Finning International Inc.

TSX : FTT


Finning International Inc.

February 19, 2014 16:32 ET

Finning Reports Solid Q4 and Annual 2013 Results

VANCOUVER, BRITISH COLUMBIA--(Marketwired - Feb. 19, 2014) - Finning International Inc. (TSX:FTT) -

Q4 2013 HIGHLIGHTS

  • Revenues rose by 3% to $1.8 billion driven by higher parts and service revenues.
  • Earnings before finance costs and income taxes (EBIT)(1) were $145 million compared to $148 million in Q4 of last year. Excluding one-time items, EBIT performance improved from Q4 of last year.
  • Basic earnings per share (EPS) of $0.54 were below $0.60 in Q4 2012, reflecting lower EBIT and higher provision for income taxes.
  • Improvements in working capital(1) decreased invested capital(1) by $204 million from Q3 2013, mainly through the reduction of equipment inventory in all operations.
  • Free cash flow(1) of $365 million was $120 million higher than in Q4 2012, driving the ratio of net debt to invested capital(1) to 41% at the end of 2013, down from 48% at the end of September 2013 and 50% at the end of 2012.

2013 ANNUAL HIGHLIGHTS

  • Revenues grew by 3% to a record $6.8 billion. Product support revenues rose by 12%, partly attributable to the contribution from the mining shovels and drills business.
  • EBIT increased by 7% to $521 million, and EBIT margin(1) rose to 7.7% from 7.4% in 2012 due to improved EBIT margin in Canada.
  • Basic EPS increased to a record $1.95 from $1.90 earned in 2012.
  • Free cash flow was $441 million, reflecting record earnings before finance costs, income taxes, depreciation and amortization (EBITDA)(1), lower working capital, and lower capital expenditures compared to 2012.

Finning International Inc. (TSX:FTT) reported quarterly revenues of $1.8 billion, a 3% increase over Q4 2012. Higher quarterly revenues in Canada and the UK & Ireland more than offset a revenue decline in South America compared to Q4 2012. Quarterly EBIT was 2% below Q4 of last year, mostly due to a $5.5 million write-off of the previously capitalized ERP costs in the UK in Q4 2013 and a $9.7 million gain on the sale of property in Canada in Q4 2012. Similarly, quarterly EBIT margin of 8.1% was below 8.5% in Q4 2012. Basic EPS was $0.54 compared to $0.60 in Q4 of last year. For the full year 2013, revenues increased by 3% to a record $6.8 billion, driven by approximately $215 million of additional revenue from the mining shovels and drills business, along with organic growth in product support. EBIT rose by 7% to $521 million and EBIT margin improved to 7.7% from 7.4% in 2012, reflecting higher EBIT margin in Canada. Net income and basic EPS were up 3% and reached new records of $335 million and $1.95, respectively. Full year free cash flow was strong at $441 million and net debt to invested capital declined to 41% at the end of 2013 from 50% at the end of 2012.

"Our Q4 results were in line with our expectations. Excluding one-time items, operating results improved year over year, as we grew our top line and improved EBIT performance in Canada. Importantly, we generated significant free cash flow, which enabled us to bring our net debt to invested capital ratio down to near the midpoint of our target range," said Scott Thomson, president and CEO, Finning International. "Going forward, we are driving higher return on invested capital by executing on clear and measurable plans to advance our operational priorities: customer & market leadership, service excellence, supply chain optimization, and asset utilization. Our increased focus on what we can control - costs, working capital and capital investment - gives me confidence in our ability to grow earnings faster than revenue and markedly improve our capital efficiency."

