due from customers for goods or services
transferred in the ordinary course of business and non-trade accounts. Unbilled receivables relate to the Company’s
right to consideration for goods or services transferred to the customer but not yet billed as at the reporting date.
Instalment notes receivable represents amounts due from customers relating to the financing of equipment and
parts and services sold.
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, the amount 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 impaired.
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 receivables. The main components of these allowances
are a specific loss component that relates to individually significant exposures, and a collective loss component
established for groups of similar 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
forecasted future economic conditions.
22
Finning International Inc.
2019 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, receivables from suppliers, 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 receivables
Supplier claims receivable
Instalment notes receivable
Derivative assets
Total exposure to credit risk
Cash and Cash Equivalents(cid:3)
2019
2018
$
268 $
895
24
246
95
35
—
454
908
61
152
83
32
7
$ 1,563 $ 1,697
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)
Receivables from Customers(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 receivables, 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.(cid:3)
Receivables from Suppliers(cid:3)
The Company is exposed to risk on supplier claims receivable, primarily from Caterpillar Inc. (Caterpillar), with
whom Finning has an ongoing relationship since 1933.(cid:3)
Derivative Assets(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 Corporation and/or A
by Fitch Ratings Inc.
(cid:3)
23
The maximum exposure to credit risk for trade receivables at the reporting date by geographic location of customer
was as follows:(cid:3)
Finning International Inc.
2019 Annual Results
Notes to the Consolidated Financial Statements
December 31
($ millions)
Canada
Chile
UK
Argentina
Other
Total
Impairment Losses(cid:3)
The aging of trade receivables at the reporting date was as follows:(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
2019
2018
$
$
459 $
265
87
45
39
895 $
409
259
109
75
56
908
2019
2018
Allowance Gross
Gross
$
620 $
160
66
19
72
$
937 $
— $
—
1
2
39
42 $
556 $
204
97
26
67
Allowance
—
—
1
5
36
42
950 $
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
2019
2018
$
$
42 $
8
(6)
(2)
42 $
35
16
(13)
4
42
The carrying amount of unbilled receivables, supplier claims receivable, and instalment notes receivable represents
the Company’s maximum exposure to credit risk for these balances.(cid:3)
24
Finning International Inc.
2019 Annual Results
Notes to the Consolidated Financial Statements
(b) Financial Liabilities and Liquidity Risk
Accounting Policy
Classification and measurement
Accounts payable and accruals, short-term and long-term debt, and lease liabilites 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
syndicated credit facilities, continuously monitors actual and forecast cash flows, and manages maturity profiles of
financial liabilities. At December 31, 2019, the Company had approximately $2.0 billion (2018: $2.2 billion) of
unsecured credit facilities. Included in this amount is a syndicated committed credit facility totalling $1.3 billion with
various Canadian and global financial institutions. At December 31, 2019, $1.1 billion (2018: $1.2 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, 2019
2020
Contractual cash flows
2021-2022 2023-2024 Thereafter
Non-derivative financial liabilities
Short-term debt
Unsecured $750 million MTN
USD $500 million Notes
£70 million Notes
Other term loans
Lease liabilities
Accounts payable and accruals (excluding
current portion of lease liabilities)
Total non-derivative financial liabilities
Derivative financial liabilities
Forward foreign currency contracts and swaps
Sell CAD
Buy USD
Sell CLP (1)
Buy USD
Total derivative liabilities
(1) Chilean Peso (CLP)
$
$
(226) $
(748)
(648)
(120)
(2)
(357)
(226) $
(225)
(28)
(4)
—
(95)
—
(232)
(247)
(8)
(1)
(148)
—
(25)
(230)
(123)
(1)
(74)
$
(1,085)
(3,186) $ (1,663) $
(1,085)
$
—
—
(636) $
(453) $
—
(494)
(289)
—
—
(71)
—
(854)
$
$
(3) $
—
(1)
—
(4) $
(435) $
432
(1)
—
(4) $
—
—
—
—
—
$
$
—
—
—
—
—
$
$
—
—
—
—
—
25
Finning International Inc.
2019 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 (e.g. over-the-counter
derivatives) 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.
26
Finning International Inc.
2019 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 hedged a portion of its foreign investments with
loans denominated in foreign currencies.
The carrying value of the Company’s long-term debt that was designated as net investment hedging instruments
was $768 million (2018: $803 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 that are made in USD
and the ultimate sale to customers made in CAD. 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, 2019
the Company entered into forward exchange contracts for inventory purchases of USD $170 million. During the
year, there were no cancellations of forward contracts where the transaction was no longer expected to occur. In
2018, the Company entered into forward exchange contracts for inventory purchases of USD $286 million of which
approximately USD $36 million related to forecast transactions that were no longer expected to occur. These
hedges were discontinued and the ineffective portion of $1 million was recognized in the consolidated statement of
net income in 2018.
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, the results of the South
American operations are impacted by CLP and ARS based revenues and costs, and the results of the UK & Ireland
operations are impacted by EUR based revenue 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 liabilities designated as cash flow hedging instruments is $1 million (2018: $5 million
asset).
27
Exposure to Foreign Exchange Risk
The currencies of the Company’s significant financial instruments were as follows:
Finning International Inc.
2019 Annual Results
Notes to the Consolidated Financial Statements
December 31, 2019
(millions)
Cash and cash equivalents
Accounts receivable – trade
Short-term and long-term debt
Accounts payable and accruals
Lease liabilities
Net statement of financial position exposure
December 31, 2018
(millions)
Cash and cash equivalents
Accounts receivable – trade
Short-term and long-term debt
Accounts payable and accruals
Lease liabilities
Net statement of financial position exposure
Sensitivity Analysis to Foreign Exchange Risk(cid:3)
CAD
USD
—
375
(748)
(393)
(267)
(1,033)
184
128
(659)
(310)
(9)
(666)
GBP
CLP
8,301
—
54 141,169
(71)
—
(77) (121,391)
—
(38)
28,079
(132)
CAD
USD
—
322
(699)
(399)
(2)
(776)
284
219
(499)
(368)
—
(364)
GBP
CLP
50
11,577
67 142,603
(71)
—
(84,311)
(90)
(13)
—
69,869
(44)
ARS
236
336
(851)
(1,188)
(2)
(1,469)
ARS
63
—
(353)
(4,570)
—
(4,860)
As a result of foreign exchange gains or losses on the translation of financial instruments denominated in foreign
currencies, a weakening of the CAD against the following currencies would increase (decrease) pre-tax income and
other comprehensive income by the amounts shown below. This analysis uses estimated forecast foreign exchange
rates for the upcoming year and assumes that all other variables, in particular volumes, relative pricing, interest
rates, and hedging activities are unchanged. (cid:3)
December 31, 2019
($ millions)
USD/CAD
GBP/CAD
CLP/CAD
ARS/CAD
Weakening
of CAD
10%
20%
10%
30%
Pre-tax
Income (Loss)
$
$
$
$
16
1
5
(10)
Other
Comprehensive
Loss
$
$
$
$
(63)
(24)
—
—
A strengthening of the CAD against the above currencies relative to the December 31, 2019 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)
28
Finning International Inc.
