TFI International
Annual Report 2017

Plain-text annual report

T F I I N T E R N A T I O N A L 2 0 1 7 A N N U A L R E P O R T 2017 ANNUAL REPORT A Message from Alain Bédard Dear Fellow Shareholders and Colleagues: Our improved profitability and strong cash flow in 2017 reflect the in net repayment to reduce long-term debt, further bolstering our successful implementation of our primary mission to continually balance sheet which remains a source of stability and strategic create and unlock shareholder value. The North American eco- strength for us. We returned another $150.6 million to sharehold- nomic recovery combined with our rigorous focus on operational ers over the course of the year through $81.6 million of share efficiency led to strong bottom line growth in all of our businesses repurchases and another $69.0 million in the form of dividends. with the exception of our U.S. Truckload operations. Looking In December, we raised our quarterly dividend another 11%. ahead, we are optimistic that our diversified businesses should be clear beneficiaries of economic expansion and tightening capacity in the trucking and logistics industries, and the resulting rate increases. TFI has for many years had a successful acquisition strategy, which has allowed countless smaller companies to benefit from the financial and operational resources that come from being underneath the TFI International umbrella, all while adding to our However, at TFI International we continually strive to optimize capabilities, our route density and our world class management our business, regardless of economic conditions. Thus, during team. Any acquisition activity we pursue in the near future would 2017 we focused on operational efficiencies, asset rationalization, involve smaller, accretive acquisitions, with a focus on being and tight cost controls. We further strengthened our balance sheet highly disciplined with our shareholders’ capital. Well-managed, through a strategic $135.7 million sale and leaseback transac- asset-light operations would remain our principal target. Whether tion and through $86.4 million of debt reduction. As a result of it’s acquisitions, debt reduction or further investment in our the strengthening economy and our own internal accomplish- organic business, our overarching goal is to invest in high ments, we were able to return significant capital to our share- return-on-capital initiatives that maximize our already strong holders through both share buybacks and dividends. cash flow. TFI International generated total revenue from continuing opera- I wish to thank our many employees who continue to embrace tions of $4.7 billion in 2017, or $4.3 billion before fuel surcharge, and thrive under our effective, decentralized operating structure. which was up 15.6% from the prior year. Growth was partially Their emphasis on delivering innovative, value-added solutions offset by lingering weakness especially in U.S. Truckload for our customers, and the dedication they bring to the job each operations, along with fluctuations in foreign exchange rates. day, are the building blocks for TFI’s continued success. I also Operating income from continuing operations was $243.7 million, reflecting a margin of 5.7% of revenue before fuel surcharge, versus 6.7% last year. The lower margin was primarily the result of U.S. Truckload operations, where we have made a concerted effort to improve performance which is beginning to yield results. Outside of U.S. Truckload, our organic profitability growth was strong. Net income from continuing operations increased to $158.0 million, or $1.70 per diluted share which was a 3.7% improvement over the prior year’s $1.64. want to express my sincere appreciation to our shareholders for joining us on our journey, and to our Board of Directors for their guidance, perspective and unwavering commitment to creating shareholder value. Our net cash from operating activities from continuing operations was one of the year’s highlights, reaching $372.6 million, up Alain Bédard Chairman of the Board, 10% from 2016. We used $74.6 million of our excess cash flow President and Chief Executive Officer MANAGEMENT’S DISCUSSION AND ANALYSIS CONSOLIDATED FINANCIAL STATEMENTS FOR THE FOURTH QUARTER AND YEAR ENDED DECEMBER 31, 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS 1 GENERAL INFORMATION The following is TFI International Inc.’s management discussion and analysis (“MD&A”). Throughout this MD&A, the terms “Company” and “TFI International” shall mean TFI International Inc., and shall include its independent operating subsidiaries. This MD&A provides a comparison of the Company’s performance for its three-month period and year ended December 31, 2017 with the corresponding three-month period and year ended December 31, 2016 and it reviews the Company’s financial position as of December 31, 2017. It also includes a discussion of the Company’s affairs up to February 20, 2018, which is the date of this MD&A. The MD&A should be read in conjunction with the audited consolidated financial statements and accompanying notes as at and for the year ended December 31, 2017. In this document, all financial data are prepared in accordance with the International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). All amounts are in Canadian dollars, and the term “dollar”, as well as the symbols “$” and “C$”, designate Canadian dollars unless otherwise indicated. Variances may exist as numbers have been rounded. This MD&A also uses non-IFRS financial measures. Refer to the section of this report entitled “Non-IFRS Financial Measures” for a complete description of these measures. The Company’s audited consolidated financial statements have been approved by its Board of Directors (“Board”) upon recommendation of its audit committee on February 20, 2018. Prospective data, comments and analysis are also provided wherever appropriate to assist existing and new investors to see the business from a corporate management point of view. Such disclosure is subject to reasonable constraints for maintaining the confidentiality of certain information that, if published, would probably have an adverse impact on the competitive position of the Company. Additional information relating to the Company can be found on its website at www.tfiintl.com. The Company’s continuous disclosure materials, including its annual and quarterly MD&A, annual and quarterly consolidated financial statements, annual report, annual information form, management proxy circular and the various press releases issued by the Company are also available on its website or directly through the SEDAR system at www.sedar.com. FORWARD-LOOKING STATEMENTS The Company may make statements in this report that reflect its current expectations regarding future results of operations, performance and achievements. These are “forward-looking” statements and reflect management’s current beliefs. They are based on information currently available to management. Words such as “may”, “could”, “should”, “would”, “believe”, “expect”, “anticipate” and words and expressions of similar import are intended to identify these forward-looking statements. Such forward- looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any forward-looking statements which reference issues only as of the date made. The following important factors could cause the Company’s actual financial performance to differ materially from that expressed in any forward-looking statement: the highly competitive market conditions, the Company’s ability to recruit, train and retain qualified drivers, fuel price variations and the Company’s ability to recover these costs from its customers, foreign currency fluctuations, the impact of environmental standards and regulations, changes in governmental regulations applicable to the Company’s operations, adverse weather conditions, accidents, the market for used equipment, changes in interest rates, cost of liability insurance coverage, downturns in general economic conditions affecting the Company and its customers, and credit market liquidity. The foregoing list should not be construed as exhaustive, and the Company disclaims any obligation subsequently to revise or update any previously made forward-looking statements unless required to do so by applicable securities laws. Unanticipated events are likely to occur. Readers should also refer to the section “Risks and Uncertainties” at the end of this MD&A for additional information on risk factors and other events that are not within the Company’s control. The Company’s future financial and operating results may fluctuate as a result of these and other risk factors. 2017 Annual Report 2 MANAGEMENT’S DISCUSSION AND ANALYSIS SELECTED FINANCIAL DATA AND HIGHLIGHTS (unaudited) (in thousands of dollars, except per share data) Revenue before fuel surcharge Fuel surcharge Total revenue Adjusted EBITDA from continuing operations1 Operating income from continuing operations1 Net income Net income from continuing operations Adjusted net income from continuing operations1 Net cash from operating activities from continuing operations Free cash flow from continuing operations1 Per share data EPS – diluted EPS from continuing operations – diluted Adjusted EPS from continuing operations – diluted1 Free cash flow from continuing operations1 Dividends As a percentage of revenue before fuel surcharge Adjusted EBITDA margin1 Depreciation of property and equipment Amortization of intangible assets Operating margin Operating ratio1 1 Refer to the section “Non-IFRS financial measures”. Fourth quarters ended December 31 Years ended December 31 2017 2016 2017 2016 1,058,990 123,481 1,182,471 1,036,446 101,288 1,137,734 4,281,823 3,704,488 320,720 4,741,019 4,025,208 459,196 131,017 66,770 120,192 120,192 54,645 116,148 102,432 1.31 1.31 0.60 1.14 0.21 12.4% 4.6% 1.5% 6.3% 93.7% 127,943 69,717 45,339 46,387 50,609 109,815 98,038 0.48 0.49 0.54 1.07 0.19 12.3% 4.1% 1.5% 6.7% 93.3% 514,481 243,724 157,988 157,988 192,571 372,601 376,487 442,351 249,265 639,579 157,059 187,391 337,908 288,340 1.70 1.70 2.08 4.16 0.78 12.0% 4.9% 1.4% 5.7% 94.3% 6.70 1.64 1.96 3.08 0.70 11.9% 3.8% 1.4% 6.7% 93.3% Q4 Highlights • Total revenue from continuing operations increased by $44.7 million from Q4 2016, or 4%, to $1,182.5 million. • Operating income from continuing operations decreased 4%, or $2.9 million from the same quarter last year, mainly as a result of a weak performance from its U.S. Truckload (“TL”) operations. • A decrease in income tax expense of $76.1 million was recorded as an income tax recovery arising from a reduction in deferred income tax liabilities as a result of the U.S. tax reform. • Net income was $120.2 million, compared to $45.3 million in Q4 2016. The increase is mainly due to the reduction in income tax expense. The diluted earnings per share (diluted “EPS”) were up 173% to $1.31, compared to 48 cents in the prior year period. • Adjusted net income1, a non-IFRS measure, increased $4.0 million mainly from business acquisitions. Adjusted diluted EPS from continuing operations1, a non-IFRS measure, increased 11% to 60 cents from 54 cents in Q4 2016. • • The Company’s long-term debt remained relatively stable at $1,498.4 million compared to last quarter. The Company returned $47.7 million to shareholders during the quarter, of which $17.1 million was through dividends and $30.6 million through share repurchases. The weighted average number of common shares was 2% lower in this quarter compared to last year’s same quarter. • On October 31, 2017, TFI International completed the acquisition of Premier Product Management (“PPM”). Based in California, PPM provides home delivery services of household appliances in the United States. • On December 11, 2017, the Board approved an 11% dividend increase to 21 cents per share over its previous quarterly dividend of 19 cents per share. TFI International MANAGEMENT’S DISCUSSION AND ANALYSIS 3 ABOUT TFI INTERNATIONAL Services TFI International is a North American leader in the transportation and logistics industry, operating across the United States, Canada and Mexico through its subsidiaries. TFI International creates value for shareholders by identifying strategic acquisitions and managing a growing network of wholly-owned operating subsidiaries. Under the TFI International umbrella, companies benefit from financial and operational resources to build their businesses and increase their efficiency. TFI International companies service the following reportable segments: Package and Courier; • Less-Than-Truckload; • Truckload; • Logistics. • Seasonality of operations The activities conducted by the Company are subject to general demand for freight transportation. Historically, demand has been relatively stable with the first quarter being generally the weakest in terms of demand. Furthermore, during the harsh winter months, fuel consumption and maintenance costs tend to rise. Human resources The Company has 17,044 employees who work in TFI International’s different business segments across North America. This compares to 17,685 employees as of December 31, 2016. The year-over-year decrease of 641 is attributable to rationalizations affecting 1,029 employees mainly in the Less-Than-Truckload (“LTL”) and TL segments offset by business acquisitions (+388). The Company believes that it has a relatively low turnover rate among its employees in Canada, a normal turnover rate in the U.S., and that its employee relations are very good. Equipment The Company has the largest trucking fleet in Canada and a significant presence in the U.S. market. As at December 31, 2017, the Company had 7,058 power units, 24,617 trailers and 9,074 independent contractors. This compares to 8,265 power units, 25,310 trailers and 10,270 independent contractors as at December 31, 2016. The decreases in power units are due to fleet reduction mainly in the U.S. TL businesses. Terminals TFI International’s head office is in Montréal, Québec and its executive office is located in Etobicoke, Ontario. As at December 31, 2017, the Company had 391 terminals. Of these, 274 are located in Canada, 172 and 102, respectively, in Eastern and Western Canada. The Company also had 105 terminals in the United States and 12 terminals in Mexico. This compares to 398 terminals as at December 31, 2016. In the last twelve months, 29 terminals were added from business acquisitions and the terminal consolidation decreased the total number of terminals by 36, mainly in the Package and Courier and TL segments. In Q4 2017, the Company closed nine sites. 2017 Annual Report 4 MANAGEMENT’S DISCUSSION AND ANALYSIS Customers The Company has a diverse customer base across a broad cross-section of industries with no single client accounting for more than 5% of consolidated revenue. Because of its customer diversity, as well as the wide geographic scope of the Company’s service offering and the range of segments in which it operates, a downturn in the activities of individual customers or customers in a particular industry is not expected to have a material adverse impact on the operations of the Company. The Company forged strategic partnerships with other transport companies in order to extend its service offering to customers across North America. Revenue by Top Customers’ Industry (54% of total revenue) Retail Manufactured Goods Metals & Mining Building Materials Automotive Energy Food & Beverage Services Forest Products Chemicals & Explosives Waste Management Maritime Containers Others (As at December 31, 2017) CONSOLIDATED RESULTS 31 % 15 % 7 % 7 % 6 % 6 % 6 % 5 % 4 % 3 % 3 % 3 % 4 % This section provides general comments on the consolidated results of operations. A more detailed analysis is provided in the “Segmented results” section. 2017 business acquisitions In line with the Company’s growth strategy, the Company acquired seven businesses during 2017, notably World Courier Ground U.S. (“World Courier Ground”), Cavalier Transportation Services Inc. (“Cavalier”), Les entreprises Dupont 1972 Inc. (“Dupont”) and Premier Product Management (“PPM”). On January 13, 2017, the Company completed the acquisition of World Courier Ground, the U.S. ground transportation division of World Courier. Established in 1983, World Courier Ground is an asset light, time critical courier provider. Operating nationally across the U.S., the company offers same-day courier, rush trucking and warehousing services primarily to the medical industry, as well as to the environmental, financial, chemical and industrial sectors. World Courier Ground management continues to operate the business under the new name TForce Critical. On January 28, 2017, the Company completed the acquisition of Cavalier. Established in 1979, Cavalier’s operations consist of LTL services, brokerage and warehousing. Based in Bolton, Ontario, Cavalier serves corridors primarily between Ontario, Quebec, New York and Illinois. On May 28, 2017, the Company completed the acquisition of Dupont, a specialty truckload business based on the south shore of Montreal. Dupont is Quebec’s leading bulk cement transport company, also serving Ontario, the Maritimes, Labrador and the northeastern United States with its expert team and state-of-the-art equipment. On October 31, 2017, the Group completed the acquisition of PPM. Based in California, PPM provides home delivery services of household appliances in the United States. Based on historical information, PPM is expected to generate US$27.0 million in annual revenue for the Logistics segment. These transactions were concluded in order to add density in the Company’s current network and further expand value-added services. The seven acquired businesses contributed revenue of $137.6 million in 2017. TFI International MANAGEMENT’S DISCUSSION AND ANALYSIS 5 Revenue from continuing operations TFI International reported a revenue increase from continuing operations mainly as a result of business acquisitions offset by revenue declines in existing operations. For the fourth quarter ended December 31, 2017, total revenue from continuing operations increased by $44.7 million, or 4%, to $1,182.5 million from $1,137.7 million in Q4 2016. The contribution from business acquisitions was $126.2 million, while revenue declines in existing operations totalled $81.5 million, or 7%. This reduction was due to a net decrease in revenue before fuel surcharge of $74.1 million and a negative currency impact of $15.4 million offset by a fuel surcharge increase of $8.0 million. The average exchange rate used to convert TFI International’s revenue generated in U.S. dollars was 4.7% lower this quarter (C$1.2709) than it was for the same quarter last year (C$1.3341). With respect to revenue before fuel surcharge from existing operations, decreases were mainly attributable to the Package and Courier and the U.S. TL operating segments. For the year ended December 31, 2017, total revenue from continuing operations increased by $715.8 million, or 18%, to $4.74 billion from $4.03 billion in 2016. The contribution from business acquisitions of $824.1 million and higher fuel surcharge was offset by decreases in revenue from existing operations. On a year to date basis, the currency movements had a negative impact of $26.9 million, or 0.7%, on revenue from continuing operations. Operating expenses from continuing operations For the fourth quarter, the Company’s operating expenses from continuing operations increased by $47.7 million, or 4%, from $1,068.0 million in Q4 2016 to $1,115.7 million in Q4 2017. The increase is mainly attributable to business acquisitions for $123.0 million offset by decreases in existing operations as a result of revenue decrease. Excluding business acquisitions, operating expenses decreased by $75.3 million, or 7%, in line with the revenue decline from existing operations. Particularly, materials and services expenses and personnel expenses decreased respectively 6% and 11% as a result of volume decline, rationalization and terminal optimization achieved in the previous quarters. Other operating expenses, which are primarily composed of costs related to offices’ and terminals’ rent, taxes, heating, telecommunications, maintenance and security and other general administrative expenses increased mainly as a result of the sale-and-leased back transactions completed earlier in 2017, which increased rent expense by $1.9 million. For the three-month period ended December 31, 2017, depreciation of property and equipment increased by $5.3 million. Excluding business acquisitions, depreciation of property and equipment decreased by $1.5 million, or 3%, as a result of the sale-and-leased back transactions and the Company’s consistent focus on adjusting capacity to match fluctuations in demand and to optimize capital allocation by using more subcontractors. For the same period, intangible asset amortization increased by $0.7 million, on a consolidated basis, due to business acquisitions offset by decreases from existing operations. The Company recorded lower gains on its recurring sale of rolling stock and equipment compared to last year (Q4 2017 showed a loss of $0.6 million and Q4 2016 showed a gain of $4.1 million). The recurring gain that the Company normally generates from its sales of rolling stock and equipment was reduced by losses generated during this quarter by the fleet renewal plan for CFI, acquired in Q4 2016, and a softer market for used equipment. The losses pertaining to CFI are not expected to continue as most of its fleet renewal plan is complete. The operating ratio1, a non-IFRS measure, was 93.7% in this quarter, compared to 93.3% for Q4 2016. This ratio was negatively impacted by a lower contribution from the U.S. TL operating segment. Excluding business acquisitions, the operating ratio remained at 93.3% as a result of strict expense management despite the revenue decline. For the year ended December 31, 2017, operating expenses from continuing operations increased by $721.4 million, or 19%, from $3.78 billion in 2016 to $4.50 billion in 2017. The increase is mainly attributable to business acquisitions, for $837.2 million, offset by decreases due to lower revenue from existing operations. Operating income from continuing operations For the fourth quarter, TFI International’s operating income from continuing operations decreased by $2.9 million to $66.8 million compared to $69.7 million in 2016 and the operating margin decreased 0.4% as a percentage of revenue before fuel surcharge from 6.7% in Q4 2016 to 6.3% in Q4 2017. Lower gains on sale of rolling stock and equipment represent 0.3% of the decrease. Material and services expenses net of fuel surcharge improved by 0.8% as a percentage of revenue before fuel surcharge from operating efficiencies, which were offset by higher personnel expenses and depreciation in percentage of revenue before fuel surcharge mainly attributable to business acquisitions. 1 Refer to the section “Non-IFRS financial measures”. 2017 Annual Report 6 MANAGEMENT’S DISCUSSION AND ANALYSIS Management’s consistent focus on the quality of revenue may have slightly reduced revenue before fuel surcharge, but this strategy in conjunction with cost control benefited the Company. As a percentage of revenue before fuel surcharge, the operating margin from existing operations and excluding the lower gain on sale of rolling stock and equipment increased by 0.2% as a percentage of revenue before fuel surcharge. For the year ended December 31, 2017, TFI International’s operating income from continuing operations decreased by $5.6 million to $243.7 million compared to $249.3 million in 2016. The decrease is attributable to an operating loss from business acquisitions of $13.2 million offset by improvement from existing operations’ operating income for $7.6 million. The negative contribution from business acquisitions is mainly attributable to CFI, primarily operating in the challenging U.S. TL market. In addition to the sluggish freight environment, CFI incurred one-time transitional and rebranding costs of $17.6 million caused by its separation from XPO Logistics, the previous owner. Furthermore, an aggressive replacement program for its rolling stock has been put in place and is almost completed, resulting in higher equipment relocation expenses. CFI operating losses were mostly generated in the first three quarters of the year but has recorded improved results in Q4. Gain on sale of property from continuing operations The gain on sale of property, which is accounted for in gain or loss on sale of land and buildings and in gain or loss of sale of assets held for sale in the consolidated statements of income, was $77.7 million in 2017, compared to $8.9 million in 2016. In Q3 TFI International unlocked shareholder value with a sale and leaseback transaction on selected real estate assets. The all-cash transaction of $135.7 million, which included two facilities in each of Montreal and Toronto, resulted in a pre-tax gain of $69.8 million. The group of properties included in the transaction represented less than 20% of the net book value of the Company’s total real estate portfolio. Impairment of intangible assets from continuing operations For the year ended December 31, 2017, impairment of intangible assets was $143.0 million. The non-cash impairment charges of 2017 were $13.2 million for an impairment to the Dynamex trade name recorded in the first quarter, and $129.8 million for a goodwill impairment in the U.S. TL operating segment recorded in Q2 due to a weak performance resulting from downward pricing pressures experienced by the industry as a result of high competitiveness, limited economic activity growth and upward cost pressures adversely impacting operating cost per mile and operating margins. At December 31, 2017, the Company performed its goodwill impairment tests for operating segments, the results determined that the recoverable amounts of the Company’s operating segments exceeded their respective carrying amounts. Finance income and costs from continuing operations (unaudited) (in thousands of dollars) Finance costs (income) Interest expense on long-term debt Interest income and accretion on promissory note Net foreign exchange (gain) loss Net change in fair value of foreign exchange derivatives Net change in fair value of interest rate derivatives Others Net finance costs Interest expense on long-term debt Fourth quarters ended December 31 Years ended December 31 2017 13,102 (725 ) (10 ) (126 ) 193 1,063 13,497 2016 11,931 (652 ) (1,207 ) (129 ) (2,692 ) 4,015 11,266 2017 56,758 (2,638 ) 2,491 (1,247 ) (365 ) 6,076 61,075 2016 41,201 (2,374 ) 2,110 (1,392 ) 6,232 9,105 54,882 Interest expense on long-term debt for the three-month period and year ended December 31, 2017 increased by $1.2 million and $15.6 million, respectively, mainly due to higher borrowings as a result of the Q4 2016 significant business acquisitions. Net foreign exchange gain or loss and net investment hedge The Company designates as a hedge a portion of its U.S. dollar denominated debt held against its net investments in U.S. operations. This accounting treatment allows the Company to offset the designated portion of foreign exchange gain (or loss) of its debt against the foreign exchange loss (or gain) of its net investments in U.S. operations and present them in other comprehensive income. Net foreign exchange gains or losses recorded in income or loss are attributable to the U.S. dollar portion of the Company’s credit facility not designated as a hedge and to other financial assets and liabilities denominated in foreign currencies. For the three-month period and year ended December 31, 2017, $1.9 million of foreign exchange losses and $25.1 million of foreign exchange gains, respectively ($1.7 million and $21.8 million net of tax, respectively), were recorded to other comprehensive income as net investment hedge. TFI International MANAGEMENT’S DISCUSSION AND ANALYSIS 7 Net change in fair value of derivatives and cash flow hedge The Company designates, as a hedge of the variable interest rate instruments, the interest rate derivatives. Therefore the effective portion of changes in fair value of the derivatives is recognized in other comprehensive income. For the three-month period and year ended December 31, 2017, $2.3 million and $5.4 million of gain on change in fair value of interest rate derivatives, respectively ($1.7 million and $3.9 million net of tax, respectively), was recorded to other comprehensive income as a change in the fair value of the cash flow hedge. The Company’s derivative financial instruments, which are used to mitigate foreign exchange and interest rate risks, saw their fair values increase by $2.2 million in Q4 2017, of which $2.3 million was designated as cash flow hedge, while in the same quarter last year their fair values increased by $2.8 million. For the year ended December 31, 2017, their fair values increased by $7.0 million, of which $5.4 million was designated as cash flow hedge, compared to a loss of $4.8 million in the same period in 2016. The derivatives’ fair values are subject to market price fluctuations in foreign exchange and interest rates. Others The other financial expenses mainly comprise bank charges, the net change in fair value of the Company’s deferred share unit liability and the reclassification to income of gain on investment in equity securities. Income tax expense from continuing operations On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (“U.S. tax reform”). The U.S. tax reform reduces the U.S. federal corporate income tax rate from 35% to 21%, effective as of January 1, 2018. As a result of the U.S. tax reform, the Company’s net deferred income tax liability decreased by $76.1 million. The U.S. Tax Reform introduces other important changes to U.S. corporate income tax laws that may significantly affect the Company’s in future years including, the creation of a new Base Erosion Anti-abuse Tax (BEAT) that subjects certain payments from U.S. corporations to foreign related parties to additional taxes, and limitations to the deduction for net interest expense incurred by U.S. corporations. Future regulations and interpretations to be issued by U.S. authorities may also impact the Company’s estimates and assumptions used in calculating its income tax provisions. For the three-month period ended December 31, 2017, the effective tax rate was -128.6%. The income tax recovery of $67.6 million reflects an $81.7 million favourable variance versus an anticipated income tax expense of $14.1 million based on the Company’s statutory tax rate of 26.8%. The favourable variance is mainly due to variation in tax rate for $76.1 million as a result of the U.S. tax reform and to positive differences between the statutory rate and the effective rates in other jurisdictions of $4.3 million. For the year ended December 31, 2017, the effective tax rate was -34.7%. The income tax recovery of $40.6 million reflects a $72.0 million favourable variance versus an anticipated income tax expense of $31.4 million based on the Company’s statutory tax rate of 26.8%. The favourable variance is mainly due to variation in tax rate for $76.1 million as a result of the U.S. tax reform, to positive differences between the statutory rate and the effective rates in other jurisdictions of $21.4 million, and to positive variance from non- taxable income, mainly capital gains, of $10.5 million, offset by the non-tax effected goodwill impairment, which negative variance was $34.8 million and to tax on multi-jurisdiction distributions, of $2.7 million. The more significant favourable variance from effective rates in other jurisdictions is attributable, in part, to the impairment of intangible assets portion attributable to the U.S. operations. Having a higher effective tax rate, this charge reduces the income tax expense in a larger proportion compared to the Company’s statutory tax rate of 26.8%. 2017 Annual Report 8 MANAGEMENT’S DISCUSSION AND ANALYSIS The table below presents the 2017 income tax reconciliation excluding the non-tax effected goodwill impairment recorded in Q2 2017 and the impact of the U.S. tax reform: (unaudited) (in thousands of dollars) Income before income tax Goodwill impairment Income before goodwill impairment and income tax Income tax using the Company’s statutory tax rate Increase (decrease) resulting from: Rate differential between jurisdictions Variation in tax rate Non-deductible expenses Tax exempt income Adjustment for prior years Tax on multi-jurisdiction distributions Net income from discontinued operations % Year ended December 31, 2017 $ 117,346 129,770 247,116 66,227 26.8 % -8.7 % 0.0 % 1.1 % -4.3 % -1.7 % 1.1 % 14.3 % (21,443 ) (109 ) 2,719 (10,513 ) (4,091 ) 2,702 35,492 As a result of the divestiture of its Waste Management segment, which was completed on February 1, 2016, and the Company’s decision to cease its operations in rig moving services in 2015, these two operating segments have been reclassified and presented on a net basis as discontinued operations in the consolidated statements of income and cash flows. For the three-month period and year ended December 31, 2017, no income from discontinued operations was recorded. Last year, the net income from discontinued operations for the year ended December 31, 2016 was $482.5 million and included a pre-tax gain on sale of the Waste Management segment in the amount of $559.2 million or $490.8 million net of tax. Net income and adjusted net income from continuing operations (unaudited) (in thousands of dollars, except per share data) Fourth quarters ended December 31 Years ended December 31 Net income Amortization of intangible assets related to business acquisitions, net of tax Net change in fair value of derivatives, net of tax Net foreign exchange (gain) loss, net of tax (Gain) loss on sale of land and buildings and assets held for sale, net of tax Impairment of intangible assets, net of tax U.S. tax reform Net (income) loss from discontinued operations Adjusted net income from continuing operations1 Adjusted EPS from continuing operations1 – basic Adjusted EPS from continuing operations1 – diluted 1 Refer to the section “Non-IFRS financial measures”. 