Q4 2013 FINANCIAL SUMMARY

$ millions, except per share amounts Three months ended Dec 31
2013 2012(2) % change
Revenue 1,796 1,746 3
EBIT 145 148 (2)
EBIT margin 8.1% 8.5%
Net income 93 103 (9)
Basic EPS 0.54 0.60 (10)
EBITDA 200 203 (1)
Free cash flow 365 245 49
  • Revenues rose by 3% from Q4 2012 to $1.8 billion, with higher revenues from Canada and the UK & Ireland more than offsetting the revenue decline in South America. New equipment sales were the highest of any quarter in 2013, but were 2% below Q4 2012 due to lower sales volumes in South America compared to the record-setting Q4 of last year. Product support revenues grew by 9%, driven mostly by Canada. Used equipment sales and rental revenues were relatively unchanged compared to Q4 of last year. A weakening Canadian dollar had a positive impact on revenues of approximately $60 million compared to Q4 2012.
  • Gross profit increased by 6%, reflecting higher revenues and gross profit margin compared to Q4 2012. Gross profit margin(1) was 30.9%, up from 30.0% in Q4 2012 due to a higher proportion of product support in the revenue mix, most notably in South America.
  • Selling, general and administrative (SG&A) expenses were 5% above Q4 2012. In Canada, higher SG&A costs reflected revenue growth in all lines of business, as well as higher service related costs. An increase in SG&A expenses in South America and the UK & Ireland was due to a weaker Canadian dollar compared to Q4 2012.
  • EBIT remained strong, but declined by 2% to $145 million due a $5.5 million write-off of the previously capitalized ERP development costs in the UK in Q4 2013 and a $9.7 million gain on sale of property in Canada in Q4 2012, as well as higher SG&A costs, discussed above. As a result, consolidated EBIT margin of 8.1% was below 8.5% in Q4 2012. Sequentially, EBIT margin improved from 7.6% in Q3 2013.
  • Net income declined by 9% to $93 million, mainly driven by a higher provision for income taxes. The effective tax rate was 25.1%, up from 16.4% in Q4 2012. The higher effective tax rate in Q4 2013 was primarily the result of foreign exchange impacts due to the devaluation of the Argentinean peso. The effective tax rate in Q4 2012 was unusually low due to the benefit of previously unrecognized tax losses. Consequently, basic EPS of $0.54 was 10% below $0.60 in Q4 2012.
$ millions Q4 2013 Q3 2013
Invested capital 3,138 3,342
Return on invested capital(1) 15.7% 15.8%
  • Invested capital decreased by $204 million from Q3 2013, driven by improvements in working capital, mainly through the reduction of equipment inventory and lower accounts receivable in all operations. During Q4, inventory levels declined by $149 million as a result of strong equipment deliveries in all regions and continued focus on inventory management. Return on invested capital was similar to Q3 2013, as the invested capital calculation is based on an average of the last four quarters.
  • Strong free cash flow of $365 million in Q4 was driven by lower working capital.
  • Net debt to invested capital declined to 40.8% at the end of 2013 from 47.8% at the end of September and 50.0% at the end of 2012 and is within the Company's 35-45% target range. Net debt to invested capital is at the lowest level since 2011, prior to the acquisition of the former Bucyrus distribution business.

Backlog

  • Q4 deliveries were higher than in any of the previous quarters in 2013. While the order intake in Canada remained strong, deliveries outpaced the order intake in South America and the UK & Ireland. The order backlog(1) was $0.9 billion at the end of December 2013, down from $1.0 billion at the end of September 2013.

Q4 2013 HIGHLIGHTS BY OPERATION

Canada

  • Revenues were up 11% from a year ago, with higher revenues in all lines of business. New equipment sales rose by 10% driven by demand from all sectors. Product support revenues increased by 12% and were higher across all sectors, despite challenges in the mining product support business as commodity producers continued to focus on cost reductions.
  • EBIT was $69 million compared to $73 million in Q4 of last year. The Q4 2012 EBIT included a $9.7 million gain on the sale of property. As a result, EBIT margin of 7.9% was lower than 9.2% in Q4 2012. Gross profit margin declined relative to Q4 2012, primarily due to a higher proportion of the lower margin equipment and parts in the sales mix. SG&A expenses were higher, largely driven by higher service related costs.
  • Invested capital declined by $228 million from the end of September, driven by reduced equipment inventory, lower accounts receivable, higher accounts payable and a reduction in rental inventory.

South America

  • Revenues declined by 9% (down 14% in functional currency - USD) from the record revenues in Q4 2012; however, Q4 saw the highest revenue of all 2013 quarters. New equipment sales were down 23% in functional currency from an exceptionally strong Q4 of last year, reflecting slower mining activity and reduced construction demand in Chile and Argentina. While copper prices and production levels remained steady, demand for equipment replacement and additional fleets has slowed as mining customers continued to focus on controlling costs. Product support revenue was down slightly in functional currency compared to Q4 2012, with higher product support in mining offset by a decline in non-mining sectors.
  • EBIT of $76 million was comparable to Q4 2012 (down 6% in functional currency) reflecting lower revenues. The EBIT margin increased to 11.3% from 10.3% a year ago as a result of a shift in revenue mix to higher margin product support and favourable adjustments to certain mining service contracts. Product support contributed 51% to total revenue compared to 44% in Q4 2012, while new equipment sales comprised 45% vs. 50% a year ago.
  • Invested capital declined by US$33 million in functional currency from Q3 2013 driven by reduced equipment and parts inventory due to improved inventory management. However, the weakening Canadian dollar against the U.S. dollar resulted in a $12 million increase in invested capital in South America compared to Q3 2013.

