Finning International Inc.
TSX : FTT

Finning International Inc.

November 13, 2007 12:00 ET

Finning Announces Third Quarter Results

VANCOUVER, BRITISH COLUMBIA--(Marketwire - Nov. 13, 2007) - Finning International Inc. (TSX:FTT) -

Highlights from Continuing Operations

- Record third quarter revenues, up 14% from third quarter of 2006, up in all operations

- Successfully completed the sale of the UK Tool Hire Division, classified as discontinued operations

- Quarterly diluted earnings of $0.35 per share

- Quarterly dividend increase of 11% to $0.10 per share, the second increase announced this year

- Strong new equipment order backlog of $1.8 billion



----------------------------------------- -------------------------
Three months ended Nine months ended
September 30 September 30
----------------------------------------- -------------------------
$ millions, except
per share data 2007 2006 Change 2007 2006 Change
----------------------------------------- -------------------------
Revenue 1,329.1 1,167.7 13.8% 4,202.7 3,488.1 20.5%
Earnings from
continuing
operations
before interest
and income
taxes (1) 109.9 114.7 (4.2)% 343.6 289.8 18.6%
Net income (loss)
from continuing
operations 63.6 71.8 (11.4)% 209.6 183.1 14.5%
from
discontinued
operations (2) - (33.9) (2.0) (31.7)
------------------------ -------------------------
Total net income 63.6 37.9 67.8% 207.6 151.4 37.1%
------------------------ -------------------------
------------------------ -------------------------
Diluted Earnings
(Loss) Per Share
from continuing
operations $0.35 $0.40 (12.5)% $1.16 $1.02 13.7%
from
discontinued
operations (2) - (0.19) (0.01) (0.18)
------------------------ -------------------------
Total diluted
earnings
per share $0.35 $0.21 66.7% $1.15 $0.84 36.9%
------------------------ -------------------------
------------------------ -------------------------
Cash flow after
working capital
changes 115.3 55.5 107.7% 183.1 381.2 (52.0)%
------------------------ -------------------------
------------------------ -------------------------

(1) This amount does not have a standardized meaning under generally
accepted accounting principles. For a reconciliation of this
amount to net income from continuing operations, see the
heading "Description of Non-GAAP Measure" in the Company's
management discussion and analysis which accompanies the
third quarter consolidated financial statements.
(2) On July 31, 2007, the Company's U.K. subsidiary, Hewden Stuart
Plc, sold its Tool Hire Division. In the third quarter of 2006,
the Company's U.K. subsidiary, Finning (UK) Ltd., sold its
Materials Handling Division. As a consequence, the results of
operations of the Tool Hire and Materials Handling divisions
have been reclassified as discontinued operations for all
periods presented.


Finning International Inc. (Finning) today reported quarterly revenue of $1.3 billion for the third quarter of 2007, an increase of 13.8% over the third quarter of 2006. Earnings from continuing operations before interest and income taxes (EBIT) were $109.9 million in the third quarter of 2007, a decrease of 4.2% compared with the same period last year. Third quarter net income from continuing operations was $63.6 million or $0.35 diluted earnings per share, a decrease of 12.5% compared with the third quarter of 2006.

"Business remained strong in the third quarter and revenues continued to grow at attractive rates," said Doug Whitehead, President and CEO of Finning International Inc. "Our order book continues to be robust and near the record levels set earlier this year. We continue to be affected by the stronger Canadian dollar and higher long term incentive plan costs, however, we have been successful in overcoming the impact of these items previously. We are also experiencing cost pressures in our South American operations and have initiatives underway to address these."

"Adjusting for the impact of a significant property gain in 2006, third quarter EBIT was up this year," said Mike Waites, Executive Vice President and CFO of Finning International Inc. "We saw solid performance in our Canadian and UK dealership operations as they continue to show attractive growth in new equipment revenues. Hewden's third quarter 2007 results were weaker as anticipated due to the significant operational changes experienced by Hewden this quarter. Our South American operations delivered strong revenue growth but results were below expectations due to higher costs which is an area of focus for the Company."

Third Quarter Results

Finning's revenues from continuing operations in the third quarter were $1.3 billion, up 13.8% from the third quarter of 2006 driven by continued strong equipment sales and demand for customer support services. Key commodity prices continue to be strong and drive demand in Canada and South America, and good overall economic conditions are supporting these businesses. Management believes these conditions are likely to continue throughout 2007 and into 2008. In the U.K., robust activity experienced at the Company's UK dealership contributed to improved revenues from the UK Group.

Finning's global order book (the retail value of new equipment units ordered by customers for future deliveries) of approximately $1.8 billion at the end of the third quarter of 2007 is comparable to June 2007 and is up 45% from September 2006 levels. The dollar value of new orders and delivery of new equipment for the third quarter of 2007 exceeded that of the comparable period in 2006.

EBIT for the quarter was $109.9 million, compared with $114.7 million in the third quarter of 2006. Adjusting prior year quarterly results for a $7.8 million pre-tax gain on the sale of certain properties, EBIT for the third quarter of 2007 is up $3.0 million or 2.8%.

- EBIT from Finning's Canadian reporting segment of $67.3 million in the third quarter of 2007 was 6.3% higher than the third quarter 2006, the result of exceptionally strong volumes in most lines of business and, in particular, new equipment sales. The third quarter 2006 results included a $7.8 million pre-tax gain from the sale of certain properties. Excluding the 2006 gain, EBIT for the third quarter of 2007 was 21.3% higher than the same period last year in spite of the stronger Canadian dollar.

- EBIT for Finning's South American operations in the third quarter of 2007 of $27.9 million was 6.7% lower than the 2006 third quarter, a result of higher operating costs to support the increased level of sales activity and cost pressures in South America.

- For the UK Group, EBIT decreased in the third quarter of 2007 to $22.7 million compared to $26.4 million in the third quarter of 2006, due to lower returns from the Hewden rental business.

- In all dealership operations, although customer support services revenues were higher in 2007, new equipment sales grew at a higher rate so that the Company continued to experience a shift in revenue mix to a higher proportion of new equipment sales.