2017 120,192 10,122 49 (7 ) 424 — (76,135 ) — 54,645 0.61 0.60 2017 2016 45,339 9,234 (2,068 ) (884 ) 2016 157,988 639,579 32,744 38,346 3,546 (1,182 ) 1,546 1,826 (7,504 ) (2,060 ) (66,710 ) — 138,438 — (76,135 ) — (482,520 ) 192,571 187,391 2.00 1.96 — — 1,048 50,609 0.55 0.54 2.13 2.08 For the three-month period ended December 31, 2017, TFI International’s net income was $120.2 million compared to $45.3 million in Q4 2016. The increase of $74.9 million is mainly attributable to the income tax recovery recorded as a result of the U.S. tax reform for $76.1 million. The Company’s adjusted net income from continuing operations1, a non-IFRS measure, which excludes items listed in the above table, was $54.6 million for the fourth quarter compared to $50.6 million in Q4 2016, up 8% or $4.0 million. The adjusted EPS from continuing operations, fully diluted, increased by 11% to 60 cents. For the year ended December 31, 2017, TFI International’s net income was $158.0 million compared to $639.6 million for 2016. The decrease is mainly attributable to last year’s net income from discontinued operations of $482.5 million (pre-tax gain on sale of the Waste Management segment in the amount of $559.2 million or $490.8 million net of tax) and to the 2017 intangible impairment charge of $138.4 million, net of tax, offset by the income tax recovery recorded as a result of the U.S. tax reform for $76.1 million and by higher gain on sale of property. The Company’s adjusted net income from continuing operations, which excludes these items, increased by $5.2 million to $192.6 million for the year ended December 31, 2017. TFI International MANAGEMENT’S DISCUSSION AND ANALYSIS 9 SEGMENTED RESULTS For the purpose of this section, adjusted EBITDA from continuing operations refer to the same definitions as in the section “Non-IFRS financial measures” for the consolidated results. Also, to facilitate the comparison of business level activity and operating costs between periods, the Company compares the revenue before fuel surcharge (“revenue”) and reallocates the fuel surcharge revenue to materials and services expenses within operating expenses. Note that “Total revenue” is not affected by this reallocation. Selected segmented financial information from continuing operations (unaudited) (in thousands of dollars) Package and Courier Less-Than- Truckload Truckload Logistics Corporate Eliminations Total Q4 2017 Revenue before fuel surcharge % of total revenue1 Adjusted EBITDA Adjusted EBITDA margin2 Operating income (loss) Operating margin2 Net capital expenditures3.4 Q4 2016 (recasted) Revenue before fuel surcharge % of total revenue1 Adjusted EBITDA Adjusted EBITDA margin2 Operating income (loss) Operating margin2 Net capital expenditures5 2017 Revenue before fuel surcharge % of total revenue1 Adjusted EBITDA Adjusted EBITDA margin2 Operating income (loss) Operating margin2 Total assets Net capital expenditures4 2016 (recasted) Revenue before fuel surcharge % of total revenue1 Adjusted EBITDA Adjusted EBITDA margin2 Operating income (loss) Operating margin2 Total assets Net capital expenditures5 317,331 29% 44,050 13.9% 35,804 11.3% (14,124 ) 342,016 32% 40,638 11.9% 32,254 9.4% 2,096 1,267,300 28% 158,101 12.5% 124,406 9.8% 651,345 (6,931 ) 1,291,331 34% 146,798 11.4% 113,040 8.8% 700,749 10,151 194,777 19% 21,881 11.2% 14,260 7.3% 3,694 181,347 18% 20,541 11.3% 13,309 7.3% 969 799,189 19% 83,346 10.4% 52,350 6.6% 556,807 (139,769 ) 732,124 20% 77,405 10.6% 47,899 6.5% 635,233 6,078 480,011 45% 68,556 14.3% 22,692 4.7% 24,510 461,360 44% 70,011 15.2% 29,032 6.3% 7,659 1,965,315 46% 274,868 14.0% 77,349 3.9% 2,232,157 142,060 1,501,224 40% 226,358 15.1% 102,511 6.8% 2,440,148 35,620 78,982 7% 8,173 10.3% 6,214 7.9% (462 ) 65,574 6% 8,195 12.5% 7,112 10.8% 1 299,525 7% 31,833 10.6% 25,534 8.5% 221,439 (17 ) 236,609 6% 25,627 10.8% 21,750 9.2% 175,190 (3,774 ) — (12,111 ) — — (13,851 ) — — (11,643 ) (12,200 ) 98 — (11,442 ) (11,990 ) 1,052 — (49,506 ) — — (33,667 ) (35,915 ) 65,880 771 — (56,800 ) — — (33,837 ) (35,935 ) 75,233 1,493 1,058,990 100% 131,017 12.4% 66,770 6.3% 13,716 1,036,446 100% 127,943 12.3% 69,717 6.7% 11,777 4,281,823 100% 514,481 12.0% 243,724 5.7% 3,727,628 (3,886 ) 3,704,488 100% 442,351 11.9% 249,265 6.7% 4,026,553 49,568 1 2 3 4 5 Before eliminations, except for the total. As a percentage of revenue before fuel surcharge. Additions to property and equipment, net of proceeds from sale of property and equipment and assets held for sale. YTD 2017 net capital expenditures include proceeds from the sale of property for consideration of $19.5 million in the Package and Courier segment ($19.5 million in Q4) of $148.9 million in the LTL segment ($0.5 million in Q4) and of $8.0 million in the TL segment ($0.5 million in Q4). YTD 2016 net capital expenditures include proceeds from the sale of property for consideration of $7.1 million in the LTL segment ($5.0 million in Q4), of $10.6 million in the TL segment ($0.5 million in Q4) and of $3.7 million in the Logistics segment (nil in Q4). When the Company changes the structure of its internal organization in a manner that causes the composition of its reportable segments to change, the corresponding information for the comparative period is recasted to conform to the new structure. Effective January 1, 2017, the composition of reportable segments was modified to better reflect certain changes in the Company’s internal organization. In particular, TF Dedicated, which was previously included in the Package and Courier operating segment, became an independent operation and was reclassified to the TL segment. In addition, a Contrans’ LTL division, which was previously included in the TL segment, was reclassified to the LTL segment in order to better reflect the nature of services provided. Comparative figures have been recasted. 2017 Annual Report 10 MANAGEMENT’S DISCUSSION AND ANALYSIS Package and Courier (unaudited) - (in thousands of dollars) Fourth quarters ended December 31 Years ended December 31 Total revenue Fuel surcharge Revenue Materials and services expenses (net of fuel surcharge) Personnel expenses Other operating expenses Depreciation of property and equipment Amortization of intangible assets (Gain) loss on sale of rolling stock and equipment Operating income Adjusted EBITDA 2017 % 2016 % 2017 % 2016 % 344,231 (26,900 ) 365,250 (23,234 ) 1,361,268 (93,968 ) 1,366,185 (74,854 ) 317,331 100.0 % 342,016 100.0 % 1,267,300 100.0 % 1,291,331 100.0 % 174,377 55.0 % 199,777 58.4 % 71,966 22.7 % 73,648 21.5 % 8.2 % 27,032 1.3 % 4,005 1.1 % 4,241 8.5 % 27,951 4,492 1.3 % 3,892 1.3 % 712,000 56.2 % 290,879 23.0 % 8.4 % 106,571 1.3 % 16,990 1.3 % 16,705 759,723 58.8 % 276,483 21.4 % 8.4 % 108,241 1.4 % 18,191 1.2 % 15,567 (94 ) 0.0 % 2 0.0 % (251 ) 0.0 % 86 0.0 % 35,804 11.3 % 32,254 9.4 % 124,406 9.8 % 113,040 8.8 % 44,050 13.9 % 40,638 11.9 % 158,101 12.5 % 146,798 11.4 % Gain (loss) on sale of land and buildings Gain on sale of assets held for sale Impairment of intangible assets 679 — — — — — 567 9,156 (13,211 ) (8 ) — — Revenue - Package and Courier (millions of $) 312 320 316 324 321 305 342 317 Q1 Q2 Q3 Q4 2016 2017 Revenue On January 13, 2017, the Company purchased World Courier Ground U.S. (now operating under the new name TForce Critical), an asset light, time critical courier. Operating nationally across the U.S., the company offers same-day courier, rush trucking and warehousing services primarily to the medical industry, as well as to the environmental, financial, chemical and industrial sectors. For the quarter ended December 31, 2017, revenue decreased by $24.7 million, or 7%, from $342.0 million to $317.3 million compared to the same period in the prior year. The decrease is due to loss of volume of $35.1 million and to an unfavourable foreign exchange impact of $5.4 million offset by business acquisitions for $15.8 million. Part of the volume decreases relates to some losses of U.S. e-commerce businesses. For the year ended December 31, 2017, revenue decreased by $24.0 million from $1,291.3 million to $1,267.3 million compared to the same period in the prior year; volume decreases in the same-day business and negative currency impact of $9.8 million offset the $69.5 million contributions from business acquisitions. Operating expenses For the quarter ended December 31, 2017, the Package and Courier segment’s operating expenses decreased by $28.3 million, or 9%, from $309.8 million in 2016 to $281.5 million. Material and services expenses decreased by 3.4% as a percentage of revenue attributable to lower subcontractor and external labor expenses in the same-day operations. To compensate for the volume decline, Management reduced more outside services than its own personnel, as a result, personnel expenses decreased in absolute value but increased 1.2% as a percentage of revenue. TFI International MANAGEMENT’S DISCUSSION AND ANALYSIS 11 For the year ended December 31, 2017, the Package and Courier segment’s operating expenses decreased by $35.4 million from $1,178.3 million in 2016 million to $1,142.9 million. Materials and services expenses were down $47.7 million or 6% for the year ended December 31, 2017 mainly due to loss of volume in the same-day business. The employee termination cost were similar in 2017 compared to 2016 at $4.5 million. Operating income The Company’s operating income in the Package and Courier segment for the quarter ended December 31, 2017 increased by 11% or $3.5 million compared to the fourth quarter of 2016, from $32.3 million to $35.8 million mainly from existing operations. For the three–month period ended December 2017, the Package and Courier operating margin increased 1.9% year-over-year to 11.3% due to cost savings from right sizing the same-day business in the U.S. and the next-day business in Canada, ongoing strategic personnel changes focused on synergies at several operating divisions within the segment, and lower subcontractor costs due to ongoing productivity initiatives. For the year ended December 31, 2017, operating income increased by 10% or $11.4 million compared to the same period in 2016, from $113.0 million to $124.4 million. The operating margin increased 1.0% year-over-year mainly from existing operations to reach 9.8% as a result of the constant focus on profitable business and cost reduction measures. Gain or loss on sale of property and impairment of intangible assets Operating income - Package and Courier (millions of $) 34.3 31.1 32.8 31.4 32.3 35.8 22.9 16.8 Q1 Q2 Q3 Q4 2016 2017 A gain on sale of assets held for sale of $9.2 million was recorded in this segment mainly due to a sale and leaseback transaction completed in Q3 2017. In Q1 2017, TFI International also rebranded the divisions Dynamex Canada, Dynamex U.S. and Hazen Final Mile into TForce Final Mile. The establishment of the new North American division should maximize opportunities in the growing same-day business, last mile delivery category and e-commerce sector. This resulted in an impairment charge to the original trademark intangible assets related to these businesses of $13.2 million. The future amortization period of the residual intangible related to these trademarks has been reduced to 4 years with no significant impact on the yearly amortization expense. Less-Than-Truckload (unaudited) - (in thousands of dollars) Fourth quarters ended December 31 Years ended December 31 Total revenue Fuel surcharge Revenue 2017 225,620 (30,843 ) % 2016 % 2017 207,576 (26,229 ) 917,245 (118,056 ) % 2016 827,504 (95,380 ) % 194,777 100.0 % 181,347 100.0 % 799,189 100.0 % 732,124 100.0 % Materials and services expenses (net of fuel surcharge) Personnel expenses Other operating expenses Depreciation of property and equipment Amortization of intangible assets Gain on sale of rolling stock and equipment Operating income Adjusted EBITDA 100,532 51.6 % 52,012 26.7 % 20,774 10.7 % 2.6 % 1.3 % -0.2 % 5,145 2,476 (422 ) 95,808 49,664 15,413 5,136 2,096 (79 ) 52.8 % 415,001 27.4 % 225,259 75,933 21,307 9,689 (350 ) 8.5 % 2.8 % 1.2 % 0.0 % 51.9 % 383,304 52.4 % 28.2 % 211,945 28.9 % 9.5 % 60,028 8.2 % 2.7 % 20,804 2.8 % 8,702 1.2 % 1.2 % -0.1 % 0.0 % (558 ) 14,260 7.3 % 13,309 7.3 % 52,350 6.6 % 47,899 6.5 % 21,881 11.2 % 20,541 11.3 % 83,346 10.4 % 77,405 10.6 % Gain (loss) on sale of land and buildings Gain (loss) on sale of assets held for sale (267 ) (1,088 ) 2,664 — (242 ) 68,118 4,442 — 2017 Annual Report 12 MANAGEMENT’S DISCUSSION AND ANALYSIS Revenue On January 28, 2017, the Company acquired Cavalier Transportation Services Inc. (“Cavalier”). Cavalier provides domestic and U.S. services in the Great Lakes region in the LTL and Logistics segments. For the three-month period ended December 31, 2017, the LTL segment’s revenue increased by 7%, or $13.5 million, from $181.3 million to $194.8 million, mainly due to business acquisitions. Excluding business acquisitions, revenue decreased by 7% or $12.2 million to $169.2 million. The decrease is largely due to the loss of a major U.S. partner, impact mitigated by its replacement and combination of new business and growth in other existing businesses and negative foreign currency movements of $1.4 million. For the year ended December 31, 2017, revenue increased by 9%, or $67.1 million, from $732.1 million to $799.2 million mainly due to business acquisitions for $99.5 million, partially offset by decreases from existing operations. Operating expenses For the fourth quarter of 2017, operating expenses were up 7%, or $12.5 million, to $180.5 million compared to $168.0 million in Q4 2016 mainly from business acquisitions. Excluding business acquisitions, operating expenses were down by 7%, or $11.2 million due to the decline in revenue. Operating expenses from existing operations as a percentage of revenue were 92.7%, unchanged over the same quarter last year. Mainly as a result of the sale-and-leased back transactions completed earlier in 2017, the rent expense increased $1.8 million, while restructuring plan implemented in the Company’s Eastern Canadian LTL network generated improvements mainly in the materials and services expenses. During the quarter, a charge of $2.5 million was recorded as employee termination expenses. For the year ended December 31, 2017, operating expenses were up 9%, or $62.6 million, to $746.8 million compared to $684.2 million last year, mainly attributable to business acquisitions offset by reduction in operating expenses from existing operations due to volume decline and restructuration. Operating income For the quarter ended December 31, 2017, operating income increased by $1.0 million or 7% from $13.3 million to $14.3 million mainly due to business acquisitions. Despite the increase in rent expenses due to the sale-and-leased back transactions completed earlier in 2017, excluding business acquisitions, the operating margin at 7.3% remained unchanged compared to Q4 2016 largely as a result of the operating improvements resulting from the restructuration plan. For the year ended December 31, 2017, operating income increased by $4.5 million to $52.4 million from $47.9 million in 2016 mainly due to business acquisitions and 0.5% of margin improvements from existing operations, which contributed to its operating income increase of $1.3 million. Revenue - LTL (millions of $) 199 177 206 188 199 185 195 181 Q1 Q2 Q3 Q4 2016 2017 Operating income - LTL (millions of $) 16.0 14.5 14.7 13.4 13.3 14.3 8.6 5.4 Q1 Q2 Q3 Q4 2016 2017 TFI International MANAGEMENT’S DISCUSSION AND ANALYSIS 13 Gain on sale of property For the year ended December 31, 2017, gain on sale of assets held for sale of $68.1 million was recorded in this segment mainly due to sale and leaseback transactions completed in Q2 and Q3 2017. Truckload (unaudited) - (in thousands of dollars) Fourth quarters ended December 31 Years ended December 31 Total revenue Fuel surcharge Revenue Materials and services expenses (net of fuel surcharge) 2017 % 2016 % 2017 % 2016 % 545,310 (65,299 ) 511,919 (50,559 ) 2,209,424 1,647,177 (244,109 ) (145,953 ) 480,011 100.0 % 461,360 100.0 % 1,965,315 100.0 % 1,501,224 100.0 % 241,119 50.2 % 231,667 50.2 % 991,877 50.5 % 780,865 52.0 % Personnel expenses 151,915 31.6 % 146,715 31.8 % 633,839 32.3 % 442,912 29.5 % Other operating expenses 17,241 3.6 % 16,252 3.5 % 66,605 3.4 % 61,254 4.1 % Depreciation of property and equipment 38,589 8.0 % 32,740 7.1 % 168,845 8.6 % 97,846 6.5 % Amortization of intangible assets 7,275 1.5 % 8,239 1.8 % 28,674 1.5 % 26,001 1.7 % (Gain) loss on sale of rolling stock and equipment Operating income Adjusted EBITDA 1,180 0.2 % (3,285 ) -0.7 % (1,874 ) -0.1 % (10,165 ) -0.7 % 22,692 4.7 % 29,032 6.3 % 77,349 3.9 % 102,511 6.8 % 68,556 14.3 % 70,011 15.2 % 274,868 14.0 % 226,358 15.1 % Gain (loss) on sale of land and buildings Gain on sale of assets held for sale Impairment of intangible assets (18 ) — — (282 ) — — (93 ) 172 (129,770 ) 2,875 — — Revenue For the three-month period ended December 31, 2017, TL revenue increased by $18.7 million or 4%, from $461.4 million in Q4 2016 to $480.0 million. This increase is attributable to business acquisitions, mainly the acquisition of CFI in the last quarter of 2016. These business acquisitions contributed $56.3 million to the TL revenue increase. Excluding these business acquisitions, TL revenue decreased by $37.6 million or 8% compared to the same quarter last year. Part of this revenue decrease is explained by unfavourable currency fluctuations of $7.2 million and the remaining decrease comes from declines, particularly in the U.S. TL divisions mainly due to customer right sizing and the driver shortage. Pricing slightly improved in Q4 2017 compared to last’s year same quarter and is expected to improve in 2018. As part of its asset-light strategy, the TL segment increased its brokerage revenue by 5%, or $3.0 million, to $60.3 million compared to the same quarter last year. For the year ended December 31, 2017, revenue increased by $464.1 million from $1,501.2 million in 2016 to $1,965.3 million in 2017. This increase is mainly due to business acquisitions which contributed $516.2 million to the increase. Excluding business acquisitions, revenue decreased by 3%. The unfavourable foreign currency impact was $12.1 million. Revenue - TL (millions of $) 487 516 483 461 480 338 356 346 Q1 Q2 Q3 Q4 2016 2017 2017 Annual Report 14 MANAGEMENT’S DISCUSSION AND ANALYSIS Operating expenses Operating expenses increased by $25.0 million or 6% from $432.3 million in Q4 2016 to $457.3 million in Q4 2017 mainly from business acquisitions. Excluding business acquisitions, operating expenses decreased by 7% or $31.8 million which is slightly lower than the 8% decrease in revenue. The TL segment is diligently working to align its cost structure to demand mainly on the personnel side with a year-over-year improvement of 1.4% as a percentage of revenue. This was offset by gains on sale of rolling stock and equipment that were not favourable this quarter resulting in a net negative impact of $2.4 million. The Company continues to focus on being cost- conscious and its priority remains to improve the efficiency and profitability of its existing fleet and network of independent contractors. The U.S. divisions also downsized their fleet to demand. This rationalization enables the U.S. assets to be more productive. For the year ended December 31, 2017, operating expenses increased by $489.3 million or 35% mainly due to business acquisitions. Excluding business acquisitions, operating expenses decreased by $51.2 million or 4% compared to a 3% decrease in revenue on a year-to-date basis. In addition, in order to return to a normal level of rolling stock repair and maintenance expense, an extensive program of fleet renewal has been put in place. As a result, non-recurring transition costs related to the acquisition of CFI totalled $17.6 million in 2017. Operating income The Company’s operating income in the TL segment for the quarter ended December 31, 2017 decreased by $6.3 million from $29.0 million in the prior year period to $22.7 million, mainly due lower revenue and lower gain on sale of rolling stock and equipment from our U.S. TL divisions. However, initiatives aimed at equipment cost reductions have started to yield more positive results at the end of Q4. As a result, the fleet was downsized and renewed which reduced repair and maintenance expense. Operating income - TL (millions of $) 29.8 23.4 24.7 29.0 22.7 16.6 19.0 14.7 Excluding business acquisitions, for the quarter ended December 31, 2017, operating income decreased by $5.8 million, or 0.8% as a percentage of revenue as a result of difficulties in the U.S. TL divisions. Both the Canadian conventional and specialized TL operations maintained their operating margin compared to last year’s same quarter. Q1 Q2 Q3 Q4 2016 2017 For the year ended December 31, 2017, the operating margin was 3.9% compared to 6.8% in the same period in 2016. Excluding business acquisitions, the operating margin increased by 0.2% to 7.0%. The TL segment will continue to focus on cost initiatives to improve its margins in light of the stable Canadian freight market and the difficult U.S. freight market. Driver recruitment and retention, reducing empty mileage, and the tightening of our U.S. freight network are priorities for the upcoming year. Impairment of intangible assets For the year ended December 31, 2017, impairment of intangible assets was $129.8 million. A goodwill impairment charge was recorded in the U.S. TL operating segment in Q2 due to a weak performance resulting from downward pricing pressures experienced by the industry as a result of high competitiveness, limited economic activity growth and upward cost pressures adversely impacting operating cost per mile and operating margins. TFI International MANAGEMENT’S DISCUSSION AND ANALYSIS 15 Logistics (unaudited) - (in thousands of dollars) Fourth quarters ended December 31 Years ended December 31 Total revenue Fuel surcharge Revenue Materials and services expenses (net of fuel surcharge) Personnel expenses Other operating expenses 2017 % 2016 % 2017 % 2016 % 80,692 66,840 306,474 241,142 (1,710 ) (1,266 ) (6,949 ) (4,533 ) 78,982 100.0 % 65,574 100.0 % 299,525 100.0 % 236,609 100.0 % 56,557 71.6 % 47,133 71.9 % 214,690 71.7 % 170,655 72.1 % 9,823 12.4 % 7,336 11.2 % 38,391 12.8 % 29,198 12.3 % 4,525 5.7 % 3,126 4.8 % 14,946 5.0 % 11,528 4.9 % Depreciation of property and equipment Amortization of intangible assets 248 1,711 0.3 % 2.2 % 280 803 0.4 % 1,051 0.4 % 1,262 0.5 % 1.2 % 5,248 1.8 % 2,615 1.1 % Gain on sale of rolling stock and equipment (96 ) -0.1 % (216 ) -0.3 % (335 ) -0.1 % (399 ) -0.2 % Operating income Adjusted EBITDA 6,214 7.9 % 7,112 10.8 % 25,534 8.5 % 21,750 9.2 % 8,173 10.3 % 8,195 12.5 % 31,833 10.6 % 25,627 10.8 % Gain on sale of land and buildings — — — 1,639 Revenue - Logistics (millions of $) 68 54 80 59 58 73 66 79 Q1 Q2 Q3 Q4 2016 2017 Revenue On October 31, 2017, the Company completed the acquisition of PPM. Based in California, PPM provides home delivery services of household appliances in the United States. For the quarter ended December 31, 2017, revenue from the Logistics segment increased by 20% or $13.4 million year-over-year, from $65.6 million to $79.0 million, mainly due to business acquisitions. For the year ended December 31, 2017, revenue increased by 27% or $62.9 million year-over-year, from $236.6 million to $299.5 million, mainly due to business acquisitions. Excluding business acquisitions, revenue increased by 7%, or $15.7 million, attributable to higher volumes by new and current customers and some non- recurring business offset by an unfavourable foreign exchange impact of $2.3 million. Operating expenses For the quarter ended December 31, 2017, operating expenses increased 24% or $14.3 million compared to the fourth quarter of 2016, from $58.5 million to $72.8 million, mainly due to business acquisitions. Materials and services expenses represented 71.6% of revenue, an improvement of 0.3%, as a percentage of revenue, when compared to last year’s same quarter. Personnel expenses represented 12.4% of revenue, an increase of 1.2%, as a percentage of revenue, when compared to last year’s same quarter mostly due to business acquisitions being more labor intensive. For the year ended December 31, 2017, operating expenses increased by 28% or $59.1 million compared to 2016, from $214.9 million to $274.0 million. This increase was mostly attributable to higher year-over-year revenues. For the three-month period and the year ended December 31, 2017, amortization of intangible assets increased by $0.9 million and $2.6 million, respectively, due to business acquisitions. 2017 Annual Report 16 MANAGEMENT’S DISCUSSION AND ANALYSIS Operating income The Company’s operating income in the Logistics segment for the quarter ended December 31 , 2017 decreased 13% or $0.9 million compared to the fourth quarter of 2016, from $7.1 million to $6.2 million attributable to higher personnel and other operating expenses, as well as amortization of intangible assets from business acquisitions. Operating income - Logistics (millions of $) 7.4 5.6 5.4 5.0 4.2 6.3 7.1 6.2 For the year ended December 31, 2017, operating income increased 17% or $3.7 million compared to 2016, from $21.8 million to $25.5 million due to business acquisitions. The Logistics segment’s operating margin decreased 0.7% year-over-year mainly as a result of amortization of intangible assets from business acquisitions. Q1 Q2 Q3 Q4 2016 2017 LIQUIDITY AND CAPITAL RESOURCES Sources and uses of cash (unaudited) (in thousands of dollars) Sources of cash: Net cash from operating activities from continuing operations Proceeds from sale of property and equipment Proceeds from sale of assets held for sale Net variance in cash and bank indebtedness Net proceeds from long-term debt Net cash from discontinued operations Others Total sources Uses of cash: Purchases of property and equipment Business combinations, net of net cash acquired Net variance in cash and bank indebtedness Net repayment of long-term debt Dividends paid Repurchase of own shares Net cash used in discontinued operations Others Total usage Fourth quarters ended December 31 Years ended December 31 2017 2016 2017 2016 116,148 20,833 19,140 — — — — 109,815 19,240 — — 712,025 3,853 — 372,601 88,773 174,779 13,046 — — 5,882 337,908 60,992 — — — 769,558 — 156,121 844,933 655,081 1,168,458 66,142 30,021 7,857 1,147 17,086 30,580 — 3,288 31,017 775,335 13,042 — 15,523 1,092 — 8,924 259,140 118,288 — 74,648 69,016 81,565 52,424 — 110,443 798,303 23,899 6,063 64,066 151,200 — 14,484 156,121 844,933 655,081 1,168,458 Cash flow from operating activities from continuing operations For the year ended December 31, 2017, net cash from operating activities from continuing operations increased by 10% from $337.9 million in 2016 to $372.6 million. This $34.7 million increase is mainly attributable to higher cash flow from operating activities from continuing operations before net change in non-cash operating working capital for $78.7 million, which improvement came from business acquisitions and existing operations, offset by higher cash used for net change in non-cash operating working capital of $26.3 million and higher interest paid, for $21.7 million. The net change in non-cash operating working capital was negative $11.6 million in 2017, mainly due to lower trade and other payables versus December 31, 2016, compared to a positive contribution from working capital in 2016. TFI International Cash flow used in investing activities from continuing operations Property and equipment The following table presents the additions of property and equipment by category for the three-month period and year ended December 31, 2017 and 2016. MANAGEMENT’S DISCUSSION AND ANALYSIS 17 (unaudited) (in thousands of dollars) Additions to property and equipment: Purchases as stated on cash flow statements Non-cash adjustments Additions by category: Land and buildings Rolling stock Equipment Fourth quarters ended December 31 Years ended December 31 2017 2016 2017 2016 66,142 (12,453 ) 53,689 2,249 48,716 2,724 53,689 31,017 — 31,017 1,983 26,477 2,557 31,017 259,140 526 259,666 8,126 238,812 12,728 259,666 110,443 117 110,560 9,409 92,152 8,999 110,560 The Company invests in new equipment to maintain its quality of service while keeping maintenance costs low. Its capital expenditures reflect the level of reinvestment required to keep its equipment in good order as well as maintain an adequate allocation of its capital resources. In line with its asset light model, increasing the use of independent contractors to replace owned equipment is beneficial for the Company as it reduces capital needs to serve customers. The Company intends to further pursue this conversion strategy, particularly with the recent business acquisitions operating with more invested capital. Higher 2017 additions of rolling stock compared to 2016 are partly attributable to the CFI business acquisition and its fleet renewal program. In the normal course of activities, the Company constantly renews its rolling stock equipment generating regular proceeds and gain or loss on disposition. The following table indicates the proceeds and gains or losses from sale of property and equipment and assets held for sale from continuing operations by category for the three-month period and year ended December 31, 2017 and 2016. (unaudited) (in thousands of dollars) Proceeds by category: Land and buildings Rolling stock Equipment Gains (losses) by category: Land and buildings Rolling stock Equipment Fourth quarters ended December 31 2016 2017 20,520 19,409 44 39,973 (694 ) (564 ) (4 ) (1,262 ) 5,516 13,704 20 19,240 2,382 4,074 (15 ) 6,441 Years ended December 31 2016 21,344 39,498 150 60,992 8,948 11,587 (106 ) 20,429 2017 176,359 87,107 86 263,552 77,678 2,851 (85 ) 80,444 For the year ended December 31, 2017, the Company disposed of properties for total consideration of $176.4 million ($21.3 million in 2016), which generated a gain of $77.7 million ($8.9 million in 2016). Notably, in Q3, TFI International unlocked shareholder value with a sale and leaseback transaction on selected real estate assets. The all-cash transaction of $135.7 million, which included two facilities in each of Montreal and Toronto, resulted in a pre-tax gain of $69.8 million. Business acquisitions For the year ended December 31, 2017, cash used in business acquisitions totalled $118.3 million ($798.3 million in 2016). In 2017, the Company acquired seven businesses. Refer to the section of this report entitled “2017 business acquisitions” and further information can be found in note 5 of the December 31, 2017 audited consolidated financial statements. 2017 Annual Report 18 MANAGEMENT’S DISCUSSION AND ANALYSIS Cash flow from discontinued operations For the year ended December 31, 2017, the discontinued operations used cash flow of $52.4 million mainly attributable to the balance of income tax due on the gain on the sale of the Waste group, realized in February 2016, which was paid in January 2017. In 2016, discontinued operations generated cash flows of $769.6 million. In the first quarter of 2016, TFI International received $758.9 million for the sale of its Waste Management segment to GFL. Free cash flow from continuing operations (unaudited) (in thousands of dollars, except per share data) Net cash from operating activities from continuing operations Additions to property and equipment Proceeds from sale of property and equipment Proceeds from sale of assets held for sale Free cash flow from continuing operations1 Free cash flow from continuing operations per share1 Fourth quarters ended December 31 Years ended December 31 2017 116,148 (53,689 ) 20,833 19,140 102,432 1.14 2016 2017 2016 109,815 372,601 337,908 (31,017 ) (259,666 ) (110,560 ) 19,240 — 98,038 1.07 88,773 174,779 376,487 4.16 60,992 — 288,340 3.08 The Company’s objectives when managing its cash flow from operations are to ensure proper capital investment in order to provide stability and competitiveness to its operations, to ensure sufficient liquidity to pursue its growth strategy, and to undertake selective business acquisitions within a sound capital structure and a solid financial position. For the year ended December 31, 2017, TFI International generated free cash flow from continuing operations of $376.5 million, compared to $288.3 million in 2016, which represents a year-over-year increase of $88.1 million. This increase is mainly due to higher proceeds from sale of property and equipment and assets held for sale, offset by higher additions to property and equipment. Based on the December 31, 2017 closing share price of $32.86, the free cash flow from continuing operations generated by the Company in the last twelve months ($376.5 million) represented a yield of 12.7%. Financial position (unaudited) (in thousands of dollars) Total assets Long-term debt Shareholders’ equity Debt-to-equity ratio2 Debt-to-capitalization ratio3 As at December 31, 2017 As at December 31, 2016 As at December 31, 2015 3,727,628 1,498,396 1,415,124 1.06 0.51 4,026,879 1,584,815 1,458,650 1.09 0.52 3,377,870 1,615,100 1,019,799 1.58 0.61 Compared to December 31, 2016, the Company’s total assets decreased mainly due to the impairment of intangible assets and to the sale of certain real estate assets. The long-term debt decreased due to the sale of property and shareholders’ equity decreased mainly as a result of the impairment of intangible assets. The debt-to-equity ratio and the debt-to-capitalization ratio were similar to those of December 31, 2016. The Company’s current financial position reflects an appropriate debt level to further pursue its acquisition strategy. Strict cash flow management and cash flow generated from operations have allowed the Company to pursue debt reduction when the situation has dictated. As at December 31, 2017, the Company’s working capital (current assets less current liabilities) was $116.7 million compared to $56.9 million as at December 31, 2016. The increase is mainly attributable to the increase of $21.6 million of assets held for sale, composed of properties, and to the balance of 2016 income tax paid in Q1 2017 for $57.7 million. 1 2 3 Refer to the section “Non-IFRS financial measures”. Long-term debt divided by shareholders' equity. Long-term debt divided by the sum of shareholders' equity and long-term debt. TFI International MANAGEMENT’S DISCUSSION AND ANALYSIS 19 Contractual obligations The following table indicates the Company’s contractual obligations with their respective maturity dates at December 31, 2017, excluding future interest payments. (unaudited) (in thousands of dollars) Unsecured revolving facility – June 2021 Term loan – June 2019 & 2020 Unsecured debentures – December 2020 Term loan – August 2019 Finance lease liabilities Conditional sales contracts and other long-term debt Total Less than 1 year 1 to 3 years 3 to 5 years After 5 years 694,116 — — 694,116 500,000 125,000 75,000 — 500,000 — 125,000 — 75,000 — — — 14,956 9,959 4,793 204 95,021 42,468 39,811 12,742 — — — — — — Operating leases and other commitments (see commitments) 609,121 203,304 165,901 93,335 146,581 Total contractual obligations 2,113,214 255,731 910,505 800,397 146,581 As at December 31, 2017, the Company had $40.1 million of outstanding letters of credit ($40.1 million on December 31, 2016). On May 17, 2017, TFI International reached an agreement to amend and extend its existing credit facility to June 2021. The facility is unsecured and can be extended annually. The total available amount remained unchanged at $1.2 billion and the amendment provides similar terms and covenants. On December 21, 2017, the Company extended the maturity of the term loan by eight months for each tranche. The term loan is within the confines of the credit facility for the specific purpose of acquiring CFI. This term loan remains at a total of $500 million, with $200 million now due in June 2019 and $300 million due in June 2020. The following table indicates the Company’s financial covenants to be maintained under its credit facility. These covenants are measured on a consolidated rolling twelve-month basis: Covenants Requirements December 31, 2017 As at Funded debt-to-EBITDA ratio [ratio of total debt plus letters of credit and some other long-term liabilities to earnings before interest, income tax, depreciation and amortization (“EBITDA”), including last twelve months adjusted EBITDA from business acquisitions] EBITDAR-to-interest and rent ratio [ratio of EBITDAR (EBITDA before rent and including last twelve months adjusted EBITDAR from business acquisitions) to interest and net rent expenses] < 3.50 > 1.75 2.96 3.17 The Company believes it will be in compliance with these covenants for the next twelve months. Commitments, contingencies and off-balance sheet arrangements The following table indicates the Company’s commitments with their respective terms at December 31, 2017. (unaudited) (in thousands of dollars) Operating leases – rolling stock Operating leases – real estate & others Other commitments Total off-balance sheet obligations Total 87,600 446,562 74,959 609,121 Less than 1 year 41,685 86,660 74,959 1 to 3 years 36,577 129,324 — 3 to 5 years 9,338 After 5 years — 83,997 146,581 — — 203,304 165,901 93,335 146,581 Long-term real estate leases, totalling $446.6 million, include eleven significant real estate commitments for an aggregate value of $250.0 million, which expire between 2024 and 2035. A total of 294 properties constitute the remaining real estate operating leases. 