Finning Announces Strong Third Quarter Results

Thu. November 13, 2008; Posted: 01:00 PM

Highlights from Continuing Operations

- Record third quarter revenues of $1.5 billion.

- Diluted earnings per share of $0.37, up 6% from the third quarter of 2007.

- New equipment order backlog grows to a new record level of $2.0 billion.

- Strong balance sheet with committed bank lines and no term debt maturities until Dec 2011. Debt to total capital at 49%.

- Management expects that earnings per share in 2008 are likely to be in a range from $1.50 to $1.60.

---------------------- ---------------------- Three months Nine months ended September 30 ended September 30 $ millions, except per ---------------------- ---------------------- share data 2008 2007 Change 2008 2007 Change ---------------------- ---------------------- Revenue 1,463.2 1,329.1 10.1% 4,424.7 4,202.7 5.3% Earnings from continuing operations before interest and income taxes (1) 103.4 109.9 (5.9)% 321.2 343.6 (6.5)% Net income (loss) from continuing operations 64.8 63.6 1.9% 202.8 209.6 (3.2)% from discontinued operations (2) - - - - (2.0) - ---------------------- ---------------------- Total net income 64.8 63.6 1.9% 202.8 207.6 (2.3)% ---------------------- ---------------------- ---------------------- ---------------------- Diluted Earnings (Loss) Per Share from continuing operations $ 0.37 $ 0.35 5.7% $ 1.16 $ 1.16 - from discontinued operations (2) - - - - (0.01) - ---------------------- ---------------------- Total diluted earnings per share $ 0.37 $ 0.35 5.7% $ 1.16 $ 1.15 0.9% ---------------------- ---------------------- ---------------------- ---------------------- Cash flow after working capital changes 84.1 115.3 (27.1)% 109.1 183.1 (40.4)% ---------------------- ---------------------- ---------------------- ---------------------- (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 interim consolidated financial statements. (2) On July 31, 2007, the Company's U.K. subsidiary, Hewden Stuart Plc, sold its Tool Hire Division. As a consequence, the results of operations of the Tool Hire Division were reclassified as discontinued operations in 2007 and prior periods.

Finning International Inc. (Finning or the Company) today reported record third quarter revenue of $1.5 billion for 2008, an increase of 10.1% over the third quarter of 2007. Earnings from continuing operations before interest and income taxes (EBIT) were $103.4 million in the third quarter of 2008, a decrease of 5.9% compared with the same period last year. Third quarter net income from continuing operations was $64.8 million or $0.37 diluted earnings per share, an increase of 5.7% compared with the third quarter of 2007.

"Finning operates in two of the strongest heavy equipment areas in the world where the demand for mining and heavy construction equipment continues to be good," said Mike Waites, Finning's President and CEO. "We continued to execute our strategy of providing a strong service and solutions offering to our customers and building our product support business. Revenues continued to grow at attractive rates in the third quarter. On a consolidated basis, new equipment and engine sales were up 12% and parts and service revenues were up 15% compared with the same period last year. In addition, our order backlog has grown to $2.0 billion, a new record, and provides good revenue visibility for 2009 and into 2010. The backlog reflects continued solid demand from mainly our mining, oil sands, and power systems customers. Many of these mining customers are low cash-cost producers whose mines are expected to continue operating notwithstanding lower commodity prices. In addition, the cash cost of our oil sands customers are well below current oil prices. In recent weeks, financial markets have been volatile and investor interest has been focused on credit availability and the financial strength of companies. Finning has in place committed lines of credit through 2011 and expects strong cash flow generation in the fourth quarter. Debt to total capital of 49% at September 30, 2008 was within our target range of 40 to 50%."

Third Quarter Results

Finning's revenues from continuing operations in the third quarter were $1.5 billion, up 10.1% from the third quarter of 2007 driven by continued strong equipment sales and demand for customer support services. Revenue growth in Canada and South America was driven primarily by strong demand from mining customers. In the U.K., higher customer support services revenue and cost efficiencies experienced at the Company's UK dealership partially offset the lower rental activity in the Hewden rental business.