United Kingdom & Ireland

  • Revenues increased by 14% (up 7% in functional currency - GBP), driven by new equipment sales and product support, which grew by 6% and 4%, respectively, in functional currency compared to Q4 of last year.
  • Gross profit margin was similar to Q4 2012, and the SG&A costs remained flat in functional currency despite revenue growth. EBIT of $8 million included a $5.5 million write-off of previously capitalized ERP implementation costs, following the deferral of an ERP system decision in the UK for 2-3 years and the resulting time delays and uncertainties in recognizing future benefits. As a result, EBIT margin of 3.3% was below 4.2% a year ago.
  • Invested capital decreased by approximately £10 million in functional currency and $2 million in Canadian dollars compared to Q3 2013, primarily due to lower equipment inventory and an increase in accounts payable.

CORPORATE AND BUSINESS DEVELOPMENTS

Dividend

The Board of Directors has approved a quarterly dividend of $0.1525 per share, payable on March 20, 2014 to shareholders of record on March 6, 2014. This dividend will be considered an eligible dividend for Canadian income tax purposes.

Board of Directors appointment

On November 26, Finning announced the appointment of Kevin A. Neveu as the newest member of the Company's Board of Directors. Mr. Neveu is currently chief executive officer of Precision Drilling Corporation, a Calgary-based service provider to the oil and gas industry. Previously, he held senior management roles with National Oilwell Varco and its predecessor companies. Mr. Neveu's appointment is consistent the Board's strategy on director renewal and with this appointment, Finning's Board membership will be increased to eleven directors.

Finning Canada employees in Alberta and Northwest Territories ratify new labour agreement

On December 6, the Company announced that the hourly employees of its Canadian division, represented by the International Association of Machinists and Aerospace Workers - Local 99 ("IAMAW"), have voted in support of the previously announced tentative collective agreement. The new three-year collective agreement covers approximately 2,200 hourly-paid Finning Canada employees in Alberta and the Northwest Territories and expires on April 30, 2016. The new agreement provides for annual wage increases of 3% in year one, 3.5% in year two and 3.75% in year three.

SELECTED CONSOLIDATED FINANCIAL INFORMATION
(C$ millions, except per share amounts)
Three months ended Dec 31 Twelve months ended Dec 31
Revenue 2013 2012(2) %
change
2013 2012(2) %
change
New equipment 834.5 847.7 (2) 2,908.3 3,077.2 (5)
Used equipment 82.1 81.9 0 303.3 295.4 3
Equipment rental 102.2 101.4 1 391.9 379.8 3
Product support 774.3 712.0 9 3,143.8 2,815.4 12
Other 2.7 2.7 0 8.7 7.8 11
Total revenue 1,795.8 1,745.7 3 6,756.0 6,575.6 3
Gross profit 554.2 523.6 6 2,080.4 1,967.2 6
Gross profit margin 30.9% 30.0% 30.8% 29.9%
SG&A (402.7) (384.0) (5) (1,555.5) (1,490.4) (4)
SG&A as a percentage of revenue (22.4)% (22.0)% (23.0)% (22.7)%
Equity earnings 0.3 2.5 9.3 10.1
Other income (expenses) (6.3) 5.6 (13.5) 1.7
EBIT 145.5 147.7 (2) 520.7 488.6 7
EBIT margin 8.1% 8.5% 7.7% 7.4%
Net income 92.9 102.6 (9) 335.3 326.8 3
Basic EPS 0.54 0.60 (10) 1.95 1.90 3
EBITDA 200.3 203.0 (1) 736.4 701.1 5
Free Cash Flow 364.9 244.8 440.7 (37.4)
Dec 31, 13 Dec 31, 12
Total assets 5,057.6 5,118.0
Total shareholders' equity 1,857.8 1,566.6
Net debt to invested capital(1) 40.8% 50.0%
Return on invested capital(1) 15.7% 16.5%

To download Finning's complete Q4 and annual 2013 results in PDF, please open the following link: http://media3.marketwire.com/docs/FTT0219.pdf

Q4 AND ANNUAL 2013 RESULTS INVESTOR CALL

The Company will hold an investor conference call on Wednesday, February 19 at 5:30 pm Eastern Time. Dial-in numbers: 1-866-225-0198 (anywhere within Canada and the U.S.) or 416-340-8061 (for participants dialing from Toronto and overseas).