2017 Annual Report 20 MANAGEMENT’S DISCUSSION AND ANALYSIS Dividends and outstanding share data Dividends The Company declared $18.7 million in dividends, or 21 cents per common share, in the fourth quarter of 2017. For the year ended December 31, 2017, dividends declared were $70.3 million, or 78 cents per common share. On December 11, 2017, the Board of Directors approved an 11% dividend increase to 21 cents per share over its previous quarterly dividend of 19 cents per share. This increase is in keeping with TFI International’s stated dividend policy and reflects the Company’s ability to generate a strong free cash flow. NCIB on common shares Pursuant to the renewal of the normal course issuer bid (“NCIB”), which began on October 2, 2017 and will expire on October 1, 2018, the Company is authorized to repurchase for cancellation up to a maximum of 6,000,000 of its common shares under certain conditions. The Board of TFI International believes that, at appropriate times, repurchasing its shares through the NCIB represents a good use of TFI International’s financial resources, as such action can protect and enhance shareholder value when opportunities or volatility arise. For the year ended December 31, 2017, the Company repurchased 2,810,126 common shares (2016 – 6,442,702) at a price ranging from $26.56 to $32.00 (2016 - $22.00 to $27.30) for a total purchase price of $81.6 million (2016 – $151.2 million). Outstanding shares, stock options and restricted share units A total of 89,123,588 common shares were outstanding as at December 31, 2017 (December 31, 2016 – 91,575,319). There was no significant change in the Company’s outstanding share capital between December 31, 2017 and February 20, 2018. As at December 31, 2017, the number of outstanding options to acquire common shares issued under the Company’s stock option plan was 5,493,286 (December 31, 2016 – 5,495,887) of which 4,169,819 were exercisable (December 31, 2016 – 3,763,656). On February 16, 2017, the Board of Directors approved the grant of 395,113 stock options under the Company’s stock option plan. Each stock option entitles the holder to purchase one common share of the Company at an exercise price based on the closing price of the volume weighted average trading price of the Company’s shares for the last five trading days immediately preceding the effective date of the grant. As at December 31, 2017, the number of restricted share units (‘‘RSUs’’) granted under the Company’s equity incentive plan to the benefit of its senior employees was 206,396 (December 31, 2016 – 281,027). On February 16, 2017, the Board of Directors approved the grant of 60,931 RSUs under the Company’s equity incentive plan. The RSUs will vest in December of the second year from the grant date. Upon satisfaction of the required service period, the plan provides for settlement of the award through shares. Legal proceedings The Company is involved in litigation arising from the ordinary course of business primarily involving claims for bodily injury and property damage. It is not feasible to predict or determine the outcome of these or similar proceedings. However, the Company believes the ultimate recovery or liability, if any, resulting from such litigation individually or in total would not materially adversely affect the Company’s financial condition or performance and, if necessary, have been provided for in the financial statements. OUTLOOK The North American economy has improved. Unemployment is low, consumer spending remains solid, and recent tax law changes in the United States may further stimulate the economy. These factors should continue to produce a recovery in freight rates, although we expect they may also further increase driver compensation costs. In addition to generally improving economic conditions, key internal drivers of revenue and operating income growth consist of further efficiency improvement, asset rationalization, tight cost controls, and the execution of a disciplined acquisition strategy in the fragmented North American transportation and logistics market. In the Package and Courier and LTL segments, TFI International’s priorities remain the consolidation of its operations, administration and IT platforms for additional savings and efficiency gains. In Package and Courier, TFI International will remain proactive in implementing measures to further optimize asset utilization, which includes completing the optimization of businesses in U.S. same- day operations. The recent rebranding to TForce Final Mile should maximize opportunities in this growing market and is aligned with TFI International’s focus on asset-light activities related to e-commerce. TFI International MANAGEMENT’S DISCUSSION AND ANALYSIS 21 In LTL, the Company plans to remain disciplined in adapting supply to demand, as overcapacity continues to affect the industry. To this end, the Company will continue to focus on major cities and high-density regions to enhance value. TFI International will also leverage its capabilities in asset-light intermodal activities that generate higher returns. In the TL division, Canadian performance was strong in 2017, which we expect to continue in 2018. In the U.S. TL market, the gradual implementation of rate increases in contract renewals should lead to improvement in 2018. The Company will also continue to focus on the quality of its U.S. freight revenue and on cost reductions. TFI International will remain disciplined in regards to supply management in the U.S., while sustaining its efforts to optimize the utilization of existing assets. The Company will continue to deploy leading-edge analytical tools across its North American network in order to allow its people to make appropriate business decisions and maximize returns. The Company believes it can further grow its presence in the Logistics sector, as these non-asset-based activities represent a strategic complement to conventional transportation services. Logistics requires less capital, thereby generating even better free cash flow. As the Company continues to gradually adopt an asset-light business model, capital will be increasingly deployed in initiatives that provide a better return on capital and solid cash flow. In so doing, TFI International aims to increasingly distinguish itself by providing innovative, value-added solutions to its growing North American customer base. In the short term, TFI International will use its cash flow to prioritize share repurchase and debt reimbursement. TFI International is well positioned to benefit from a rising freight rate environment, and management is confident that the steps it is taking will continue to grow shareholder value. The Company aims to deliver on this commitment by adhering to its operating principles and by executing its strategy with the same discipline and rigour that have made TFI International a North American leader in the transportation and logistics industry. SUMMARY OF EIGHT MOST RECENT QUARTERLY RESULTS (unaudited) - (in millions of dollars, except per share data) Q4’17 Q3’17 Q2’17 Q1’17 Q4’16 Total revenue 1,182.5 1,154.4 1,232.2 1,171.9 1,036.4 Q3’16 975.5 Q2’16 977.8 Q1’16 934.2 Adjusted EBITDA from continuing operations1 Operating income Net income (loss) EPS – basic EPS – diluted Net income (loss) from continuing 131,0 66.8 120.2 1.34 1.31 128.2 60.5 98.8 1.10 1.07 145.7 74.3 (75.0 ) (0.82 ) (0.82 ) 109.5 127.9 113.8 116.2 42.1 14.1 0.15 0.15 69.7 45.3 0.50 0.48 69.3 51.5 0.56 0.55 71.4 39.1 0.42 0.41 84.5 38.9 503.6 5.16 5.09 operations 120.2 98.8 (75.0 ) 14.1 46.4 51.1 44.3 15.3 EPS from continuing operations – basic 1.34 1.10 (0.82 ) 0.15 0.51 0.55 0.47 0.16 EPS from continuing operations – diluted 1.31 1.07 (0.82 ) 0.15 0.49 0.54 0.47 0.15 Adjusted net income from continuing operations1 Adjusted EPS from continuing 54.6 48.8 56.2 32.9 50.6 53.5 53.3 30.0 operations - diluted1 0.60 0.53 0.60 0.35 0.54 0.57 0.56 0.30 1 Refer to the section “Non-IFRS financial measures”. The differences between the quarters are mainly the result of seasonality (softer in Q1) and business acquisitions. In Q4 2017, higher net income, as well as higher basic and diluted EPS, is mainly due to an income tax gain for $76.1 million as a result of the U.S. tax reform. In Q3 2017, higher net income, as well as higher basic and diluted EPS, is mainly due to gain on sale of property for $70.1 million, $59.7 million after-tax. In Q2 2017, the Company recorded a net loss and negative basic and diluted EPS principally due to a goodwill impairment in its U.S. TL operating segment of $129.8 million (no tax impact on this impairment). In Q1 2016, higher net income, as well as higher basic and diluted EPS, is mainly due to the $490.8 million after-tax gain on the sale of the Waste Management segment. 2017 Annual Report 22 MANAGEMENT’S DISCUSSION AND ANALYSIS NON-IFRS FINANCIAL MEASURES Financial data have been prepared in conformity with IFRS. This MD&A includes references to certain non-IFRS financial measures as described below. These non-IFRS measures do not have any standardized meanings prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other companies. Accordingly, they should not be considered in isolation, in addition to, not as a substitute for or superior to, measures of financial performance prepared in accordance with IFRS. The terms and definitions of IFRS and non-IFRS measures used in this MD&A and a reconciliation of each non-IFRS measure to the most directly comparable IFRS measure are provided below or in the MD&A. Adjusted net income from continuing operations: Net income or loss excluding amortization of intangible assets related to business acquisitions, net change in the fair value of derivatives, net foreign exchange gain or loss, gain or loss on sale of land and buildings and assets held for sale, impairment of intangible assets, impact from the U.S. tax reform and income or loss from discontinued operations, net of tax. In presenting an adjusted net income from continuing operations and adjusted EPS from continuing operations, the Company’s intent is to help provide an understanding of what would have been the net income and earnings per share in a context of significant business combinations and excluding specific impacts and to reflect earnings from a strictly operating perspective. The amortization of intangible assets related to business acquisitions comprises amortization expense of customer relationships, trademarks and non-compete agreements accounted for in business combinations and the income tax effects related to this amortization. Management also believes, in excluding amortization of intangible assets related to business acquisitions, it provides more information on the amortization of intangible asset expense portion, net of tax, that will not have to be replaced to preserve the Company’s ability to generate similar future cash flows. The Company excludes these items because they affect the comparability of its financial results and could potentially distort the analysis of trends in its business performance. Excluding these items does not imply they are necessarily non-recurring. See reconciliation on page 8. Adjusted earnings per share (adjusted “EPS”) from continuing operations - basic: Adjusted net income from continuing operations divided by the weighted average number of common shares. Adjusted EPS from continuing operations - diluted: Adjusted net income from continuing operations divided by the weighted average number of diluted common shares. Adjusted EBITDA from continuing operations: Net income or loss from continuing operations before finance income and costs, income tax expense (recovery), depreciation, amortization, gain or loss on sale of land and buildings and assets held for sale and impairment of intangible assets. Management believes adjusted EBITDA from continuing operations to be a useful supplemental measure. Adjusted EBITDA from continuing operations is provided to assist in determining the ability of the Company to generate cash from its operations. Adjusted EBITDA from continuing operations reconciliation: (unaudited) (in thousands of dollars) Fourth quarters ended December 31 Years ended December 31 Net income from continuing operations Net finance costs Income tax expense (recovery) Depreciation of property and equipment Amortization of intangible assets Gain on sale of land and buildings (Gain) loss on sale of assets held for sale Impairment of intangible assets 2017 120,192 13,497 (67,613 ) 48,298 15,949 (394 ) 1,088 — 2016 46,387 11,266 14,446 42,993 15,233 (2,382 ) — — Adjusted EBITDA from continuing operations 131,017 127,943 Adjusted EBITDA margin is calculated as a percentage of revenue before fuel surcharge. 2017 157,988 61,075 (40,642 ) 209,557 61,200 (232 ) (77,446 ) 142,981 514,481 2016 157,059 54,882 46,272 139,439 53,647 (8,948 ) — — 442,351 Free cash flow from continuing operations: Net cash from operating activities from continuing operations less additions to property and equipment plus proceeds from sale of property and equipment and assets held for sale. Management believes that this measure provides a benchmark to evaluate the performance of the Company in regard to its ability to meet capital requirements. See reconciliation on page 18. Free cash flow from continuing operations per share: Free cash flow from continuing operations divided by the weighted average number of common shares. TFI International MANAGEMENT’S DISCUSSION AND ANALYSIS 23 Operating expenses: Operating expenses, as defined in the audited consolidated financial statements. Operating income (loss): Net income or loss from continuing operations before finance income and costs, income tax expense (recovery), gain or loss on sale of land and buildings and assets held for sale, and impairment of intangible assets, as stated in the audited consolidated financial statements. Operating margin is calculated as a percentage of revenue before fuel surcharge. Operating ratio: Operating expenses, net of fuel surcharge revenue, divided by revenue before fuel surcharge. Although the operating ratio is not a recognized financial measure defined by IFRS, it is a widely recognized measure in the transportation industry, which we believe provides a comparable benchmark for evaluating the Company’s performance. Also, to facilitate the comparison of business level activity and operating costs between periods, the Company compares the revenue before fuel surcharge (“revenue”) and reallocates the fuel surcharge revenue to materials and services expenses within operating expenses. Operating ratio (unaudited) (in thousands of dollars) Operating expenses Fuel surcharge revenue Fourth quarters ended December 31 Years ended December 31 2017 2016 2017 2016 1,115,701 1,068,017 4,497,295 3,775,943 (123,481 ) (101,288 ) (459,196 ) (320,720 ) Operating expenses, net of fuel surcharge revenue 992,220 966,729 4,038,099 3,455,223 Revenue before fuel surcharge Operating ratio 1,058,990 1,036,446 4,281,823 3,704,488 93.7% 93.3% 94.3% 93.3% RISKS AND UNCERTAINTIES The Company’s future results may be affected by a number of factors over some of which the Company has little or no control. The following discussion of risk factors contains forward-looking issues, uncertainties and risks, among others, should be considered in evaluating the Company’s business and growth outlook: statements. following The Competition. The Company operates in a highly-competitive and fragmented industry, and numerous competitive factors could impair the Company’s ability to maintain or improve the Company’s profitability and could have a materially adverse effect on the Company’s results of operations. In addition, the Company faces growing competition from other transporters in the United States and Mexico. These factors include the following: • • • the Company competes with many other transportation companies of varying sizes, including United States and Mexican transportation companies; the Company’s competitors may periodically reduce their freight rates to gain business, which may limit the Company’s ability to maintain or increase freight rates or maintain growth in the Company’s business; the Company’s some of customers are other transportation companies or also operate their own private trucking fleets, and they may decide to transport more of their own freight; • some of the Company’s customers may reduce the number of carriers they use by selecting so-called “core carriers” as approved service providers or by engaging dedicated providers, and in some instances the Company may not be selected; • many customers periodically accept bids from multiple carriers for their shipping needs, and this process may depress freight rates or result in the loss of some of the Company’s business to competitors; • • • the market for qualified drivers can be competitive, particularly in the Company’s growing United States operations, and the Company’s inability to attract and retain drivers could reduce the Company’s equipment utilization or increase compensation, both of which would adversely affect the Company’s profitability; the Company cause to economies of scale that may be passed on to smaller carriers by procurement aggregation providers may improve their ability to compete with the Company; some of the Company’s smaller competitors may not yet be fully compliant with pending regulations, such as regulations requiring the use of electronic logging devices, which may allow such competitors to take advantage of additional driver productivity; 2017 Annual Report 24 MANAGEMENT’S DISCUSSION AND ANALYSIS • • advances in technology may require the Company to increase investments in order to remain competitive, and the Company’s customers may not be willing to accept higher freight rates to cover the cost of these investments; and higher fuel prices and, in turn, higher fuel surcharges to the Company’s customers may cause some of the Company’s customers to consider freight transportation alternatives, including rail transportation. Regulation. The Company operates in a highly-regulated industry, and changes in existing regulations or violations of existing or future regulations could have a materially adverse effect on the Company’s operations and profitability. In Canada, carriers must obtain licenses issued by provincial transport boards in order to carry goods inter-provincially or to transport goods within any province. Licensing from United States and Mexican regulatory authorities is also required for the transportation of goods between Canada, the United States and Mexico. Any change in or violation of existing or future regulations could have an adverse impact on the scope of the Company’s activities. The Company is increasing the Company’s operations in the United States, where the transportation industry is subject to regulation from various federal, state and local agencies. Drivers must comply with safety and fitness regulations, including those relating to drug and alcohol testing, driver safety performance and hours of service, and matters such as equipment weight and dimensions, exhaust emissions and fuel efficiency are also subject to government regulation. The right to continue to hold applicable licenses and permits is generally subject to maintaining satisfactory compliance with regulatory and safety guidelines, policies and laws. Although the Company is committed to compliance with laws and safety, there is no assurance that it will be in full compliance with them at all times. Consequently, at some future time, the Company could be required to incur significant costs to maintain or improve its compliance record. Future laws and regulations may be more stringent, require changes in the Company’s operating practices, influence the demand for transportation services or require the Company to incur additional significant costs. to and transportation the International Operations. A growing portion of Company’s revenue is derived from operations in the United States and from Mexico. The Company’s international operations are subject to a variety of risks, including fluctuations in foreign currencies, changes in the economic strength or greater volatility in the economies of foreign countries in which the Company does business, difficulties in enforcing contractual rights and intellectual property rights, compliance burdens associated with export and import laws, and social, political and economic instability. The Company’s international operations could be adversely affected by restrictions on travel. Additional risks associated with include restrictive trade policies, imposition of duties, taxes or international operations the Company’s TFI International government royalties by foreign governments, adverse changes in the regulatory environments, including in tax laws and regulations, of the foreign countries in which the Company does business, compliance with anti-bribery laws, restrictions on the withdrawal of foreign investments, the ability to identify and retain qualified local managers and the challenge of managing a culturally and geographically diverse operation. Operating Environment. The Company is subject to changes in its general operating environment. The Company is exposed to the following factors, among others, affecting its operating environment: • • • • the Company’s future insurance and claims expense, including the cost of the Company’s liability insurance premiums and the number and severity of claims, may levels, which would require the exceed historical Company to incur additional costs and could reduce the Company’s earnings; declines in the demand for used revenue equipment could result in decreased equipment sales, lower resale values and lower gains (or recording losses) on sales of assets; increased prices for new revenue equipment, design changes of new engines, reduced equipment efficiency resulting reduce emissions, or decreased availability of new revenue equipment; and from new engines designed to adverse weather conditions can adversely affect the Company’s revenue, as inclement weather may impede operations and may cause higher accident frequency, increased claims, more equipment repairs and decreased fuel efficiency due to increased engine idling. General Economic, Credit, Business and Regulatory Conditions. The Company’s business is subject to general economic, credit, business and regulatory factors that are largely beyond the Company’s control, and which could have a materially adverse effect on the Company’s operating results. The Company’s industry is highly cyclical, and the Company’s business is dependent on a number of factors that may have a materially adverse effect on the Company’s results of operations, many of which are beyond the Company’s control. The Company believes that some of the most significant of these factors include (i) excess tractor and trailer capacity in the transportation industry in comparison with shipping demand; (ii) declines in the resale value of used equipment; (iii) strikes, work stoppages or work slowdowns at the Company’s facilities or at customer, port, border crossing or other shipping-related facilities; and (iv) increases in interest rates, fuel taxes, tolls and license and registration fees. The Company is also affected by (i) recessionary economic cycles, which tend to be characterized by weak demand and downward pressure on rates; (ii) changes in customers’ inventory levels and in the availability of funding for their working capital; (iii) changes in the way the Company’s customers choose to source or utilize the Company’s services; and (iv) downturns in customers’ business cycles, such as retail and manufacturing, where the Company has significant customer concentration. Economic conditions may adversely affect customers and their demand for and ability to pay for the Company’s services. Customers encountering adverse economic conditions represent a greater potential for loss increase the and the Company may be required to Company’s allowance for doubtful accounts. Economic conditions that decrease shipping demand and increase the supply of available tractors and trailers can exert downward pressure on rates and equipment utilization, thereby decreasing asset productivity. The risks associated with these factors are heightened when the economy is weakened. Some of the principal risks during such times include: • • • • the Company may experience a reduction in overall freight levels, which may impair the Company’s asset utilization; freight patterns may change as supply chains are redesigned, resulting in an imbalance between the Company’s capacity and customers’ freight demand; customers may solicit bids for freight from multiple trucking companies or select competitors that offer lower rates in an attempt to lower their costs, and the Company may be forced to lower the Company’s rates or lose freight; and lack of access to current sources of credit or lack of lender access to capital, leading to an inability to secure credit financing on satisfactory terms, or at all. reduce that could materially The Company is subject to cost increases that are outside the the Company’s control Company’s profitability if the Company is unable to increase its rates sufficiently. Such cost increases include, but are not limited to, increases in fuel and energy prices, driver and office employee wages, purchased transportation costs, taxes, interest rates, tolls, license and registration fees, insurance premiums and claims, revenue equipment and related maintenance, and tires and other components. The Company could be affected by strikes or other work stoppages at the Company’s service centers or at customer, port, border or other shipping locations. Further, the Company may not be able to appropriately adjust the Company’s costs and staffing levels to changing market demands. In periods of rapid change, it is more difficult to match the Company’s staffing level to the Company’s business needs. MANAGEMENT’S DISCUSSION AND ANALYSIS 25 Changing impacts of regulatory measures could impair the Company’s operating efficiency and productivity, decrease the Company’s operating revenues and profitability and result in higher operating costs. From time to time, various taxes are also increased, including taxes on fuels. The Company cannot predict whether, or in what form, any such increase applicable to the Company will be enacted, but such an increase could adversely affect the Company’s results of operations and profitability. In addition, the Company cannot predict future economic conditions, fuel price fluctuations or changes in consumer confidence. Interest Rate Fluctuations. Changes in interest rates may result in fluctuations in the Company’s future cash flows related to variable-rate financial liabilities. For these items, cash flows could be impacted by changes in benchmark rates such as Bankers’ Acceptance or London Interbank Offered Rate (Libor). In addition, the Company is exposed to gains and losses arising from changes in interest rates through its derivative financial instruments carried at fair value. Currency Fluctuations. Significant fluctuations in relative currency values against the Canadian dollar could have a significant impact on the Company’s future profitability. The Company’s financial results are reported in Canadian dollars and a growing portion of the Company’s revenue and operating costs are realized in currencies other than Canadian dollars, primarily United States dollars. The exchange rates between these currencies and the Canadian dollar have fluctuated in recent years and may continue to do so in the future. It is not possible to mitigate all exposure to fluctuations in foreign currency exchange rates. The results of operations are therefore affected by movements of these currencies against the Canadian dollar. armed events, terrorist activities, Price and Availability of Fuel. Fuel is one of the Company’s largest operating expenses. Diesel fuel prices fluctuate greatly due to factors beyond the Company’s control, such as political conflicts, commodity futures trading, currency fluctuations and natural and man-made disasters, any of which may lead to an increase in the cost of fuel. Fuel prices are also affected by the rising demand for fuel in developing countries, and could be materially adversely affected by the use of crude oil and oil reserves for purposes other than fuel production and by diminished drilling activity. Such events may lead not only to increases in fuel prices, but also to fuel shortages and disruptions in the fuel supply chain. Because the Company’s operations are dependent upon diesel fuel, significant diesel fuel cost increases, shortages or supply disruptions could materially and adversely affect the Company’s business, financial condition and results of operations. While the Company has fuel surcharge programs in place with a majority of the Company’s customers, which historically have helped the Company offset the majority of the negative impact of rising fuel prices, the Company also 2017 Annual Report 26 MANAGEMENT’S DISCUSSION AND ANALYSIS incurs fuel costs that cannot be recovered even with respect to customers with which the Company maintains fuel surcharge programs, such as those associated with non- revenue generating miles or time when the Company’s engines are idling. Moreover, the terms of each customer’s fuel surcharge program vary from one division to another, and the recoverability for fuel price increases varies as well. In addition, because the Company’s fuel surcharge recovery lags behind changes in fuel prices, the Company’s fuel surcharge recovery may not capture the increased costs the Company pays for fuel, especially when prices are rising. This could lead to fluctuations in the Company’s levels of reimbursement, which have occurred in the past. There can be no assurance that such fuel surcharges can be maintained indefinitely or will be sufficiently effective. Insurance. The Company’s operations are subject to risks inherent in the transportation sector, including personal injury, property damage, worker’s compensation and employment and other issues. The Company’s future insurance and claims expenses may exceed historical levels, which could reduce the Company’s earnings. The Company subscribes for insurance in amounts it considers appropriate in the circumstances and having regard to industry norms. Like many players in the industry, the Company self-insures a significant portion of the claims exposure related to cargo loss, bodily injury, worker’s compensation and property damages. Due to the Company’s significant self-insured amounts, the Company has exposure to fluctuations in the number or severity of claims and the risk of being required to accrue or pay additional amounts if the Company’s estimates are revised or claims ultimately prove to be more severe than originally assessed. Further, the Company’s self-insured retention levels could change and result in more volatility than in recent years. Although the Company believes its aggregate insurance limits should be sufficient to cover reasonably expected claims, it is possible that the amount of one or more claims could exceed the Company’s aggregate coverage limits or that the Company chose not to obtain insurance in respect of such claims. If any claim were to exceed the Company’s coverage, the Company would bear the excess, in addition to the Company’s other self-insured amounts. The Company’s results of operations and financial condition could be materially and adversely affected if (i) cost per claim, premiums or the number of claims significantly exceeds the Company’s coverage limits or retention amounts; (ii) the Company experiences a claim in excess of the Company’s coverage limits; (iii) the Company’s insurance carriers fail to pay on the Company’s insurance claims; or (iv) the Company experiences a claim for which coverage is not provided, either because the Company chose not to obtain insurance as a result of high premiums or because the claim is not covered by insurance the Company has in place. TFI International Employee and Company’s Labour Relations. At the date hereof, the collective agreements between the Company and the vast majority of the Company’s unionized employees have been renewed. The Company’s unionized employees are all Canadian employees, and the Company does not currently have union contracts in place with respect to any of the Company’s United States operations. Although the Company believes that the Company’s relations with the Company’s employees are satisfactory, no assurance can be given that the Company will be able to successfully extend or renegotiate the Company’s current collective agreements as they expire from time to time. If the Company fails to extend or renegotiate the Company’s collective agreements, if disputes with the Company’s unions arise, or if the Company’s unionized workers engage in a strike or other work stoppage or the Company could interruption, experience a significant disruption of, or inefficiencies in, the Company’s operations or incur higher labour costs, which could have a materially adverse effect on the Company’s business, results of operations, financial condition and liquidity. Drivers. Increases in driver compensation or difficulties attracting and retaining qualified drivers could have a materially adverse effect on the Company’s profitability and the ability to maintain or grow the Company’s fleet. Like many in the transportation sector, the Company experiences substantial difficulty in attracting and retaining sufficient numbers of qualified drivers. The truckload industry periodically