2019 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. The Company’s
floating-rate financial assets comprise cash and cash equivalents. Due to the short-term nature of cash and cash
equivalents, the impact of fluctuations in fair value are limited 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 and lease liabilities. 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
2019
2018
$
$
$
35
(1,875) $
32
(1,384)
$
$
$
268
(226) $
454
(154)
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 less than $1 million
with a 1.0% decrease having the opposite effect. This analysis assumes that all other variables, in particular foreign
currency exchange rates, remain constant. (cid:3)
29
Finning International Inc.
2019 Annual Results
Notes to the Consolidated Financial Statements
(d) Fair Values
Financial instruments measured at fair value are grouped into three levels based on the degree to which fair value is
observable:
Level 1 – quoted prices in active markets for identical securities
Level 2 – significant observable inputs other than quoted prices included in Level 1
Level 3 – significant unobservable inputs
The Company’s only financial instruments measured at fair value are derivative instruments. All of the derivative
instruments are measured at fair value using Level 2 inputs. Certain assets held-for-sale are measured at fair value
using level 3 inputs. The Company did not move any instruments between levels of the fair value hierarchy during
the years ended December 31, 2019 and 2018.
Derivative Instruments (Level 2)
The fair value of foreign currency forward contracts is determined by discounting contracted future cash flows using
a discount rate derived from interest rate curves and observed forward prices for comparable assets and liabilities.
Where appropriate, fair values are adjusted for credit risk based on observed credit default spreads or market yield
spreads for counterparties for financial assets and based on the Company’s credit risk for financial liabilities. The
Company’s credit risk is derived from yield spreads on the Company’s market quoted debt.
Long-Term Debt (Level 2)
The carrying value and fair value of the Company’s long-term debt is estimated as follows:
December 31
($ millions)
Long-term debt
2019
2018
Carrying
$
1,518
Fair Value
$
1,635
Carrying
$
1,354
Fair Value
1,569
$
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)
Asset Held-For-Sale (Level 3)(cid:3)
The Company’s 28.8% investment in Energyst was considered held-for-sale at December 31, 2019 and 2018. The
fair value was estimated by applying a multiple of Energyst’s book value (Enterprise Value to EBITDA ratio), was
estimated to be trivial and therefore recorded at $nil.(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)
30
Finning International Inc.
2019 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 2019, the Company renewed its normal course issuer bid which enables the Company to
purchase its common shares for cancellation. During 2019, the Company repurchased 1,073,354 Finning common
shares for cancellation at an average cost of $24.75 per share (2018: 4,128,053 Finning common shares were
repurchased for cancellation at an average cost of $26.41 per share).
The Company monitors net debt to EBITDA to assess operating leverage and ability to repay debt. This ratio
approximates the length of time, in years, that it would take the Company to repay its debt, with net debt and
EBITDA held constant.
December 31
Net debt to EBITDA Ratio
Company
long-term target
< 3.0
2019
2.1
2018
1.7
Net debt to EBITDA is calculated as net debt divided by EBITDA for the last twelve months. Net debt is calculated
as short-term and long-term debt, net of cash. EBITDA is calculated by adding depreciation and amortization to
earnings before finance costs and income taxes, as shown in Note 3.(cid:3)
Net Debt is calculated as follows: (cid:3)
December 31
($ millions)
Cash and cash equivalents
Short-term debt
Current portion of long-term debt
Long-term debt
Net debt
2019
2018
$
(268)
226
200
1,318
$ 1,476
$
(454)
154
—
1,354
$ 1,054
31
Finning International Inc.
2019 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 that have 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, 2019 and 2018.
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)
32
Finning International Inc.
2019 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 TSX:FTT share prices. 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 liabilities
recorded within accounts payable and accruals (current portion) and long-term other liabilities (non-current portion)
on the consolidated statement of financial position.
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 2019 and 2018, 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, 2019 and 2018, approximately 2 million common shares remained
eligible to be issued in connection with future grants.
In 2019, the Company granted 608,821 common share options to senior executives and management of the
Company (2018: 358,755 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 on exercise is based on the premium between the fair value of shares 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 2019 comprised cashless exercises. 133,384 options were exercised in 2019 resulting in 10,507 common shares
being issued; 122,877 options were withheld and returned to the option pool for future issues/grants (2018:
1,032,718 options were exercised resulting in 243,438 common shares being issued; 789,280 options were withheld
and returned).
33
Finning International Inc.
2019 Annual Results
Notes to the Consolidated Financial Statements
Details of the share option plans were as follows:
For years ended December 31
Options outstanding, beginning of year
Granted
Exercised
Forfeited
Expired
Options outstanding, end of year
Exercisable, end of year
Options
3,164,352
608,821
(133,384)
(165,021)
(58,600)
3,416,168
2,449,590
2019
Weighted Average
Exercise Price
Options
2018
Weighted Average
Exercise Price
$
$
$
$
$
$
$
26.22
22.31
22.25
26.91
25.48
25.66
3,864,338
358,755
(1,032,718)
(23,673)
(2,350)
3,164,352
25.67
2,363,029
$
$
$
$
$
$
$
25.45
33.62
25.85
28.25
28.29
26.22
25.33
The fair value of the options granted was 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 (years)
Share price
2019 Grant 2018 Grant
2.9%
27.6%
1.5%
5.38
$
22.31 $
2.8%
27.1%
2.3%
5.38
33.62
(1) Expected volatility is based on historical share price volatility of TSX:FTT shares
The weighted average grant date fair value of options granted during the year was $4.28 (2018: $6.85). (cid:3)
The following table summarizes information about share options outstanding at December 31, 2019:(cid:3)
Options Outstanding
Options Exercisable
Weighted
Average
Range of
Number
exercise prices outstanding Remaining Life
$19.53 - $22.29
$22.30 - $23.95
$23.96 - $25.47
$25.48 - $27.98
$27.99 - $33.68
Total
2.20 years
6.38 years
2.36 years
4.32 years
3.07 years
3.45 years
702,452
599,407
871,727
421,235
821,347
3,416,168
Weighted
Average
Exercise Price
$
$
$
$
$
$
21.83
22.31
25.44
26.75
31.05
25.66
Number
outstanding
702,452
—
871,727
283,490
591,921
2,449,590
Weighted
Average
Exercise Price
$
$
$
$
$
$
21.83
—
25.44
26.73
30.06
25.67
The following table summarizes information about share options outstanding at December 31, 2018:
Options Outstanding
Options Exercisable
Range of
Number
exercise prices outstanding
653,209
$19.53 - $22.15
192,357
$22.16 - $24.97
939,940
$24.98 - $25.47
492,603
$25.48 - $27.98
886,243
$27.99 - $33.68
3,164,352
Total
Weighted
Average
Remaining Life
3.39 years
1.37 years
3.36 years
4.72 years
3.99 years
3.63 years
Weighted
Average
Exercise Price
Number
outstanding
Weighted
Average
Exercise Price
$
$
$
$
$
$
21.78
22.30
25.44
26.59
30.96
26.22
498,607
192,357
939,940
200,644
531,481
2,363,029
$
$
$
$
$
$
21.77
22.30
25.44
26.33
29.20
25.33
34
Finning International Inc.