In the third quarter of 2006, the Company incurred incremental finance costs of $8.9 million for the early partial repayment of Eurobond notes. Adjusting for these costs, finance costs increased 17.7% in the third quarter of 2007 compared with the same period last year due to higher short-term interest rates and higher average debt levels to support working capital growth and customer demand requirements. Income tax expenses were also higher than the third quarter of 2006 due to a change in the earnings mix with proportionately more income earned in the higher tax jurisdictions of the Canadian and UK operations and the lower benefit from tax planning strategies.

As a result, Finning's net income from continuing operations for the quarter was $63.6 million compared with $71.8 million in 2006. Diluted Earnings Per Share (EPS) from continuing operations for the quarter was $0.35, down from the 2006 comparable diluted EPS of $0.40.

Cash flow after working capital changes was $115.3 million for the third quarter of 2007, compared with $55.5 million for the same period last year. Working capital demands have stabilized in the third quarter of 2007, which combined with initiatives to improve cash cycle times, have resulted in improved cash flow.

The Company has an active share repurchase program in effect until March 29, 2008. During the third quarter of 2007, the Company repurchased and cancelled 1,226,200 common shares at an average price of $28.84.

Year-to-Date Results

Revenue from continuing operations for the nine months ended September 30, 2007, was $4.2 billion, up 20.5% from the prior year. EBIT of $343.6 million for the first nine months of 2007 was up 18.6%. Adjusting prior year results for $18.2 million of property and business sale gains, EBIT for the first nine months of 2007 was up over 26%.

- For the nine months ending September 30, 2007, revenue was up 16.5% at the Company's Canadian operations, reflecting growth in most lines of business, particularly equipment sales. Adjusting for non-recurring pre-tax gains of $18.2 million recorded in the first and third quarters of 2006, EBIT from Finning's Canadian reporting segment would have been $159.5 million for the nine months ended September 30, 2006. EBIT from the Canadian reporting segment in the first nine months of 2007 of $217.0 million was 36.1% higher than the 2006 adjusted EBIT noted above. The increase was a result of exceptionally strong volumes in most lines of business.

- For the first nine months of 2007, revenues from the Company's South American operations increased 37.9% (41.5% in local currency) with strong new equipment sales and continued growth in customer support service revenues. EBIT for the first nine months of 2007 of $99.2 million was 24.8% higher compared to the same period last year (27.3% in local currency).

- Revenue from the UK Group increased 15.0% in the first nine months of 2007 compared with the same period last year, and increased 8.1% in local currency. EBIT increased 15.7% (10.1% in local currency), a significant improvement over the prior year with higher margins achieved in most lines of business and continued management of operating costs. The results from Hewden were lower than prior year, as expected, due to the significant operational changes experienced during the first nine months of 2007.

Finning's net income from continuing operations for the nine months ended September 30, 2007, was $209.6 million compared with $183.1 million in 2006. Diluted EPS from continuing operations for the first nine months of 2007 was $1.16, and improved over the 2006 comparable diluted EPS of $1.02 reflecting the EBIT improvements noted above. The 2006 results included $0.09 per share of gains on the sale of surplus properties and businesses in Canada, partially offset by incremental finance costs of approximately $0.04 per share for the early repayment of Finning's previously issued Eurobond notes in the third quarter of 2006. Adjusting the prior year results for the gains on dispositions and the incremental finance costs noted above, diluted EPS for the first nine months of 2007 was up approximately 20%.

Important New Business

During the third quarter of 2007, PipeLine Machinery International Partnership (PLM), the global Caterpillar pipeline equipment dealer in which Finning has a 25% interest, delivered 20 Caterpillar 320 D excavators and 4 D7G tractors to Lanfang China for ultimate deployment on China Petroleum Pipeline Bureau projects. The contract for the provision of pipeline equipment to this Chinese customer resulted from the team effort of PLM, Caterpillar Asia-Pacific District and WesTrac China, Caterpillar's north and northeast China local dealership.

Executive Appointments and Announcements

- After 28 years of a distinguished career and dedicated service to Finning, Steve Mallett, currently President Power Systems, will retire effective January 4, 2008.

- Andy Bone, currently Senior Vice President, Customer Support Solutions, will be promoted to President, Power Systems, effective January 7, 2008.

Director Appointment

In October, Mr. James Carter was appointed to the Board of Directors. Mr. Carter is a corporate director and resident of Canada and is the former President and Chief Operating Officer of Syncrude Canada. In 2005, Mr. Carter was named Resource Person of the Year by the Alberta Chamber of Resources, inducted as a Fellow of the Canadian Academy of Engineering, and received an Alberta Centennial Medal from the Province of Alberta. He has extensive community and professional affiliations including director positions on various other Boards.

Other

Finning, Finning (Canada), and OEM have been involved in legal proceedings for the past two years with the Alberta division of the International Association of Machinists and Aerospace Workers - Local Lodge 99 (IAM) relating to Finning (Canada)'s outsourcing of component repair and rebuilding services to OEM in 2005. On October 17, 2007 the Alberta Court of Appeal overturned previous labour board and court decisions in favour of Finning and OEM and reinstated a finding of the original Alberta Labour Relations Board (ALRB) panel. The original ALRB panel had found that OEM was a successor employer to Finning (Canada) in respect of the component repair and rebuilding activities being carried out by OEM as a service provider to Finning (Canada). The full operational and legal implications of the Court's decision are still being considered and, at this time, Finning and OEM are confident that they can manage the operational impacts of this recent Court decision.

Finning, Finning (Canada), and OEM intend to file for leave to appeal this decision to the Supreme Court of Canada, and expect to file supporting documentation within the 60 day appeal period. The timing of the appeal, if allowed, is not yet known.

Outlook

The full year outlook for 2007 remains within the previous earnings guidance range of $1.48 - $1.60 per share. Due to the strengthening Canadian dollar, management now anticipates earnings per share will be in the lower end of the range.