experiences a shortage of qualified drivers. The Company believes the shortage of qualified drivers and intense competition for drivers from other transportation companies will create difficulties in maintaining or increasing the number of drivers and may restrain the Company’s ability to engage a sufficient number of drivers, and the Company’s inability to do so may negatively impact the Company’s operations. Further, the compensation the Company offers the Company’s drivers and independent contractor expenses are subject to market conditions, and the Company may find it necessary to increase driver compensation in future periods. the Company and many other trucking In addition, companies suffer from a high turnover rate of drivers. This high turnover rate requires the Company to continually recruit a substantial number of drivers in order to operate existing revenue equipment. If the Company is unable to continue to attract and retain a sufficient number of drivers, the Company could be forced to, among other things, adjust the Company’s compensation packages, increase the number of the Company’s tractors without drivers or operate with fewer trucks and face difficulty meeting shipper demands, any of which could adversely affect the Company’s growth and profitability. to successfully Acquisitions and Integration Risks. Historically, acquisitions have been a part of the Company’s growth strategy. The Company may not be able integrate acquisitions into the Company’s business, or may incur significant unexpected costs in doing so. Further, the process of integrating acquired businesses may be disruptive to the Company’s existing business and may cause an interruption or reduction of the Company’s business as a result of the following factors, among others: • • • • • • • loss of key employees, customers or contracts; in or inconsistencies conflicts between possible standards, controls, procedures and policies among the implement combined companies and the need to company-wide information financial, technology and other systems; accounting, failure to maintain or improve the safety or quality of services that have historically been provided; inability to retain, integrate, hire or recruit qualified employees; unanticipated environmental or other liabilities; failure organizations; and to coordinate geographically dispersed the diversion of management’s attention from the Company’s day-to-day business as a result of the need to manage any disruptions and difficulties and the need to add management resources to do so. Anticipated cost savings, synergies, revenue enhancements or other benefits from any acquisitions that the Company undertakes may not materialize in the expected timeframe or at all. The Company’s estimated cost savings, synergies, revenue enhancements or other benefits from acquisitions are subject to a number of assumptions about the timing, execution and costs associated with realizing such synergies. Such assumptions are inherently uncertain and are subject to a wide variety of significant business, economic and competition risks. There can be no assurance that such assumptions will turn out to be correct and, as a result, the amount of cost savings, synergies, revenue enhancements or other benefits the Company actually realizes and/or the timing of such realization may differ significantly (and may be significantly lower) from the ones the Company estimated, and the Company may incur significant costs in reaching the estimated cost savings, synergies, revenue enhancements or other benefits. Many of the Company’s recent acquisitions have involved the purchase of stock of existing companies. These acquisitions, as well as acquisitions of substantially all of the assets of a company, may expose the Company to liability for actions taken by an acquired business and its management before the Company’s acquisition. The due diligence the Company MANAGEMENT’S DISCUSSION AND ANALYSIS 27 in connection with an acquisition and any conducts contractual guarantees or indemnities that the Company receives from the sellers of acquired companies may not be sufficient to protect the Company from, or compensate the Company for, actual liabilities. Generally, the representations made by the sellers, other than certain representations related to fundamental matters, such as ownership of capital stock, expire within several years of the closing. A material liability associated with an acquisition, especially where there is no right to indemnification, could adversely affect the Company’s results of operations, financial condition and liquidity. The Company intends to continue to review acquisition and investment opportunities to attempt to acquire companies and assets that meet the Company’s investment criteria. Depending on the number of acquisitions and investments and funding requirements, the Company may need to raise substantial additional capital. Instability or disruptions in the capital markets, including credit markets, or the deterioration of the Company’s financial condition due to internal or external factors, could restrict or prohibit access to the capital markets and could also increase the Company’s cost of capital. To the extent the Company raises additional capital through the sale of equity, equity-linked or convertible debt securities, the issuance of such securities could result in dilution to the Company’s existing shareholders. If the Company raises additional funds through the issuance of debt securities, the terms of such debt could impose the Company’s additional operations. Additional capital, if required, may not be available on acceptable terms or at all. If the Company is unable to obtain additional capital at a reasonable cost, the Company may be required to forego potential acquisitions, which could impair the execution of the Company’s growth strategy. restrictions and costs on In addition, the Company faces competition from peer group and non-peer group firms for acquisition opportunities. This external competition may hinder the Company’s ability to identify and/or consummate future acquisitions successfully. There is also a risk of impairment of acquired goodwill and intangible assets. This risk of impairment to goodwill and intangible assets exists because the assumptions used in the initial valuation of these assets, such as interest rate or forecasted cash flows, may change when testing for impairment is required. There is no assurance that the Company will be successful in identifying, negotiating, consummating or integrating any future acquisitions. If the Company does not make any future acquisitions, the Company’s growth rate could be materially and adversely affected. Any future acquisitions the Company does undertake could involve the dilutive issuance of equity securities or incurring additional indebtedness. 2017 Annual Report 28 MANAGEMENT’S DISCUSSION AND ANALYSIS Environmental Matters. The Company uses storage tanks at certain of its Canadian and United States transportation terminals. Canadian and United States laws and regulations generally impose potential liability on the present or former owners or occupants or custodians of properties on which contamination has occurred. Although the Company is not aware of any contamination which, if remediation or clean- up were required, would have a material adverse effect on it, certain facilities have been in operation for many years and over such time, the Company or the prior owners, operators or custodians of the properties may have generated and disposed of wastes which are or may be considered hazardous. Liability may be imposed without regard to whether the Company knew of, or was responsible for, the presence or disposal of those substances. In addition, the presence of those substances, or the failure to properly dispose of or remove those substances, may adversely affect the Company’s ability to sell or rent that property. There can be no assurance that the Company will not be required at some future date to incur significant costs to comply with environmental laws, or that the Company’s operations, business or assets will not be materially affected by current or future environmental laws. The Company’s transportation operations and its properties are subject to extensive and frequently-changing federal, provincial, state, municipal and local environmental laws, regulations and requirements in Canada, the United States and Mexico relating to, among other things, air emissions, the management of contaminants, including hazardous substances and other materials (including the generation, handling, storage, transportation and disposal thereof), discharges and the remediation of environmental impacts (such as the contamination of soil and water, including ground water). A risk of environmental liabilities is inherent in transportation operations, historic activities associated with such operations and the ownership, management or control of real estate. Environmental laws may authorize, among other things, federal, provincial, state and local environmental regulatory agencies to issue orders, bring administrative or judicial actions for violations of environmental laws and regulations or to revoke or deny the renewal of a permit. Potential penalties for such violations may include, among other things, civil and criminal monetary penalties, imprisonment, permit suspension or revocation and injunctive relief. These agencies may also, among other things, revoke or deny renewal of the Company’s operating permits, franchises or licenses for violations or alleged violations of environmental laws or regulations and impose environmental assessment, removal of contamination, follow up or control procedures. TFI International In addition, certain environmental regulations, particularly in the United States, limit exhaust emissions. The Company believes these requirements will result in increases in new tractor and trailer prices and additional parts and maintenance costs incurred to retrofit the Company’s tractors and trailers with technology to achieve compliance with such exhaust emissions standards, which could adversely affect the Company’s operating results and profitability, particularly if such costs are not offset by potential fuel savings. Furthermore, any future regulations that impose restrictions, caps, taxes or other controls on emissions of greenhouse gases could adversely affect the Company’s operations and financial results. Until the timing, scope and extent of any future regulation becomes known, the Company cannot predict its effect on the Company’s cost structure or the Company’s operating results; however, any future regulation impair the Company’s operating efficiency and could productivity and result in higher operating costs. Environmental Contamination. The Company may have liability for environmental contamination associated with its current or formerly-owned or leased facilities as well as third- party facilities. If the Company incurs liability under applicable federal, state, provincial or local laws and regulations and if it cannot identify other parties which it can compel to contribute to its expenses and who are financially able to do so, it could have a material adverse effect on the Company’s financial condition and results of operations. The Company could be subject to orders and other legal actions and procedures brought by governmental or private parties in connection with environmental contamination, emissions or discharges. Although the Company has instituted programs to monitor and control environmental risks and promote compliance with applicable environmental laws and regulations, if the Company is involved in a spill or other accident involving hazardous substances, if there are releases of hazardous substances the Company transports, if soil or groundwater contamination is found at the Company’s facilities or results from the Company’s operations, or if the Company is found to be in violation of applicable laws or regulations, the Company could be subject to cleanup costs and liabilities, including substantial fines or penalties or civil and criminal liability, any of which could have a materially adverse effect on the Company’s business and operating results. Key Personnel. The future success of the Company will be based in large part on the quality of the Company’s management and key personnel. The loss of key personnel could have a negative effect on the Company. There can be no assurance that the Company will be able to retain its current personnel or, in the event of their departure, to develop or attract new personnel of equal quality. including other Dependence on Third Parties. Certain portions of the Company’s business are dependent upon the services of third- party capacity providers, transportation companies. For that portion of the Company’s business, the Company does not own or control the transportation assets that deliver the customers’ freight, and the Company does not employ the people directly involved in delivering the freight. This reliance could also cause delays in reporting certain events, including recognizing revenue and claims. These third-party providers seek other freight opportunities and may require increased compensation in times of improved freight demand or tight trucking capacity. The Company’s inability to secure the services of these third parties could significantly limit the Company’s ability to serve its customers on competitive terms. Additionally, if the Company is unable to secure sufficient equipment or other transportation services to meet the Company’s commitments to the Company’s customers or provide the Company’s services on competitive terms, the Company’s operating results could be materially and adversely affected. The Company’s ability to secure sufficient equipment or other transportation services is affected by many risks beyond the Company’s control, including equipment shortages in the transportation industry, particularly among contracted carriers, interruptions in service due to labour disputes, changes in regulations in transportation rates. impacting transportation and changes covenants, restrictions arrangement Loan Default. The Company’s current credit facilities and financing agreements contain certain restrictions and other covenants relating to, among other things, funded debt, distributions, liens, investments, acquisitions and dispositions outside the ordinary course of business and affiliate transactions. If the Company fails to comply with any of its and financing requirements, the Company could be in default under the relevant agreement, which could cause cross-defaults to other financing arrangements. In the event of any such default, if the Company failed to obtain replacement financing or amendments to or waivers under the applicable financing arrangement, the Company may be unable to pay dividends to its shareholders, its lenders could cease making further advances, declare the Company’s debt to be immediately due and payable, fail to renew letters of credit, impose significant restrictions and requirements on the Company’s operations, foreclosure procedures institute against their collateral, or impose significant fees and transaction costs. If debt acceleration occurs, economic conditions may make it difficult or expensive to refinance the accelerated debt or the Company may have to issue equity securities, which would dilute stock ownership. Even if new financing is made available to the Company, credit may not be available to the Company on acceptable terms. A default under the Company’s financing arrangements could result in MANAGEMENT’S DISCUSSION AND ANALYSIS 29 a materially adverse effect on its liquidity, financial condition and results of operations. As at the date hereof, the Company was in compliance with all of the Company’s debt covenants and obligations. Credit Facilities. The Company’s credit facilities and financing agreements mature on various dates. The Company has significant ongoing capital requirements that could affect the Company’s profitability if the Company is unable to generate sufficient cash from operations and/or obtain financing on favourable terms. There can be no assurance that such credit facilities or financing agreements will be renewed or refinanced, or if renewed or refinanced, that the renewal or refinancing will occur on equally favourable terms to the Company. The Company’s ability to pay dividends to shareholders and ability to purchase new revenue equipment may be adversely affected if the Company is not able to renew its credit facilities or arrange refinancing, or if such renewal or refinancing, as the case may be, occurs on terms materially less favourable to the Company than at present. If the Company is unable to generate sufficient cash flow from operations and obtain financing on terms favourable to the Company in the future, the Company may have to limit the Company’s fleet size, enter into less favourable financing arrangements or operate the Company’s revenue equipment for longer periods, any of which may have a materially adverse effect on the Company’s operations. Customer and Credit Risks. The Company provides services to clients primarily in Canada, the United States and Mexico. The concentration of credit risk to which the Company is exposed is limited due to the significant number of customers that make up its client base and their distribution across different geographic areas. Furthermore, no client accounted for more than 5% of the Company’s total accounts receivable for the period ended as of the date hereof. Generally, the Company does not have long-term contracts in with the Company’s major customers. Accordingly, response to economic conditions, supply and demand factors in the industry, the Company’s performance, the Company’s customers’ internal initiatives or other factors, the Company’s customers may reduce or eliminate their use of the Company’s services, or may threaten to do so to gain pricing and other concessions from the Company. Economic conditions and capital markets may adversely affect the Company’s customers and their ability to remain solvent. The customers’ financial difficulties can negatively impact the Company’s results of operations and financial condition, especially if those customers were to delay or default in payment to the Company. For certain customers, the Company has entered into multi-year contracts, and the rates the Company charges may not remain advantageous. 2017 Annual Report 30 MANAGEMENT’S DISCUSSION AND ANALYSIS Availability of Capital. If the economic and/or the credit markets weaken, or the Company is unable to enter into acceptable financing arrangements to acquire revenue equipment, make investments and fund working capital on terms favourable to it, the Company’s business, financial results and results of operations could be materially and adversely affected. The Company may need to incur additional indebtedness, reduce dividends or sell additional shares in order to accommodate these items. A decline in the credit or equity markets and any increase in volatility could make it more difficult for the Company to obtain financing and may lead to an adverse impact on the Company’s profitability and operations. Information Systems. The Company depends heavily on the proper functioning, availability and security of the Company’s information and communication systems, including financial reporting and operating systems, in operating the Company’s business. The Company’s operating system is critical to understanding customer demands, accepting and planning loads, dispatching equipment and drivers and billing and collecting for the Company’s services. The Company’s financial reporting system is critical to producing accurate and timely analyzing business information to help the Company manage its business effectively. statements financial and The Company’s operations and those of the Company’s technology and communications service providers are vulnerable to interruption by natural and man-made disasters and other events beyond the Company’s control. If any of the Company’s critical information systems fail, are breached or become otherwise unavailable, the Company’s ability to manage the Company’s fleet efficiently, to respond to customers’ requests effectively, to maintain billing and other records reliably, to maintain the confidentiality of the Company’s data and to bill for services and prepare financial system significant statements accurately or in a timely manner would be challenged. Any failure, upgrade complication, security breach or other system disruption could interrupt or delay the Company’s operations, damage the Company’s reputation, cause the Company to lose customers, cause the Company to incur costs to repair the Company’s systems or in respect of litigation or impact the Company’s ability to manage the Company’s operations and report the Company’s financial performance, any of which could have a materially adverse effect on the Company’s business. Litigation. The Company’s business is subject to the risk of litigation by employees, customers, vendors, government agencies, shareholders and other parties. The outcome of litigation is difficult to assess or quantify, and the magnitude of the potential loss relating to such lawsuits may remain unknown for substantial periods of time. The cost to defend litigation may also be significant. Not all claims are covered by the Company’s insurance, and there can be no assurance that the Company’s coverage limits will be adequate to cover all amounts in dispute. In the United States, where the Company has growing operations, many trucking companies have been subject to class-action lawsuits alleging violations of various federal and state wage and the Company’s laws regarding, among other things, employee classification, employee meal breaks, rest periods, overtime eligibility, and failure to pay for all hours worked. A number of these lawsuits have resulted in the payment of substantial settlements or damages by the defendants. To the extent the Company experiences claims that are uninsured, exceed the Company’s coverage limits, involve significant aggregate use of the Company’s self- insured retention amounts or cause increases in future premiums, the resulting expenses could have a materially adverse effect on the Company’s business, results of operations, financial condition and cash flows. CRITICAL ACCOUNTING POLICIES AND ESTIMATES IFRS to make requires management The preparation of the financial statements in conformity judgments, with estimates and assumptions about future events. These estimates and the underlying assumptions affect the reported amounts of assets and liabilities, the disclosures about contingent assets and liabilities, and the reported amounts of revenues and expenses. Such estimates include the valuation of goodwill and intangible assets, the measurement of identified assets and in business combinations, the provision for income taxes, and the self- insurance provisions. These estimates and assumptions are based on management’s best estimates and judgments. liabilities acquired Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, the current economic environment, which including management believes the to be circumstances. Management adjusts such estimates and assumptions when facts and circumstances dictate. Actual results could differ from these estimates. Changes in those estimates and assumptions resulting from changes in the economic environment will be reflected in the financial statements of future periods. reasonable under TFI International MANAGEMENT’S DISCUSSION AND ANALYSIS 31 CHANGES IN ACCOUNTING POLICIES Adopted during the period The following new standards, and amendments to standards and interpretations, are effective for the first time for interim periods beginning on or after January 1, 2017 and have been applied in preparing the audited consolidated financial statements: Disclosure Initiative: Amendments to IAS 7 Recognition of Deferred Tax Assets for Unrealized Losses: Amendments to IAS 12 Annual Improvements to IFRS Standards (2014-2016 cycle) To be adopted in future periods The following new standards and amendments to standards are not yet effective for the year ended December 31, 2017, and have not been applied in preparing the audited consolidated financial statements: IFRS 15, Revenue from Contracts with Customers Classification and Measurement of Share-based Payment Transactions: Amendments to IFRS 2 IFRIC 22, Foreign Currency Transactions and Advance Consideration IFRS 16, Leases These new standards did not have a significant impact on the Company’s audited consolidated financial statements. Annual Improvements to IFRS Standards (2015-2017 cycle) CONTROLS AND PROCEDURES In compliance with the provisions of Canadian Securities Administrators’ Regulation 52-109, the Company has filed certificates signed by the President and Chief Executive Officer (“CEO”) and by the Chief Financial Officer (“CFO”) that, among other things, report on: • • their responsibility for establishing and maintaining disclosure controls and procedures and internal control over financial reporting for the Company; and the design and effectiveness of disclosure controls and procedures and the design and effectiveness of internal controls over financial reporting. Disclosure controls and procedures (“DC&P”) The President and Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), have designed DC&P, or have caused them to be designed under their supervision, in order to provide reasonable assurance that: • material information relating to the Company is made known to the CEO and CFO by others, particularly during the period in which the interim and annual filings are being prepared; and • information required to be disclosed by the Company in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation. IFRIC 23, Uncertainty over Income Tax Treatments Further information can be found in note 3 of the December 31, 2017 audited consolidated financial statements. As at December 31, 2017, an evaluation was carried out, under the supervision of the CEO and the CFO, of the design and operating effectiveness of the Company’s DC&P. Based on this evaluation, the CEO and the CFO concluded that the Company’s DC&P were appropriately designed and were operating effectively as at December 31, 2017. Internal controls over financial reporting (“ICFR”) The CEO and CFO have also designed ICFR, or have caused them to be designed under their supervision, in order to provide reasonable assurance regarding the reliability of financial financial statements for external purposes in accordance with IFRS. the preparation of reporting and As at December 31, 2017, an evaluation was carried out, under the supervision of the CEO and the CFO, of the design and operating effectiveness of the Company’s ICFR. Based on this evaluation, the CEO and the CFO concluded that the ICFR were appropriately designed and were operating effectively as at December 31, 2017, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission Internal Control – Integrated Framework (2013 framework). (COSO) on Changes in internal controls over financial reporting No changes were made to the Company’s ICFR during the quarter ended December 31, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s ICFR. 2017 Annual Report 32 MANAGEMENT’S RESPONSIBILITY The consolidated financial statements of TFI International Inc. and all information in this annual report are the responsibility of management and have been approved by the Board of Directors. The financial statements have been prepared by management in conformity with International Financial Reporting Standards. They include some amounts that are based on management’s best estimates and judgement. Financial information included elsewhere in the annual report is consistent with that in the financial statements. The management of TFI International Inc. has developed and maintains an internal accounting system and administrative controls in order to provide reasonable assurance that the financial transactions are properly recorded and carried out with the necessary approval, and that the consolidated financial statements are properly prepared and the assets properly safeguarded. The Board of Directors carries out its responsibility for the financial statements in this annual report principally through its Audit Committee. The Audit Committee reviews the Company’s annual consolidated financial statements and recommends their approval by the Board of Directors. These financial statements have been audited by the independent auditors, KPMG LLP, whose report follows. Alain Bédard, FCPA, FCA Chairman of the Board, President and Chief Executive Officer February 20, 2018 TFI International INDEPENDENT AUDITORS’ REPORT 33 To the Shareholders of TFI International Inc. We have audited the accompanying consolidated financial statements of TFI International Inc., which comprise the consolidated statements of financial position as at December 31, 2017 and December 31, 2016, the consolidated statements of income, comprehensive income, changes in equity and cash flows for the years then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management’s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB"), and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of TFI International Inc. as at December 31, 2017 and December 31, 2016, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. February 20, 2018 Montréal, Canada *CPA auditor, CA, public accountancy permit No. A109612 2017 Annual Report 34 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION DECEMBER 31, 2017 AND 2016 (in thousands of Canadian dollars) Assets Cash and cash equivalents Trade and other receivables Inventoried supplies Current taxes recoverable Prepaid expenses Derivative financial instruments Assets held for sale Current assets Property and equipment Intangible assets Other assets Deferred tax assets Derivative financial instruments Non-current assets Total assets Liabilities Bank indebtedness Trade and other payables Current taxes payable Provisions Other financial liability Derivative financial instruments Long-term debt Current liabilities Long-term debt Employee benefits Provisions Other financial liability Derivative financial instruments Deferred tax liabilities Non-current liabilities Total liabilities Equity Share capital Contributed surplus Accumulated other comprehensive income Retained earnings Equity attributable to owners of the Company Operating leases, contingencies, letters of credit and other commitments Total liabilities and equity (*) Recasted (see notes 5 c) and 15) The notes on pages 39 to 84 are an integral part of these consolidated financial statements. On behalf of the Board: As at December 31, As at December 31, Note 2017 2016* 7 25 9 10 11 16 25 12 15 25 13 13 14 15 25 16 17 17, 19 26 — 567,106 9,296 14,852 33,228 4,521 23,409 652,412 1,197,613 1,832,274 35,874 5,138 4,317 3,075,216 3,727,628 9,392 425,815 13,913 32,344 1,300 559 52,427 535,750 1,445,969 17,559 39,380 13,281 373 260,192 1,776,754 2,312,504 711,036 21,995 (2,811 ) 684,904 1,415,124 3,654 569,181 8,520 11,370 38,746 741 1,850 634,062 1,367,161 1,973,150 42,809 8,410 1,287 3,392,817 4,026,879 — 455,175 57,717 21,370 — 2,376 40,498 577,136 1,544,317 14,282 44,406 5,447 3,707 378,934 1,991,093 2,568,229 723,390 20,230 51,977 663,053 1,458,650 3,727,628 4,026,879 Alain Bédard André Bérard Director Director TFI International YEARS ENDED DECEMBER 31, 2017 AND 2016 (In thousands of Canadian dollars, except per share amounts) Note 2017 2016* CONSOLIDATED STATEMENTS OF INCOME 35 Revenue Fuel surcharge Total revenue Materials and services expenses Personnel expenses Other operating expenses Depreciation of property and equipment Amortization of intangible assets Gain on sale of rolling stock and equipment Total operating expenses Operating income Gain on sale of land and buildings Gain on sale of assets held for sale Impairment of intangible assets Finance income (costs) Finance income Finance costs Net finance costs Income before income tax Income tax expense (recovery) Net income from continuing operations Net income from discontinued operations Net income for the year attributable to owners of the Company Earnings per share attributable to owners of the Company Basic earnings per share Diluted earnings per share Earnings per share from continuing operations attributable to owners of the Company Basic earnings per share Diluted earnings per share (*) Recasted for changes in presentation The notes on pages 39 to 84 are an integral part of these consolidated financial statements. 4,281,823 459,196 4,741,019 2,739,834 1,220,871 268,599 209,557 61,200 (2,766 ) 4,497,295 3,704,488 320,720 4,025,208 2,352,594 998,031 243,713 139,439 53,647 (11,481 ) 3,775,943 243,724 249,265 232 77,446 (142,981 ) 4,250 (65,325 ) (61,075 ) 117,346 (40,642 ) 157,988 — 8,948 — — 4,832 (59,714 ) (54,882 ) 203,331 46,272 157,059 482,520 157,988 639,579 1.75 1.70 1.75 1.70 6.83 6.70 1.68 1.64 20 20 20 20 20 20 21 10 23 23 24 6 18 18 18 18 2017 Annual Report 36 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME YEARS ENDED DECEMBER 31, 2017 AND 2016 (In thousands of Canadian dollars) 2017 2016 Net income for the year attributable to owners of the Company 157,988 639,579 Other comprehensive income (loss) Items that may be reclassified to income or loss in future years: Foreign currency translation differences Net investment hedge, net of tax Changes in fair value of cash flow hedge, net of tax Employee benefits, net of tax Unrealized gain on investment in equity securities available for sale, net of tax Reclassification to income of accumulated unrealized gain on investment in equity securities available for sale, net of tax Items that may never be reclassified to income or loss in future years: Defined benefit plan remeasurement gains (losses), net of tax Items directly reclassified to retained earnings: Realized loss on investments, net of tax Unrealized loss on investments measured at fair value through OCI, net of tax Other comprehensive income (loss) for the year, net of tax (80,212 ) 21,761 3,927 (148 ) — — (1,930 ) — (1,403 ) (58,005 ) (24,788 ) 22,373 9,125 (221 ) 923 (923 ) 407 (260 ) (1,054 ) 5,582 Total comprehensive income for the year attributable to owners of the Company 99,983 645,161 The notes on pages 39 to 84 are an integral part of these consolidated financial statements. TFI International CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY 37 YEARS ENDED DECEMBER 31, 2017 AND 2016 (In thousands of Canadian dollars) Accumulated unrealized Note Share Contributed surplus capital loss on Accumulated cash flow hedge employee benefit plans Accumulated foreign currency translation gain differences Accumulated unrealized loss on investment Total equity attributable to owners in equity Retained of the securities earnings Company Balance as at December 31, 2016 723,390 20,230 (221 ) 9,125 44,127 (1,054 ) 663,053 1,458,650 Net income for the year Other comprehensive income (loss) for the year, net of tax Realized loss on equity securities Total comprehensive income (loss) for the year — — — — — — — — — — — — 157,988 157,988 (148 ) — 3,927 — (58,451 ) — (1,403 ) 1,287 (1,930 ) (1,287 ) (58,005 ) — (148 ) 3,927 (58,451 ) (116 ) 154,771 99,983 Share-based payment transactions Stock options exercised Dividends to owners of the 19 17, 19 — 7,748 6,817 (1,514 ) Company Repurchase of own shares Restricted share units exercised Total transactions with owners, recorded directly in equity 17 17 19 — (22,231 ) 2,129 — — (3,538 ) (12,354 ) 1,765 — — — — — — — — — — — — — — — — — — — — — — — — — 6,817 6,234 (70,334 ) (59,334 ) (3,252 ) (70,334 ) (81,565 ) (4,661 ) — (132,920 ) (143,509 ) Balance as at December 31, 2017 711,036 21,995 (369 ) 13,052 (14,324 ) (1,170 ) 684,904 1,415,124 Balance as at December 31, 2015 764,343 17,819 Net income for the year Other comprehensive loss for the year, net of tax Total comprehensive income (loss) for the year — — — — — — — — — 46,542 — 191,095 1,019,799 — — — 639,579 639,579 (221 ) 9,125 (2,415 ) (1,054 ) 147 5,582 (221 ) 9,125 (2,415 ) (1,054 ) 639,726 645,161 Share-based payment transactions Stock options exercised Dividends to owners of the 19 17, 19 — 8,259 6,164 (1,742 ) Company Repurchase of own shares Restricted share units exercised Total transactions with owners, recorded directly in equity 17 17 19 — (50,478 ) 1,266 — — (2,011 ) (40,953 ) 2,411 — — — — — — — — — — — — — — — — — — — — — — 6,164 6,517 (64,867 ) — — (100,722 ) (2,179 ) — (64,867 ) (151,200 ) (2,924 ) — (167,768 ) (206,310 ) Balance as at December 31, 2016 723,390 20,230 (221 ) 9,125 44,127 (1,054 ) 663,053 1,458,650 The notes on pages 39 to 84 are an integral part of these consolidated financial statements. 