2019 Annual Results
Notes to the Consolidated Financial Statements
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)
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 69,567 deferred share units in 2019 (2018: 49,265),
which were expensed over the calendar year as the units were issued. An additional 28,370 deferred share units
(2018: 21,780) were issued in lieu of cash compensation payable for service as a Director. A further 16,691 deferred
share units (2018: 10,494) were granted to Directors during 2019 as 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 or be awarded deferred share units as approved by the Board of Directors.
The Exec DSU Plan utilizes notional units that become fully vested at the time of issuance or in accordance with
terms set at the time of grant. 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 330,057 deferred share units in 2019 (2018: 20,357) as remuneration of their
annual bonus payment and 1,940 deferred share units (2018: 1,097) were issued as notional dividends under the
Exec DSU Plan.(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 2019, 4,600 deferred share units (2018: 3,229) were granted to executives as notional dividends under the
DSU-B Plan.(cid:3)
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. All
units accumulate dividend equivalents in the form of additional performance share units based on the dividends paid
on the Company’s common shares, redeemed upon vesting. All PSUs granted in 2019 and 2018 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)
35
Finning International Inc.
2019 Annual Results
Notes to the Consolidated Financial Statements
Vested performance share units are redeemable in cash and the fair value payout per unit is based on the five-day
volume-weighted average price of the Company’s common shares at the end of the performance period. During the
year ended December 31, 2019, a total of 551,604 performance share units were granted to Executives, based on
100% vesting (2018: 375,332), and 43,891 notional units (2018: 19,233) were issuable based on 100% vesting as
payment for dividends upon vesting. (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 2019 and 2018 grants were as follows: (cid:3)
TSR PSUs(cid:3)
Percentile Rank < 25th Percentile 25th Percentile
TSR PSUs Vested
50%
0%
50th Percentile
100%
75th Percentile 100th Percentile
150%
200%
ROIC PSUs
Performance Level
Below Threshold
Threshold
Target
Maximum
Restricted Share Unit (RSU) Plan
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%
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, redeemed upon vesting.
Restricted share units that have vested are redeemable in cash and the fair value payout per unit is 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, 2019, a total of 258,024 restricted share units were granted to
Executives (2018: 167,052) and 21,572 notional units (2018: 14,892) are issuable as payment for dividends upon
vesting.
(cid:3)
36
Details of the DSU, PSU, and RSU plans were as follows:
Finning International Inc.
2019 Annual Results
Notes to the Consolidated Financial Statements
For year ended December 31, 2019
Units
Outstanding, beginning of year
Additions (decreases)
Exercised
Forfeited
Outstanding, end of year
DSU-B DDSU
Exec
DSU
50,164 125,772 419,765 1,339,214 605,354 2,540,269
721,305
(9,516) 279,596
(781,185)
(244,466)
(495,411)
(31,164)
(78,709)
(47,545)
803,123 592,939 2,401,680
4,600 114,628
(40,000)
—
380,853 130,372 494,393
331,997
(1,308)
—
RSU
—
—
Total
PSU
Vested, beginning of year
Vested
Exercised
Vested, end of year
Liability
($ millions)
Balance, beginning of year
Expensed
Exercised
Forfeited
Balance, end of year
50,164 125,772 419,765
5,732
4,600 114,628
(1,308)
(40,000)
54,588 130,372 494,393
—
472,450
249,383 244,466
(244,466)
(495,411)
—
226,422
— 1,068,151
618,809
(781,185)
905,775
$
$
1 $
—
—
—
1 $
3 $
—
—
—
3 $
10 $
4
(1)
—
13 $
23 $
2
(11)
(1)
13 $
9 $
6
(6)
(1)
8 $
46
12
(18)
(2)
38
For year ended December 31, 2018
Units
Outstanding, beginning of year
Additions
Exercised
Forfeited
Outstanding, end of year
DSU-B DDSU
Exec
DSU
35,356 122,543 418,284 1,304,458 448,080 2,328,721
545,717
21,454
(269,333)
(6,646)
(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
—
—
RSU
Total
PSU
Vested, beginning of year
Vested
Exercised
Vested, end of year
Liability
($ millions)
Balance, beginning of year
(Recovery) expensed
Exercised
Forfeited
Balance, end of year
35,356 122,543 418,284
3,229
21,454
81,539
(6,646)
(80,058)
—
50,164 125,772 419,765
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
The fair value of the DSUs, ROIC PSUs, and RSUs outstanding as at December 31, 2019 has been estimated using
the period-end closing share price of $25.30 (December 31, 2018: $23.80).
37
Finning International Inc.
2019 Annual Results
Notes to the Consolidated Financial Statements
The impact of the share-based payment plans on the Company’s financial statements was as follows:
For years ended December 31
($ 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
Total
Consolidated Statements of Financial Position
Current liability for cash-settled share-based payments
Non-current liability for cash-settled share-based payments (Note 22)
2019
2018
$
$
$
$
3
10
13
13
25
$
$
$
$
3
4
7
16
30
The total intrinsic value of vested but not settled share-based payments was $23 million (2018: $25 million).
12. INVENTORIES
Accounting Policy
Inventories are assets held for sale in the ordinary course of business, in the process of production for sale, or in the
form of materials or supplies to be consumed in the production process or in the rendering of services. Inventories
are stated at the lower of cost and net realizable value. Cost is determined on a specific item basis for on-hand
equipment and internal service work in progress, and on a weighted average cost basis for parts and supplies. The
cost of inventories includes all costs of purchase, conversion costs, other costs incurred in bringing inventories to
their existing location and condition, and an appropriate share of overhead costs based on normal operating
capacity.
Areas of Estimation Uncertainty
The Company makes estimates of the provision required to reflect slow-moving and obsolete inventory. These
estimates are determined on the basis of age, redundancy, and stock levels. For equipment inventory, estimates are
determined on a specific item basis.
(cid:3)
December 31
($ millions)
On-hand equipment
Parts and supplies
Internal service work in progress
Total inventory
2019
2018
$
891 $ 1,036
716
775
309
324
$ 1,990 $ 2,061
For the year ended December 31, 2019, on-hand equipment, parts, supplies, and internal service work in progress
recognized as an expense in cost of sales amounted to $5.0 billion (2018: $4.8 billion). For the year ended
December 31, 2019, the write-down of inventories to net realizable value, included in cost of sales, was $52 million
(2018: $43 million).(cid:3)
38
Finning International Inc.
2019 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 which 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 a 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)
39
For year ended December 31, 2019
($ 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, 2018
($ millions)
Current
Adjustment for prior periods recognized in the current year
Total current tax expense
Deferred
Origination and reversal of timing differences
Increase due to tax rate changes
Adjustment for prior periods recognized in the current year
Total deferred tax expense
Provision for income taxes
Finning International Inc.