Common Share Dividend

The Board of Directors increased the Company's quarterly dividend to $0.10 per common share, payable on December 12, 2007, to shareholders of record on November 27, 2007. This is the second increase announced this year and the sixth consecutive year of dividend increases.

Third Quarter Conference Call

Management will hold an investor conference call on Tuesday, November 13, 2007 at 2:00 pm Eastern Time. Dial-in numbers:

1-866-898-9626 (anywhere within Canada and the U.S.)

(416) 340-2216 (for participants dialing from Toronto and overseas)

The call will be webcast live at http://www.finning.com/investors/investors.aspx and subsequently archived on the Finning website. Playback recording will be available at 1-800-408-3053 from 7:00 pm Eastern Time on November 13, 2007, until the end of business day on November 20, 2007. The passcode to access the playback recording is 3237548 followed by the number sign.

About Finning International Inc.

Finning International Inc. sells, rents and provides customer support services for Caterpillar equipment and engines, and complementary equipment, in Western Canada (Alberta, British Columbia, the Northwest Territories and the Yukon Territory and a portion of Nunavut), the U.K. and South America (Argentina, Bolivia, Chile and Uruguay). Headquartered in Vancouver, B.C., Canada, Finning International Inc. (www.finning.com) is a widely held, publicly traded corporation, listed on the Toronto Stock Exchange (symbol FTT). Complete financial statements and Management's Discussion and Analysis can be accessed at www.finning.com.

Forward-Looking Disclaimer

This report (including the attached Management's Discussion and Analysis) contains forward-looking statements and information, which reflect the current view of Finning International Inc. with respect to future events and financial performance. Any such forward-looking statements are subject to risks and uncertainties and Finning's actual results of operations could differ materially from historical results or current expectations. Finning assumes no obligation to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein do not materialize.

Refer to Finning's annual report, management information circular, annual information form, and other filings with Canadian securities regulators, which can be found at www.sedar.com, for further information on risks and uncertainties that could cause actual results to differ materially from forward-looking statements contained in this report.

Next Quarterly and Year-End Results February 19, 2008

Finning International's fourth quarter and year-end results for 2007 will be released and an investor conference call will be held on February 19, 2008.

MANAGEMENT'S DISCUSSION AND ANALYSIS

This discussion and analysis of Finning International Inc. (Finning or the Company) should be read in conjunction with the interim consolidated financial statements and accompanying notes. The results reported herein have been prepared in accordance with Canadian generally accepted accounting principles (GAAP) and are presented in Canadian dollars unless otherwise stated. For additional information, please refer to Finning's audited annual financial statements and accompanying notes and the management's discussion and analysis included in the Company's 2006 annual report.

Results of Operations

The results from continuing operations include the results of acquired businesses from the date of their purchase and exclude results from operations that have been disposed or are classified as discontinued. Results from operations that qualify as discontinued operations have been reclassified to that category for all periods presented unless otherwise noted. Please see the section entitled "Discontinued Operations" for a discussion of these operations.

Third Quarter Overview



--------------------- ------------------------
Q3 2007 Q3 2006 Q3 2007 Q3 2006
--------------------- ------------------------
($ millions) (% of revenue)
--------------------- ------------------------
Revenue $1,329.1 $1,167.7
---------------------
Gross profit 390.8 341.6 29.4% 29.3%
Selling, general
& administrative
expenses (281.9) (233.0) (21.2)% (20.0)%
Other income 1.0 6.1 0.1% 0.5%
--------------------- ------------------------
Earnings from
continuing
operations before
interest and
income taxes (1) 109.9 114.7 8.3% 9.8%
Finance costs (19.3) (25.3) (1.5)% (2.2)%
Provision for
income taxes (27.0) (17.6) (2.0)% (1.5)%
--------------------- ------------------------
Net income from
continuing
operations 63.6 71.8 4.8% 6.1%
Loss from
discontinued
operations, net
of tax - (33.9) - (2.9)%
--------------------- ------------------------
Net income $63.6 $37.9 4.8% 3.2%
--------------------- ------------------------
--------------------- ------------------------

(1) This amount does not have a standardized meaning under generally
accepted accounting principles. For a reconciliation of this
amount to net income from continuing operations, see the
heading "Description of Non-GAAP Measure" in this Management's
Discussion and Analysis.


To view accompanying Revenue by Operation graph, please click on the following link: http://www.ccnmatthews.com/docs/FTT1.jpg

Third quarter consolidated revenues from continuing operations of $1.3 billion increased 13.8% from the third quarter of 2006. In spite of the downward pressure from the strengthening of the Canadian dollar relative to the U.S. dollar, record third quarter revenues were achieved driven by continued strong equipment sales and good demand for customer support services in all Finning territories. Continued growth in resource-based industries and the construction sector has led to sustained equipment demand in the dealership operations in Canada, South America, and the U.K.

Revenue was 7.6% higher in the third quarter of 2007 compared with the same period last year in the Company's Canadian operations as a result of robust activity driven by strong market demand and high prices in key commodities. Revenue from the Company's operations in South America increased 21.6% in Canadian dollars compared with the third quarter of 2006 with strong new equipment sales combined with an increase in customer support services. The Company's operations in the U.K. also experienced a 19.2% increase in revenue in Canadian dollars compared with the third quarter of 2006 primarily due to 45% higher new equipment and power systems sales. This revenue growth was diluted by only modest growth from the UK rental business (Hewden), where management's time was diverted somewhat by the sale of its Tool Hire Division and the implementation of a new information technology system.

Finning's business is geographically diversified and the Company conducts business in multiple currencies, the most significant of which are the Canadian dollar, the U.S. dollar, and the U.K. pound sterling. The most significant foreign exchange impact on the Company's revenues and net income is the translation of foreign currency based results into Canadian dollars. Compared to the prior year, foreign exchange had a negative impact on consolidated revenues in the third quarter of 2007 of approximately $30 million mainly due to a 6.7% stronger Canadian dollar in the quarter relative to the U.S. dollar. The Canadian dollar relative to the U.K. pound sterling was comparable to the same period last year. At the net income level, the foreign exchange rate movement quarter over quarter had a negative impact of approximately $0.02 per share.

