Finning International Inc.

Finning International Inc.

February 23, 2010 17:50 ET

Finning Reports Fourth Quarter Results and Record Annual Free Cash Flow

VANCOUVER, BRITISH COLUMBIA--(Marketwire - Feb. 23, 2010) - Finning International Inc. (TSX:FTT) -

- The Company generated a record $494 million in free cash flow in 2009, and strengthened its balance sheet significantly with net debt to capital down to 39% from 49% at the end of 2008.

- Order intake improved in all operations in the fourth quarter compared to the prior quarter driven by large equipment orders from the mining sector. Consolidated order backlog increased for the first time since 2008, up 15% from the third quarter of 2009 to $0.6 billion.

- Diluted earnings were $0.10 per share compared to $0.26(1) in the fourth quarter of 2008. Continued strong performance in South America partly offset weaker results in Canada and the UK. Annual diluted EPS was $0.77 compared to $1.43(1) in 2008.

- Selling, general and administrative expenses in the quarter decreased by $77 million from the fourth quarter of 2008. On an annual basis, SG&A costs were reduced by $183 million from the 2008 level, of which $110 million resulted from targeted initiatives to reduce the Company's cost structure. The Company remains on track to achieve over $200 million in annual cost savings in 2010 compared to 2008 levels.

Finning International Inc. (TSX:FTT) today reported fourth quarter 2009 results including revenues of $1.1 billion, earnings before interest and income taxes (EBIT) of $30 million and diluted earnings per share (EPS) of $0.10. Fourth quarter results included net non-operational charges of $0.02 per share ($0.07 per share in Q4 2008).

For the full year 2009, the Company reported revenues of $4.7 billion, EBIT of $207 million and diluted EPS of $0.77. As expected, new and used equipment sales and rental revenues were down from 2008 levels in all operations. Product support revenues were comparable to 2008 levels, as strong parts and service revenue growth continued in the mining sector.

"The quarterly results were consistent with expectations," said Mike Waites, president and chief executive officer of Finning International Inc. "Free cash flow continued to be very strong and totaled $494 million for the year. We are well on our way to our cost reduction goal of over $200 million, and combined, these accomplishments give us a great deal of flexibility and position us well for growth."

"Importantly, we are seeing signs of a recovery, led by mining. Quoting activity is strong, notably in South America, and our backlog has posted the first increase since 2008. More recently, we were very pleased to have secured the Kearl mining contract in Canada and the Letter of Intent from Codelco's Ministro Hales project in Chile, under which equipment deliveries will commence in 2011," concluded Mike Waites.


(unaudited) 2009 2008 % Change
Revenue 1,135 1,567 (28)
Earnings before interest and income taxes
(EBIT)(1)(2) 30 67 (55)
Net income(1) 16 45 (64)
Diluted EPS(1) 0.10 0.26 (62)
Earnings before interest, income taxes,
depreciation and amortization (EBITDA)(1)(2) 89 153 (42)
Free cash flow(2)(3) 130 152 (14)

- Revenues of $1.1 billion declined by 28% from the fourth quarter of 2008 as a result of significantly lower new and used equipment sales and rental revenues in all operations. Product support revenues decreased only modestly, by 7% from the fourth quarter of 2008. Strong product support revenues generated by the mining sectors were offset by weaker demand for parts and service from other sectors. The stronger Canadian dollar also negatively impacted revenues when compared to the fourth quarter of 2008.

- Gross profit decreased by $121 million or 29% over the prior year's quarter. Product support accounted for 42% of the total revenues compared to 32% in the fourth quarter of 2008. Despite the revenue mix shift to higher margin product support, gross profit margin of 26.5% was slightly below the 26.9% in the fourth quarter of 2008 due to the decline in gross profit margins on new and used equipment sales and rentals.

- Selling, general and administrative (SG&A) expenses decreased by $77 million or 23% from the fourth quarter of 2008. On an annual basis, SG&A costs were down $183 million or 14% from 2008 as a result of aggressive cost management, successful productivity improvement measures and lower sales volumes. The targeted cost reductions and productivity improvements taken by management resulted in $110 million of SG&A savings in 2009. The Company is implementing additional SG&A expense reduction measures announced in the third quarter of 2009, and is on track to achieve over $200 million in annual cost savings from 2008 levels going forward.

- EBIT of $30 million was down 55%(1) from the fourth quarter of 2008. Consolidated EBIT margin was 2.6% compared to 4.3%(1) in the fourth quarter of 2008 due to lower revenues and gross profit margin from the Canadian operations. EBIT margins in South American and UK Group operations improved from the fourth quarter of 2008.