2019 Annual Results
Notes to the Consolidated Financial Statements
Canada
$
International
Total
32
(4)
28
$
39 $
(12)
27
11
(3)
4
12
40
$
(2)
(1)
12
9
$
36 $
Canada
$
International
Total
47
(3)
44
$
74 $
(17)
57
5
—
4
9
53
$
(13)
1
17
5
$
62 $
71
(16)
55
9
(4)
16
21
76
121
(20)
101
(8)
1
21
14
115
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
2019
2018
the statutory tax rate
$
85
26.7 %
$
94
27.0 %
(Decrease) increase 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
$
(9)
(7)
(4)
1
11
(5)
—
4
76
(2.8)%
(2.2)%
(1.3)%
0.3 %
3.6 %
(1.6)%
—
1.3 %
24.0 %
$
(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 %
40
Finning International Inc.
2019 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)
(cid:120)
In Canada, the Alberta provincial government announced the reduction of the corporate income tax rate from
12% to 11% effective July 1, 2019. The rate will further decrease to 10% effective January 1, 2020, 9% effective
January 1, 2021, and 8% effective January 1, 2022. These tax rate changes were substantively enacted in
2019.
In 2017, the Argentine government announced the reduction of the corporate tax rate from 30% to 25% effective
January 1, 2020. On December 23, 2019 the Argentine government approved the delay of the tax rate reduction
until January 1, 2022.
Deferred Tax Asset and Liability (cid:3)
Temporary differences and tax loss carry-forwards that give rise to deferred tax assets and liabilities were 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 (liability) asset
2019
$
2018
$
82
1
9
3
95
66
4
8
11
89
(103)
(13)
(4)
(120)
(31)
$
$
(62)
(12)
(3)
(77)
18
Deferred taxes are not recognized on retained profits of approximately $1.7 billion (2018: $1.8 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 recognized the benefit of the following tax loss carry-forwards available to reduce future taxable
income, of which $16 million do not expire and $26 million expire between 2023 and 2024.(cid:3)
December 31
($ millions)
International
2019
2018
$
42 $
12
As at December 31, 2019, the Company had unrecognized capital loss carry-forwards of $77 million to reduce future
taxable income. These amounts do not expire. (cid:3)
The income tax (recovery) expense relating to components of other comprehensive income was as follows:
For years ended December 31
($ millions)
Current tax expense
Deferred tax (recovery) expense
(Recovery of) provision for income taxes recognized in other comprehensive income
2019
2018
$
$
—
(5)
(5)
$
$
1
14
15
41
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)
Other
Total other assets – current
December 31
($ millions)
Deferred tax assets (Note 13)
Indemnification asset (b)
Prepaid expenses
Net post-employment asset (Note 24)
Finance assets (a)
Other
Total other assets – non-current
Finning International Inc.
2019 Annual Results
Notes to the Consolidated Financial Statements
2019
2018
$
$
95 $
11
54
26
5
35
—
4
6
236 $
83
78
70
29
6
7
7
4
4
288
2019
2018
$
$
57 $
10
26
73
12
6
184 $
59
14
28
87
8
7
203
(a) Finance assets include equipment leased to customers under long-term financing leases. Depreciation expense
for equipment leased to customers of $3 million was recorded in 2019 (2018: $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
UK. 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 (USD $11
million) in settlement of Caterpillar’s indemnification on these long-term contracts which was recorded in
deferred revenue and will be released 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 (USD $2
million) were derecognized in 2018 accordingly.
42
Finning International Inc.
2019 Annual Results
Notes to the Consolidated Financial Statements
15. JOINT VENTURES AND ASSOCIATE
Accounting Policy
A joint venture is a contractual arrangement whereby the Company and other parties undertake an economic
activity that is subject to joint control (i.e. when the strategic, financial and operating policy decisions relating to the
activities of the joint venture require the unanimous consent of the parties sharing control).
An associate is an entity over which the Company has significant influence and that is neither a subsidiary nor an
interest in a joint venture. Significant influence is the power to participate in the financial and operating policy
decisions of the investee but is not control or joint control over those policies.
The Company accounts for its joint ventures and associate in which the Company has an interest using the equity
method. The joint ventures and associate follow accounting policies that are materially consistent with the
Company’s accounting policies. Where the Company transacts with its joint ventures or associate, unrealized profits
or losses are eliminated to the extent of the Company’s interest in the joint venture or associate.
Nature of Relationships
PipeLine Machinery International (PLM) is a strategic partnership that sells and rents both purpose-built pipeline and
traditional Caterpillar products to mainline pipeline construction customers worldwide.
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 was 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
2019
2018
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, 2019
($ millions)
Company’s share of income
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, 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)
PLM
Agriterra
Energyst (1)
Total
$
$
$
15 $
(1) $
— $
— $
— $
— $
15
(1)
89 $
5 $
— $
94
PLM
Agriterra
Energyst (1)
Total
$
$
$
16 $
— $
— $
— $
(4) $
(2) $
12
(2)
82 $
5 $
— $
87
(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 was an advance of $2 million to Agriterra, bearing interest at prime
rate + 2%.
43
Finning International Inc.
2019 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 - 20 years
2 - 5 years
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 Significant Judgment
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,
physical condition, prospective use, and maintenance programs.
(cid:3)
44
Finning International Inc.
2019 Annual Results
Notes to the Consolidated Financial Statements
December 31, 2019
($ millions)
Cost
Balance, beginning of year
IFRS 16 adjustment (Note 2)
Additions
Additions through leases (Note 17)
Remeasurement of right-of-use assets (Note 17)
Additions through business combinations (Note 26)
Transfers from inventory
Disposals
Foreign exchange rate changes
Balance, end of year
Land
Vehicles and
Buildings Equipment
Total
Rental
Equipment
$
$
78
—
—
—
—
—
—
—
(2)
76
$
$
762
143
35
11
37
4
—
(6)
(13)
973
$
$
404
110
55
57
—
38
1
(20)
(12)
633
$ 1,244
253
90
68
37
42
1
(26)
(27)
$ 1,682
$
$
648
25
183
12
(2)
—
32
(199)
(8)
691
December 31, 2019
($ millions)
Accumulated depreciation and impairment losses
Balance, beginning of year
Depreciation for the year
Disposals
Impairment loss
Foreign exchange rate changes
Balance, end of year
$
$
Land
Vehicles and
Buildings Equipment
Total
Rental
Equipment
(10) $
—
—
—
—
(10) $
(305) $
(64)
5
(5)
7
(362) $
(284) $
(77)
16
—
6
(339) $
(599) $
(141)
21
(5)
13
(711) $
(207)
(102)
73
—
2
(234)
December 31, 2019
($ millions)
Net book value
Balance, beginning of year
Balance, end of year
Land
Vehicles and
Buildings Equipment
Total
Rental
Equipment
$
$
68
66
$
$
457
611
$
$
120
294
$
$
645
971
$
$
441
457
45
December 31, 2018
($ millions)
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
Finning International Inc.
2019 Annual Results
Notes to the Consolidated Financial Statements
Land
Buildings
Vehicles and
Equipment
Total
Rental
Equipment
$
$
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) $
(565) $
(25)
24
(11)
(53)
39
(20)
(284) $
(599) $
(204)
(97)
99
(5)
(207)
Land
Buildings
Vehicles and
Equipment
Total
Rental
Equipment
$
$
65
68
$
$
432
457
$
$
75
120
$
$
572
645
$
$
385
441
46
Finning International Inc.