In addition to the above impact as a result of translating foreign currency based earnings, the Company experiences foreign currency translation gains or losses as a result of consolidating the financial statements of self-sustaining foreign operations. These unrealized foreign currency translation gains or losses are recorded in the Accumulated Other Comprehensive Income/Loss account on the Consolidated Balance Sheet. Currency translation adjustments arise as a result of fluctuations in foreign currency exchange rates at the period end. The unrealized currency translation loss of $59.7 million recorded in the third quarter of 2007 mainly resulted from the 4.8% and 6.3% stronger spot Canadian dollar against the U.K. pound sterling and the U.S. dollar, respectively, from June 30, 2007 to September 30, 2007. This was partially offset by $8.3 million of unrealized foreign exchange gains on net investment hedges.

Excluding the impact of foreign exchange when translating results, revenues for the third quarter of 2007 in local currency increased by 30.6% in the Company's South American operations and increased by 18.4% in the UK Group when compared to last year's third quarter.

To view accompanying Revenue by Line of Business graph, please click on the following link: http://www.ccnmatthews.com/docs/FTT2.jpg

From a line of business perspective, strong demand continued in the third quarter of 2007 for new equipment sales, rentals,and customer support services. On a consolidated basis, all lines of business increased over third quarter 2006 levels, with the exception of used equipment. Used equipment revenues typically vary depending on product availability, customer buying preferences, and exchange rate considerations. New equipment is currently in high demand and, while product availability has improved in most operations, certain models remain in short supply. As a result, some customers are utilizing their older units longer and as such, availability of used equipment is low. In addition, with the stronger Canadian dollar, many customers in Canada are currently opting to buy new rather than used equipment.

Revenue mix continued to be more heavily weighted to new equipment sales as a result of extremely strong demand for equipment. Revenues from the Canadian operations continue to grow, most notably in new equipment, rental, and customer support services. The South American operations recorded a 28.5% increase in new equipment and power systems revenues as demand in the construction sector continued to be strong. The UK Group experienced stronger revenues from all lines of business in the third quarter of 2007 compared to the prior year, most notably new equipment and power and energy solutions, with higher unit deliveries.

Finning's global order book or backlog (the retail value of new equipment units ordered by customers for future deliveries) continues to be very strong at $1.8 billion at the end of the third quarter of 2007, similar to the level at June 2007, but down marginally from the record $1.9 billion March 2007 levels. The backlog at September 2006 was $1.2 billion. Backlog is dependent on various factors, such as order intake or bookings as well as the level of deliveries. In the third quarter of 2007, the dollar value of order intake and delivery of new equipment exceeded that of the comparable period last year.

The Company is dependent on Caterpillar for the timely supply of parts and equipment to fulfill its deliveries and meet the requirements of the Company's service maintenance contracts. Although availability of most models has been improving, there continues to be certain models of large equipment, large engines, and some parts under managed distribution. Finning continues to work closely with Caterpillar and customers to ensure that demand for parts and equipment can be met.

Gross profit of $390.8 million in the third quarter increased 14.4% over the same period last year. Gross profit as a percentage of revenue for the quarter was 29.4%, slightly higher when compared with the same period last year. The higher margins achieved by the Canadian and South American operations reflected higher customer support services margins as well as improved margins from new equipment sales. The gross profit margin for the UK Group was lower when compared to the prior year's quarter due to lower rental utilization as well as a higher proportion of revenues from new equipment sales, which typically have lower margins.

To view accompanying EBIT by Operation - continuing operations graph please click on the following link: http://www.ccnmatthews.com/docs/FTT3.jpg

Earnings from continuing operations before interest and income taxes (EBIT) of $109.9 million in the third quarter of 2007 decreased 4.2% year over year. EBIT in the third quarter of 2006 included a $7.8 million pre-tax gain on the sale of certain properties in Canada. Excluding the gain on the 2006 property sale, EBIT of $109.9 million in the third quarter of 2007 increased 2.8% compared with the same period last year. EBIT in the third quarter of 2007 included higher variable operating costs to support the increased level of sales activity, higher employee related costs, and higher long-term incentive plan (LTIP) charges. Headcount at September 2007 increased by over 1,500 employees from the September 2006 level, with increases in the Company's Canadian operations of 13% and in the South American operations of 24%.

The LTIP charges in the third quarter of 2007 were higher by $5.1 million compared with the same period in 2006, primarily due to the mark-to-market impact on the valuation of certain stock-based compensation plans as a result of the appreciation of the Company's share price in the quarter.

The Company's EBIT margin (EBIT divided by revenues) was 8.3% in the third quarter of 2007, down from 9.8% earned in the third quarter of 2006. Excluding the gain on the 2006 property sale noted above, the 2006 EBIT margin would have been 9.2% versus 8.3% in the third quarter of 2007. The lower EBIT margin in 2007 is due to higher costs incurred to meet customer demand as well as cost pressures in South America.

In the third quarter of 2006, the Company incurred incremental finance costs of $8.9 million for the early partial repayment of Eurobond notes. Adjusting for these costs, finance costs increased 17.7% in the third quarter of 2007 compared with the same period last year due to higher short-term interest rates and higher average debt levels. Income tax expenses were also 53.4% higher than the third quarter of 2006, with a higher effective tax rate. This is a result of capital tax treatment on the 2006 Canadian property gains, a lower benefit from tax planning strategies, and a change in the earnings mix with proportionately more income earned in the higher tax jurisdictions of the Canadian and UK operations.

Consolidated net income from continuing operations of $63.6 million was 11.4% lower in the third quarter of 2007 compared with the same period in 2006.

Basic Earnings Per Share (EPS) from continuing operations for the quarter was $0.35 compared with $0.40 in the same period last year, a decrease of 12.5%.