2017 Annual Report 38 CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2017 AND 2016 (In thousands of Canadian dollars) Cash flows from operating activities Net income for the year attributable to owners of the Company Net income from discontinued operations Net income from continuing operations Adjustments for Depreciation of property and equipment Amortization of intangible assets Impairment of intangible assets Share-based payment transactions Net finance costs Income tax expense (recovery) Gain on sale of property and equipment Gain on sale of assets held for sale Provisions and employee benefits Net change in non-cash operating working capital Cash generated from operating activities Interest paid Income tax paid Net realized loss on derivatives Net cash from operating activities from continuing operations Net cash used in operating activities from discontinued operations Cash flows from investing activities Purchases of property and equipment Proceeds from sale of property and equipment Proceeds from sale of assets held for sale Purchases of intangible assets Business combinations, net of cash and bank indebtedness acquired Purchases of investments Proceeds from sale of investments Others Net cash used in investing activities from continuing operations Net cash from investing activities from discontinued operations Cash flows from financing activities Increase (decrease) in bank indebtedness Proceeds from long-term debt Repayment of long-term debt Dividends paid Repurchase of own shares Proceeds from exercise of stock options Payment of restricted share units Net cash used in financing activities from continuing operations Net cash used in financing activities from discontinued operations Net change in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year (*) Recasted (see note 15) Note 2017 2016* 6 9 10 10 19 23 24 8 21 10 5 157,988 — 157,988 209,557 61,200 142,981 6,817 61,075 (40,642 ) (2,998 ) (77,446 ) 3,809 522,341 (11,649 ) 510,692 (64,538 ) (73,553 ) — 372,601 (52,424 ) 320,177 (259,140 ) 88,773 174,779 (2,083 ) (118,288 ) — 7,914 (1,522 ) (109,567 ) — (109,567 ) 9,392 48,316 (122,964 ) (69,016 ) (81,565 ) 6,234 (4,661 ) (214,264 ) — (214,264 ) (3,654 ) 3,654 — 639,579 482,520 157,059 139,439 53,647 — 6,164 54,882 46,272 (20,429 ) — 6,577 443,611 14,659 458,270 (42,856 ) (77,099 ) (407 ) 337,908 (1,631 ) 336,277 (110,443 ) 60,992 — (1,835 ) (798,303 ) (29,711 ) 13,404 65 (865,831 ) 771,189 (94,642 ) (20,245 ) 615,529 (621,592 ) (64,066 ) (151,200 ) 6,517 (2,924 ) (237,981 ) — (237,981 ) 3,654 — 3,654 The notes on pages 39 to 84 are an integral part of these consolidated financial statements. TFI International YEARS ENDED DECEMBER 31, 2017 AND 2016 (Tabular amounts in thousands of Canadian dollars, unless otherwise noted.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 39 1. Reporting entity TFI International Inc. (the “Company”) is incorporated under the Canada Business Corporations Act, and is a company domiciled in Canada. The address of the Company’s registered office is 8801 Trans-Canada Highway, Suite 500, Montreal, Quebec, H4S 1Z6. The consolidated financial statements of the Company as at and for the years ended December 31, 2017 and 2016 comprise the Company and its subsidiaries (together referred to as the “Group” and individually as “Group entities”). The Group is involved in the provision of transportation and logistics services across the United States, Canada and Mexico. 2. Basis of preparation a) Statement of compliance These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). These consolidated financial statements were authorized for issue by the Board of Directors on February 20, 2018. b) Basis of measurement These consolidated financial statements have been prepared on the historical cost basis except for the following material items in the statements of financial position: • investment in equity securities, derivative financial instruments, forward purchase agreement and contingent considerations are measured at fair value; liabilities for cash-settled share-based payment arrangements are measured at fair value in accordance with IFRS 2; the defined benefit pension plan liability is recognized as the net total of the present value of the defined benefit obligation less the fair value of the plan assets; and assets and liabilities acquired in business combinations are measured at fair value at acquisition date. • • • c) Functional and presentation currency These consolidated financial statements are presented in Canadian dollars (“C$” or “CDN$”), which is the Company’s functional currency. All financial information presented in Canadian dollars has been rounded to the nearest thousand. d) Use of estimates and judgments The preparation of the accompanying financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions about future events. These estimates and the underlying assumptions affect the reported amounts of assets and liabilities, the disclosures about contingent assets and liabilities, and the reported amounts of revenues and expenses. Such estimates include the valuation of goodwill and intangible assets, the measurement of identified assets and liabilities acquired in business combinations, the provision for income taxes and the self-insurance provisions. These estimates and assumptions are based on management’s best estimates and judgments. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. Management adjusts such estimates and assumptions when facts and circumstances dictate. Actual results could differ from these estimates. Changes in those estimates and assumptions resulting from changes in the economic environment will be reflected in the financial statements of future periods. Information about critical judgments, assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment within the next financial year are included in the following notes: Note 5 – Establishing the fair value of assets and liabilities, intangible assets and goodwill related to business combinations; Note 10 – Determining estimates and assumptions related to impairment tests for long-lived assets and goodwill; Note 6, 15 and 26 – Recognition and measurement of provisions and contingencies. 2017 Annual Report 40 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2017 AND 2016 (Tabular amounts in thousands of Canadian dollars, unless otherwise noted.) 3. Significant accounting policies The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements, unless otherwise indicated. The accounting policies have been applied consistently by Group entities. a) Basis of consolidation i) Business combinations The Group measures goodwill as the fair value of the consideration transferred including the fair value of liabilities resulting from contingent consideration arrangements, less the net recognized amount of the identifiable assets acquired and liabilities assumed, all measured at fair value as of the acquisition date. When the excess is negative, a bargain purchase gain is recognized immediately in income or loss. Transaction costs, other than those associated with the issue of debt or equity securities, that the Group incurs in connection with a business combination are expensed as incurred. ii) Subsidiaries Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed to, or has the right to, variable returns from its involvement with the entity and has the ability to affect those through its power over the entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The accounting policies of subsidiaries are aligned with the policies adopted by the Group. iii) Forward purchase agreement As part of a certain business combination, the Company has entered into a forward purchase agreement to purchase the non-controlling interest holders stake in the respective company. Under the forward purchase agreement the Company will acquire the non-controlling interest in the future at a formulaic variable price based mainly on the earnings levels in future periods (the “exit price”). The agreement does not include a specified minimum amount for the forward purchase price. When the forward granted to the non-controlling shareholders provides for settlement in cash or in another financial asset by the Company, the Company is required to recognize a liability for the present value of the exercise price of the forward. In accounting for this transaction, the Company applies the anticipated acquisition method of accounting. Under this method of accounting, the forward purchase agreement is accounted for on the date of the forward purchase agreement as if the forward had already been exercised and satisfied by the non-controlling shareholders. As a result, the underlying interests are presented as already owned by the Company in the consolidated statements of financial position, the consolidated statements of income and the consolidated statements of comprehensive income, even though legally they are still considered non-controlling interest. The forward purchase agreement is considered a financial liability and is initially recognized at the present value of the exercise price of the forward (recorded as other financial liability on the consolidated statements of financial position). The forward is re-measured to fair value at each reporting date and any subsequent changes are recognized in the consolidated statements of income as finance income or costs. iv) Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealized income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. TFI International YEARS ENDED DECEMBER 31, 2017 AND 2016 (Tabular amounts in thousands of Canadian dollars, unless otherwise noted.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 41 3. Significant accounting policies (continued) b) Foreign currency translation i) Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currencies of the Group’s entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated to the functional currency at the exchange rate in effect at the reporting date. The foreign currency gain or loss on monetary items is the difference between amortized cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortized cost in foreign currency translated at the exchange rate at the end of the reporting period. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated at the rate in effect on the transaction date. Income and expense items denominated in foreign currency are translated at the date of the transactions. Gains and losses are included in income or loss. ii) Foreign operations The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on business combinations, are translated to Canadian dollars at exchange rates in effect at the reporting date. The income and expenses of foreign operations are translated to Canadian dollars at the average exchange rate in effect during the reporting period. Foreign currency differences are recognized in other comprehensive income in the accumulated foreign currency translation differences account. When a foreign operation is disposed of, the relevant amount in the cumulative amount of foreign currency translation differences is transferred to income or loss as part of the income or loss on disposal. On the partial disposal of a subsidiary while retaining control, the relevant proportion of such cumulative amount is reattributed to non-controlling interest. In any other partial disposal of a foreign operation, the relevant proportion is reclassified to income or loss. Foreign exchange gains or losses arising from a monetary item receivable from or payable to a foreign operation, the settlement of which is neither planned nor likely to occur in the foreseeable future and which in substance is considered to form part of the net investment in the foreign operation, are recognized in other comprehensive income in the accumulated foreign currency translation differences account. c) Discontinued operations A discontinued operation is a component of the Group’s business; the operations and cash flows of which can be clearly distinguished from the rest of the Group and which: • • • Represents a separate major line of business or geographic area Is part of a single co-ordinated plan to dispose of a separate major line of business or geographic area of operations; or Is a subsidiary acquired exclusively with a view to re-sale. Classification as a discontinued operation occurs at the earlier of disposal or when the operation meets the criteria to be classified as held-for-sale. When an operation is classified as a discontinued operation, the comparative statement of income and comprehensive income is re-presented as if the operation had been discontinued from the start of the comparative year. 2017 Annual Report 42 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2017 AND 2016 (Tabular amounts in thousands of Canadian dollars, unless otherwise noted.) 3. Significant accounting policies (continued) d) Financial instruments i) Non-derivative financial assets The Group initially recognizes financial assets on the trade date at which the Group becomes a party to the contractual provisions of the instrument. Financial assets are initially measured at fair value. If the financial asset is not subsequently accounted for at fair value through profit or loss, then the initial measurement includes transaction costs that are directly attributable to the asset’s acquisition or origination. On initial recognition, the Group classifies its financial assets as subsequently measured at either amortized cost or fair value, depending on its business model for managing the financial assets and the contractual cash flow characteristics of the financial assets. The Group derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Group is recognized as a separate asset or liability. Financial assets and liabilities are offset and the net amount is presented in the statement of financial position when, and only when, the Group has a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. Financial assets are classified into financial assets measured at amortized cost or financial assets measured at fair value depending on the purpose for which the financial assets were acquired. Financial assets measured at amortized cost A financial asset is subsequently measured at amortized cost, using the effective interest method and net of any impairment loss, if: • • The asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows; and The contractual terms of the financial asset give rise, on specified dates, to cash flows that are solely payments of principal and/or interest. The Group currently classifies its cash equivalents, trade and other receivables and long-term non-trade receivables included in other non-current assets as financial assets measured at amortized cost. The Group recognizes loss allowances for expected credit losses on financial assets measured at amortized cost. The Group has a portfolio of trade receivables at the reporting date. The Group uses a provision matrix to determine the lifetime expected credit losses for the portfolio. The Group uses historical trends of the probability of default, the timing of recoveries and the amount of loss incurred, adjusted for management’s judgement as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical trends. An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the asset’s original effective interest rate. Losses are recognized in income or loss and reflected in an allowance account against trade and other receivables. TFI International YEARS ENDED DECEMBER 31, 2017 AND 2016 (Tabular amounts in thousands of Canadian dollars, unless otherwise noted.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 43 3. Significant accounting policies (continued) i) Non-derivative financial assets (continued) Financial assets measured at fair value These assets are measured at fair value and changes therein, including any interest or dividend income, are recognized in income or loss. However, for investments in equity instruments that are not held for trading, the Group may elect at initial recognition to present gains and losses in other comprehensive income. For such investments measured at fair value through other comprehensive income, gains and losses are never reclassified to profit or loss, and no impairment is recognized in profit or loss. Dividends earned from such investments are recognized in profit or loss, unless the dividend clearly represents a repayment of part of the cost of the investment. Financial assets measured at fair value through other comprehensive income On initial recognition of an equity investment that is not held for trading, the Group may irrevocably elect to present subsequent changes in the investment’s fair value in OCI. This election is made on an investment-by-investment basis. ii) Non-derivative financial liabilities The Group initially recognizes debt issued and subordinated liabilities on the date that they are originated. All other financial liabilities are recognized initially on the trade date at which the Group becomes a party to the contractual provisions of the instrument. A financial liability is derecognized when its contractual obligations are discharged or cancelled or expire. Financial liabilities are classified into financial liabilities measured at amortized cost and financial liabilities measured at fair value. Financial liabilities measured at amortized cost A financial liability is subsequently measured at amortized cost, using the effective interest method. The Group currently classifies bank indebtedness, trade and other payables and long-term debt as financial liabilities measured at amortized cost. Financial liabilities measured at fair value Financial liabilities at fair value are initially recognized at fair value and are re-measured at each reporting date with any changes therein recognized in net earnings. The Group currently classifies its forward purchase agreement liability in connection with a business acquisition as a financial liability measured at fair value. iii) Share capital Common shares Common shares are classified as equity. Incremental costs directly attributable to the issue of common shares, stock options and warrants are recognized as a deduction from equity, net of any tax effects. When share capital recognized as equity is repurchased, the amount of the consideration paid, which includes directly attributable costs, net of any tax effects, is recognized as a deduction from equity. iv) Derivative financial instruments The Group uses derivative financial instruments to manage its foreign currency and interest rate risk exposures. Embedded derivatives are separated from the host contract and accounted for separately if the economic characteristics and risks of the host contract and the embedded derivative are not closely related, a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative, and the combined instrument is not measured at fair value through income or loss. Derivatives and embedded derivatives are recognized initially at fair value; related transaction costs are recognized in income or loss as incurred. Subsequent to initial recognition, derivatives and embedded derivatives are measured at fair value, and changes therein are recognized in net change in fair value of foreign exchange derivatives in income or loss with the exception of net change in fair value of cross currency interest rate swap contracts recognized in net foreign exchange gain or loss in income or loss. 2017 Annual Report 44 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2017 AND 2016 (Tabular amounts in thousands of Canadian dollars, unless otherwise noted.) 3. Significant accounting policies (continued) e) Hedge accounting Management’s risk strategy is focused on reducing the variability in profit or losses and cash flows associated with exposure to market risks. Hedge accounting is used to reduce this variability to an acceptable level. The hedges employed by the Group reduce the currency and interest rate fluctuation exposures. On the initial designation of a hedging relationship, the Group formally documents the relationship between the hedging instrument and the hedged items, including the risk management objectives and strategy in undertaking the hedge transaction, together with the methods that will be used to assess the effectiveness of the hedging relationship. The Group makes an assessment, both at the inception of the hedge relationship as well as on an ongoing basis, whether the hedging instruments are expected to be effective in offsetting the changes in the fair value or cash flows of the respective hedged items throughout the period for which the hedge in designated. Net investment hedge The Group designates a portion of its U.S. dollar (“US$”) denominated debt as a hedging item in a net investment hedge. The Group applies hedge accounting to foreign currency differences arising between the functional currency of the foreign operation and the Company’s functional currency (CDN$), regardless of whether the net investment is held directly or through an intermediate parent. Foreign currency differences arising on the translation of a financial liability designated as a hedge of a net investment in foreign operations are recognized in other comprehensive income to the extent that the hedge is effective, and are presented in the currency translation differences account within equity. To the extent that the hedge is ineffective, such differences are recognized in income or loss. When the hedged net investment is disposed of, the relevant amount in the translation reserve is transferred to income or loss as part of the gain or loss on disposal. Cash flow hedges When a derivative is designated as the hedging instrument in a hedge of the variability in cash flows attributable to a particular risk associated with a recognized asset or liability or a highly probable forecasted transaction that could affect income or loss, the effective portion of changes in the fair value of the derivatives is recognized in other comprehensive income and presented in accumulated other comprehensive income as part of equity. The amount recognized in other comprehensive income is removed and included in net earnings under the same line item in the consolidated statement of earnings and comprehensive income as the hedged item, in the same period that the hedged cash flows affect income or loss. If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated, exercised, or the designation is revoked, then hedge accounting is discontinued prospectively. The cumulative gain or loss previously recognized in other comprehensive income remains in accumulated other comprehensive income until the forecasted transaction affects income or loss. If the forecasted transaction is no longer expected to occur, then the balance in accumulated other comprehensive income is recognized immediately in income or loss. f) Property and equipment Property and equipment are accounted for at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset, the costs of dismantling and removing the assets and restoring the site on which they are located, and borrowing costs on qualifying assets. When parts of an item of property and equipment have different useful lives, they are accounted for as separate items (major components) of property and equipment. Gains and losses on disposal of an item of property and equipment are determined by comparing the proceeds from disposal with the carrying amount of property and equipment, and are recognized in net income or loss. Depreciation is based on the cost of an asset less its residual value and is recognized in income or loss over the estimated useful life of each component of an item of property and equipment. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Group will obtain ownership by the end of the lease term. TFI International YEARS ENDED DECEMBER 31, 2017 AND 2016 (Tabular amounts in thousands of Canadian dollars, unless otherwise noted.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 45 3. Significant accounting policies (continued) f) Property and equipment (continued) The depreciation method and useful lives are as follows: Categories Buildings Rolling stock Equipment Basis Straight-line Primarily straight-line Primarily straight-line Useful lives 15 – 40 years 3 – 20 years 5 – 12 years Depreciation methods, useful lives and residual values are reviewed at each financial year end and adjusted prospectively, if appropriate. Property and equipment are reviewed for impairment in accordance with IAS 36 Impairment of Assets when there are indicators that the carrying value may not be recoverable. g) Intangible assets i) Goodwill Goodwill that arises upon business combinations is included in intangible assets. Goodwill is not amortized and is measured at cost less accumulated impairment losses. ii) Other intangible assets Intangible assets consist of customer relationships, trademarks, non-compete agreements and information technology. Other intangible assets that are acquired by the Group and have finite lives are measured at cost less accumulated amortization and accumulated impairment losses. Intangible assets with finite lives are amortized on a straight-line basis over the following estimated useful lives: Categories Customer relationships Trademarks Non-compete agreements Information technology Useful lives 5 – 15 years 5 – 20 years 3 – 10 years 5 – 7 years Useful lives and residual values are reviewed at each financial year end and adjusted prospectively, if appropriate. h) Leased assets Leases with terms which indicate that the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. Other leases are operating leases and the leased assets are not recognized in the Group’s statements of financial position. i) Inventoried supplies Inventoried supplies consist primarily of repair parts and fuel and are measured at the lower of cost and net realizable value. j) Impairment Non-financial assets The carrying amounts of the Group’s non-financial assets other than inventoried supplies and deferred tax assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. For goodwill, the recoverable amount is estimated on December 31 of each year. 2017 Annual Report 46 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2017 AND 2016 (Tabular amounts in thousands of Canadian dollars, unless otherwise noted.) 3. Significant accounting policies (continued) j) Impairment (continued) For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the “cash-generating unit”, or “CGU”). For the purposes of goodwill impairment testing, goodwill acquired in a business combination is allocated to the group of CGUs (usually a Group’s operating segment), that is expected to benefit from the synergies of the combination. This allocation is subject to an operating segment ceiling test and reflects the lowest level at which that goodwill is monitored for internal reporting purposes. The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or group of assets. The Group’s corporate assets do not generate separate cash inflows. If there is an indication that a corporate asset may be impaired, then the recoverable amount is determined for the CGU to which the corporate asset belongs. An impairment loss is recognized if the carrying amount of an asset or its CGU exceeds its estimated recoverable amount. Impairment losses recognized in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the units, if any, and then to reduce the carrying amounts of the other assets in the unit (group of units) on a prorata basis. An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. Impairment losses and impairment reversals are recognized in income or loss. k) Assets held for sale Non-current assets are classified as held-for-sale if it is highly probable that they will be recovered primarily through sale rather than through continuing use. Such assets are generally measured at the lower of their carrying amount and fair value less costs to sell. Impairment losses on initial classification as held-for-sale or held-for-distribution and subsequent gains and losses on remeasurement are recognized in income or loss. Once classified as held-for-sale, intangible assets and property and equipment are no longer amortized or depreciated. l) Employee benefits i) Defined contribution plans A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution pension plans are recognized as an employee benefit expense in income or loss in the periods during which services are rendered by employees. Prepaid contributions are recognized as an asset to the extent that a cash refund or a reduction in future payments is available. ii) Defined benefit plans The Group’s net obligation in respect of defined benefit pension plans is calculated separately for each plan by estimating the amount of future benefit that employees have earned in return for their services in the current and prior periods discounting that amount and deducting the fair value of any plan assets. The discount rate is the yield at the reporting date on AA credit-rated bonds that have maturity dates approximating the terms of the Group’s obligations and that are denominated in the same currency in which the benefits are expected to be paid. The calculation is performed annually by a qualified actuary using the projected unit credit method. When the calculation results in a benefit to the Group, the recognized asset is limited to the present value of economic benefits available in the form of any future refunds from the plan or reductions in future contributions to the plan. In order to calculate the present value of economic benefits, consideration is given to any minimum funding requirements that apply to any plan in the Group. TFI International YEARS ENDED DECEMBER 31, 2017 AND 2016 (Tabular amounts in thousands of Canadian dollars, unless otherwise noted.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 47 3. Significant accounting policies (continued) l) Employee benefits (continued) ii) Defined benefit plans (continued) Remeasurements of the net defined benefit liability, which comprise actuarial gains and losses, the return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest), are recognized immediately in other comprehensive income. The Group determines the net interest expense (income) on the net defined benefit liability (asset) for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the then-net defined benefit liability (asset), taking into account any changes in the net defined benefit liability (asset) during the period as a result of contributions and benefit payments. Net interest expense and other expenses related to defined benefit plans are recognized in profit or loss. When the benefits of a plan are changed or when a plan is curtailed, the resulting change in benefit that relates to past service or the gain or loss on curtailment is recognized immediately in profit or loss. The Group recognizes gains and losses on the settlement of a defined benefit plan when the settlement occurs. iii) Short-term employee benefits Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognized for the amount expected to be paid under short-term cash bonus or income-sharing plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee, and the obligation can be estimated reliably. iv) Share-based payment transactions The grant date fair value of equity share-based payment awards granted to employees is recognized as a personnel expense, with a corresponding increase in contributed surplus, over the period that the employees unconditionally become entitled to the awards. The amount recognized as an expense is adjusted to reflect the number of awards for which the related service conditions are expected to be met, such that the amount ultimately recognized as an expense is based on the number of awards that do meet the related service condition at the vesting date. The fair value of the amount payable to board members in respect of deferred share unit (“DSU”), which are to be settled in cash, is recognized as an expense with a corresponding increase in liabilities. The liability is remeasured at each reporting date until settlement. Any changes in the fair value of the liability are recognized as finance income or costs in income or loss. v) Termination benefits Termination benefits are expensed at the earlier of when the Group can no longer withdraw the offer of those benefits and when the Group recognises costs for a restructuring. If benefits are not expected to be fully settled within 12 months of the end of the reporting period, then they are discounted. m) Provisions A provision is recognized if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. Where discounting is used, the unwinding of the discount is recognized as finance cost. Self-Insurance The self-insurance provision represents an accrual for estimated future disbursements associated with the self-insured portion for claims filed as at year-end and incurred but not reported, related to cargo loss, bodily injury, worker’s compensation and property damages. The estimates are based on the Group’s historical experience including settlement patterns and payment trends. The most significant assumptions in the estimation process include determining the trend in costs, the expected cost of claims incurred but not reported and the expected cost to settle or pay the outstanding claims. Changes in assumptions and experience could cause these estimates to change significantly in the near term. 2017 Annual Report 48 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2017 AND 2016 (Tabular amounts in thousands of Canadian dollars, unless otherwise noted.) 