2019 Annual Results
Notes to the Consolidated Financial Statements
17. LEASES
The Company has applied IFRS 16 retrospectively and recognized the cumulative effect of initial application on
January 1, 2019 and therefore comparative information has not been restated and is presented under IAS 17. The
accounting policies under both IFRS 16 and IAS 17 are included below.
Accounting Policy under IFRS 16
At inception of a contract, the Company assesses whether the contract is or contains a lease.
The Company as Lessee
At the commencement of the lease, the Company recognizes a right-of-use asset and a corresponding lease
liability, except for short-term leases (defined as leases with a lease term of 12 months or less) and leases of low
value assets.
The right-of-use asset at inception includes the initial measurement of the corresponding lease liability, lease
payments made at or before the commencement date and any initial direct costs. The right-of-use asset is
subsequently measured at cost less accumulated depreciation and impairment losses. Depreciation of right-of-use
assets is recorded in selling, general, and administrative expenses for all assets except leases of rental equipment,
where depreciation is recorded in cost of sales in the consolidated statement of net income. Depreciation is
recorded on a straight-line basis over the shorter of the term of the lease or the estimated useful life of the
underlying asset, commencing when the asset becomes available for use.
Right-of-use 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 a right-of-use asset, the asset is reviewed for possible reversal of the impairment
at the end of each subsequent reporting period.
The lease liability is initially measured at the present value of the remaining lease payments that have not been paid
at the commencement date, discounted by using the Company’s incremental borrowing rate unless the rate implicit
in the lease is readily determinable.
Lease payments over the estimated lease term included in the measurement of the lease liability comprise:
(cid:120) Fixed lease payments, less any lease incentives;
(cid:120) Variable lease payments that depend on an index or rate, initially measured using the index or rate at the
commencement date;
(cid:120) The amount expected to be payable by the lessee under residual value guarantees;
(cid:120) The exercise price of purchase options, if the lessee is reasonably certain to exercise the options; and,
(cid:120) Payments of penalties for terminating the lease, if the lease term reflects the exercise of an option to terminate
the lease.
The lease liability is subsequently measured by increasing the carrying amount to reflect interest on the lease
liability (using the effective interest rate method) and by reducing the carrying amount to reflect the lease payments
made.
The Company remeasures the lease liability (and makes a corresponding adjustment to the related right-of-use
asset) whenever:
(cid:120) The lease term changes or there is a change in the assessment of exercise of a purchase option, in which case
the lease liability is remeasured by discounting the revised lease payments using a revised discount rate,
(cid:120) The lease payments change due to a change in an index, rate, or expected payment under a guaranteed
residual value, in which cases the lease liability is remeasured by discounting the revised lease payments using
the initial discount rate; or,
(cid:120) A lease contract is modified and the lease modification is not accounted for as a separate lease, in which case
the lease liability is remeasured by discounting the revised lease payments using a revised discount rate.
The right-of-use asset is presented within property, plant, and equipment and the lease liability is presented within
accounts payable and accruals (current portion) and long-term lease liabilities (non-current portion) on the
statement of financial position.
47
Finning International Inc.
2019 Annual Results
Notes to the Consolidated Financial Statements
Short-term leases and leases of low-value assets
The Company has elected not to recognize right-of-use assets and lease liabilities for leases that have a term of 12
months or less and leases of low-value assets. The Company recognizes these lease payments as an expense on a
straight-line basis over the lease term.
Areas of Significant Judgment
The Company is required to make judgments in determining the lease term. Management considers all facts and
circumstances, including economic incentives to exercise an extension option and its asset management strategy.
Extension options are only included in the lease term if the lease is reasonably certain to be extended. Most of the
Company’s extension options relate to lease of properties in the Company’s Canadian operations and are evaluated
based on management’s long-term facility strategy.
The Company as Lessor
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.
Accounting Policy under IAS 17
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.
48
Right-of-use assets, included in property, plant, and equipment and rental equipment (Note 16) was as follows:
Finning International Inc.
2019 Annual Results
Notes to the Consolidated Financial Statements
December 31, 2019
($ millions)
Cost
Balance, beginning of year
IFRS 16 adjustment (Note 2)
Additions
Additions through business combinations (Note 26)
Remeasurement of right-of-use assets
Disposals
Foreign exchange rate changes
Balance, end of year
December 31, 2019
($ millions)
Accumulated depreciation and
impairment losses
Balance, beginning of year
Depreciation for the year
Disposals
Impairment loss
Balance, end of year
December 31, 2019
($ millions)
Net book value
Balance, beginning of year
Balance, end of year
Lease Liabilities(cid:3)
Vehicles and
Buildings Equipment
Total
Rental
Equipment
$
$
14
143
11
3
37
(1)
—
207
$
$
—
110
57
27
—
(1)
(1)
192
$
$
14
253
68
30
37
(2)
(1)
399
$
$
36
25
12
—
(2)
(1)
(1)
69
Vehicles and
Buildings Equipment
Total
Rental
Equipment
$
$
(11) $
(33)
—
(4)
(48) $
$
—
(43)
1
—
(42) $
(11) $
(76)
1
(4)
(90) $
(13)
(10)
1
—
(22)
Vehicles and
Buildings Equipment
Total
Rental
Equipment
$
$
3
159
$
$
—
150
$
$
3
309
$
$
23
47
Lease liabilities included in the consolidated statement of financial position:(cid:3)
December 31
($ millions)
Current portion of lease liability
Non-current portion of lease liability
2019
2018
$
$
84
273
$
$
5
25
49
Finning International Inc.
2019 Annual Results
Notes to the Consolidated Financial Statements
18. 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 21 for the
Company’s policy on impairment reviews.
(cid:3)
December 31, 2019
($ millions)
Balance, beginning of year
Additions through business combination (Note 26)
Foreign exchange rate changes
Balance, end of year
December 31, 2018
($ millions)
Balance, beginning of year
Foreign exchange rate changes
Balance, end of year
19. DISTRIBUTION NETWORK
Accounting Policy
Canada
$
81 $
85
—
$
166 $
Canada
$
$
81 $
—
81 $
South
America
UK
& Ireland
Total
5 $
—
—
5 $
34 $
—
(1)
33 $
120
85
(1)
204
South
UK
America
& Ireland
Total
5 $
—
5 $
33 $
1
34 $
119
1
120
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 21 for
the Company’s policy on impairment reviews.
(cid:3)
December 31, 2019
($ millions)
Balance, beginning of year
Balance, end of year
December 31, 2018
($ millions)
Balance, beginning of year
Balance, end of year
UK
& Ireland
Total
2 $
2 $
100
100
UK
& Ireland
Total
Canada
$
$
98 $
98 $
Canada
$
$
98 $
98 $
2 $
2 $
100
100
50
Finning International Inc.
2019 Annual Results
Notes to the Consolidated Financial Statements
20. INTANGIBLE ASSETS
Accounting Policy
Intangible assets are recorded at cost or acquisition-date fair value (if acquired through a business acquisition), net
of any accumulated amortization and any impairment losses. Intangible assets with finite lives are amortized on a
straight-line basis over the period 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
Tradename
2 – 10 years
2 – 7 years
20 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.
Areas of Significant Judgment
Amortization 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, prospective use, and
maintenance programs.