Discontinued Operations - Tool Hire and Materials Handling divisions

On July 31, 2007, the Company sold its U.K. Tool Hire Division for cash proceeds of $242.9 million (approximately 112 million pounds sterling), net of costs. The gross sale price, net of taxes and transaction costs, was approximately equal to the net book value of the net tangible assets and goodwill associated with the tools rental business, and resulted in an after-tax gain on disposal of $0.1 million.

Restructuring and other costs associated with the disposition of the Tool Hire Division of $2.0 million after tax were recorded in the second and third quarters of 2007.

On September 29, 2006, the U.K. Materials Handling Division was sold for cash proceeds of $170.6 million (81.7 million pounds sterling), net of costs, which resulted in an after-tax loss on disposal of $32.7 million (approximately 15.5 million pounds sterling).

These divisions are classified as discontinued operations within the consolidated income statements for all periods presented prior to the disposition.

Net income after discontinued operations for the third quarter of 2007 was $63.6 million compared with $37.9 million for the same period in 2006, reflecting the gains and losses on disposal and costs related to the disposition of the businesses noted above.

Cash Flow

Cash flow after changes in working capital for the third quarter was $115.3 million, compared with cash flow of $55.5 million generated in the same period last year. Working capital demands have stabilized in the third quarter of 2007 and, combined with initiatives to improve cash cycle times, have resulted in improved cash flow. As disclosed in the prior quarter, an improvement in cash flow was anticipated due to the scheduled delivery and sale of inventories in the second half of the year.

The Company made a net investment in rental assets of $138.9 million in the third quarter, which was $39.0 million higher than the same period in 2006. Demand for rental assets was up in all operations. In the third quarter of 2007, there was strong demand from customers for equipment to be supplied under rental purchase option contracts which are reported as rental assets on the consolidated balance sheet. As part of the Company's strategy to increase its market penetration, further investment was made into the rental fleet to target non-traditional customers. Finning (Canada) and South America also experienced a higher investment in rental assets to support product availability constraints and mining contracts.

As a result of these items, cash flow used by operating activities was $22.5 million in the third quarter of 2007 compared to cash flow used of $47.6 million in the comparative period in 2006. Cash flow in the third quarter of 2007 improved as a result of various initiatives to improve cash cycle times.

During the third quarter of 2007, under a share repurchase program, the Company repurchased 1,226,200 common shares at an average price of $28.84.



Year-to-Date Overview

September 30 September 30
YTD 2007 YTD 2006 YTD 2007 YTD 2006
---------------------- -------------------------
($ millions) (% of revenue)
---------------------- -------------------------
Revenue $4,202.7 $3,488.1
Gross profit 1,190.3 996.1 28.3% 28.6%
Selling,
general &
administrative
expenses (847.3) (718.1) (20.1)% (20.6)%
Other income 0.6 11.8 - 0.3%
---------------------- -------------------------
Earnings from
continuing
operations
before interest
and income
taxes (1) 343.6 289.8 8.2% 8.3%
Finance costs (53.9) (53.4) (1.3)% (1.6)%
Provision for
income taxes (80.1) (53.3) (1.9)% (1.5)%
---------------------- -------------------------
Net income from
continuing
operations 209.6 183.1 5.0% 5.2%
Loss from
discontinued
operations, net
of tax (2.0) (31.7) (0.1)% (0.9)%
---------------------- -------------------------
Net income $207.6 $151.4 4.9% 4.3%
---------------------- -------------------------
---------------------- -------------------------

(1) This amount does not have a standardized meaning under
generally accepted accounting principles. For a reconciliation
of this amount to net income from continuing operations,
see the heading "Description of Non-GAAP Measure" in this
Management's Discussion and Analysis.


To view the accompanying Revenue by Operation and Revenue by Line of Business graphs, please click on the following link: http://www.ccnmatthews.com/docs/FTT4.jpg

For the nine month period ending September 30, 2007, revenues from continuing operations of $4.2 billion increased 20.5%, year over year, as continued strong growth in resource-based industries and the construction sector continue to drive demand in Canada and South America. Revenue from the UK Group increased 15.0% in the first nine months of 2007, reflecting improvement in most lines of business but primarily in new equipment sales.

On a consolidated basis, all lines of business increased in the first nine months of 2007 over the same period last year. New equipment sales continued to dominate revenue growth as a result of extremely strong demand for equipment.

Foreign exchange translation had a positive impact of approximately $15 million on revenues due to the 6.7% weaker Canadian dollar in the first nine months of 2007 relative to the U.K. pound sterling, partially offset by a 2.4% stronger Canadian dollar relative to the U.S dollar.

Gross profit of $1,190.3 million in the first nine months of the year increased 19.5% over the same period last year, while gross profit as a percentage of revenue of 28.3% was slightly lower. The gross profit margin in the Canadian operations for the first nine months of 2007 was higher when compared to the first nine months of the prior year with a lower gross profit margin contributed by South American and UK operations, primarily due to a revenue mix shift from customer support services to lower margin new equipment sales.

To view accompanying EBIT by Operation - continuing operations graph, please click on the following link: http://www.ccnmatthews.com/docs/FTT5.jpg

EBIT of $343.6 million increased 18.6% year over year, primarily due to the strong performance of the Company's Canadian and South American operations and a continued improvement in the UK Group. EBIT in the first nine months of 22007 included higher variableoperating costs to support the increased level of activity and higher employee costs related to the increased headcount and aggressive competition for a skilled workforce, as well as cost pressures in South America. Higher LTIP charges also had a significant impact on EBIT. LTIP charges in the first nine months of 2007 are higher by $25.6 million compared with the same period in 2006. This was primarily due to the mark-to-market impact on the valuation of certain stock-based compensation plans resulting from the appreciation of the Company's share price in the second and third quarters of 2007.

The results of the first nine months of 2006 also included non-recurring pre-tax gains of $18.2 million from the disposal of surplus properties in Canada and the sale of OEM Remanufacturing's railroad and non-Caterpillar engine component remanufacturing business to Caterpillar. Excluding these pre-tax gains from 2006 results, the 2007 EBIT was 26.5% higher than the same period last year and EBIT margin of 8.2% was above the prior year of 7.8%.

