Finning International Inc.

Finning International Inc.

November 10, 2010 16:31 ET

Growth in All Finning Operations Fuels Strong Third Quarter Results

Earnings Per Share Up 140 Percent

VANCOUVER, BRITISH COLUMBIA--(Marketwire - Nov. 10, 2010) - Finning International Inc. (TSX:FTT) -

Q3 2010 HIGHLIGHTS (from continuing operations)

  • Basic EPS of $0.36 was up 140% from Q3 2009 and up 71% from Q2 2010
  • EBIT of $88 million, increased by 87% over Q3 2009 and 32% over Q2 2010
  • Higher revenues and a lower cost structure yielded significant operating leverage; EBIT margin improved to 7.2% compared to 4.7% in Q3 2009 and 6.2% in Q2 2010
  • On-track to meet permanent cost reduction targets
  • Consolidated order backlog increased for fourth consecutive quarter to $1.2 billion

Finning International Inc. reported strong third quarter 2010 results driven by robust top-line growth and improved EBIT margins. Finning achieved third quarter 2010 revenue of $1.2 billion, a 21% increase over Q3 2009. Earnings before interest and income taxes (EBIT) increased by 87% from Q3 2009 to $88 million, and basic earnings per share (EPS) grew by 140% to $0.36 compared to $0.15 in the same quarter of last year. Q3 2010 results included net non-operational charges of $0.05 per share ($0.02 per share in Q3 2009).

"Our equipment backlog climbed by 21% to $1.2 billion and product support business increased by 17% as all our operations captured strong growth opportunities in their respective markets. Continued margin recovery in Canada underpins the decision we have made to proceed with the construction of a new oil sands service facility in Fort McKay, Alberta," said Mike Waites, Finning International Inc. president and CEO. "This investment in our product support capability will further solidify our leadership position in mining and our ongoing commitment to deliver superior services to our customers."

"As markets continue to recover, our commitment to generate sustainable operating leverage from efficiency and productivity initiatives is demonstrating results. We are achieving improvements in operating margin and continued to make solid progress towards lowering SG&A expenses as a percentage of revenue during the quarter," continued Mike Waites. "The successful execution of our strategic initiatives and our enhanced focus on operational excellence is transforming Finning into a stronger organization. With the improved operating leverage and strong balance sheet, we remain well-positioned to capitalize on further growth opportunities and generate a solid return on equity for our shareholders."

"The outlook for the second half of 2010 is shaping up to be better than we had originally expected with the third quarter being an exceptionally strong quarter," said Dave Smith, EVP and chief financial officer of Finning International Inc. "Led by higher than anticipated product support and new equipment revenues, we now expect revenues from continuing operations for the full year to be about equal to 2009 despite a $900 million lower backlog going into 2010. As markets recover and our cost structure is reduced, we are producing higher operating leverage which is expected to result in moderately better EBIT performance compared to 2009."

Consistent with the Company's long-term strategic focus on key growth markets, the new facility in Fort McKay will build on Finning's strong commitment to serve its customers and will capitalize on robust demand in mining. Finning has developed a mining support infrastructure in central and northern Alberta that is unmatched in the industry. The new 16-bay facility, an investment of approximately $110 million, will further expand the Company's strong product support capabilities. Construction of the new building is expected to commence in Q2 2011, with completion by the end of 2012.