(cid:3)
December 31, 2019
($ millions)
Cost
Balance, beginning of year
Additions
Additions through business combination (Note 26)
Disposals
Foreign exchange rate changes
Balance, end of year
December 31, 2019
($ millions)
Accumulated amortization
Balance, beginning of year
Amortization for the year
Foreign exchange rate changes
Balance, end of year
December 31, 2019
($ millions)
Net book value
Balance, beginning of year
Balance, end of year
Contracts and
Customer
relationships
Software
and
Technology
Tradename
Total
$
$
172
11
108
—
(7)
284
$
$
244
58
3
(1)
(6)
298
$
$
—
—
19
—
—
19
$
$
416
69
130
(1)
(13)
601
Contracts and
Customer
relationships
Software
and
Technology
Tradename
Total
$
$
(140)
(22)
6
(156)
$
$
(100)
(24)
1
(123)
$
$
$
—
(1)
—
(1) $
(240)
(47)
7
(280)
Contracts and
Customer
relationships
Software
and
Technology
Tradename
Total
$
$
32
128
$
$
144
175
$
$
—
18
$
$
176
321
51
December 31, 2018
($ millions)
Cost
Balance, beginning of year
Additions
Disposals
Foreign exchange rate changes
Balance, end of year
December 31, 2018
($ millions)
Accumulated amortization
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
Finning International Inc.
2019 Annual Results
Notes to the Consolidated Financial Statements
Contracts and
Customer
relationships
Software
and
Technology
Total
$
$
155
6
—
11
172
$
$
166 $
75
(4)
7
244 $
321
81
(4)
18
416
Contracts and
Customer
relationships
Software
and
Technology
Total
$
$
(118)
(13)
—
(9)
(140)
$
$
(86) $
(17)
4
(1)
(100) $
(204)
(30)
4
(10)
(240)
Contracts and
Customer
relationships
Software
and
Technology
Total
$
$
37
32
$
$
80 $
144 $
117
176
There were $0 million borrowing costs capitalized to intangible assets for the year ended December 31, 2019 (2018:
$1 million). The average rate used for capitalization of borrowing costs was 3.4% (2018: 3.7%).(cid:3)
52
Finning International Inc.
2019 Annual Results
Notes to the Consolidated Financial Statements
21. 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
an impairment loss is recognized immediately in the consolidated statement of net income.
Areas of Significant Judgment
Judgment is used to identify an appropriate discount rate and growth rate used to estimate the recoverable value,
identifying the CGUs to which 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 purposes of the
annual impairment test, 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.
53
Finning International Inc.
2019 Annual Results
Notes to the Consolidated Financial Statements
Key assumptions(cid:3)
The significant assumptions used in the Company’s value-in-use calculations for each CGU or group of CGUs were
as follows:(cid:3)
2019
Post-tax
2018
Post-tax
For years ended December 31
Canada
Canada Mining
Chile
UK & Ireland
Sensitivities to key assumptions(cid:3)
WACC rate Growth rate WACC rate Growth rate
2%
1%
3%
2%
2%
2%
3%
2%
8%
9%
9%
9%
8%
9%
8%
9%
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 2019 or 2018 related to CGUs, goodwill, or distribution networks.
There were no impairment reversals in 2019 or 2018 related to the distribution network in the Company’s South
American operations.(cid:3)
22. 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)
Onerous contracts
Share-based payments (Note 11)
Provisions (Note 23)
Total other liabilities – non-current
2019
2018
$
$
10 $
4
14 $
55
—
55
2019
2018
$
$
50 $
88
10
7
25
2
182 $
49
41
14
8
30
2
144
54
Finning International Inc.
2019 Annual Results
Notes to the Consolidated Financial Statements
23. 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
Other provisions are estimated for tax, legal, environmental or rehabilitation costs, expected repurchase guarantees,
and anticipated losses related to long-term product support contracts or power system projects. Other provisions are
recorded, when the likelihood of payment or loss is probable and can be reliably measured, with a corresponding
expense in the consolidated 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, 2019
($ 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, 2018
($ millions)
Balance, beginning of year
New provisions
Charges against provisions
Foreign exchange rate changes
Balance, end of year
Current portion
Non-current portion
Other
Total
Other
Total
Warranty
Claims
$
38 $
26
(19)
(1)
44 $
44 $
— $
28 $
50
(42)
2
$
$
$
Warranty
Claims
$
$
$
$
38 $
38 $
— $
10 $
59
(54)
—
15 $
13 $
2 $
48
85
(73)
(1)
59
57
2
11 $
45
(46)
—
10 $
8 $
2 $
39
95
(88)
2
48
46
2
55
Finning International Inc.
2019 Annual Results
Notes to the Consolidated Financial Statements
24. 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 UK, 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.
56
Finning International Inc.
2019 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. 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.
57
The net benefit cost and actuarial loss (gain) for the Company’s post-employment benefit plans were as follows:
Finning International Inc.
2019 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 (recovery)
Net benefit cost
Total benefit cost recognized
2019
UK & South
Canada Ireland America Total
2018
UK &
South
Canada Ireland America Total
$
39 $
7 $
— $ 46 $
35 $
9 $ — $
44
6
—
1
1
8
—
—
1
(3)
(2)
8
—
—
1
9
14
—
2
(1)
15
6
—
1
—
7
—
3
1
—
4
8
—
—
1
9
14
3
2
1
20
in net income
$
47 $
5 $
9 $ 61 $
42 $
13 $
9 $
64
Actuarial (gain) loss on plan
assets
Actuarial loss (gain) on plan
liabilities
Total actuarial (gain) loss
recognized in other
comprehensive income
$
(28) $
(57) $
— $
(85) $
19 $
23 $ — $
42
25
77
12
114
(14)
(86)
(8)
(108)
$
(3) $
20 $
12 $ 29 $
5 $
(63) $
(8) $
(66)
(1)
In October 2018, the High Court in the UK 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 $3 million (£2 million) was recorded to reflect the estimated additional costs associated with GMP equalization
for the Finning UK defined benefit pension plan. (cid:3)
58
Other financial information about the Company’s defined benefit pension plans in Canada and UK and other post-
employment benefit plans in South America was as follows:
Finning International Inc.