Net income from continuing operations of $209.6 million improved 14.5% in the first nine months of 2007 compared to the same period last year, reflecting the solid activity noted above.

Basic EPS from continuing operations for the nine months ended September 30, 2007, was $1.17 compared with $1.02 in the same period last year. The 2006 results included $0.09 per share of non-recurring gains on the sale of surplus properties and a portion of the OEM remanufacturing business in Canada, partially offset by incremental finance costs of approximately $0.04 per share for the early repayment of Finning's previously issued Eurobond notes in the third quarter of 2006. Adjusting the prior year results for the gains on dispositions and the incremental finance costs noted above, basic EPS would have been $0.97 for the nine months ended September 30, 2006, compared to $1.17 in the first nine months of 2007, an improvement of 20.6%.

Net income after discontinued operations for the first nine months of 2007 was $207.6 million compared with net income of $151.4 million for the same period in 2006. Basic EPS after discontinued operations was $1.16 in the first nine months of 2007 compared with $0.84 in the first nine months of 2006 ($0.79 after adjusting for non-recurring gains and incremental finance costs noted previously).

Cash flow after changes in working capital for the nine months ended September 30, 2007, was $183.1 million, compared with cash flow of $381.2 million generated in the same period last year. The Company's operations experienced a significant increase in working capital as a result of the timing of equipment and parts deliveries in relation to strong customer demand requirements in 2007. Throughout all operations, management continues to focus on improving cash cycle times and operating efficiencies.

The Company made a net investment in rental assets of $460.4 million in the first nine months of 2007, which was $181.0 million higher than the same period in 2006, and up in all operations to support increased demand for all rental lines, particularly in Finning (Canada). The Company experienced strong demand from customers of Finning (Canada) for equipment to be supplied under rental purchase option contracts. Rental additions were also higher in the Finning UK Group due to the earlier delivery of rental assets at Hewden in 2007 compared to the prior year.

As a result of these items, cash flow used by operating activities was $264.0 million in the first nine months of 2007 compared to cash flow provided by operating activities of $85.5 million in the comparative period in 2006. Cash flow in the first nine months of 2007 reflects the growth in assets to meet customer demand with strong deliveries and cash generation anticipated for the remainder of the year.

Results by Business Segment

The Company and its subsidiaries operate primarily in one principal business, that being the selling, servicing and renting of heavy equipment and related products in various markets worldwide as noted below.

Finning's operating units are as follows:

- Canadian operations: British Columbia, Alberta, the Yukon Territory, the Northwest Territories, and a portion of Nunavut.

- South American operations: Chile, Argentina, Uruguay and Bolivia.

- UK Group operations: England, Scotland, Wales, Falkland Islands, and the Channel Islands.

- Other: corporate head office.

The table below provides details of revenue by operations and lines of business for continuing operations. Comparative periods have been reclassified to conform to the 2007 presentation.



---------------------------------------------------------------------
Three months ended
September 30, 2007 South UK Revenue
($ millions) Canada America Group Consolidated percentage
---------------------------------------------------------------------
New mobile
equipment $237.2 $129.7 $112.9 $479.8 36.1%
New power &
energy systems 42.4 29.1 49.5 121.0 9.1%
Used equipment 45.3 10.5 35.9 91.7 6.9%
Equipment rental 82.4 12.9 112.2 207.5 15.6%
Customer support
services 229.2 134.8 61.3 425.3 32.0%
Other 3.4 0.4 - 3.8 0.3%
---------------------------------------------------------------------
Total $639.9 $317.4 $371.8 $1,329.1 100.0%
---------------------------------------------------------------------
---------------------------------------------------------------------
Revenue percentage
by operations 48.1% 23.9% 28.0% 100.0%
---------------------------------------------------------------------
Three months ended
September 30, 2006 South UK Revenue
($ millions) Canada America Group Consolidated percentage
---------------------------------------------------------------------
New mobile
equipment $209.9 $110.3 $77.5 $397.7 34.1%
New power &
energy systems 35.6 13.3 34.2 83.1 7.1%
Used equipment 60.5 7.1 32.5 100.1 8.6%
Equipment rental 64.8 9.2 107.2 181.2 15.5%
Customer support
services 217.2 120.8 60.6 398.6 34.1%
Other 6.7 0.3 - 7.0 0.6%
---------------------------------------------------------------------
Total $594.7 $261.0 $312.0 $1,167.7 100.0%
---------------------------------------------------------------------
---------------------------------------------------------------------
Revenue percentage
by operations 50.9% 22.4% 26.7% 100.0%
---------------------------------------------------------------------
Nine months ended
September 30, 2007 South UK Revenue
($ millions) Canada America Group Consolidated percentage
---------------------------------------------------------------------
New mobile
equipment $911.4 $420.3 $291.5 $1,623.2 38.6%
New power &
energy systems 149.0 72.8 138.3 360.1 8.6%
Used equipment 188.2 33.6 78.7 300.5 7.2%
Equipment rental 216.5 37.4 339.3 593.2 14.1%
Customer support
services 704.2 411.8 191.4 1,307.4 31.1%
Other 16.6 1.7 - 18.3 0.4%
---------------------------------------------------------------------
Total $2,185.9 $977.6 $1,039.2 $4,202.7 100.0%
---------------------------------------------------------------------
---------------------------------------------------------------------
Revenue percentage
by operations 52.0% 23.3% 24.7% 100.0%
---------------------------------------------------------------------
Nine months ended
September 30, 2006 South UK Revenue
($ millions) Canada America Group Consolidated percentage
---------------------------------------------------------------------
New mobile
equipment $732.6 $268.0 $233.6 $1,234.2 35.4%
New power &
energy systems 136.6 40.4 109.7 286.7 8.2%
Used equipment 170.6 30.6 79.1 280.3 8.0%
Equipment rental 174.5 27.9 306.7 509.1 14.6%
Customer support
services 648.7 340.7 174.5 1,163.9 33.4%
Other 12.6 1.3 - 13.9 0.4%
---------------------------------------------------------------------
Total $1,875.6 $708.9 $903.6 $3,488.1 100.0%
---------------------------------------------------------------------
---------------------------------------------------------------------
Revenue percentage
by operations 53.8% 20.3% 25.9% 100.0%


Canadian Operations

The Canadian operating segment primarily reflects the results of the Company's operating division, Finning (Canada). This reporting segment also includes the Company's interest in OEM Remanufacturing Company Inc. (OEM), which is separately managed from Finning (Canada). OEM is a component remanufacturing business based in Edmonton, Alberta.