3. Significant accounting policies (continued) n) Revenue recognition The Group’s normal business operations consist of the provision of transportation and logistics services. All income relating to normal business operations is recognized as revenue based on the stage of completion of the service in the statement of income. The stage of completion of the service is determined using the proportion of costs incurred to date compared to the estimated total costs of the service. Revenue is measured at the fair value of the consideration received or receivable, net of trade discounts and volume rebates. Revenue is recognized as services are rendered, when the amount of revenue and income can be reliably measured and in all probability the economic benefits from the transactions will flow to the Group. o) Lease payments Payments made under operating leases are recognized in income or loss on a straight-line basis over the term of the lease. Lease incentives received are recognized as an integral part of the total lease expense, over the term of the lease. Minimum lease payments made under finance leases are apportioned between the finance costs and the reduction of the outstanding liability. The finance cost is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. p) Finance income and finance costs Finance income comprises interest income on funds invested, available-for-sale financial assets (prior to adoption of IFRS 9, see note 3 t)), dividend income, interest and accretion on promissory note, and bargain purchase gains on business acquisitions. Interest income is recognized as it accrues in income or loss, using the effective interest method. Finance costs comprise interest expense on bank indebtedness and long-term debt, unwinding of the discount on provisions and impairment losses recognized on financial assets (other than trade receivables). Fair value gains or losses on derivative financial instruments and on contingent considerations, and foreign currency gains and losses are reported on a net basis as either finance income or cost. q) Income taxes Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in income or loss except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized for the following temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable income or loss, and differences relating to investments in subsidiaries and jointly controlled entities to the extent that it is probable that they will not reverse in the foreseeable future. In addition, deferred tax is not recognized for taxable temporary differences arising on the initial recognition of goodwill. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted at the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously. A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable income will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. r) Earnings per share The Group presents basic and diluted earnings per share (“EPS”) data for its common shares. Basic EPS is calculated by dividing the income or loss attributable to common shareholders of the Company by the weighted average number of common shares outstanding during the period, adjusted for own shares held, if any. Diluted EPS is determined by adjusting the income or loss attributable to common shareholders and the weighted average number of common shares outstanding, adjusted for own shares held, for the effects of all dilutive potential common shares, which comprise convertible debentures, warrants, and restricted share units and stock options granted to employees. TFI International YEARS ENDED DECEMBER 31, 2017 AND 2016 (Tabular amounts in thousands of Canadian dollars, unless otherwise noted.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 49 3. Significant accounting policies (continued) s) Segment reporting An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group’s other components. All operating segments’ operating results are reviewed regularly by the Group’s chief executive officer (“CEO”) to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. Segment results that are reported to the CEO include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly corporate assets (primarily the Group’s headquarters), head office expenses, income tax assets, liabilities and expenses, as well as long-term debt and interest expense thereon. Sales between Group’s segments are measured at the exchange amount. Transactions, other than sales, are measured at carrying value. Segment capital expenditure is the total cost incurred during the period to acquire property and equipment, and intangible assets other than goodwill. t) New standards and interpretations adopted during the year The Group has adopted the following new standards and amendments to standards and interpretations, with a date of initial application of January 1, 2017. These have been applied in preparing these consolidated financial statements: Disclosure Initiative: Amendments to IAS 7: On January 7, 2016 the IASB issued Disclosure Initiative (Amendments to IAS 7). The amendments apply prospectively for annual periods beginning on or after January 1, 2017. The amendments require disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flow and non-cash changes. One way to meet this new disclosure requirement is to provide a reconciliation between the opening and closing balances for liabilities from financing activities. Adoption of Disclosure Initiative: Amendments to IAS 7 did not have a material impact on the Group’s consolidated financial statements. Recognition of Deferred Tax Assets for Unrealized Losses: Amendments to IAS 12: On January 19, 2016 the IASB issued Recognition of Deferred Tax Assets for Unrealized Losses (Amendments to IAS 12). The amendments apply retrospectively for annual periods beginning on or after January 1, 2017. The amendments clarify that the existence of a deductible temporary difference depends solely on a comparison of the carrying amount of an asset and its tax base at the end of the reporting period, and is not affected by possible future changes in the carrying amount or expected manner of recovery of the asset. The amendments also clarify the methodology to determine the future taxable profits used for assessing the utilization of deductible temporary differences. Adoption of Recognition of Deferred Tax Assets for Unrealized Losses: Amendments to IAS 12 did not have a material impact on the Group’s consolidated financial statements. Annual Improvements to IFRS Standards (2014-2016 cycle): On December 8, 2016 the IASB issued narrow-scope amendments to three standards as part of its annual improvements process. Each of the amendments has its own specific transaction requirements and effective date. Amendments were made to the following standards: • Clarification that IFRS 12 Disclosures of Interests in Other Entities also applies to interests that are classified as held for sale, held for distribution, or discontinued operations, effective retrospectively for annual periods beginning on or after January 1, 2017; Removal of outdated exemptions for first time adopters under IFRS 1 First-time Adoption of International Financial Reporting Standards, effective for annual periods beginning on or after January 1, 2018; • • Clarification that the election to measure an associate or joint venture at fair value under IAS 28 Investments in Associates and Joint Ventures for investments held directly, or indirectly, through a venture capital or other qualifying entity can be made on an investment-by-investment basis. The amendments are effective retrospectively for annual periods beginning on or after January 1, 2018. Adoption of Annual Improvements to IFRS Standards (2014-2016 cycle) did not have a material impact on the Group’s consolidated financial statements. 2017 Annual Report 50 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2017 AND 2016 (Tabular amounts in thousands of Canadian dollars, unless otherwise noted.) 3. Significant accounting policies (continued) u) New standards and interpretations not yet adopted The following new standards are not yet effective for the year ending December 31, 2017, and have not been applied in preparing these consolidated financial statements: IFRS 15 Revenue from Contracts with Customers: On May 28, 2014 the IASB issued IFRS 15 Revenue from Contracts with Customers. The new standard is effective for annual periods beginning on or after January 1, 2018. IFRS 15 will replace IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfer of Assets from Customers, and SIC 31 Revenue – Barter Transactions Involving Advertising Services. On April 12, 2016, the IASB issued Clarifications to IFRS 15, Revenue from Contracts with Customers, which is effective at the same time as IFRS 15. The standard contains a single model that applies to contracts with customers and two approaches to recognising revenue: at a point in time or over time. The model features a contract- based five-step analysis of transactions to determine whether, how much and when revenue is recognized. New estimates and judgmental thresholds have been introduced, which may affect the amount and/or timing of revenue recognized. The new standard applies to contracts with customers. It does not apply to insurance contracts, financial instruments or lease contracts, which fall in the scope of other IFRSs. The clarifications to IFRS 15 provide additional guidance with respect to the five-step analysis, transition, and the application of the Standard to licenses of intellectual property. The Group will adopt IFRS 15 and the clarifications in its financial statements for the annual period beginning on January 1, 2018. Following the analysis of the impact of adoption of the standard, the Group has determined that there will be no significant impact on the results. The standard also requires to evaluate whether there is a promise to transfer services to the customer as a principal or to arrange for services to be provided by another party (as an agent). To make that determination, the standard uses a control model rather than the risks-and-rewards model under current standard. Based on the evaluation of the control model, it was determined that certain businesses mainly in the LTL segment act as the principal rather than the agent within their revenue arrangements. This change will require the affected businesses to report transportation revenue gross of associated purchase transportation costs rather than net of such amounts within the consolidated statements of income. It is expected that this change will result in an approximate $100 million reclassification from operating expenses to revenue on the consolidated statements of income for the year ended December 31, 2017. Classification and Measurement of Share-based Payment Transactions: Amendments to IFRS 2: On June 20, 2016, the IASB issued amendments to IFRS 2 Share-based Payment, clarifying how to account for certain types of share-based payment transactions. The amendments apply for annual periods beginning on or after January 1, 2018. As a practical simplification, the amendments can be applied prospectively. Retrospective application is permitted if information is available without the use of hindsight. The amendments provide requirements on the accounting for: • • • the effects of vesting and non-vesting conditions on the measurement of cash-settled share-based payments; share-based payment transactions with a net settlement feature for withholding tax obligations; and a modification to the terms and conditions of a share-based payment that changes the classification of the transaction from cash-settled to equity-settled. The Group will adopt the amendments to IFRS 2 in its financial statements for the annual period beginning on January 1, 2018. The Group does not expect the amendments to have a material impact on the financial statements. IFRIC 22, Foreign Currency Transactions and Advance Consideration: On December 8, 2016, the IASB issued IFRIC Interpretation 22 Foreign Currency Transactions and Advance Consideration. The Interpretation clarifies which date should be used for translation when a foreign currency transaction involves an advance payment or receipt. The Interpretation is applicable for annual periods beginning on or after January 1, 2018. The Interpretation clarifies that the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income (or part of it) is the date on which an entity initially recognizes the non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration. The Interpretation may be applied either: • • retrospectively; or prospectively to all assets, expenses and income in the scope of the Interpretation initially recognized on or after: • • the beginning of the reporting period in which the entity first applies the Interpretation; or the beginning of a prior reporting period presented as comparative information in the financial statements. TFI International YEARS ENDED DECEMBER 31, 2017 AND 2016 (Tabular amounts in thousands of Canadian dollars, unless otherwise noted.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 51 3. Significant accounting policies (continued) u) New standards and interpretations not yet adopted (continued) The Group will adopt the Interpretation in its financial statements for the annual period beginning on January 1, 2018. The Group does not expect the amendments to have a material impact on the financial statements. IFRS 16, Leases: On January 13, 2016 the IASB issued IFRS 16 Leases. The new standard is effective for annual periods beginning on or after January 1, 2019. Earlier application is permitted for entities that apply IFRS 15 Revenue from Contracts with Customers at or before the date of initial adoption of IFRS 16. IFRS 16 will replace IAS 17 Leases. This standard introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee is required to recognize a right- of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. This standard substantially carries forward the lessor accounting requirements of IAS 17, while requiring enhanced disclosures to be provided by lessors. Other areas of the lease accounting model have been impacted, including the definition of a lease. Transitional provisions have been provided. The Group intends to adopt IFRS 16 in its financial statements for the annual period beginning on January 1, 2019. The Group is in the process of reviewing lease agreements in accordance with the new standard. The adoption of this standard will have a material impact on the financial statements. Annual Improvements to IFRS Standards (2015-2017 cycle): On December 12, 2017 the IASB issued narrow-scope amendments to three standards as part of its annual improvements process. The amendments are effective on or after January 1, 2019, with early application permitted. Each of the amendments has its own specific transition requirements. Amendments were made to the following standards: • • • IFRS 3 Business Combinations and IFRS 11 Joint Arrangements - to clarify how a company accounts for increasing its interest in a joint operation that meets the definition of a business; IAS 12 Income Taxes – to clarify that all income tax consequences of dividends are recognized consistently with the transactions that generated the distributable profits – i.e. in profit or loss, OCI, or equity; and IAS 23 Borrowing Costs – to clarify that specific borrowings – i.e. funds borrowed specifically to finance the construction of a qualifying asset – should be transferred to the general borrowings pool once the construction of the qualifying asset has been completed. The Group intends to adopt these amendments in its financial statements for the annual period beginning on January 1, 2019. The extent of the impact of adoption of the amendments has not yet been determined. IFRIC 23 Uncertainty over Income Tax Treatments: On June 7, 2017, the IASB issued IFRIC Interpretation 23 Uncertainty over Income Tax Treatments. The Interpretation provides guidance on the accounting for current and deferred tax liabilities and assets in circumstances in which there is uncertainty over income tax treatments. The Interpretation is applicable for annual periods beginning on or after January 1, 2019. Earlier application is permitted. The Interpretation requires: • • • an entity to contemplate whether uncertain tax treatments should be considered separately, or together as a group, based on which approach provides better predictions of the resolution; an entity to determine if it is probable that the tax authorities will accept the uncertain tax treatment; and if it is not probable that the uncertain tax treatment will be accepted, measure the tax uncertainty based on the most likely amount or expected value, depending on whichever method better predicts the resolution of the uncertainty. The Group intends to adopt the Interpretation in its financial statements for the annual period beginning on January 1, 2019. The extent of the impact of adoption of the Interpretation has not yet been determined. 2017 Annual Report 52 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2017 AND 2016 (Tabular amounts in thousands of Canadian dollars, unless otherwise noted.) 4. Segment reporting The Group operates within the transportation and logistics industry in the United States, Canada and Mexico in different reportable segments, as described below. The reportable segments are managed independently as they require different technology and capital resources. For each of the operating segments, the Group’s CEO reviews internal management reports on a monthly basis. The following summary describes the operations in each of the Group’s reportable segments: Package and Courier: Pickup, transport and delivery of items across North America. Less-Than-Truckload: Pickup, consolidation, transport and delivery of smaller loads. Truckload(a): Full loads carried directly from the customer to the destination using a closed van or specialized equipment to meet customer’s specific needs. Includes expedited transportation, flatbed, container and dedicated services. Logistics: Logistics services. (a) The Truckload segment represents the aggregation of the Canadian Truckload, U.S. Truckload, and Specialized Truckload operating segments. The aggregation of the segment was analyzed using management’s judgement in accordance with IFRS 8. The operating segments were determined to be similar with respect to the nature of services offered and the methods used to distribute their services, additionally, they have similar economic characteristics with respect to long term expected gross margin, levels of capital invested and market place trends. Information regarding the results of each reportable segment is included below. Performance is measured based on segment operating income or loss. This measure is included in the internal management reports that are reviewed by the Group’s CEO and refers to “Operating income (loss)” in the consolidated statements of income. Segment’s operating income or loss is used to measure performance as management believes that such information is the most relevant in evaluating the results of certain segments relative to other entities that operate within these industries. When the Group changes the structure of its internal organization in a manner that causes the composition of its reportable segments to change, the corresponding information for the comparative period is recasted to conform to the new structure. Package and Less-Than- Courier Truckload Truckload Logistics Corporate Eliminations Total 2017 External revenue Inter-segment revenue Total revenue Operating income (loss) Selected items: 1,353,474 907,985 2,181,389 298,171 7,794 9,260 8,303 1,361,268 917,245 2,209,424 306,474 25,534 124,406 52,350 28,035 77,349 — — — (35,915 ) — 4,741,019 — (53,392 ) (53,392 ) 4,741,019 243,724 — Depreciation and amortization Gain (loss) on sale of land and buildings Gain on sale of assets held for sale Impairment of intangible assets Intangible assets Total assets Total liabilities Additions to property and equipment 2016* External revenue Inter-segment revenue Total revenue Operating income (loss) Selected items: Depreciation and amortization Gain (loss) on sale of land and buildings Intangible assets Total assets Total liabilities Additions to property and equipment 33,695 567 9,156 13,211 6,299 197,519 30,996 — (93 ) (242 ) — 172 68,118 129,770 — — 425,653 238,995 988,773 176,487 651,345 556,807 2,232,157 221,439 145,173 154,531 12,640 2,248 — — — 2,366 65,880 32,704 1,602,816 771 377,280 231,936 13,823 496 270,757 — 232 — 77,446 — — 142,981 — 1,832,274 — 3,727,628 — 2,312,504 259,666 — 7,016 1,359,169 808,430 1,624,753 232,856 8,286 1,366,185 827,504 1,647,177 241,142 21,750 102,511 113,040 47,899 19,074 22,424 — — — (35,935 ) — 4,025,208 (56,800 ) — (56,800 ) 4,025,208 249,265 — 33,758 (8 ) 29,506 4,442 123,847 2,875 3,877 1,639 450,541 230,194 1,159,622 130,994 700,749 635,233 2,440,148 175,190 157,426 146,008 16,967 2,098 — 1,799 75,233 19,350 1,725,480 1,990 517,265 80,021 11,152 430 193,086 — — 8,948 — 1,973,150 — 4,026,553 — 2,565,529 110,560 — (*) Recasted for changes in composition of reportable segments, changes in presentation and note 5 c). TFI International YEARS ENDED DECEMBER 31, 2017 AND 2016 (Tabular amounts in thousands of Canadian dollars, unless otherwise noted.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 53 4. Segment reporting (continued) Geographical information Revenue is attributed to geographical locations based on the origin of service’s location. Segment assets are based on the geographical location of the assets. Revenue Canada United States Mexico Property and equipment and intangible assets Canada United States Mexico (*) Recasted (see note 5 c)) 5. Business combinations a) Business combinations 2017 2016 2,677,040 2,434,762 2,042,861 1,586,766 21,118 3,680 4,741,019 4,025,208 2017 2016* 1,693,190 1,771,198 1,314,635 1,543,820 22,062 25,293 3,029,887 3,340,311 In line with the Group’s growth strategy, the Group acquired seven businesses during 2017, notably World Courier Ground U.S. (“World Courier Ground”), Cavalier Transportation Services Inc. (“Cavalier”) and Premier Product Management (“PPM”). On January 13, 2017, the Group completed the acquisition of World Courier Ground. Established in 1983, World Courier Ground is an asset light, time critical courier provider. Operating nationally across the U.S., the company offers same day courier, rush trucking and warehousing services primarily to the medical industry, as well as to the environmental, financial, chemical and industrial sectors. World Courier Ground management continues to operate the business under the new name TForce Critical. On January 28, 2017, the Group completed the acquisition of Cavalier. Established in 1979, Cavalier’s operations consist of LTL services, brokerage and warehousing. Based in Bolton, ON, Cavalier serves corridors primarily between Ontario, Quebec, New York and Illinois. On October 31, 2017, the Group completed the acquisition of PPM. Founded in 2004 and based in California, PPM provides home delivery services of household appliances in the United States. During 2017, transaction costs of $0.1 million have been expensed in other operating expenses in the consolidated statements of income in relation to the above mentioned business acquisitions (2016 – $3.7 million, $3.2 million of which has been recorded in personnel expenses and $0.5 million in other operating expenses). These cash-settled transactions were concluded in order to add density in the Group’s current network and further expand value-added services. The seven acquired businesses contributed revenue and net income of $137.6 million and $5.3 million respectively. If these acquisitions had occurred on January 1, 2017, per management’s best estimates, the revenue and net income would have been $197.3 million and $9.7 million respectively. In determining these estimated amounts, management assumed that the fair value adjustments that arose on the date of acquisition would have been the same had the acquisition occurred on January 1, 2017. 2017 Annual Report 54 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2017 AND 2016 (Tabular amounts in thousands of Canadian dollars, unless otherwise noted.) 5. Business combinations (continued) a) Business combinations (continued) As of the reporting date, the Group had not completed the purchase price allocation over the identifiable net assets and goodwill of several of the 2017 acquisitions. Information to confirm fair value of certain assets and liabilities is still to be obtained for these acquisitions. As the Group obtains more information, the allocation will be completed. The table below presents the purchase price allocation based on the best information available to the Group to date. Identifiable assets acquired and liabilities assumed Cash and cash equivalents Trade and other receivables Inventoried supplies and prepaid expenses Property and equipment Intangible assets Other assets Bank indebtedness Trade and other payables Income tax payable Provisions Long-term debt Deferred tax liabilities Total identifiable net assets Total consideration transferred Goodwill Cash Contingent consideration Total consideration transferred (*) Includes non material adjustments to prior year acquisitions (**) Recasted (see note 5 c)) Note 9 10 10 2017* 1,006 22,112 5,950 27,213 70,873 859 — (17,081 ) (1,673 ) — (9,030 ) (12,163 ) 88,066 130,958 42,892 119,294 11,664 130,958 2016** 15,794 100,333 12,981 458,804 98,677 — (121 ) (75,099 ) (468 ) (16,251 ) (5,103 ) (154,178 ) 435,369 816,393 381,024 813,976 2,417 816,393 The trade receivables comprise of gross amounts due of $21.7 million, of which $0.7 million was expected to be uncollectible at the acquisition date. Of the goodwill and intangible assets acquired through business combinations in 2017, $28.6 million is deductible for tax purposes (2016 - $21.8 million). During 2016, the Group acquired ten businesses, one of which is considered significant. On October 27, 2016, the Group completed the acquisition of the North American truckload operation of XPO Logistics for a total cash consideration of $747.4 million, of which, $500.0 million has been financed through a new term loan. The acquisition represents an important expansion of the Group’s TL and Logistics services across North America. With an operating history of over 60 years, the acquired business is a top 20 carrier headquartered in Joplin, Missouri. The business provides an integrated offering of point-to-point dry-van TL transportation services across the United States, and is one of the largest service providers of cross-border trucking into Mexico. This acquisition, which operates under the name of CFI, significantly strengthens the Group’s presence in the North American truckload landscape with prominent market positions in domestic US and cross-border Mexico freight. The other 2016 acquisitions did not have a material effect on the Group’s financial position and results of operations. TFI International YEARS ENDED DECEMBER 31, 2017 AND 2016 (Tabular amounts in thousands of Canadian dollars, unless otherwise noted.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 55 5. Business combinations (continued) b) Goodwill The goodwill is attributable mainly to the premium of an established business operation with a good reputation in the transportation industry, and the synergies expected to be achieved from integrating the acquired entity into the Group’s existing business. The goodwill arising in the above business combinations has been allocated to operating segments as indicated in the table below, which represents the lowest level at which goodwill is monitored internally. Operating segment Package and Courier Less-Than-Truckload U.S. Truckload Specialized Truckload Logistics Reportable segment Package and Courier Less-Than-Truckload Truckload Truckload Logistics (*) Recasted for changes in composition in reportable segments and note 5 c). 2017 1,992 8,927 — 19,352 12,621 42,892 2016* 7,823 7,481 333,339 7,230 25,151 381,024 c) Adjustment to the provisional amounts of prior year business combinations The 2016 annual consolidated financial statements included details of the Group’s business combinations and set out provisional fair values relating to the consideration and net assets acquired of CFI. This acquisition was accounted for under the provisions of IFRS 3. As required by IFRS 3, the provisional fair values have been reassessed in light of information obtained during the measurement period following the acquisition. Consequently, the fair value of certain assets acquired and liabilities assumed of CFI has been adjusted during the year and accordingly, the comparative information for the prior year presented in these consolidated financial statements has been revised as follow: Cash and cash equivalents Trade and other receivables Inventoried supplies and prepaid expenses Property and equipment Intangible assets Trade and other payables Provisions Deferred tax liabilities Total identifiable net assets Total consideration transferred Goodwill d) Contingent consideration Provisional fair value Measurement period adjustment Reassessed fair value 13,949 82,997 12,104 460,779 129,860 (57,607 ) (16,251 ) (194,680 ) 431,151 747,449 316,298 — 13,949 — — (27,910 ) (50,198 ) — — 44,408 (33,700 ) — 33,700 82,997 12,104 432,869 79,662 (57,607 ) (16,251 ) (150,272 ) 397,451 747,449 349,998 The contingent consideration relates to one business combination and is recorded in the original purchase price allocation. The fair value was determined using expected cash flow based on probability weighted scenario discounted at a rate of 6.0%. This consideration is contingent on achieving specified earning levels in future periods. The maximum yearly amount payable over the next four years is $5.0 million for a total consideration of $20.0 million. At December 31, 2017, the fair value of the contingent arrangement was estimated at $11.7 million and is currently presented in other financial liabilities on the consolidated statements of financial position. 2017 Annual Report 56 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2017 AND 2016 (Tabular amounts in thousands of Canadian dollars, unless otherwise noted.) 6. Discontinued operations On September 30, 2015, the Company decided to cease operations in the rig moving operating segment and accordingly has classified all the property and equipment as assets held for sale. On February 1, 2016, the Company sold the Waste Management segment (“Waste”) to GFL Environmental Inc. (“GFL”) for total consideration of $800 million, which includes an unsecured promissory note of $25 million yielding 3% interest with a term of 4 years. The following table presents the net income (loss) from discontinued operations: Revenue Expenses Loss on assets held for sale Gain on the sale of Waste Income (loss) before income tax Income tax expense (recovery) Net income (loss) from discontinued operations (1) Earnings (loss) per share from discontinued operations Basic earnings (loss) per share Diluted earnings (loss) per share Additional information: Depreciation of property and equipment Rig moving 304 1,898 (1,594 ) (8,920 ) — (10,514 ) (3,656 ) (6,858 ) 2016 Waste 14,340 15,630 (1,290 ) — 559,246 557,956 68,578 489,378 Total 14,644 17,528 (2,884 ) (8,920 ) 559,246 547,442 64,922 482,520 (0.07 ) (0.07 ) 5.22 5.12 5.15 5.05 — 2,256 2,256 (1) The net income from discontinued operations is fully attributable to the owners of the Company. During 2016, an impairment of $5.0 million was recognized on assets belonging to the rig moving segment. The assets and liabilities of the discontinued operations were as follows: Current assets Current liabilities 2016 326 (2,700 ) TFI International YEARS ENDED DECEMBER 31, 2017 AND 2016 (Tabular amounts in thousands of Canadian dollars, unless otherwise noted.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 57 6. Discontinued operations (continued) Sale of the Waste Management segment On February 1, 2016, the Company completed the sale of Waste to GFL, headquartered in Toronto, Ontario, for a sale price of $800 million. At closing, GFL paid $758.9 million to the Company net of closing adjustments, and issued an unsecured promissory note to the Company in an amount of $25 million, payable in four years and bearing interest at an annual rate of 3%. The table below presents the reconciliation of the gain on the sale of the Waste Management. Sale price Closing adjustment to sale price Net sale price Trade and other receivables Inventoried supplies and prepaid expenses Property and equipment Intangible assets Goodwill Other assets Bank indebtedness Trade and other payables Income taxes payable Provisions Long-term debt Deferred tax liabilities Total identifiable net assets Fair value adjustment to the promissory note Gain on sale of Waste Income tax on gain on disposal Gain on sale of Waste, net of tax Net sale price is paid as follow: Cash consideration received Promissory note issued Note i ii iii ii 2016 800,000 (16,126 ) 783,874 34,014 4,364 140,089 93,408 22,369 9,576 (6,018 ) (16,576 ) (3,956 ) (26,544 ) (7,235 ) (26,398 ) 217,093 (7,535 ) 559,246 (68,475 ) 490,771 758,874 25,000 783,874 i) Closing adjustments to the sale price includes an assumed lease amount of $0.7 million, closure and post-closure costs of $9.1 million, working capital adjustment of $2.4 million and income taxes payable of $4.0 million. ii) The fair value adjustment to the promissory note has been calculated with a discount rate of 12% over 4 years based on the specific risk of the business. iii) The gain of $559.2 million on the sale of Waste generated an income tax expense $68.5 million which represents an effective tax rate of 12.2% largely explained by the capital nature of the transaction. 7. Trade and other receivables Trade receivables Other receivables 2017 546,160 20,946 567,106 2016 552,057 17,124 569,181 The Group’s exposure to credit and currency risks related to trade and other receivables is disclosed in note 25 a) and d). 2017 Annual Report 58 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2017 AND 2016 (Tabular amounts in thousands of Canadian dollars, unless otherwise noted.) 