- Net income decreased by 64%(1) to $16 million. Diluted EPS was $0.10 per share compared to $0.26(1) in the fourth quarter of 2008. Foreign exchange had a negative impact of $0.10 per share compared to the fourth quarter of 2008.

- Restructuring and IT system implementation costs, mainly in Canada, were $0.06 and $0.03 per share, respectively. These were partly offset by gains on property disposals of $0.07 per share. Comparatively, in the fourth quarter of 2008, restructuring and IT costs were $0.07 and $0.02 per share, respectively, partly offset by gains on property disposals of $0.02 per share.

- EBITDA, which is an indicator of a company's cash operating performance and generation of operating cash flow, was $89 million in the fourth quarter of 2009 compared to $153 million(1) in the fourth quarter of 2008.

- Free cash flow was $130 million, compared to $152 million in the fourth quarter of 2008. On an annual basis, the Company generated a record $494 million free cash flow, compared to $23 million in 2008. The Company expects to generate over $200 million of free cash flow in 2010.

- Net debt to capital was reduced to 39%, an improvement from 42% at September 30, 2009 and 49% at December 31, 2008.

- Backlog was $0.6 billion at December 31, 2009, up from $0.5 billion at September 30, 2009, and down from $1.5 billion at December 31, 2008. Driven by large equipment orders from the mining sector in Canada and South America, new order intake increased by 2% from the fourth quarter of 2008, and was up 55% from the third quarter of 2009.



- Fourth quarter revenues were 27% lower than last year mainly due to the 36% decline in new equipment sales. Used equipment sales and rental revenues were down by 37% and 41% respectively, reflecting continued weak demand in the quarter. SG&A costs were 22% lower than in the fourth quarter of 2008. Approximately one third of the decrease was due to headcount reductions, one third was a result of improved operating efficiencies and lower discretionary expenses, and the balance from lower sales volumes. As a percentage of revenue, SG&A costs were higher than in the fourth quarter of 2008 due to lower revenues and the fixed nature of certain costs.

- In 2009, the Company was successful in implementing cost reduction measures and restructuring initiatives in Canada to more closely align expense levels with revenues. On an annual basis, SG&A expenses were down 15% from 2008. Additional initiatives related to regional consolidation of branches and re-alignment of facilities are expected to drive a further $50 million in expenses out of the Canadian operations in 2010. The shift to a more variable cost structure is expected to improve profitability in 2010.

- EBIT was at break even compared to $47 million in the fourth quarter of 2008. The Canadian operations incurred restructuring costs of $11 million and IT system implementation costs of $6 million in the fourth quarter.

- Product support revenues were 5% lower than in the fourth quarter of 2008. A 19% increase in product support revenue in the mining sector was more than offset by the slowdown in other sectors, where some of the equipment remained idle or maintenance is deferred. For the full year 2009, product support revenues were down 5%. Adjusted for 2008 parts and service revenues from the discontinued Collicutt fabrication business, product support revenues in Canada declined by only 1% from 2008. Mining product support revenues were strong, increasing by 30% from 2008.

- Order intake improved further in the fourth quarter as the Canadian operations received orders for large equipment from mining customers, including in the oil sands. Backlog was down from the third quarter of 2009 as a result of strong mining deliveries at the end of 2009.

South America

- Fourth quarter revenues decreased by 27% from the fourth quarter of 2008. In functional currency (USD), revenues were down 17%. New equipment sales were down 44% (down 35% in functional currency) due to a pause in mining deliveries in the quarter and slower demand from the construction and power systems sectors. Product support revenues declined 7% compared to the fourth quarter of 2008. However, in functional currency, product support revenues were up 7%, mainly driven by strong mining activity.

- EBIT was $32 million, down 15% from the fourth quarter of 2008 (down 3% in functional currency). EBIT margin of 9.6% remained strong.

- Order intake was strong in the quarter driven by demand from mining customers, and new equipment backlog was higher compared to September 2009. The activity in the mining sector remained solid through 2009. For the full year, in the mining sector, new equipment sales achieved a new record and increased by 17%. Product support revenues in mining were up 9% in functional currency. Growth in product support revenues is expected to continue in 2010 driven by the larger number of mining maintenance and repair contracts.

United Kingdom

- The UK Group's revenues declined 29% from the fourth quarter last year as difficult market conditions continued to impact the UK operations. In local currency (GBP), quarterly revenues were down 22%. New equipment sales and rental revenues were down 34% and 20%, respectively, compared to the fourth quarter of 2008. Product support revenues were down 14%. The UK Group incurred an EBIT loss of $4 million, an improvement from a $10 million(1) EBIT loss in the fourth quarter of 2008. The dealership contributed a positive EBIT of $6 million in the quarter, which was offset by a $10 million EBIT loss at Hewden.