The call will be webcast live and subsequently archived at www.finning.com. Playback recording will be available at 1-800-408-3053 from 7:00 pm Eastern Time on February 19 until February 26. The pass code to access the playback recording is 4463383 followed by the number sign.

ABOUT FINNING

Finning International Inc. (TSX:FTT) is the world's largest Caterpillar equipment dealer delivering unrivalled service to customers for over 80 years. 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, as well as in the United Kingdom and Ireland.

Footnotes

  1. These financial metrics do not have a standardized meaning under IFRS, which are also referred to herein as generally accepted accounting principles (GAAP). Management's Discussion and Analysis (MD&A) includes additional information regarding these financial metrics, including definitions, under the heading "Description of Non-GAAP and Additional GAAP Measures".
  2. Prior year comparative figures have been restated to reflect the Company's adoption of the amendments to International Accounting Standard (IAS) 19, Employee Benefits, for the financial year beginning January 1, 2013.

Forward-Looking Disclaimer

This report contains statements about the Company's business outlook, objectives, plans, strategic priorities and other statements that are not historical facts. A statement Finning makes is forward-looking when it uses what the Company knows and expects today to make a statement about the future. Forward-looking statements may include 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; expected revenue; EBIT margin; ROIC; market share growth; expected results from service excellence action plans; anticipated asset utilization, inventory turns and parts service levels; and the expected target range of the Company's net debt to invested capital 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 Finning's expectations at February 19, 2014. Except as may be required by Canadian securities laws, Finning does not undertake any obligation to update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise.

Forward-looking statements, by their very nature, are subject to numerous risks and uncertainties and are based on several assumptions which give rise to the possibility that actual results could differ materially from the expectations expressed in or implied by such forward-looking statements and that Finning's business outlook, objectives, plans, strategic priorities and other statements that are not historical facts may not be achieved. As a result, Finning cannot guarantee that any forward-looking statement will materialize. Factors that could cause actual results or events to differ materially from those expressed in or implied by these forward-looking statements include: general economic and market conditions; foreign exchange rates; commodity prices; the level of customer confidence and spending, and the demand for, and prices of, Finning's products and services; Finning's dependence on the continued market acceptance of Caterpillar's products and Caterpillar's timely supply of parts and equipment; Finning's ability to continue to improve productivity and operational efficiencies while continuing to maintain customer service; Finning's ability to manage cost pressures as growth in revenues occur; Finning's ability to reduce costs in response to slowing activity levels; Finning's ability to attract sufficient skilled labour resources to meet growing product support demand; Finning's ability to negotiate and renew collective bargaining agreements with satisfactory terms for Finning's employees and the Company; the intensity of competitive activity; Finning's ability to raise the capital needed to implement its business plan; regulatory initiatives or proceedings, litigation and changes in laws or regulations; stock market volatility; changes in political and economic environments for operations; the integrity, reliability, availability and benefits from information technology and the data processed by that technology. Forward-looking statements are provided in this report for the purpose of giving information about management's current expectations and plans and allowing investors and others to get a better understanding of Finning's operating environment. However, readers are cautioned that it may not be appropriate to use such forward-looking statements for any other purpose.

Forward-looking statements made in this report are based on a number of assumptions that Finning believed were reasonable on the day the Company made the forward-looking statements. Refer in particular to the Outlook section of the Company's 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 Section 4 of the Company's Annual Information Form (AIF).

Finning cautions readers that the risks described in the AIF are not the only ones that could impact the Company. Additional risks and uncertainties not currently known to the Company or that are currently deemed to be immaterial may also have a material adverse effect on Finning's business, financial condition, or results of operations.

Except as otherwise indicated, forward-looking statements do not reflect the potential impact of any non-recurring or other unusual items or of any dispositions, mergers, acquisitions, other business combinations or other transactions that may be announced or that may occur after the date 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. Finning therefore cannot describe the expected impact in a meaningful way or in the same way Finning presents known risks affecting its business.

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