8. Additional cash flow information Net change in non-cash operating working capital Trade and other receivables Inventoried supplies Prepaid expenses Trade and other payables 9. Property and equipment 2017 14,548 (238 ) 9,060 (35,019 ) (11,649 ) 2016 40,095 836 1,598 (27,870 ) 14,659 Cost Balance at December 31, 2015 Additions through business combinations* Other additions Disposals Reclassification from (to) assets held for sale Land and buildings Rolling stock Equipment Total 424,593 44,420 9,409 (16,434 ) 4,644 908,662 412,716 92,152 (114,207 ) (3,277 ) 149,482 1,668 8,999 (6,673 ) — 1,482,737 458,804 110,560 (137,314 ) 1,367 Effect of movements in exchange rates (556 ) (6,073 ) (334 ) (6,963 ) Balance at December 31, 2016* Additions through business combinations Other additions Disposals Reclassification to assets held for sale Effect of movements in exchange rates 466,076 4,788 8,126 (7,167 ) (133,003 ) (5,355 ) 1,289,973 20,755 238,812 (219,024 ) — 153,142 1,670 12,728 (14,001 ) — 1,909,191 27,213 259,666 (240,192 ) (133,003 ) (36,113 ) (1,069 ) (42,537 ) Balance at December 31, 2017 333,465 1,294,403 152,470 1,780,338 Depreciation Balance at December 31, 2015 Depreciation for the year Disposals Reclassification from (to) assets held for sale Effect of movements in exchange rates Balance at December 31, 2016 Depreciation for the year Disposals Reclassification to assets held for sale Effect of movements in exchange rates 67,620 11,505 (3,991 ) 2,067 (244 ) 76,957 11,719 (3,933 ) (14,111 ) (956 ) 341,707 112,441 (86,736 ) (1,388 ) (689 ) 365,335 182,627 (137,243 ) — 1,066 91,549 15,493 (7,211 ) — (93 ) 99,738 15,211 (13,241 ) — (444 ) 500,876 139,439 (97,938 ) 679 (1,026 ) 542,030 209,557 (154,417 ) (14,111 ) (334 ) Balance at December 31, 2017 69,676 411,785 101,264 582,725 389,119 924,638 53,404 1,367,161 263,789 882,618 51,206 1,197,613 Net carrying amounts At December 31, 2016* At December 31, 2017 (*) Recasted (see note 5 c)) TFI International YEARS ENDED DECEMBER 31, 2017 AND 2016 (Tabular amounts in thousands of Canadian dollars, unless otherwise noted.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 59 9. Property and equipment (continued) Leased assets The Group leases items of rolling stock and equipment under a number of finance lease agreements. For the majority of these leases, the Group is responsible for the residual value on termination date. The leased assets secure lease obligations (see note 13). At December 31, 2017, the net carrying amount of leased assets was $32.3 million (2016 - $36.1 million). During the year ended December 31, 2017, the Group acquired leased assets in the amount of $0.4 million (2016 – $0.1 million) under finance lease agreements and all other new leased assets come from business acquisitions. Security At December 31, 2017 certain rolling stock are pledged as security for conditional sales contracts, with a carrying amount of $120.4 million (2016 - $104.1 million) (see note 13). 10. Intangible assets Other intangible assets Non- Goodwill Customer compete relationships Trademarks agreements Information technology Total Cost Balance at December 31, 2015 Additions through business combinations* Other additions Extinguishments Effect of movements in exchange rates Balance at December 31, 2016* Additions through business combinations Other additions Extinguishments Effect of movements in exchange rates 1,207,311 443,516 73,649 2,530 29,630 1,756,636 381,024 — — (11,979 ) 59,992 — (6,261 ) (5,333 ) 37,010 — (57 ) (986 ) 785 — (541 ) (48 ) 890 1,835 (1,948 ) (348 ) 479,701 1,835 (8,807 ) (18,694 ) 1,576,356 491,914 109,616 2,726 30,059 2,210,671 42,892 — — (42,587 ) 64,040 — (2,100 ) (15,715 ) 365 — (2,877 ) (4,478 ) 6,440 — — (202 ) 28 2,083 (7,231 ) (978 ) 113,765 2,083 (12,208 ) (63,960 ) Balance at December 31, 2017 1,576,661 538,139 102,626 8,964 23,961 2,250,351 Amortization and impairment losses Balance at December 31, 2015 Amortization for the year Extinguishments Effect of movements in exchange rates Balance at December 31, 2016 Amortization for the year Impairment loss Extinguishments Effect of movements in exchange rates 60,000 — — — 60,000 — 129,770 — (4,320 ) 98,748 42,606 (6,261 ) (1,055 ) 134,038 47,271 — (2,100 ) (4,991 ) 14,434 5,919 (57 ) (137 ) 20,159 8,270 13,211 (2,877 ) (1,185 ) 743 490 (541 ) (18 ) 674 1,081 — — (41 ) 20,211 4,632 (1,948 ) (245 ) 22,650 4,578 — (7,231 ) (880 ) 194,136 53,647 (8,807 ) (1,455 ) 237,521 61,200 142,981 (12,208 ) (11,417 ) Balance at December 31, 2017 185,450 174,218 37,578 1,714 19,117 418,077 Net carrying amounts At December 31, 2016* 1,516,356 357,876 89,457 2,052 7,409 1,973,150 At December 31, 2017 1,391,211 363,921 65,048 7,250 4,844 1,832,274 (*) Recasted (see note 5 c)) 2017 Annual Report 60 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2017 AND 2016 (Tabular amounts in thousands of Canadian dollars, unless otherwise noted.) 10. Intangible assets (continued) In 2017, the Group rebranded certain package and courier companies by initiating a change of name. This rebranding was identified as an indicator of impairment for the trade name intangibles of these companies. The group estimated the value in use of the trade names to be $5.8 million using the relief-from-royalty method compared to its carrying value of $19.0 million, resulting in an impairment charge of $13.2 million. Management assumed that the trade names have a value for 4 years and used a discount rate of 9.3% in its analysis. The Group also changed the amortization period to 4 years for the remaining net book value of these trade names only. Goodwill impairment test IFRS requires an entity to assess at the end of each reporting period whether there is any indication that an asset may be impaired. If such indication exists, the entity shall estimate the recoverable amount of the assets. In Q2 2017, management determined that such an indication existed as the results of the U.S. Truckload operating segment were substantially below the expected results. As a result, a goodwill impairment analysis was performed only for the U.S. Truckload operating segment. For the purpose of impairment testing, goodwill is allocated to the Group’s operating segments which represent the lowest level within the Group at which the goodwill is monitored for internal management purposes. The aggregate carrying amounts of goodwill allocated to the U.S. Truckload operating segment, prior to any impairment, was $441.8 million as at June 30, 2017 (December 31, 2016 - $444.8 million). The Group performed a goodwill impairment test as at June 30, 2017. The results using the value in use approach determined that the recoverable amount of the U.S. Truckload operating segment was lower than the carrying amount at June 30, 2017. The Group recognized a goodwill impairment charge of $129.8 million. The value in use methodology is based on discounted future cash flows. Management believes that the discounted future cash flows method is appropriate as it allows more precise valuation of specific future cash flows. The estimated future cash flows were discounted to their present value using a pre-tax discount rate of 11.2% (2016 - 11.2%) at June 30, 2017 for the U.S.Truckload. The discount rate was estimated based on past experience, and industry average weighted average cost of capital, which were based on a possible range of debt leveraging of 40.0% (2016 – 40.0%) at a market interest rate of 6.8% (2016 – 6.7%). First year cash flows were projected based on previous operating results and reflect current economic conditions. For a further 4-year period, cash flows were extrapolated using an average growth rate of 2.0% (2016 – 2.0%) in revenues and margins were adjusted where deemed appropriate. The terminal value growth rate was 2.0% (2016 – 2.0%). The values assigned to the key assumptions represent management’s assessment of future trends in the transportation industry and were based on both external and internal sources (historical data). The recoverable amount for the U.S. Truckload calculated at June 30, 2017 was $869.7 million ($1,257.6 million – December 31, 2016) as compared to a carrying amount of $999.5 million on June 30, 2017 ($960.0 million – December 31, 2016). At December 31, 2017, the Group performed its annual goodwill impairment tests for operating segments which represent the lowest level within the Group at which the goodwill is monitored for internal management purposes. The aggregate carrying amounts of goodwill allocated to each unit are as follows: Reportable segment / operating segment Package and Courier Less-Than-Truckload Truckload Canadian Truckload U.S. Truckload Specialized Truckload Logistics (*) Recasted for changes in composition of reportable segments and note 5 c). 2017 359,557 159,261 110,298 292,582 360,547 108,966 2016* 367,430 150,334 110,298 444,752 346,851 96,691 1,391,211 1,516,356 TFI International YEARS ENDED DECEMBER 31, 2017 AND 2016 (Tabular amounts in thousands of Canadian dollars, unless otherwise noted.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 61 10. Intangible assets (continued) The results as at December 31, 2017 determined that the recoverable amounts of the Group’s operating segments exceeded their respective carrying amounts. The recoverable amounts of the Group’s operating segments were determined using the value in use approach. The value in use methodology is based on discounted future cash flows. Management believes that the discounted future cash flows method is appropriate as it allows more precise valuation of specific future cash flows. In assessing value in use, the estimated future cash flows are discounted to their present value using pre-tax discount rates as follows: Reportable segment / operating segment Package and Courier Less-Than-Truckload Truckload Canadian Truckload U.S. Truckload Specialized Truckload Logistics 2017 9.5% 10.1% 11.9% 11.3% 11.9% 10.7% 2016 9.4% 10.0% 11.2% 11.2% 11.8% 10.6% The discount rates were estimated based on past experience, and industry average weighted average cost of capital, which were based on a possible range of debt leveraging of 40.0% (2016 – 40.0%) at a market interest rate of 7.0% (2016 – 6.7%). First year cash flows were projected based on previous operating results and reflect current economic conditions. For a further 4-year period, cash flows were extrapolated using an average growth rate of 2.0% (2016 – 2.0%) in revenues and margins were adjusted where deemed appropriate. The terminal value growth rate was 2.0% (2016 – 2.0%). The values assigned to the key assumptions represent management’s assessment of future trends in the transportation industry and were based on both external and internal sources (historical data). 11. Other assets Promissory note Investments in equity securities Restricted cash Security deposits Other Note 6 2017 20,739 6,310 4,294 3,748 783 2016 18,962 15,884 4,294 3,645 24 35,874 42,809 Restricted cash consists of cash held as potential claims collateral pursuant to re-insurance agreements under the Group’s insurance program. 12. Trade and other payables Trade payables and accrued expenses Personnel accrued expenses Dividend payable (*) Recasted (see note 15) 2017 305,781 101,317 18,717 425,815 2016* 318,480 119,296 17,399 455,175 The Group’s exposure to currency and liquidity risk related to trade and other payables is disclosed in note 25. 2017 Annual Report 62 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2017 AND 2016 (Tabular amounts in thousands of Canadian dollars, unless otherwise noted.) 13. Long-term debt This note provides information about the contractual terms of the Group’s interest-bearing long-term debt, which are measured at amortized cost. For more information about the Group’s exposure to interest rate, foreign exchange currency and liquidity, see note 25. Non-current liabilities Revolving facility Term loans Unsecured debentures Conditional sales contracts Finance lease liabilities Other long-term debt Current liabilities Current portion of conditional sales contracts Current portion of finance lease liabilities Current portion of other long-term debt 2017 2016 690,893 572,788 124,738 52,553 4,997 — 767,034 571,663 124,552 42,758 12,401 25,909 1,445,969 1,544,317 33,502 9,959 8,966 52,427 29,807 9,869 822 40,498 Terms and conditions of outstanding long-term debt are as follows: Currency Nominal interest rate Year of maturity Face value Carrying amount Face value Carrying amount 2017 2016 Revolving facility Revolving facility Term loan Unsecured debentures Term loan Conditional sales contracts Finance lease liabilities Other long-term debt a a a b c C$ US$ C$ C$ C$ BA + 2.15% Libor + 2.15% 2021 250,400 2021 354,851 BA + 2.15% 2019-2020 500,000 2020 125,000 3.00 - 3.45% 75,000 2019 3.95% 248,720 442,173 497,957 124,738 74,831 302,900 348,953 500,000 125,000 75,000 d Mainly C$ 1.99% - 3,81% 2018-2022 e Mainly C$ 2.35% - 6.90% 2018-2022 2018 C$ 4.30% - 4.75% 86,055 14,956 8,966 86,055 14,956 8,966 72,565 22,270 26,731 301,170 465,864 496,933 124,552 74,730 72,565 22,270 26,731 1,498,396 1,584,815 In 2017, in addition to the repayments and new borrowings, the debt decreased due to currency fluctuations by $23.3 million and increased by $2.5 million due to the amortization of deferred financing fees. TFI International YEARS ENDED DECEMBER 31, 2017 AND 2016 (Tabular amounts in thousands of Canadian dollars, unless otherwise noted.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 63 13. Long-term debt (continued) a) Revolving credit facility On May 17, 2017, the Group extended its existing revolving credit facility, by one year, to June 2021. The facility is unsecured and can be extended annually. The total available amount under the revolving facility is $1,200 million. The agreement still provides, under certain conditions, an additional $250 million of credit availability (C$245 million and US$5 million). Based on certain ratios, the interest rate will vary between banker’s acceptance rate (or Libor rate on US$ denominated debt) plus applicable margin, which can vary between 125 basis points and 275 basis points. As of December 31, 2017, the credit facility’s interest rate on CAD denominated debt was 3.5% (2016 – 3.0%) and on US$ denominated debt was 3.7% (2016 – 2.7%). The Group is subject to certain covenants regarding the maintenance of financial ratios and was in compliance with these covenants at year-end (see note 25 (f)). Deferred financing fees of $0.9 million were recognized on the extension. On December 21, 2017, the Group extended the maturity of the term loan by eight months for each tranche. The term loan is within the confines of the credit facility for the specific purpose of acquiring CFI. This term loan remains at a total of $500 million, with $200 million now due in June 2019 and $300 million due in 2020. Early repayment, in part or whole is permitted, and will permanently reduce the amount borrowed. The terms and conditions of the facility are the same as the credit facility and is subject to the same covenants. Deferred financing fees of $0.2 million were recognized on the extension. b) Unsecured debentures Loan agreement is in the form of unsecured debentures carrying an interest rate between 3% and 3.45% depending on certain ratios and with a December 2020 maturity date. The debentures may be repaid, without penalty, after December 18, 2019, subject to the approval of the Group’s syndicate of bank lenders. c) Term loan This loan takes the form of a term loan carrying an interest rate of 3.95% and with an August 2019 maturity date. This second ranking term loan may be repaid prior to the maturity subject to the approval of the Group’s syndicate of bank lenders. Repayment prior to August 18, 2018 would result in an early repayment penalty. No penalty would apply after this date. d) Conditional sales contracts Conditional sales contracts are secured by rolling stock having a carrying value of $120.4 million (2016 - $104.1 million) (see note 9). e) Finance lease liabilities Finance lease liabilities are secured by rolling stock having a carrying value of $32.3 million (2016 - $36.1 million) (see note 9). Finance lease liabilities are payable as follows: Future minimum lease payments Interest Present value of minimum lease payments Less than 1 year 10,478 (519 ) 9,959 1 to 5 More than 5 years years 5,244 (247 ) 4,997 — — — Total 15,722 (766 ) 14,956 f) Principal installments of other long-term debt payable during the subsequent years are as follows: Revolving facility Term loans Unsecured debentures Conditional sales contracts Other long-term debt Less than 1 year — — — 33,502 8,966 42,468 1 to 5 More than 5 years years 694,116 575,000 125,000 52,553 — 1,446,669 — — — — — — Total 694,116 575,000 125,000 86,055 8,966 1,489,137 2017 Annual Report 64 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2017 AND 2016 (Tabular amounts in thousands of Canadian dollars, unless otherwise noted.) 14. Employee benefits The Group sponsors defined benefit pension plans for 259 of its employees (2016 – 289). These plans are all within Canada and include one unregistered plan. All the defined benefit plans are no longer offered to employees and two defined benefits plan in the past have already been converted prospectively to defined contribution plans. Therefore, the future obligation will only vary by actuarial re-measurements. With the exception of one plan, all other plans do not have recurring contributions for employees. These plans are still required to fund past service costs. The remaining plan is fully funded by the Group. The Group measures its accrued benefit obligations and the fair value of plan assets for accounting purposes as at December 31 of each year. The most recent actuarial valuation of the pension plans for funding purposes was as of December 31, 2016 and the next required valuation will be as of December 31, 2017. In addition to the above mentioned defined benefit plans, the Group sponsors employee severance plan in Mexico. At December 31, 2017, total obligation under this arrangement amounted to $0.7 million (nil in 2016). Information about the Group’s defined benefit pension plans is as follows: Accrued benefit obligation Fair value of plan assets Plan deficit - employee benefit liability Plan assets comprise: Equity securities Debt securities Other 2017 48,689 (31,822 ) 16,867 2016 45,942 (31,660 ) 14,282 2017 33% 59% 8% 2016 32% 60% 8% All equity and debt securities have quoted prices in active markets. Debt securities are held through mutual funds and primarily hold investments with ratings of AAA or AA, based on Moody’s ratings. The other asset categories are real estate investment trusts. Movement in the present value of the accrued benefit obligation for defined benefit plans: Accrued benefit obligation, beginning of year Current service cost Interest cost Benefits paid Remeasurement loss arising from: - Financial assumptions - Experience Accrued benefit obligation, end of year 2017 45,942 591 1,729 (2,661 ) 1,839 1,249 2016 46,908 541 1,744 (3,772 ) 132 389 48,689 45,942 TFI International YEARS ENDED DECEMBER 31, 2017 AND 2016 (Tabular amounts in thousands of Canadian dollars, unless otherwise noted.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 65 14. Employee benefits (continued) Movement in the fair value of plan assets for defined benefit plans: Fair value of plan assets, beginning of year Interest income Employer contributions Benefits paid Remeasurement gain arising from financial assumptions Plan administration expenses Fair value of plan assets, end of year Expense recognized in income or loss: Current service cost Net interest cost Plan administration expenses Pension expense Actual return on plan assets Actuarial losses recognized in other comprehensive income: Amount accumulated in retained earnings, beginning of year Recognized during the year Amount accumulated in retained earnings, end of year Recognized during the year, net of tax The significant actuarial assumptions used (expressed as weighted average): Accrued benefit obligation: Discount rate at December 31 Future salary increases Employee benefit expense: Discount rate at January 1 Rate of return on plan assets at January 1 Future salary increases 2017 2016 31,660 33,147 1,193 1,314 (2,661 ) 456 (140 ) 1,206 138 (3,772 ) 1,077 (136 ) 31,822 31,660 2017 2016 591 536 140 1,267 1,649 2017 10,692 2,632 13,324 1,930 541 538 136 1,215 2,283 2016 11,248 (556 ) 10,692 (407 ) 2017 2016 3.5% 1.2% 3.9% 3.9% 1.1% 3.9% 2.9% 3.9% 3.9% 2.9% 2017 Annual Report 66 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2017 AND 2016 (Tabular amounts in thousands of Canadian dollars, unless otherwise noted.) 14. Employee benefits (continued) Assumptions regarding future mortality are based on published statistics and mortality tables. The current longevities underlying the value of the liabilities in the defined benefit plans are as follows: Longevity at age 65 for current pensioners Males Females Longevity at age 65 for current members aged 45 Males Females 2017 2016 21.7 24.1 22.8 25.1 21.6 24.1 22.7 25.0 At December 31, 2017 the weighted-average duration of the defined benefit obligation was 12.0 years. The following table presents the impact of changes of major assumptions on the defined benefit obligation for the years ended December 31: Discount rate (1% movement) Life expectancy (1-year movement) Historical information: 2017 2016 Increase Decrease Increase Decrease (5,050 ) 1,145 6,173 (1,046 ) (5,169 ) 1,065 6,304 (1,097 ) Present value of the accrued benefit obligation 48,689 45,942 46,908 46,620 41,441 Fair value of plan assets Deficit in the plan (31,822 ) (31,660 ) (33,147 ) (32,973 ) (28,888 ) 16,867 14,282 13,761 13,647 12,553 2017 2016 2015 2014 2013 Experience adjustments arising on plan obligations Experience adjustments arising on plan assets 3,088 456 521 1,077 738 278 5,201 2,492 (1,161 ) 2,736 The Group expects approximately $1.0 million in contributions to be paid to its defined benefit plans in 2018. 15. Provisions Balance at January 1, 2017 Provisions made during the year Provisions used during the year Provisions reversed during the year Revaluation of provisions Balance at December 31, 2017 2017 Current provisions Non-current provisions 2016 Current provisions Non-current provisions TFI International Self insurance 53,424 65,694 (61,318 ) (1,408 ) (1,177 ) 55,215 Other 12,352 11,310 (7,088 ) (65 ) — 16,509 Total 65,776 77,004 (68,406 ) (1,473 ) (1,177 ) 71,724 26,992 28,223 5,352 11,157 32,344 39,380 21,370 32,054 — 12,352 21,370 44,406 YEARS ENDED DECEMBER 31, 2017 AND 2016 (Tabular amounts in thousands of Canadian dollars, unless otherwise noted.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 67 15. Provisions (continued) As at December 31, 2017, the current portion of provisions is being disclosed separately from the trade and other payables. The prior period comparative figures have been recasted for this change in presentation. Self-insurance provisions represent the uninsured portion of outstanding claims at year-end. The current portion reflects the amount expected to be paid in the following year. Due to the long-term nature of the liability, the provision has been calculated using a discount rate of 3.0%. 16. Deferred tax assets and liabilities Property and equipment Intangible assets Derivative financial instruments and investment in equity securities Long-term debt Employee benefits Provisions Tax losses Other Net deferred tax liabilities Presented as: Deferred tax assets Deferred tax liabilities (*) Recasted (see note 5 c)) Movement in temporary differences during the year: Recognized in income or loss from Recognized in income or loss from continuing discontinued operations operations Balance December 31, 2015 Partnership investments (9,953 ) 9,953 Property and equipment Intangible assets Long-term debt Employee benefits Provisions Tax losses Other (140,986 ) (117,351 ) 10,553 5,305 10,671 14,284 (1,680 ) 14,222 (4,650 ) 1,850 1,886 (13,734 ) (386 ) 4,389 Net deferred tax liabilities (227,863 ) 12,236 — 218 (1,299 ) 13 — (572 ) — (2,046 ) (3,686 ) 2017 2016* (181,628 ) (103,987 ) (1,890 ) 3,877 9,730 13,025 6,583 (764 ) (270,191 ) (136,028 ) 1,248 5,903 7,102 21,334 550 (442 ) (255,054 ) (370,524 ) 5,138 8,410 (260,192 ) (378,934 ) Transfer of Recognized directly in Acquired in business equity combinations* Balance group December 31, 2016* held for sale deferred taxes to disposal — — — — 2,151 1,001 — (53 ) — — (3,166 ) (130,659 ) (32,976 ) — — 9,457 — — (67 ) (154,178 ) 765 375 (13 ) — (108 ) — 2,015 3,034 (270,191 ) (136,028 ) 5,903 7,102 21,334 550 806 (370,524 ) 2017 Annual Report 68 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2017 AND 2016 (Tabular amounts in thousands of Canadian dollars, unless otherwise noted.) 16. Deferred tax assets and liabilities (continued) Balance December 31, 2016 (270,191 ) (136,028 ) 5,903 7,102 21,334 550 806 Recognized in income or loss from continuing operations 78,470 37,880 (2,026 ) 1,862 (7,274 ) 6,730 (2,052 ) Property and equipment Intangible assets Long-term debt Employee benefits Provisions Tax losses Other Net deferred tax liabilities (370,524 ) 113,590 (*) Restated (see note 5 c)) Recognized directly in equity 11,683 4,834 — 766 (1,135 ) (697 ) (1,408 ) 14,043 Acquired in business combinations Balance December 31, 2017 (1,590 ) (10,673 ) — — 100 — — (12,163 ) (181,628 ) (103,987 ) 3,877 9,730 13,025 6,583 (2,654 ) (255,054 ) Tax losses expire between 2027 and 2037 and the related deferred tax assets have been recognized because it is probable that future taxable income will be available to benefit from these losses. 17. Share capital and other components of equity The Company is authorized to issue an unlimited number of common shares and preferred shares, issuable in series. Both common and preferred shares are without par value. All issued shares are fully paid. The common shares entitle the holders thereof to one vote per share. The holders of the common shares are entitled to receive dividends as declared from time to time. Subject to the rights, privileges, restrictions and conditions attached to any other class of shares of the Company, the holders of the common shares are entitled to receive the remaining property of the Company upon its dissolution, liquidation or winding-up. The preferred shares may be issued in one or more series, with such rights and conditions as may be determined by resolution of the Directors who shall determine the designation, rights, privileges, conditions and restrictions to be attached to the preferred shares of such series. There are no voting rights attached to the preferred shares except as prescribed by law. In the event of the liquidation, dissolution or winding-up of the Company, or any other distribution of assets of the Company among its shareholders, the holders of the preferred shares of each series are entitled to receive, with priority over the common shares and any other shares ranking junior to the preferred shares of the Company, an amount equal to the redemption price for such shares, plus an amount equal to any dividends declared thereon but unpaid and not more. The preferred shares for each series are also entitled to such other preferences over the common shares and any other shares ranking junior to the preferred shares as may be determined as to their respective series authorized to be issued. The preferred shares of each series shall be on a parity basis with the preferred shares of every other series with respect to payment of dividends and return of capital. There are no preferred shares currently issued and outstanding. The following table summarizes the number of common shares issued: (in number of shares) Balance, beginning of year Repurchase and cancellation of own shares Stock options exercised Repurchase and cancellation of own shares - Substantial issuer bid Balance, end of year Note 2017 2016 91,575,319 97,632,502 (2,810,126 ) (3,742,778 ) 19 358,395 385,519 — (2,699,924 ) 89,123,588 91,575,319 TFI International YEARS ENDED DECEMBER 31, 2017 AND 2016 (Tabular amounts in thousands of Canadian dollars, unless otherwise noted.) 17. Share capital and other components of equity (continued) The following table summarizes the share capital issued and fully paid: Balance, beginning of year Repurchase and cancellation of own shares Cash consideration of stock options exercised Ascribed value credited to share capital on stock options exercised Issuance of shares on settlement of RSUs Balance, end of year NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 69 2017 723,390 (22,231 ) 6,234 1,514 2,129 2016 764,343 (50,478 ) 6,517 1,742 1,266 711,036 723,390 Pursuant to the renewal of the normal course issuer bid (“NCIB”) which began on October 2, 2017 and expiring on October 1, 2018, the Company is authorized to repurchase for cancellation up to a maximum of 6,000,000 of its common shares under certain conditions. As at December 31, 2017, and since the inception of this NCIB, the Company has repurchased and cancelled 979,400 common shares under this NCIB. During 2017, the Company repurchased 2,810,126 common shares at a price ranging from $26.56 to $32.00 per share for a total purchase price of $81.6 million relating to the NCIB. During 2016, the Company repurchased 3,742,778 common shares at a price ranging from $22.00 to $27.30 per share for a total purchase price of $91.8 million relating to a previous NCIB. The excess of the purchase price paid over the carrying value of the shares repurchased in the amount of $59.3 million (2016 – $62.4 million) was charged to retained earnings as share repurchase premium. On February 11, 2016, the Company announced a substantial issuer bid (“SIB”) to purchase, for cancellation, up to 10 million common shares for an aggregate purchase price not to exceed $220 million (the ‘Offer’). The Offer was made by way of a “modified Dutch Auction” pursuant to which shareholders may tender all or a portion of their shares (i) at a price not less than $19.00 and not more than $22.00 per share, in increments of $0.10 per share, or (ii) without specifying a purchase price, in which case their shares would be purchased at the purchase price determined in accordance with the Offer. The offer expired on March 28, 2016. The Company purchased and cancelled 2,699,924 common shares at a price of $22.00 per share, for a total purchase price of $59.4 million relating to this SIB. The excess of the purchase price paid over the carrying value of the shares repurchased in the amount of $38.3 million was charged to retained earnings as share repurchase premium. Contributed surplus The contributed surplus account is used to record amounts arising on the issue of equity-settled share-based payment awards (see note 19). Accumulated other comprehensive income (“AOCI”) At December 31, 2017 and 2016, AOCI is comprised of accumulated foreign currency translation differences arising from the translation of the financial statements of foreign operations, changes in fair value of available for sale financial assets (prior to the adoption of IFRS 9), financial assets measured at fair value through OCI, gain or loss on net investment hedge, realized gains on investments, cash flow hedges and defined benefit plan remeasurement gain or loss. Dividends In 2017, the Company declared dividends amounting to 78.0 cents per common share (2016 – 70.0 cents) for a total of $70.3 million (2016 - $64.9 million). After December 31, 2017 no dividends were declared by the Board of Directors. 2017 Annual Report 70 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2017 AND 2016 (Tabular amounts in thousands of Canadian dollars, unless otherwise noted.) 18. Earnings per share Basic earnings per share The basic earnings per share and the weighted average number of common shares outstanding have been calculated as follows: (in thousands of dollars and number of shares) Net income attributable to owners of the Company Net income from continuing operations Issued common shares, beginning of year Effect of stock options exercised Effect of repurchase of own shares Weighted average number of common shares Earnings per share – basic Earnings per share from continuing operations – basic 2017 157,988 157,988 2016 639,579 157,059 91,575,319 97,632,502 109,479 94,049 (1,191,059 ) (4,017,885 ) 90,493,739 93,708,666 1.75 1.75 6.83 1.68 Diluted earnings per share The diluted earnings per share and the weighted average number of common shares outstanding after adjustment for the effects of all dilutive common shares have been calculated as follows: (in thousands of dollars and number of shares) Net income attributable to owners of the Company Net income from continuing operations attributable to owners of the Company, adjusted for dilution effect Weighted average number of common shares Dilutive effect: Stock options and restricted share units Weighted average number of diluted common shares Earnings per share - diluted Earnings per share from continuing operations - diluted 2017 157,988 2016 639,579 157,988 157,059 90,493,739 93,708,666 2,284,144 1,811,827 92,777,883 95,520,493 1.70 1.70 6.70 1.64 As at December 31, 2017, 394,056 stock options were excluded from the calculation of diluted earnings per share as these options were deemed to be anti-dilutive (2016 – 1,909,897). The average market value of the Company’s shares for purposes of calculating the dilutive effect of stock options was based on quoted market prices for the period during which the options were outstanding. TFI International YEARS ENDED DECEMBER 31, 2017 AND 2016 (Tabular amounts in thousands of Canadian dollars, unless otherwise noted.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 71 19. Share-based payment arrangements Stock option plan The Company offers a stock option plan for the benefit of certain of its employees. The maximum number of shares that can be issued upon the exercise of options granted under the current 2012 stock option plan is 5,979,201. Each stock option entitles its holder to receive one common share upon exercise. The exercise price payable for each option is determined by the Board of Directors at the date of grant, and may not be less than the closing price of volume weighted average trading price of the Company’s shares for the last five trading days immediately preceding the grant date. The options vest in equal installments over three years and the expense is recognized following the accelerated method as each installment is fair valued separately. The table below summarizes the changes in the outstanding stock options: (in thousands of options and in dollars) Balance, beginning of year Granted Exercised Forfeited Balance, end of year 2017 Number of options Weighted Number of options average exercise price 2016 Weighted average exercise price 5,496 395 (358 ) (40 ) 5,493 18.02 35.02 17.39 28.21 19.22 4,934 1,039 (386 ) (91 ) 5,496 16.67 24.64 16.90 24.75 18.02 Options exercisable, end of year 4,170 16.52 3,764 14.92 The following table summarizes information about stock options outstanding and exercisable at December 31, 2017: (in thousands of options and in dollars) Options outstanding Options exercisable Exercise prices 6.32 9.46 14.28 16.46 20.18 24.64 24.93 25.14 35.02 Weighted average remaining contractual life (in years) Number of options 685 620 381 665 632 988 786 354 382 5,493 1.6 2.6 0.6 1.6 2.6 5.6 4.6 3.6 6.1 3.3 Number of options 685 620 381 665 632 324 509 354 — 4,170 Of the options outstanding at December 31, 2017, a total of 4,456,400 (2016 – 4,667,432) are held by key management personnel. The weighted average share price at the date of exercise for stock options exercised in 2017 was $31.79 (2016 – $29.99). In 2017, the Group recognized a compensation expense of $3.4 million (2016 – $3.1 million) with a corresponding increase to contributed surplus. 