- Management has initiated a strategic review of Hewden in 2009 which is progressing according to plan. One option is to continue with the implementation of a recovery plan to drive operational improvement at Hewden which is progressing well. The second option is to dispose of the Hewden operation and, as a result of exploring alternatives, the Company has received expressions of interest from a number of parties. The Company continues to explore both options and anticipates a decision by the end of the second quarter of 2010 which will be driven by the need to optimize shareholder value.

- Market conditions in the U.K. remained soft in the fourth quarter, negatively impacting new and used equipment sales to the construction sector and rental revenues. Product support business was not affected to the same degree due to the active coal mining sector and power systems projects. On an annual basis, product support revenues were down 6% in local currency, a modest decline compared to other lines of business. Mining product support revenues were strong, growing by 10% in local currency from 2008.

- Throughout 2009, the UK Group implemented cost reduction initiatives and disposed of surplus rental fleet. SG&A costs decreased by 26% from the fourth quarter of 2008. For the full year, SG&A costs were down 20% over 2008.


Kearl Oil Sands Project

On February 9, 2010, the Company announced that its Canadian division has secured a key mining equipment and product support agreement. Imperial Oil Limited has chosen Finning as a mining mobile equipment supplier for the Kearl oil sands project. The ten-year agreement includes the supply of Caterpillar equipment, parts, specialized maintenance labour and training.

Ministro Hales Mining Project

On February 18, 2010, the Company announced that its South American division has received a Letter of Intent from Codelco, Chile's state-owned mining company that includes the supply of 20 Caterpillar 797 mining trucks and 15 pieces of support equipment, plus a ten-year maintenance and repair contract (MARC). The approximate value of the deal, including the maintenance services, is US$400 million. The Letter of Intent is subject to final project approval by Codelco's Board which is expected in mid 2010. The equipment will be delivered in the first half of 2011 to Codelco's Ministro Hales mine.


The Board of Directors approved the Company's quarterly dividend at $0.11 per common share, payable on March 24, 2010, to shareholders of record on March 10, 2010. This dividend will be considered an eligible dividend for Canadian income tax purposes.

(C$ millions, except per share amounts)

Three months ended Twelve months ended
December 31 December 31
% %
Revenue 2009 2008 Change 2009 2008 Change
New equipment 470.0 759.3 (38) 1,984.7 2,928.6 (32)
Used equipment 70.4 123.5 (43) 337.8 431.8 (22)
Equipment rental 119.8 172.6 (31) 510.4 712.8 (28)
Product support 471.4 506.7 (7) 1,892.6 1,899.5 0
Other 3.5 4.6 (24) 12.0 18.7 (36)
Total revenue 1,135.1 1,566.7 (28) 4,737.5 5,991.4 (21)
Gross profit 301.5 422.0 (29) 1,329.6 1,672.9 (21)
Gross profit
margin(4) 26.5% 26.9% 28.1% 27.9%
SG&A (261.0) (338.5) 23 (1,085.1) (1,268.0) 14
Other income
(expenses)(1) (10.5) (16.6) (37.5) (16.8)
EBIT(1) 30.0 66.9 (55) 207.0 388.1 (47)
EBIT margin(5) 2.6% 4.3% 4.4% 6.5%
Net income(1) 16.3 44.6 (64) 130.8 247.4 (47)
Diluted EPS(1) 0.10 0.26 (62) 0.77 1.43 (46)

EBITDA(1) 89.1 152.8 (42) 474.7 712.5 (33)
Free cash flow 130.4 151.7 (14) 493.9 23.2 n/a
Dec 31, Dec 31,
2009 2008
Total assets 3,671.4 4,720.4
Total shareholders'
equity 1,515.7 1,567.1
Net debt to total
capital(6) 39% 49%

To download Finning's complete fourth quarter and annual 2009 results in PDF, please open the following link:


Management will hold an investor conference call on Wednesday, February 24 at 1:00 pm Eastern Time. Dial-in numbers: 1-866-223-7781 (anywhere within Canada and the U.S.) (416) 340-8018 (for participants dialing from Toronto and overseas).

The call will be webcast live and subsequently archived at Playback recording will be available at 1-800-408-3053 from 3:00 pm Eastern Time on February 24 until March 4. The pass code to access the playback recording is 8252734 followed by the number sign.


Finning International's first quarter 2010 results will be released on May 13, 2010 after market close. An investor conference call will be held on May 14, 2010.


Finning International's Annual General Meeting will be held at The Fairmont Hotel Vancouver (Saturna Island Room), 900 West Georgia Street, Vancouver, British Columbia on May 13, 2010.