Q3 2010 FINANCIAL SUMMARY (from continuing operations)
C$ millions, except per share amounts (unaudited) Three months ended Sep 30
  2010 2009 % change
Revenue 1,220 1,012 21
Earnings before interest and income taxes (EBIT) (1) 88 47 87
Net Income 61 26 140
Diluted EPS 0.36 0.15 140
Earnings before interest, income taxes, depreciationand amortization (EBITDA) (1) 134 95 40
Free cash flow (1)(2) 22 226  
  • Revenues of $1.2 billion were up 21% from Q3 2009, reflecting higher new equipment sales and product support revenues in all operations. New equipment sales increased by 32%, driven by improved market conditions in Canada and South America. Consolidated product support revenues were up 17% from Q3 2009 driven by mining as well as growth in non-mining sectors in all regions. Used equipment sales declined by 14% in the quarter. Rental revenues were higher across all regions and were up 9% on a consolidated basis compared to Q3 2009. Foreign exchange had a negative impact on quarterly revenues of approximately $80 million as the Canadian dollar was 5.4% stronger relative to the U.S. dollar and 10.5% stronger relative to the U.K. pound sterling for Q3 2010 compared to Q3 2009.
  • Gross profit increased by 24% from Q3 2009, and gross profit margin improved to 29.7% from 28.9% in Q3 2009. New equipment sales contributed 45% to the total revenue in Q3 2010 compared to 41% in Q3 2009, while product support accounted for 44% of the total revenues compared to 45% in Q3 2009. The Company realized higher margins in all lines of business, which more than offset the shift in revenue mix to relatively lower margin new equipment sales.
  • Selling, general and administrative (SG&A) expenses were 10% higher than in Q3 2009, supporting a significant increase in revenues. The Company remains on track to meet the targeted permanent cost reductions by the end of 2010, and continued to realize cost savings from productivity initiatives in the quarter. As a result of higher revenues on a lower fixed cost base due to various cost initiatives, SG&A expenses as a percentage of revenue decreased to 21.6% from 23.7% in Q3 2009.
  • EBIT increased by 87% to $88 million. Consolidated EBIT margin of 7.2% improved significantly from 4.7% in Q3 2009 and 6.2% in Q2 2010. This result was driven by Canada, where EBIT margin more than doubled to 7.3% from 3.0% in Q3 2009. Generating operating leverage to improve EBIT margin performance remains at the top of the Company's priorities.
  • Net income increased by 140% to $61 million. Diluted EPS of $0.36 was up 140% compared to $0.15 in Q3 2009 and rose by 71% from Q2 2010 EPS of $0.21. Foreign exchange had a negative impact of $0.04 per share compared to Q3 2009. Non-operational costs of $0.05 per share in Q3 2010 included IT system implementation costs of $0.04 per share and Ireland dealership acquisition costs of $0.01 per share. 
  • EBITDA, which is an indicator of a company's cash operating performance and generation of operating cash flow, was $134 million, up 40% from Q3 2009.
  • Quarterly free cash flow was $22 million, compared to $226 million in Q3 2009, as increased sales activity resulted in higher working capital requirements, primarily in South America and, to a lesser extent, in Canada. Year to date, free cash flow was $137 million. The Company remains committed to achieving its annual free cash flow target of approximately $200 million; however, pressures on working capital to meet stronger than expected demand for equipment are making it increasingly challenging to reach this goal.
  • The net debt to total capital ratio was 36.1%, down from 36.6% at the end of June 2010 and below 39.3% at December 2009. The ratio is expected to be in the mid 30% range at the end of 2010.
  • Consolidated backlog of $1.2 billion was 21% higher than at June 30, 2010, and increased for the fourth consecutive quarter. New order intake was higher in all operations in Q3 2010 driven by mining; there was also an increase in new orders from the construction sector.
  • Third quarter revenues rose by 23% from Q3 2009 driven by higher new equipment sales and strong growth in product support revenues. New equipment sales were up 43%, reflecting higher deliveries and stronger demand in the quarter. Used equipment sales were 18% lower compared to Q3 2009, while rental revenues increased by 3%. Product support revenues increased by 19% from Q3 2009, due to growth in all sectors. Product support revenues were strong in mining and continued to increase in non-mining sectors.
  • SG&A costs in absolute dollars were higher than in the prior year, resulting from increased revenues and higher LTIP (long-term incentive plan) costs in Q3 2010 relative to Q3 2009. SG&A as a percentage of revenue declined from Q3 2009, reflecting successful cost reduction initiatives and on-going productivity improvements. The Canadian operations incurred IT system implementation costs of $5 million in Q3 2010 ($1 million in Q3 2009). The new system is now expected to go live in Q1 2011. 
  • EBIT improved to $44 million in the quarter, compared to $15 million in Q3 2009 and $33 million in Q2 2010. EBIT margin of 7.3% was significantly higher than 3.0% in Q3 2009 and improved from 5.8% in Q2 2010. Finning Canada remains focused on driving higher EBIT margin by maintaining disciplined cost management and improving service labour productivity and supply chain efficiencies.
  • Order activity continued to increase in Q3 2010 with strengthening market conditions. The backlog was comparable to the level of June 2010 and remains at its highest level since December 2008.
  • In Q3 2010, Finning Canada and the International Association of Machinists and Aerospace Workers (IAM) – Local Lodge 99 (Alberta Union) successfully reached a new two-year collective agreement which will expire in 2012.
South America
  • Third quarter revenues increased by 23% from Q3 2009. In functional currency (USD), quarterly revenues were at record levels, up 29% from Q3 2009. In functional currency, new equipment sales rose by 41% in the quarter, driven by increased demand in construction and mining. Product support revenues continued to show solid growth, increasing by 20% in functional currency.
  • SG&A costs as a percentage of revenue were slightly higher compared to Q3 2009 due to a 16% increase in the workforce as the Company continued to invest in product support capabilities to meet current and anticipated customer demand. There was also an increase in IT implementation costs compared to Q3 2009.
  • EBIT of $41 million was 14% higher than in Q3 2009. In functional currency, EBIT increased by 20% and achieved record levels. EBIT margin was 8.9% in the quarter, compared to 9.6% in Q3 2009.
  • Driven by mining and construction, order intake remained strong in Q3 2010. The backlog increased over June 2010 level and was at its highest level since September 2008, and now includes Codelco's Ministro Hales mine order. 
United Kingdom and Ireland (continuing operations)
  • Quarterly revenues were up 8% from Q3 2009, due to higher product support revenues and new equipment sales. In functional currency (GBP), quarterly revenues increased by 21% from Q3 2009, driven by a 31% increase in product support revenues and a 16% rise in new equipment sales over Q3 2009. 
  • EBIT from our UK and Ireland operations was $2 million compared to $4 million in Q3 2009, reflecting Ireland dealership acquisition costs, higher IT implementation costs, as well as higher SG&A expenses due to increase in volume related costs. EBIT margin was 1.3% in the quarter, compared to 3.0% in Q3 2009. Adjusting for Ireland dealership acquisition costs, restructuring and IT implementation costs, EBIT would have been comparable to Q3 2009 and EBIT margin for Q3 2010 would have been 3.1% (3.4% in Q3 2009).
  • Order intake increased in the quarter compared to Q2 2010, and the backlog is at the highest level since September 2008, as a result of improved market conditions in coal mining, quarrying, waste management and plant hire sectors.
  • The acquisition of the Irish dealerships was completed during this quarter.