2017 Annual Report 72 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2017 AND 2016 (Tabular amounts in thousands of Canadian dollars, unless otherwise noted.) 19. Share-based payment arrangements (continued) On February 16, 2017, the Board of Directors approved the grant of 395,113 stock options under the Company’s stock option plan of which 240,254 were granted to key management personnel. The options vest in equal installments over three years and have a life of seven years. The fair value of the stock options granted was estimated using the Black-Scholes option pricing model using the following weighted average assumptions: Average expected option life Risk-free interest rate Expected stock price volatility Average dividend yield February 16, 2017 July 21, 2016 4.5 years 1.04% 22.46% 2.17% 4.5 years 0.56% 23.01% 2.83% Weighted average fair value per option of options granted $ 5.34 $ 3.33 Deferred share unit plan for board members The Company offers a deferred share unit plan (“DSU”) for its board members. Under this plan, board members may elect to receive cash, deferred share units or a combination of both for their compensation. The following table provides the number of units related to this plan: (in units) Balance, beginning of year Board members compensation Deferred share units redeemed Dividends paid in units Balance, end of year 2017 260,567 27,633 (13,428 ) 6,551 281,323 2016 255,053 36,031 (38,108 ) 7,591 260,567 In 2017, the Group recognized, as a result of deferred share units, a compensation expense of $0.9 million (2016 - $1.0 million) with a corresponding increase to trade and other payables. In addition, in other finance costs, the Group recognized a mark-to- market gain of $0.3 million on deferred share units in 2017 (2016 – loss of $3.2 million). As at December 31, 2017, the total carrying amount of liabilities for cash-settled arrangements recorded in trade and other payables amounted to $9.3 million (2016 - $9.1 million). Performance contingent restricted share unit plan The Company offers an equity incentive plan to the benefits of senior employees of the Group. The plan provides for the issuance of restricted share units (‘‘RSUs’’) under conditions to be determined by the Board of Directors. The RSUs will vest in December of the second year from the grant date. Upon satisfaction of the required service period, the plan provides for settlement of the award through shares. On February 16, 2017, the Company granted a total of 60,931 RSUs under the Company’s equity incentive plan of which 36,494 were granted to key management personnel. The fair value of the RSUs is determined to be the share price fair value at the date of the grant and is recognized as a share-based compensation expense, through contributed surplus, over the vesting period. The fair value of the RSU’s granted during the year was $35.02 per unit. TFI International YEARS ENDED DECEMBER 31, 2017 AND 2016 (Tabular amounts in thousands of Canadian dollars, unless otherwise noted.) 19. Share-based payment arrangements (continued) The table below summarizes changes to the outstanding RSUs: (in thousands of RSUs and in dollars) Balance, beginning of year Granted Reinvested Settled Forfeited Balance, end of year NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 73 2017 Weighted average exercise price Number of RSUs 2016 Weighted average exercise price Number of RSUs 281 61 8 (143 ) (1 ) 206 24.78 35.02 26.14 24.93 29.14 27.74 224 143 7 (86 ) (7 ) 281 25.01 24.64 24.98 25.13 24.95 24.78 The following table summarizes information about RSUs outstanding and exercisable as at December 31, 2017: (in thousands of RSUs and in dollars) Exercise prices 24.64 35.02 RSUs outstanding Number of RSUs Remaining contractual life (in years) 145 61 206 1.0 2.0 1.3 The weighted average share price at the date of settlement of RSUs vested in 2017 was $32.87 (2016 – $33.53). The excess of the purchase price paid over the carrying value of shares repurchased for settlement of the award, in the amount of $3.3 million (2016 – $2.1 million), was charged to retained earnings as share repurchase premium. In 2017, the Group recognized as a result of RSUs a compensation expense of $3.4 million (2016 - $3.0 million) with a corresponding increase to contributed surplus. Of the RSUs outstanding at December 31, 2017, a total of 129,246 (2016 – 198,832) are held by key management personnel. 20. Operating expenses The Group’s operating expenses from continuing operations include: a) materials and services expenses, which are primarily costs related to independent contractors and vehicle operation; vehicle operation expenses, which primarily include fuel, repairs and maintenance, insurance, permits and operating supplies; b) personnel expenses; c) other operating expenses, which are primarily composed of costs related to offices’ and terminals’ rent, taxes, heating, telecommunications, maintenance and security and other general administrative expenses; and d) depreciation, amortization and gain or loss on disposition of rolling stock and equipment. Materials and services expenses Independent contractors Vehicle operation expenses Personnel expenses Other operating expenses Depreciation of property and equipment Amortization of intangible assets Gain on sale of rolling stock and equipment 2017 2016 1,931,800 1,751,707 808,034 600,887 2,739,834 2,352,594 1,220,871 268,599 209,557 61,200 998,031 243,713 139,439 53,647 (2,766 ) (11,481 ) 4,497,295 3,775,943 2017 Annual Report 74 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2017 AND 2016 (Tabular amounts in thousands of Canadian dollars, unless otherwise noted.) 21. Sale of assets held for sale During the year ended December 31, 2017, the Group disposed of properties classified as assets held for sale for total consideration of $174.8 million (2016 – nil). The Group has concluded a number of sale and leaseback transactions. The all-cash transactions totalling $166.4 million resulted in a pre-tax gain of $78.0 million. As a result of these transactions, commitments increased by $112.1 million at December 31, 2017. 22. Personnel expenses Short-term employee benefits Contributions to defined contribution plans Current and past service costs related to defined benefit plans Termination benefits Equity-settled share-based payment transactions Cash-settled share-based payment transactions 23. Finance income and finance costs Recognized in income or loss: (Income) costs Interest expense on long-term debt Interest income and accretion on promissory note Net foreign exchange loss Net change in fair value of foreign exchange derivatives Net change in fair value of interest rate derivatives Other financial expenses Reclassification to income of gain on investment in equity securities Net finance costs Presented as: Finance income Finance costs 24. Income tax expense Note 2017 2016 14 19 19 1,187,950 970,855 11,499 12,394 591 13,091 6,817 923 541 7,063 6,164 1,014 1,220,871 998,031 2017 56,758 (2,638 ) 2,491 (1,247 ) (365 ) 6,076 — 61,075 (4,250 ) 65,325 2016 41,201 (2,374 ) 2,110 (1,392 ) 6,232 10,171 (1,066 ) 54,882 (4,832 ) 59,714 On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (“U.S. Tax Reform”). The U.S. Tax Reform reduces the U.S. federal corporate income tax rate from 35% to 21%, effective as of January 1, 2018. The U.S. Tax Reform also allows for immediate capital expensing of new investments in certain qualified depreciable assets made after September 27, 2017, which will be phased down starting in year 2023. As a result of the U.S. Tax Reform, the Group’s net deferred income tax liability decreased by $76.1 million. The U.S. Tax Reform introduces other important changes to U.S. corporate income tax laws that may significantly affect the Group in future years including the creation of a new Base Erosion Anti-abuse Tax (BEAT) that subjects certain payments from U.S. corporations to foreign related parties to additional taxes, and limitations to the deduction for net interest expense incurred by U.S. corporations. Future regulations and interpretations to be issued by U.S. authorities may also impact the Group’s estimates and assumptions used in calculating its income tax provisions. TFI International YEARS ENDED DECEMBER 31, 2017 AND 2016 (Tabular amounts in thousands of Canadian dollars, unless otherwise noted.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 75 24. Income tax expense (continued) Income tax recognized in income or loss: Current tax expense Current year Adjustment for prior years Deferred tax expense (recovery) Origination and reversal of temporary differences Variation in tax rate Adjustment for prior years Income tax expense (recovery) from continuing operations Income tax recognized in other comprehensive income: 2017 2016 74,148 (1,200 ) 72,948 (34,455 ) (76,244 ) (2,891 ) (113,590 ) (40,642 ) 63,324 (4,816 ) 58,508 (14,548 ) (34 ) 2,346 (12,236 ) 46,272 2017 Tax (benefit) expense Before tax Net of tax Before Tax 2016 Tax (benefit) expense Net of tax (133 ) (17 ) (116 ) (1,217 ) (163 ) (1,054 ) (80,212 ) — (80,212 ) (24,788 ) — (24,788 ) (2,632 ) (212 ) (702 ) (64 ) (1,930 ) (148 ) 556 (316 ) 149 (95 ) 407 (221 ) (1,485 ) 25,114 5,352 (54,208 ) (198 ) 3,353 1,425 3,797 (1,287 ) 21,761 3,927 (58,005 ) (300 ) 25,824 12,454 12,213 (40 ) 3,451 3,329 6,631 (260 ) 22,373 9,125 5,582 Change in fair value of investment in equity securities Foreign currency translation differences Defined benefit plan remeasurement gains (losses) Employee benefit Reclassification to retained earnings of accumulated unrealized loss on investment in equity securities Gain on net investment hedge Gain on cash flow hedge Reconciliation of effective tax rate: Income before income tax 117,346 203,331 Income tax using the Company’s statutory tax rate 26.8 % 31,449 26.9 % 54,696 Increase (decrease) resulting from: Rate differential between jurisdictions (31.0 %) (36,405 ) (3.7 %) (7,588 ) 2017 2016 Variation in tax rate Non deductible expenses Tax exempt income Adjustment for prior years Others (65.0 %) (76,244 ) 44.7 % 52,460 (9.0 %) (10,513 ) (3.5 %) 2.3 % (4,091 ) 2,702 0.0 % 1.9 % (1.2 %) (1.2 %) 0.0 % (34 ) 3,950 (2,365 ) (2,470 ) 83 (34.7 %) (40,642 ) 22.7 % 46,272 2017 Annual Report 76 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2017 AND 2016 (Tabular amounts in thousands of Canadian dollars, unless otherwise noted.) 25. Financial instruments and financial risk management Derivative financial instruments’ fair values were as follows: Current assets Interest rate derivatives Non-current assets Interest rate derivatives Current liabilities Embedded foreign exchange derivatives in finance leases Interest rate derivatives Non-current liabilities Embedded foreign exchange derivatives in finance leases Interest rate derivatives Measured at fair value through income or loss Designated as effective cash flow hedge instruments Note 2017 2016 2017 2016 a a a a — — 311 — 311 — — — — — 1,062 162 1,224 496 — 496 4,521 741 4,317 1,287 — 248 248 — 373 373 — 1,152 1,152 — 3,211 3,211 As at December 31, 2017 and 2016, the impact to income or loss and other comprehensive income is as follows: Finance loss (income) 2017 2016 Other comprehensive loss 2016 2017 Derivative financial instruments measured at fair value through income or loss: Cross currency interest rate swap contracts Interest rate derivatives Foreign exchange derivatives — (365 ) — 11,375 6,232 177 Embedded foreign exchange derivatives in finance leases (1,247 ) (1,569 ) — — — — — — — — Derivative financial instruments measured at fair value through other comprehensive income: Interest rate derivatives — — (1,612 ) 16,215 (5,352 ) (5,352 ) (12,454 ) (12,454 ) Risks In the normal course of its operations and through its financial assets and liabilities, the Group is exposed to the following risks: credit risk • • liquidity risk • market risk. This note presents information about the Group’s exposure to each of the above risks, the Group’s objectives and processes for managing risk, and the Group’s management of capital. Further quantitative disclosures are included throughout these consolidated financial statements. TFI International YEARS ENDED DECEMBER 31, 2017 AND 2016 (Tabular amounts in thousands of Canadian dollars, unless otherwise noted.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 77 25. Financial instruments and financial risk management (continued) Risk management framework The Group’s management identifies and analyzes the risks faced by the Group, sets appropriate risk limits and controls, and monitors risks and adherence to limits. Risk management is reviewed regularly to reflect changes in market conditions and the Group’s activities. The Board of Directors has overall responsibility of the Group’s risk management framework. The Board of Directors monitors the Group’s risks through its audit committee. The audit committee reports regularly to the Board of Directors on its activities. The Group’s audit committee oversees how management monitors and manages the Group’s risks and is assisted in its oversight role by the Group’s internal audit. Internal audit undertakes both regular and ad hoc reviews of risk, the results of which are reported to the audit committee. a) Credit risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligation, and arises principally from the Group’s trade receivables. The Group grants credit to its customers in the ordinary course of business. Management believes that the credit risk of trade receivables is limited due to the following reasons: There is a broad base of customers with dispersion across different market segments; • • No single customer accounts for more than 10% of the Group’s revenue; • Approximately 94.5% (2016 – 92.9%) of the Group’s trade receivables are not past due or 30 days or less past due; Bad debt expense has been approximately 0.1% (2016 – 0.1%) of consolidated revenues for the last 3 years. • Exposure to credit risk The Group’s maximum credit exposure corresponds to the carrying amount of the financial assets. The maximum exposure to credit risk at the reporting date was: Trade and other receivables Promissory note Derivative financial assets Impairment losses The aging of trade and other receivables at the reporting date was: 2017 2016 567,106 569,181 20,739 8,838 18,962 2,028 596,683 590,171 Not past due Past due 1 – 30 days Past due 31 – 60 days Past due more than 60 days Total 2017 Impairment 2017 Total 2016 Impairment 2016 424,745 112,135 23,120 14,037 574,037 — 693 2,079 4,159 6,931 414,794 114,523 25,328 20,961 575,606 — 643 1,928 3,854 6,425 2017 Annual Report 78 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2017 AND 2016 (Tabular amounts in thousands of Canadian dollars, unless otherwise noted.) 25. Financial instruments and financial risk management (continued) a) Credit risk (continued) Impairment losses (continued) The movement in the allowance for impairment in respect of trade and other receivables during the year was as follows: Balance, beginning of year Business combinations Bad debt expenses Amount written off and recoveries Balance, end of year 2017 6,425 651 2,147 (2,292 ) 6,931 2016 10,277 1,943 113 (5,908 ) 6,425 The impaired trade receivables are mostly due from customers that are experiencing financial difficulties. The promissory note has been individually evaluated for impairment due to its significance. b) Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to its reputation. Cash inflows and cash outflows requirements from Group’s entities are monitored closely and separately to ensure the Group optimizes its cash return on investment. Typically, the Group ensures that it has sufficient cash to meet expected operational expenses; this excludes the potential impact of extreme circumstances that cannot reasonably be predicted. The Group monitors its short and medium-term liquidity needs on an ongoing basis using forecasting tools. In addition, the Group maintains a revolving facility, which has $501.3 million availability at December 31, 2017 (2016 - $410.0 million) and has an additional $250 million credit available (C$245 million and US$5 million) under certain conditions under its syndicated bank agreement (2016 - $250 million, C$245 million and US$5 million). The following are the contractual maturities of the financial liabilities, including estimated interest payment: December 31, 2017 Trade and other payables Long-term debt Derivatives financial liabilities Other financial liability December 31, 2016 Trade and other payables Long-term debt Derivatives financial liabilities Other financial liability Carrying amount Contractual cash flows Less than 1 year 1 to 2 years 2 to 5 years More than 5 years 425,815 425,815 1,498,396 932 14,581 1,657,039 932 17,000 425,815 105,490 559 1,300 — — 352,127 249 6,555 1,199,422 124 9,145 1,939,724 2,100,786 533,164 358,931 1,208,691 455,175 1,584,815 6,083 5,447 455,175 1,741,045 6,083 5,692 455,175 91,092 2,376 1,300 — 303,998 1,649 1,300 — 1,345,955 1,953 3,092 2,051,520 2,207,995 549,943 306,947 1,351,000 — — — — — — — 105 — 105 It is not expected that the contractual cash flows could occur significantly earlier, or at significantly different amounts. TFI International YEARS ENDED DECEMBER 31, 2017 AND 2016 (Tabular amounts in thousands of Canadian dollars, unless otherwise noted.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 79 25. Financial instruments and financial risk management (continued) c) Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates and interest rates, will affect the Group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposure within acceptable parameters, while optimizing the return. The Group buys and sells derivatives, and also incurs financial liabilities, in order to manage market risks. All such transactions are carried out within the guidelines set by the Group’s management and it does not use derivatives for speculative purposes. d) Currency risk The Group is exposed to currency risk on financial assets and liabilities, sales and purchases that are denominated in a currency other than the respective functional currencies of Group entities. Primarily the Canadian entities are exposed to U.S. dollars and entities having a functional currency other than the Canadian dollars (foreign operations) are not significantly exposed to currency risk. The Group mitigates and manages its future US$ cash flow by creating offsetting positions through the use of derivatives. These instruments include foreign exchange contracts and currency option instruments, which are commitments to buy or sell at a future date, and may be settled in cash. To mitigate its financial net liabilities exposure to foreign currency risk related to Canadian entities, the Group designated a portion of its U.S. dollar denominated debt as a hedging item in a net investment hedge. The Group’s financial assets and liabilities exposure to foreign currency risk related to Canadian entities was as follows based on notional amounts: (in thousands of U.S. dollars) Trade and other receivables Trade and other payables Long-term debt Balance sheet exposure Long-term debt designated as investment hedge Net balance sheet exposure 2017 2016 35,437 (6,208 ) (328,167 ) (298,938 ) 325,000 37,644 (5,248 ) (332,539 ) (300,143 ) 325,000 26,062 24,857 The Group estimates its annual net US$ denominated cash flow from operating activities at approximately $280 million (2016 - $240 million). This cash flow is earned evenly throughout the year. The following exchange rates applied during the year: Average US$ for the year ended December 31 Closing US$ as at December 31 Sensitivity analysis 2017 1.2982 1.2545 2016 1.3245 1.3427 A 1-cent increase in the U.S. dollar at the reporting date, assuming all other variables, in particular interest rates, remain constant, would have increased (decreased) equity and income or loss by the amounts shown below. The analysis is performed on the same basis for 2016. Balance sheet exposure Long-term debt designated as investment hedge Net balance sheet exposure 2017 2016 1-cent Increase 1-cent Decrease 1-cent Increase 1-cent Decrease (2,383 ) 2,591 208 2,383 (2,591 ) (208 ) (2,235 ) 2,420 185 2,235 (2,420 ) (185 ) Net impact on change in fair value of foreign exchange derivatives is not significant. 2017 Annual Report 80 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2017 AND 2016 (Tabular amounts in thousands of Canadian dollars, unless otherwise noted.) 25. Financial instruments and financial risk management (continued) e) Interest rate risk The Group’s intention is to minimize its exposure to changes in interest rates by maintaining a significant portion of fixed- rate interest-bearing long-term debt. This is achieved by entering into interest rate swaps. On October 27, 2016, pursuant to the adoption of IFRS 9, the Group entered into interest rate swaps designated for cash flow hedges at the inception of the swap for $500 million. This variable interest debt sets interest using the 30-day Banker`s Acceptance rate. In addition, on November 1, 2016, the Group further designated for cash flow hedges of pre-existing interest rate swaps of $325 million to hedge variable interest debt set using the 30-day Libor rate. A $5.4 million gain, $4.0 million net of tax, (2016 - $12.5 million gain, $9.1 million net of tax) was recorded on the marking-to-market of the interest rate derivative to other comprehensive income for these cash flow hedges. Ineffectiveness in hedging stems from differences between the hedged item and hedging instruments with respect to interest rate characteristics, currency, notional values and term. For the year ended December 31, 2017, the derivatives designated as cash flow hedges were considered to be fully effective and no ineffectiveness has been recognized in net earnings. At December 31, 2017 and 2016, the interest rate profile of the Group’s carrying amount interest-bearing financial instruments excluding the effects of interest rate derivatives was: Fixed rate instruments Variable rate instruments 2017 307,503 1,190,893 1,498,396 2016 337,661 1,247,154 1,584,815 The Group’s interest rate derivatives are as follows: 2017 2016 Notional Notional Notional Notional Average Contract Average Contract Libor Amount rate B.A. Amount rate CDN$ Fair value US$ CDN$ Average Contract Average Contract Libor Amount rate B.A. Amount rate CDN$ Fair value US$ CDN$ Coverage period: Less than 1 year 1 to 2 years 2 to 3 years 3 to 4 years 4 to 5 years 5 to 6 years Asset (liability) Presented as: Current assets Non-current assets Current liabilities Non-current liabilities 0.98% 500,000 1.92% 325,000 4,273 0.99% 300,000 1.92% 325,000 3,129 433 218 164 — — 1.89% 237,500 — 1.92% 100,000 — 1.92% 75,000 — — — — — — — 0.98% 500,000 1.85% 350,000 0.98% 500,000 1.92% 325,000 0.99% 300,000 1.92% 325,000 — 1.89% 237,500 — 1.92% 100,000 — 1.92% 75,000 — — — (573 ) (411 ) (605 ) (661 ) (141 ) (106 ) 8,217 4,521 4,317 (248 ) (373 ) (2,497 ) 741 1,287 (1,314 ) (3,211 ) The fair value of the interest rate swaps has been estimated using industry standard valuation models which use rates published on financial capital markets. TFI International YEARS ENDED DECEMBER 31, 2017 AND 2016 (Tabular amounts in thousands of Canadian dollars, unless otherwise noted.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 81 25. Financial instruments and financial risk management (continued) Fair value sensitivity analysis for fixed rate instruments The Group does not account for any fixed rate financial liabilities at fair value through income or loss. Therefore a change in interest rates at the reporting date would not affect income or loss. Cash flow sensitivity analysis for variable rate instruments A 1% change in interest rates at the reporting date would have increased (decreased) equity and net income or net loss by the amounts shown below. This analysis assumes that all other variables, in particular foreign currency rates, remain constant. The analysis is performed on the same basis for 2016. Interest on variable rate instrument Interest on interest rate swaps Impact on instruments used in cash flow hedge: Interest on variable rate instrument Interest on interest rate swaps 2017 2016 1% increase 1% decrease 1% increase 1% decrease (2,070 ) — (2,070 ) 2,070 — 2,070 (2,272 ) 245 (2,027 ) 2,272 (245 ) 2,027 2017 2016 1% increase 1% decrease 1% increase 1% decrease (6,635 ) 6,635 — 6,635 (6,635 ) — (6,845 ) 6,845 — 6,845 (6,845 ) — Net impact on change in fair value of interest rate swaps is not significant. f) Capital management For the purposes of capital management, capital consists of share capital and retained earnings of the Group. The Group’s objectives when managing capital are: • • • • To ensure proper capital investment in order to provide stability and competitiveness to its operations; To ensure sufficient liquidity to pursue its growth strategy and undertake selective acquisitions; To maintain an appropriate debt level so that there are no financial constraints on the use of capital; and To maintain investors, creditors and market confidence. The Group seeks to maintain a balance between the highest returns that might be possible with higher level of borrowings and the advantages and security by a sound capital position. The Group monitors its long-term debt using the ratios below to maintain an appropriate debt level. The Group’s debt-to- equity and debt-to-capitalization ratios are as follows: Long-term debt Shareholders’ equity Debt-to-equity ratio Debt-to-capitalization ratio 2017 2016 1,498,396 1,415,124 1,584,815 1,458,650 1.06 0.51 1.09 0.52 2017 Annual Report 82 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2017 AND 2016 (Tabular amounts in thousands of Canadian dollars, unless otherwise noted.) 25. Financial instruments and financial risk management (continued) f) Capital management (continued) There were no changes in the Group’s approach to capital management during the year. The Group’s credit facility agreement requires monitoring two ratios on a quarterly basis. The first is a ratio of total debt plus letters of credit and some other long-term liabilities to earnings before interest, income taxes, depreciation and amortization (“EBITDA”). The second is a ratio of adjusted earnings before interest, income taxes, depreciation and amortization and rent expense (“EBITDAR”), and, including last twelve months adjusted EBITDAR from acquisitions to interest and net rent expenses. These ratios are measured on a consolidated last twelve-month basis and must be kept below a certain threshold so as not to breach a covenant in the Group’s syndicated bank. At December 31, 2017 and December 31, 2016, the Group was in compliance with its financial covenants. The Group has sufficient liquidity to continue both its operations as well as its acquisition strategy. Upon maturity of the Group’s long-term debt, the Group’s management and its Board of Directors will assess if the long- term debt should be renewed at its original value, increased or decreased based on the then required capital need, credit availability and future interest rates. g) Accounting classification and fair values The fair values of financial assets and liabilities, together with the carrying amounts shown in the statements of financial position, are as follows: Financial assets Assets carried at fair value Derivative financial instruments Investment in equity securities Assets carried at amortized cost Cash and cash equivalents Trade and other receivables Promissory note Financial liabilities Liabilities carried at fair value Derivative financial instruments Other financial liability Liabilities carried at amortized cost Bank indebtedness Trade and other payables Long-term debt 2017 Carrying Amount 2016 Fair Value Carrying Amount Fair Value 8,838 6,310 — 567,106 20,739 602,993 8,838 6,310 — 567,106 20,739 602,993 2,028 15,884 3,654 569,181 18,962 609,709 2,028 15,884 3,654 569,181 18,962 609,709 932 14,581 932 14,581 6,083 5,447 6,083 5,447 9,392 425,815 1,498,396 9,392 425,815 1,563,730 — 455,175 1,584,815 1,949,116 2,014,450 2,051,520 — 455,175 1,647,483 2,114,188 TFI International YEARS ENDED DECEMBER 31, 2017 AND 2016 (Tabular amounts in thousands of Canadian dollars, unless otherwise noted.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 83 25. Financial instruments and financial risk management (continued) g) Accounting classification and fair values (continued) Interest rates used for determining fair value The interest rates used to discount estimated cash flows, when applicable, are based on the government yield curve at December 31 plus an adequate credit spread, and were as follows: Long-term debt 2017 3.1% 2016 3.1% Fair value hierarchy Group’s financial assets and liabilities recorded at fair value on a recurring basis are investment in equity securities and the derivative financial instruments discussed above. Investment in equity securities are measured using level-1 inputs of the fair value hierarchy and derivative financials instruments are measured using level-2 inputs. The forward purchase agreement liability and the promissory note are valued at the fair value using level 3 inputs in the fair value hierarchy. The fair value of the forward purchase agreement liability represents the present value of the exercise price of the forward and is measured by applying the income approach using the probability-weighted expected payment of the exit price and is based on discounted cash flows. Unobservable inputs within the fair value measurement include the exit price and the expected payment date for the written put options. The exit price is based on a formulaic variable price which is mainly a function of earnings levels in future periods and requires assumptions about revenue growth rates and operating margins and the expected payment date of the exit price. If the future earnings levels in the future periods would increase (decrease), the estimated fair value of forward purchase agreement liability would increase (decrease). The fair value of the promissory note represents the present value of the future cash flows, based on the interest rate of the note, discounted by the company specific rate of the counterparty of the note. The company specific rate is comprised of a risk-free market rate and a company specific premium based on their risk profile. The counterparty to the note is GFL, a private company, for which limited publicly available information exist. At the issuance of the promissory note, the fair value was established using public information on the source of funding to acquire the Waste Management segment. Subsequent to the initial measurement, adjustments to the company risk premium are made based on the analysis of published financial information and on significant macro environmental factors impacting their segment. The risk-free market rate is publicly available. 26. Operating leases, contingencies, letters of credit and other commitments a) Operating leases The Group entered into operating leases expiring on various dates through March 2035, with respect to rolling stock, real estate and other. The total future minimum lease payments under non-cancellable operating leases are as follows: Less than 1 year Between 1 and 5 years More than 5 years 2017 128,345 259,236 146,581 534,162 2016 128,339 246,284 100,898 475,521 In 2017, expense of $149.5 million was recognized in the consolidated statement of income in respect of operating leases (2016 – $134.3 million). 2017 Annual Report 84 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2017 AND 2016 (Tabular amounts in thousands of Canadian dollars, unless otherwise noted.) 26. Operating leases, contingencies, letters of credit and other commitments (continued) b) Contingencies There are pending operational and personnel related claims against the Group. The Group has accrued $6.9 million for claim settlements which are presented in long term provisions on the consolidated statements of financial position (2016 – $6.7 million). In the opinion of management, these claims are adequately provided for and settlement should not have a significant impact on the Group’s financial position or results of operations. c) Letters of credit As at December 31, 2017, the Group had $40.1 million of outstanding letters of credit (2016 - $40.1 million). d) Other commitments As at December 31, 2017, the Group had $75 million of purchase and lease commitments materializing within a year (2016 – nil). 27. Related parties Parent and ultimate controlling party There is no single ultimate controlling party. The shares of the Company are widely held. Transactions with key management personnel Board members of the Company, executive officers and top managers of major Group’s entities are deemed to be key management personnel. Compensation totalling $0.4 million (2016 – nil) was paid to a board member for consulting services provided during 2017. There were no other transactions with key management personnel other than their respective compensation. Key management personnel compensation In addition to their salaries, the Company also provides non-cash benefits to board members and executive officers. Executive officers also participate in the Company’s stock option and performance contingent restricted share unit plans and board members are entitled to deferred share units, as described in note 19. Costs incurred for key management personnel in relation to these plans are detailed below. Key management personnel compensation comprised: Short-term benefits Post-employment benefits Equity-settled share-based payment transactions Cash-settled share-based payment transactions 2017 10,574 1,035 4,515 923 17,047 2016 18,019 975 4,231 934 24,159 TFI International TRANSFER AGENT AND REGISTRAR Computershare Trust Company of Canada 100 University Avenue, 8th floor Toronto, Ontario M5J 2Y1 Telephone: 1 800 564-6253 Fax: 1 888 453-0330 ANNUAL MEETING OF SHAREHOLDERS Wednesday, April 25, 2018 at 1:30 p.m. The Exchange Tower 130 King Street West Toronto, Ontario M5X 1J2 Si vous désirez recevoir la version française de ce rapport, veuillez écrire au secrétaire de la société : 8801, route Transcanadienne, bureau 500 Montréal (Québec) H4S 1Z6 Corporate Information EXECUTIVE OFFICE 96 Disco Road Etobicoke, Ontario M9W 0A3 Telephone: 647 725-4500 HEAD OFFICE 8801 Trans-Canada Highway Suite 500 Montreal, Quebec H4S 1Z6 Telephone: 514 331-4000 Fax: 514 337-4200 Web site: www.tfiintl.com E-mail: administration@tfiintl.com AUDITORS KPMG LLP STOCK EXCHANGE LISTING TFI International Inc. shares are listed on the Toronto Stock Exchange under the symbol TFII and on the OTCQX market- place in the U.S. under the symbol TFIFF. FINANCIAL INSTITUTIONS National Bank of Canada Royal Bank of Canada Bank of America Merrill Lynch Bank of Montreal The Bank of Nova Scotia Caisse Centrale Desjardins JP Morgan Chase Bank Toronto Dominion Bank Bank of Tokyo-Mitsubishi UFJ (Canada) Canadian Imperial Bank of Commerce HSBC Bank Canada PNC Bank Canada Branch Alberta Treasury Branch T F I I N T E R N A T I O N A L 2 0 1 7 A N N U A L R E P O R T www.tfiintl.com 

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