About Finning

Finning International Inc. (TSX:FTT) is the world's largest Caterpillar equipment dealer delivering unrivalled service to customers since 1933. Finning sells, rents and services equipment and engines to help customers maximize productivity. Headquartered in Vancouver, B.C., the Company operates in western Canada, Chile, Argentina, Bolivia, Uruguay, and the United Kingdom.


(1) Adjusted for goodwill impairment charge of $151 million (diluted EPS $0.88) in the fourth quarter of 2008.

(2) These amounts do not have a standardized meaning under generally accepted accounting principles. For a reconciliation of these amounts to net income and cash flow from operating activities, see the heading "Description of Non-GAAP Measures" in the Company's management discussion and analysis that accompanies the fourth quarter and annual consolidated financial statements.

(3) Free cash flow is defined as cash flow provided by (used in) operating activities less net capital expenditures.

(4) Gross profit margin is defined as gross profit as a percentage of total revenue.

(5) EBIT margin is defined as earnings before interest and income taxes as a percentage of total revenue.

(6) Net debt to total capital ratio is calculated as short-term debt and long-term debt, net of cash and cash equivalents (net debt) divided by total capitalization. Total capitalization is defined as the sum of net debt and all components of equity (share capital, contributed surplus, accumulated other comprehensive loss, and retained earnings).

Forward-Looking Disclaimer

This report contains statements about the Company's business outlook, objectives, plans, strategic priorities and other statements that are not historical facts. A statement we make is forward-looking when it uses what we know and expect today to make a statement about the future. Forward-looking statements may include words such as aim, anticipate, assumption, believe, could, expect, goal, guidance, intend, may, objective, outlook, plan, project, seek, should, strategy, strive, target, and will. Forward-looking statements in this report include, but are not limited to, statements with respect to: expectations with respect to the economy and associated impact on the Company's financial results; the estimated annualized cost savings and anticipated restructuring charges related to actions taken by the Company in response to the economic downturn; the potential outcome of the Company's strategic review of Hewden; expected revenue levels and EBIT growth; anticipated effective tax rate; anticipated generation of free cash flow (including projected net capital and rental expenditures), and its expected use; anticipated defined benefit plan contributions; and expected target range of Debt Ratio. All such forward-looking statements are made pursuant to the 'safe harbour' provisions of applicable Canadian securities laws.

Unless otherwise indicated by us, forward-looking statements in this report describe our expectations at February 23, 2010. Except as may be required by Canadian securities laws, we do not undertake any obligation to update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise.

Forward-looking statements, by their very nature, are subject to numerous risks and uncertainties and are based on several assumptions which give rise to the possibility that actual results could differ materially from our expectations expressed in or implied by such forward-looking statements and that our business outlook, objectives, plans, strategic priorities and other statements that are not historical facts may not be achieved. As a result, we cannot guarantee that any forward-looking statement will materialize. Factors that could cause actual results or events to differ materially from those expressed in or implied by our forward-looking statements include: general economic and credit market conditions; foreign exchange rates; commodity prices; the level of customer confidence and spending, and the demand for, and prices of, our products and services; our dependence on the continued market acceptance of Caterpillar's products and Caterpillar's timely supply of parts and equipment; our ability to continue to implement our cost reduction initiatives while continuing to maintain customer service; the intensity of competitive activity; our ability to raise the capital we need to implement our business plan; regulatory initiatives or proceedings, litigation and changes in laws or regulations; stock market volatility; changes in political and economic environments for operations outside Canada; with respect to Hewden, not being successful in generating the expected improvements in the underlying business performance or not being able to successfully negotiate and complete a transaction on terms acceptable to the Company or at all. Forward-looking statements are provided in this report for the purpose of giving information about management's current expectations and plans and allowing investors and others to get a better understanding of our operating environment. However, readers are cautioned that it may not be appropriate to use such forward-looking statements for any other purpose.

Forward-looking statements made in this report are based on a number of assumptions that we believed were reasonable on the day we made the forward-looking statements. Refer in particular to the Market Outlook section of the MD&A. Some of the assumptions, risks, and other factors which could cause results to differ materially from those expressed in the forward-looking statements contained in this report are discussed in the Company's current Annual Information Form (AIF) in Section 4.

We caution readers that the risks described in the AIF are not the only ones that could impact us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also have a material adverse effect on our business, financial condition, or results of operations.

Except as otherwise indicated by us, forward-looking statements do not reflect the potential impact of any non-recurring or other unusual items or of any dispositions, mergers, acquisitions, other business combinations or other transactions that may be announced or that may occur after the date hereof. The financial impact of these transactions and non-recurring and other unusual items can be complex and depends on the facts particular to each of them. We therefore cannot describe the expected impact in a meaningful way or in the same way we present known risks affecting our business.

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