2019 Annual Results
Notes to the Consolidated Financial Statements
For years ended December 31
($ millions)
Accrued benefit obligation
Balance, beginning of year
Conversion of buy-in annuities
to buy-out annuities
Current service cost
Past service cost
Interest cost
Benefits paid
Remeasurements:
- Actuarial loss (gain) from
change in demographic
assumptions
- Actuarial loss (gain) from
change in financial
assumptions
Experience (gain) loss
Foreign exchange rate changes
Balance, end of year
Plan assets
Balance, beginning of year
Conversion of buy-in annuities
to buy-out annuities
Return on plan assets:
- Return on plan assets
included in net interest cost
- Actuarial gain (loss) on plan
assets
Employer contributions
Employee contributions
Benefits paid
Administration costs
Foreign exchange rate changes
Balance, end of year
Net post-employment
obligation (asset)
2019
South
2018
South
Canada
UK
America Total
Canada
UK
America Total
$ 516 $ 608 $
48 $ 1,172
$ 531 $ 701 $
57 $ 1,289
(280)
6
—
9
(7)
—
—
—
16
(36)
—
8
—
1
(6)
(280)
14
—
26
(49)
—
7
—
18
(26)
—
—
3
18
(46)
—
8
—
1
(9)
—
15
3
37
(81)
—
—
11
11
—
(29)
(9)
(38)
25
—
—
80
(3)
(7)
$ 269 $ 658 $
7
(6)
(8)
55 $
112
(9)
(15)
982
(19)
5
—
(50)
(7)
18
$ 516 $ 608 $
(68)
1
(2)
—
(1)
17
48 $ 1,172
$ 492 $ 695 $ — $ 1,187
$ 510 $ 722 $ — $ 1,232
(280)
—
—
(280)
—
—
—
—
8
19
28
8
—
(7)
(1)
—
57
6
—
(36)
(1)
(9)
—
—
6
—
(6)
—
—
$ 248 $ 731 $ — $
27
18
18
—
36
85
20
—
(49)
(2)
(9)
979
(19)
9
1
(26)
(1)
—
(42)
24
1
(81)
(2)
19
$ 492 $ 695 $ — $ 1,187
(23)
6
—
(46)
(1)
19
—
9
—
(9)
—
—
$
21 $
(73) $
55 $
3
$
24 $
(87) $
48 $
(15)
Included in the accrued benefit obligation and plan assets were the following amounts in respect of plans that
were not fully funded:
For years ended December 31
($ millions)
Accrued benefit obligation
Fair value of plan assets
Funded status - plan deficit
2019
South
Canada
$
UK
65 $ — $
40
25 $ — $
America Total
55 $
—
55 $
120
40
80
—
$
Canada
UK
2018
South
America
Total
$ 512 $ — $
485
—
$
27 $ — $
48 $
—
48 $
560
485
75
59
Finning International Inc.
2019 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 included: (cid:3)
2019
2018
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
UK
3.1%
3.7%
n/m (2)
n/m (2)
n/m (2)
n/m (2)
2.0%
2.9%
3.0%
3.3%
n/m (2)
n/a (2)
South
America
0.4%
1.5%
n/a (2)
n/a (2)
9.4%
3.0%
Canada
UK
3.7%
3.4%
n/m (2)
n/m (2)
n/m (2)
n/m (2)
2.9%
2.5%
3.3%
3.3%
n/m (2)
n/a (2)
South
America
1.5%
1.8%
n/a (2)
n/a (2)
13.6%
3.0%
(1) Used to determine the net interest cost and expense for the years ended December 31, 2019 and 2018.
(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 were set based on
management’s best estimate in accordance with published statistics and experience in each country. These
assumptions for 2019 and 2018 translate into an average life expectancy (in years) as follows:(cid:3)
December 31
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
(3) n/a – not applicable.
Canada
22
24
23
25
South
America
n/a (3)
n/a (3)
n/a (3)
n/a (3)
UK
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 18 years, the UK is 20 years, and South America is 5 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
(4) 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
$
$
(11)
n/m (4)
n/m (4)
n/m (4)
(33)
24
n/m (4)
n/a (4)
South America
$
$
$
$
(1)
n/a (4)
(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)
60
Finning International Inc.
2019 Annual Results
Notes to the Consolidated Financial Statements
Funding and Valuations of Defined Benefit Plans(cid:3)
In Canada, the Company governs and administers the defined benefit plans. An actuarial valuation of the Canadian
registered defined benefit plan is completed at least every three years to determine minimum annual contributions
prescribed by applicable legislation. The Company also makes voluntary contributions to a Retirement
Compensation Arrangement to partially fund benefits for the Canadian non-registered supplemental defined benefit
plans. To the extent a surplus is recognized on the balance sheet in respect of the Canadian defined benefit pension
plans, a surplus is recognized on the consolidated statement of financial position to the extent the economic benefit
can be gained by the Company.(cid:3)
In the UK, a board of trustees governs and administers the defined benefit plans. An actuarial valuation of the UK
defined benefit plan is required every three years. As at the last formal valuation, a schedule was set out by the
board of trustees for contributions to be made until mid-2023. (cid:3)
Based on the most recent formal valuations completed, the Company expects to contribute approximately $16
million to the defined benefit pension plans during the year ended December 31, 2020. The actuarial valuation dates
of the Company’s material post-employment benefit plans were 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
Plan Assets(cid:3)
Last Actuarial
Valuation Date
December 31, 2017
December 31, 2017
December 31, 2017
December 31, 2019
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 were principally invested
in the following securities (segregated by geography):(cid:3)
Fixed-income
Equity (2)
Real estate investment funds
Cash and cash equivalents
Canada
UK
Canada
Global (1)
UK
Global (1)
57%
12%
—
8%
—
23%
—
—
68%
1%
3%
1%
11%
16%
—
—
(1) Global investments exclude investments in Canadian and UK securities in Canada and UK, respectively.
(2) 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, 2019 and
2018. (cid:3)
In January 2019, the Company converted the buy-in annuity contracts to buy-out annuity contracts. This conversion
settled a portion of the Company’s liability and reduced both the plan assets and the accrued benefit obligation in
the Canadian registered defined benefit plan by $280 million.(cid:3)
61
Finning International Inc.
2019 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 UK 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 UK
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 UK (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 UK 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. (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 the Canadian 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 UK 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)
62
Maturity Analysis(cid:3)
Expected maturity analysis of undiscounted pension and other post-employment benefit obligations of the
Company’s operations in Canada, UK and Ireland, and South America were as follows:(cid:3)
Finning International Inc.
2019 Annual Results
Notes to the Consolidated Financial Statements
December 31, 2019
($ millions)
Defined benefit pension plans
Other post-employment benefits
Total
Accumulated Remeasurement Losses(cid:3)
Less than Between
1-2 years
Between
2-5 years
Over
a year
$
27 $
5
28 $
4
$
32 $
32 $
5 years
95 $ 1,414 $
70 1
11
106 $ 1,484 $
Total
$ 1,564
90
$ 1,654
The accumulated actuarial loss, net of tax, of the post-employment benefit obligations in the Company’s operations
in Canada, UK and Ireland, and South America recognized in retained earnings is $182 million as at December 31,
2019 (December 31, 2018: $158 million).(cid:3)
25. SUPPLEMENTAL CASH FLOW INFORMATION
Accounting Policy
Cash and cash equivalents comprise cash on hand together with short-term investments, consisting of highly rated
and liquid money market instruments with original maturities of three months or less, and are classified and
measured as amortized cost.
(cid:3)
The components of cash and cash equivalents were as follows:
December 31
($ millions)
Cash
Cash equivalents
Cash and cash equivalents
The changes in operating assets and liabilities were as follows:
For years ended December 31
($ millions)
Accounts receivable
Unbilled receivables
Inventories
Other assets
Accounts payable and accruals
Other liabilities
Changes in operating assets and liabilities
2019
2018
$
$
158 $
110
268 $
274
180
454
2019
2018
$
$
89 $
(98)
29
68
(127)
(180)
(219) $
(39)
14
(291)
3
46
164
(103)
63
The changes in liabilities arising from financing and operating activities were as follows:
Finning International Inc.