The table below provides details of the results from the Canadian operating segment:



--------------------------------------------------------------------
Three months ended Nine months ended
September 30 September 30
-----------------------------------------
($ millions) 2007 2006 2007 2006
--------------------------------------------------------------------
Revenue from
external sources $639.9 $594.7 $2,185.9 $1,875.6
Operating costs (526.6) (498.6) (1,843.6) (1,608.3)
Depreciation and
amortization (46.0) (40.6) (124.9) (107.4)
Other income (expenses) - 7.8 (0.4) 17.8
--------------------------------------------------------------------
Earnings before interest
and taxes $67.3 $63.3 $217.0 $177.7
--------------------------------------------------------------------
--------------------------------------------------------------------
Earnings before interest
and taxes
- as a percentage
of revenue 10.5% 10.6% 9.9% 9.5%
- as a percentage
of consolidated
earnings before
interest and
taxes 61.2% 55.2% 63.1% 61.3%


To view accompanying Canada - Revenue by Line of Business graphs, please click on the following link: http://www.ccnmatthews.com/docs/FTT6.jpg

The results from the Company's Canadian operations continue to be strong. Third quarter revenues increased 7.6% over the 2006 levels to $639.9 million. Revenues from most lines of business in Canada increased over 2006 levels, most notably in new equipment, rental, and customer support services, continuing the trend experienced in 2006.

The increase in new equipment revenues was attributable to strong market demand and continued growth in the mining, construction, and government sectors, driven by strong commodity and oil prices and infrastructure spending.

Higher revenues from customer support services were a result of servicing the steadily increasing population of Caterpillar units in the Company's Canadian dealership territory and the accompanying demand for Caterpillar parts. Rental revenues in the third quarter of 2007 increased 27.2% over 2006 as a result of strong customer demand in this sector and a corresponding increased investment in the rental fleet and in the Cat Rental Store operations. All rental categories continue to generate strong returns.

In Canada, overall gross profit as a percentage of revenue in the third quarter of 2007 was slightly higher than last year, primarily due to higher margins across most lines of business reflecting good price realization in a robust market.

Selling, general, and administrative (SG&A) costs have increased both in absolute dollars and as a percentage of revenue in the third quarter of 2007 to support the strong revenue growth and to meet customer demand. In order to support the strong demand in western Canada, headcount for Finning (Canada) increased by approximately 470 or 13% compared to September 2006. As a result, higher salaries, benefit, pension, training, and recruitment costs were incurred in the third quarter of 2007. In addition, standard variable selling costs such as warranty and freight have increased. SG&A costs in the third quarter of 2007 also include higher LTIP costs due to the appreciation of the Company's share price.

Strong revenues and good price realization due to robust market activity and demand translated into a significant contribution by the Company's Canadian operating segment in the quarter. EBIT of $67.3 million in the third quarter of 2007 was 6.3% higher than the $63.3 million earned in the same period in 2006. Excluding the $7.8 million pre-tax gain recorded in 2006 on property sales included in other income, EBIT for the third quarter of 2007 was 21.3% higher than the prior year. Excluding the gain on the 2006 property sale noted above, the 2006 EBIT margin (EBIT divided by revenues) would have been 9.3% in 2006 versus 10.5% in the third quarter of 2007.

Revenues for the nine months ended September 30, 2007, increased 16.5% to $2,185.9 million. Year-to-date revenues from all lines of business increased over 2006 levels, and the quarterly trends noted above for new equipment sales and customer support services also hold for the year-to-date results of the Company's Canadian operations. Strong returns from the Canadian operations resulted in an EBIT of $217.0 million for the nine months ended September 30, 2007, compared with $177.7 million for the same period in the prior year, an increase of 22.1%. The nine month results for 2006 included a $12.9 million pre-tax gain on the sale of surplus properties at Finning (Canada) and a $5.3 million pre-tax gain recorded on the sale of a portion of OEM's remanufacturing business. OEM sold its railroad and non-Caterpillar engine component remanufacturing business to Caterpillar, and Caterpillar and OEM have signed an initial two-year agreement under which OEM will provide remanufacturing services to Caterpillar for these lines of business.

Excluding the gains on the 2006 property sales and the OEM sale, the 2006 EBIT margin would have been 8.5% versus 9.9% achieved in the first nine months of 2007.

Other Developments

Finning, Finning (Canada), and OEM have been involved in legal proceedings for the past two years with the Alberta division of the International Association of Machinists and Aerospace Workers - Local Lodge 99 (IAM) relating to Finning (Canada)'s outsourcing of component repair and rebuilding services to OEM in 2005. On October 17, 2007 the Alberta Court of Appeal overturned previous decisions in favour of Finning and OEM made by the Court of Queens Bench and by a Reconsideration Panel of the Alberta Labour Relations Board (ALRB), and reinstated a finding of the original ALRB panel. The original ALRB panel had found that OEM was a successor employer to Finning (Canada) in respect of the component repair and rebuilding activities being carried out by OEM as a service provider to Finning (Canada).

The result of the Court of Appeal finding is that IAM may now have the right to assert that it is the authorized bargaining agent for some or all of the non-management employees of OEM. These OEM employees are currently represented by another union, the Christian Labour Association of Canada. The Court of Appeal did not overturn other aspects of the previous decisions in Finning's and OEM's favour and the full operational and legal implications of the Court's decision are still being considered. At this time, Finning and OEM are confident that they can manage the operational impacts of this recent Court decision.