Board of Directors Appointment

On September 22, 2010, Finning announced the appointment of Chris Patterson to its Board of Directors. Mr. Patterson has over 30 years of experience in the North American truck manufacturing industry. He served as President and Chief Executive Officer of Daimler Trucks North America LLC, and held progressively senior executive positions with Freightliner LLC (predecessor to Daimler Trucks North America). He currently serves as a director of Modine Manufacturing Company.


The Board of Directors approved a quarterly dividend at $0.12 per common share, payable on December 10, 2010, to shareholders of record on November 26, 2010. This dividend will be considered an eligible dividend for Canadian income tax purposes.

(from continuing operations unless otherwise stated, C$ millions, except per share amounts)
  Three months ended Sept 30   Nine months ended Sept 30  
Revenue 2010   2009   % change   2010   2009   % change  
  New equipment 549.7   416.5   32   1,306.7   1,513.9   (14 )
  Used equipment 55.7   64.6   (14 ) 211.3   224.0   (6 )
  Equipment rental 81.4   74.5   9   215.3   238.0   (10 )
  Product support 531.2   454.4   17   1,534.6   1,414.7   8  
  Other 2.1   2.3   (9 ) 7.1   8.5   (16 )
    Total revenue 1,220.1   1,012.3   21   3,275.0   3,399.1   (4 )
Gross profit 362.7   292.3   24   987.3   991.0   0  
Gross profit margin(3) 29.7 % 28.9 %     30.2 % 29.1 %    
SG&A (263.9 ) (239.7 ) (10 ) (765.2 ) (759.4 ) (1 )
SG&A as a percentage of revenue (21.6 )% (23.7 )%     (23.4 )% (22.3 )%    
Other expenses (10.7 ) (5.4 ) (98 ) (26.2 ) (24.4 ) (7 )
EBIT 88.1   47.2   87   195.9   207.2   (5 )
EBIT margin(4) 7.2 % 4.7 %     6.0 % 6.1 %    
Income from continuing operations 61.5   25.6   140   120.6   135.0   (11 )
Loss from discontinued operations, net of tax -   (3.9 )     (249.1 ) (20.5 )    
Net income (loss) 61.5   21.7   183   (128.5 ) 114.5      
Diluted earnings (loss) per share (EPS)                        
from continuing operations 0.36   0.15   140   0.70   0.79   (11 )
from discontinued operations -   (0.02 )     (1.45 ) (0.12 )    
Total diluted earnings (loss) per share 0.36   0.13   177   (0.75 ) 0.67      
EBITDA 133.5   95.5   40   322.7   358.2   (10 )
Free Cash Flow* 21.9   225.6       137.4   363.5      
  Sep 30, 10   Dec 31, 09  
Total assets* 3,533.5   3,671.4  
Total shareholders' equity* 1,393.6   1,515.7  
Net debt to total capital(5)* 36.1 % 39.3 %
* Free cash flow and assets from Hewden have been included in the figures for periods prior to the sale.

To download Finning's complete Q3 2010 results in PDF, please open the following link:

To download the CEO and CFO certification letters, please open the following link:


Management will hold an investor conference call on Thursday, November 11 at 1:00 pm Eastern Time. Dial-in numbers: 1-866-223-7781 (anywhere within Canada and the U.S.) or (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 November 11 until November 18. The pass code to access the playback recording is 5374840 followed by the number sign.


Finning will hold an investor call on Wednesday, December 8 at 4:30 pm Eastern Time to discuss the Company's transition from Canadian GAAP to IFRS (International Financial Reporting Standards) and the key adjustments to Finning's financial statements resulting from conversion to IFRS.

Dial-in numbers: 1-866-223-7781 (anywhere within Canada and the U.S.) or (416) 340-8018 (for participants dialing from Toronto and overseas).


Finning's fourth quarter and annual 2010 results will be released on February 16, 2011 after market close. An investor conference call will be held on February 17, 2011.


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, as well as in Ireland and the United Kingdom.  


  1. 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 second quarter consolidated financial statements.
  2. Free cash flow is defined as cash flow provided by (used in) operating activities less net capital expenditures.
  3. Gross profit margin is defined as gross profit as a percentage of total revenue.
  4. EBIT margin is defined as earnings before interest and income taxes as a percentage of total revenue.
  5. 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; 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; and the expected quantitative impact on the consolidated statement of financial position of the Company's transition to IFRS at January 1, 2010. 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 November 10, 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; new or amended IFRS or interpretations that become effective prior to the inclusion of the Company's financial statement of position in its first annual audited IFRS financial statements. 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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