2019 Annual Results
Notes to the Consolidated Financial Statements
For year ended December 31, 2019
($ millions)
Balance, beginning of year
IFRS 16 adjustment (Note 2)
Balance, January 1, 2019
Cash flows provided by (used in)
Financing activities
Operating activities
Total cash movements
Non-cash changes
Additions
Additions through business combination (Note 26)
Disposals and remeasurement of liability
Interest expense
Foreign exchange rate changes
Total non-cash movements
Balance, end of year
For year ended December 31, 2018
($ millions)
Balance, beginning of year
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, end of year
Short-term Long-term
debt
debt
$
$
$
$
$
154 $ 1,354
—
154 $ 1,354
—
77
—
77 $
199
—
199
—
—
—
—
(5)
(5) $
—
—
—
—
(35)
(35)
226 $ 1,518
Lease
liability
$
Total
30 $ 1,538
278
278
308 $ 1,816
(88)
(11)
(99) $
188
(11)
177
80
30
31
11
(4)
80
30
31
11
(44)
148 $
108
357 $ 2,101
$
$
$
$
Short-term Long-term Finance lease
debt
debt
$
18 $ 1,296
liability
$
Total
34 $ 1,348
136
—
$
136 $
—
—
—
—
—
—
— $
—
—
58
58
154 $ 1,354
$
$
$
$
$
(4)
(2)
(6) $
132
(2)
130
2
(1)
1
2 $
2
(1)
59
60
30 $ 1,538
Dividends of $0.815 (2018: $0.79) per share were paid during the year. In February 2020, the Board of Directors
approved a quarterly dividend of $0.205 per share payable on March 12, 2020 to shareholders of record on
February 27, 2020. This dividend will be considered an eligible dividend for Canadian income tax purposes. As at
December 31, 2019, the Company has not recognized a liability for this dividend.(cid:3)
64
Finning International Inc.
2019 Annual Results
Notes to the Consolidated Financial Statements
26. ACQUISITION
Accounting Policy
The acquisition method of accounting is used to account for all business combinations, regardless of whether
equity instruments or other assets are acquired. The consideration for the acquisition of a subsidiary is:
(cid:120) fair values of the assets transferred, and(cid:3)
(cid:120) fair value of an asset or liability resulting from a contingent consideration arrangement(cid:3)
Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are
measured initially at the acquisition-date fair value.
The excess of the consideration transferred over the fair value of the net identifiable assets acquired is recorded
as goodwill. Acquisition-related costs are expensed as incurred.
On February 1, 2019, the Company acquired a 100% ownership interest in the Canadian and US operations of
4Refuel. 4Refuel is a mobile on-site refueling company operating in British Columbia, Alberta, Saskatchewan,
Manitoba, Ontario, Quebec, New Brunswick and Nova Scotia and in Texas, US. Acquiring 4Refuel provides a
complementary service offering to the Company’s existing customer base and provides opportunities for the
Company to sell, rent, and service to a new customer base.
Cash consideration of $241 million was paid based on the fair value of the business at the acquisition date, which
included $12 million cash acquired and was subject to customary closing adjustments. The Company funded the
transaction with cash on hand and from existing credit facilities. This purchase has been accounted for as a
business combination using the acquisition method of accounting.
Management finalized its purchase price allocation on December 31, 2019.
The acquisition-date fair values of acquired tangible and intangible assets, assumed liabilities and deferred tax
liabilities were estimated to be:
Final purchase price allocation
($ millions)
Cash
Accounts receivable
Property, plant, and equipment
Intangible assets
Goodwill
Other assets
Accounts payable and accruals
Lease liabilities
Deferred tax liabilities
Net assets acquired
December 31,
2019
$
12
60
42
130
85
4
(32)
(30)
(30)
241
$
Goodwill relates to the expected synergies from combining complementary capabilities and existing customer bases
across Finning's territory in British Columbia, Alberta, Yukon, Northwest Territories and part of Nunavut and new
customers in Canada and in Texas. The goodwill is assigned to the Company’s Canada reportable segment and is
not deductible for tax purposes.(cid:3)
Acquisition costs of $4 million were paid on the transaction and recorded as other expenses in the consolidated
statement of income in the year ended December 31, 2019.(cid:3)
The results of the newly acquired business since the date of acquisition have been included in the Company’s
Canada reportable segment. From the acquisition date to December 31, 2019, 4Refuel contributed approximately
$635 million of revenue.(cid:3)
65
Finning International Inc.
2019 Annual Results
Notes to the Consolidated Financial Statements
27. ECONOMIC RELATIONSHIPS
The Company distributes and services heavy equipment, engines, and related products. The Company has
dealership agreements with numerous equipment manufacturers, of which the most significant are with subsidiaries
of Caterpillar. Distribution and servicing of Caterpillar products account for the major portion of the Company's
operations. Finning has had a relationship with Caterpillar that has been ongoing since 1933.
28. RELATED PARTY TRANSACTIONS AND TOTAL STAFF COSTS
Balances and transactions between the Company and its subsidiaries, which are related parties, have been
eliminated on consolidation and are not disclosed in this note.
The remuneration of the Board of Directors during the year was as follows:
For years ended December 31
($ millions)
Cash compensation
Share-based payments
Total
2019
2018
$
$
— $
3
3 $
1
(1)
—
The remuneration of key management personnel (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
2019
2018
$
$
11 $
2
5
18 $
10
1
2
13
Total staff costs, including salaries, benefits, pension, share-based payments, termination payments, and
commissions are $1.0 billion (2018: $1.1 billion). This amount includes staff costs associated with key management
personnel noted above.(cid:3)
29. 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 the export of
agricultural product and an order that could result in up to a one-year suspension of imports into Argentina by a
portion of the business. The Company is appealing these claims and the order, believes they are without merit, and
is confident in its position. Mitigation measures are also available to the Company. These pending matters may take
a number of years to resolve. Should the ultimate resolution of these matters differ from management’s assessment
and the mitigation measures not be effective, this could result in a material negative impact on the Company’s
financial position.
66
Finning International Inc.
2019 Annual Results
Notes to the Consolidated Financial Statements
30. 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, 2019, the total estimated value of these contracts
outstanding is $148 million (2018: $130 million) coming due at periods ranging from 2020 to 2025. The Company’s
experience to date has been that the estimated fair value of the equipment at the exercise date of the contract is
generally greater than the repurchase price, 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, 2019 and 2018 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, 2019, the maximum potential
amount of future payments that the Company could be required to make under the guarantees, before any amounts
that may possibly be recovered under recourse or collateralization provisions in the guarantees, is $8 million,
covering various periods up to 2022. As at December 31, 2019 and 2018, 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, 2019, the
maximum potential amount of future payments that the Company could be required to make under the guarantees is
$15 million, covering various periods up to 2024. As at December 31, 2019, the Company has recognized a liability
of $4 million for these guarantees (2018: $4 million).
In connection with the sale of the Materials Handling Division in the Company’s UK & Ireland operations 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 2019 or 2018.
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, 2019 was $206 million (2018: $291
million) principally related to performance and advance payment guarantees on delivery for prepaid equipment and
other operational commitments in Chile.
67
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