Finning, Finning (Canada), and OEM intend to file for leave to appeal this decision to the Supreme Court of Canada, and expect to file supporting documentation within the 60 day appeal period. The timing of the appeal, if allowed, is not yet known.

In a separate matter in the second quarter of 2007, Finning (Canada) and the IAM, representing Finning (Canada) hourly employees in Alberta and the Northwest Territories, agreed to a two year extension of the existing collective agreement with an enhanced wage settlement. This extends the agreement to April 2010. All other terms and conditions of the existing collective agreement continue in effect.

A transition agreement was signed in the second quarter of 2007 by Finning (Canada) and Shell Canada terminating their alliance agreement relating to the distribution of Shell's lubricant and light oil products. The transition will be completed before the end of this year with minimal business impacts.

South America

The Company's South American operations include the results of its Caterpillar dealerships in Chile, Argentina, Uruguay, and Bolivia.

The table below provides details of the results from the South American operations:



--------------------------------------------------------------------
Three months ended Nine months ended
September 30 September 30
-----------------------------------------
($ millions) 2007 2006 2007 2006
--------------------------------------------------------------------
Revenue from
external sources $317.4 $261.0 $977.6 $708.9
Operating costs (283.5) (225.1) (859.0) (611.0)
Depreciation and
amortization (7.0) (6.0) (20.4) (18.4)
Other income (expenses) 1.0 - 1.0 -
--------------------------------------------------------------------
Earnings before interest
and taxes $27.9 $29.9 $99.2 $79.5
--------------------------------------------------------------------
--------------------------------------------------------------------
Earnings before interest
and taxes
- as a percentage
of revenue 8.8% 11.5% 10.1% 11.2%
- as a percentage
of consolidated
earnings before
interest and taxes 25.4% 26.1% 28.9% 27.4%


To view accompanying South America - Revenue by Line of Business graphs, please click on the following link: http://www.ccnmatthews.com/docs/FTT7.jpg

Revenues for the third quarter of 2007 of $317.4 million exceeded revenues for the third quarter of 2006 by 21.6%. Revenues from all lines of business in South America increased over 2006 levels, most notably in new equipment sales, power and energy, and customer support services. The strong commodity cycle and high metal prices continue to fuel increased demand for equipment and support services in the countries in which Finning South America operates.

Although revenues for customer support services were higher in 2007, new equipment sales continued to dominate revenue growth in the third quarter of 2007. The significant growth in new equipment revenues was attributable to the strong demand in the construction sector, primarily in Argentina. Revenue growth in customer support services, up 11.6%, was driven by the higher number of Caterpillar units operating in the field and reflects the increasing number of mining maintenance and repair contracts entered into over the past couple of years.

For the nine months ended September 30, 2007, revenue increased 37.9% over 2006 to $977.6 million, reflecting the same quarterly trends noted above.

Gross profit increased in the third quarter of 2007 compared with the same period in 2006 in absolute terms and as a percentage of revenue. Stronger margins were achieved in most lines of business partially through price realization in a robust market. Margins from customer support services remained relatively level compared with the third quarter of 2006, in spite of the higher customer support costs. In order to meet strong customer service demand due to the higher number of service maintenance contracts, over 1,000 additional revenue-generating employees and support staff have been hired, representing a 24% increase over September 2006 levels.

As a result of an increased headcount for associated support staff, SG&A expenses included higher salaries and benefit costs in the third quarter of 2007 compared with the same period in 2006 together with higher recruitment and training costs. Parts availability constraints also increased parts delivery costs. Other operating costs reflect the upward pressure of inflationary increases, especially from Argentina which continues to have a comparatively high rate of inflation. Where possible, price increases have been implemented to offset rising costs. SG&A costs in the third quarter of 2007 also include higher LTIP costs due to the appreciation of the Company's share price.

EBIT of the Company's South American operations of $27.9 million for the three months ended September 30, 2007, was 6.7% lower than the third quarter of 2006, and in local currency was comparable to the prior year's quarter. As a result of the higher costs to meet customer demand, a sales mix oriented to a higher proportion of equipment sales (which typically attract a lower margin), and higher LTIP costs, EBIT as a percentage of revenue for Finning South America declined to 8.8%, down from 11.5% in the third quarter of 2006. Management continues to undertake cost saving initiatives to drive productivity efficiencies in work flow processes wherever possible but continues to be challenged by product availability constraints and the supply of a skilled workforce to fulfill current demand levels.

For the first nine months of 2007, EBIT of $99.2 million was 24.8% higher compared to the same period last year, reflecting the strong revenue growth, but as a result of the revenue mix shift to lower margin equipment sales as well as the higher costs associated with meeting demand, EBIT as a percentage of revenue for the nine months ended September 30, 2007 declined to 10.1%, down from 11.2% for the same period in 2006.

United Kingdom ("UK") Group

During the fourth quarter of 2006, the UK Group business model was reorganized to combine the operations of Finning (UK) and Hewden into one organization creating four distinct lines of business to more effectively service customers, improve alignment with Caterpillar and to generate operating efficiencies. At the same time a new management team was appointed. These four business units will, over time, be supported by an integrated back office operation that will provide common head office services, generating additional synergies among the business units. As a result of this reorganization, the Finning UK Group is reported as one operating segment in 2007, with the four lines of business being: Heavy Construction, General Construction, Power Systems, and Rental (Hewden).

Prior to 2007, results from the UK Group were reported as two separate operating segments: Finning UK Operations, reflecting the results of Finning (UK), the UK Caterpillar dealership operation and Diperk UK, which distributes and services Perkins engines in the U.K; and Hewden Operations, an equipment rental and associated services operation in the U.K.

On July 31, 2007, Hewden sold its Tool Hire Division. In September 2006, Finning (UK) sold its Materials Handling Division. The results from the Tool Hire and Materials Handling divisions are recorded as discontinued operations with prior period results restated accordingly.

The table below provides details of the results of the continuing operations from the UK Group