Finning's global order book (the retail value of new equipment units ordered by customers for future deliveries) of approximately $2.0 billion at the end of the third quarter of 2008 is at a new record level, up approximately 15% from the levels at June 2008 and December 2007. The Company's current backlog is weighted towards mining customers which more than offsets weakness in other sectors. Although commodity prices have declined subsequent to the third quarter of 2008, these prices are still above historical levels and management believes that most commodity prices that affect our customers will continue at levels that will support ongoing investment in those sectors.

EBIT for the quarter was $103.4 million, compared with $109.9 million in the third quarter of 2007, a decrease of 5.9%. As anticipated, the impact of foreign exchange in the third quarter of 2008 was not significant as the Canadian dollar traded relative to the U.S. dollar, on average, at approximately the same level as the third quarter of last year.

- EBIT from Finning's Canadian reporting segment of $63.5 million in the third quarter of 2008 was 5.6% lower than the third quarter 2007. The decrease in 2008 was primarily due to an increase in selling, general, and administrative costs to support strong customer demand and projected growth in the Alberta oil sands. In addition, higher costs were incurred in the design of a new information technology system which is expected to provide benefits in the future.

- EBIT for Finning's South American operations in the third quarter of 2008 of $37.2 million was 33.3% higher than the 2007 third quarter, reflecting strong demand and higher volumes, particularly from customer support services and new equipment revenues.

- For the UK Group, EBIT decreased 24.2% in the third quarter of 2008 to $17.2 million compared to $22.7 million in the third quarter of 2007. In local currency, EBIT from continuing operations for the third quarter of 2008 was 18.5% lower compared with the same period in the prior year, reflecting lower results from the UK Group's rental business. Adjusting for the restructuring costs incurred in connection with the business support integration announced in the first quarter, EBIT from continuing operations in the third quarter of 2008, in local currency, would have been 10.1% lower than the comparable period in 2007.

Finning's net income from continuing operations for the quarter was $64.8 million compared with $63.6 million in 2007. Diluted Earnings Per Share (EPS) from continuing operations for the quarter was $0.37 per share, an increase of 5.7% compared with the third quarter 2007.

Cash flow after working capital changes was $84.1 million for the third quarter of 2008, compared with $115.3 million for the same period last year. Strong demand, particularly in South America, from mining customers resulted in increased investments in inventory for committed orders for deliveries in the fourth quarter of 2008 and early 2009. The Company's South American operations also experienced an increase in accounts receivable at the end of the quarter, as a result of the strong demand.

Year-to-Date Results

Revenue from continuing operations for the nine months ended September 30, 2008, was $4.4 billion, up 5.3% from the prior year. EBIT of $321.2 million for the first nine months of 2008 was down 6.5% and year-to-date trends are similar to the third quarter trends noted above. The results for the first nine months of 2008 included certain non-recurring items in the form of gains on the sale of properties at Hewden, offset by non-recurring costs related to the transition and integration of Collicutt Energy Services Inc. (Collicutt) and restructuring costs in connection with the business support integration in the U.K. Excluding these non-recurring items, EBIT for the first nine months of 2008 would have been $323.7 million, 5.8% lower than the same period in the prior year. The total negative impact on EBIT due to the much stronger Canadian dollar for the first nine months of 2008 compared to the same period in the prior year was approximately $47 million.

- For the nine months ending September 30, 2008, revenue was up 9.4% at the Company's Canadian operations, primarily due to strong new equipment sales. Adjusting for non-recurring costs related to the transition and integration of Collicutt, EBIT from Finning's Canadian reporting segment would have been $200.0 million for the nine months ended September 30, 2008, down 7.8% from the comparable period in 2007. The results in the first nine months of 2008 were negatively impacted by the stronger Canadian dollar as well as higher variable operating costs to support the projected growth in the Alberta oil sands and costs related to the design of a new information technology system.

- For the first nine months of 2008, revenues from the Company's South American operations were 6.1% higher compared with the same period last year, in spite of the negative impact of foreign exchange due to the stronger Canadian dollar relative the U.S. dollar in the first nine months of 2008. In functional currency (the U.S. dollar), revenues were up 14.6% in the first nine months of 2008 compared to the same period in 2007. EBIT for the first nine months of 2008 of $109.9 million was 10.8% higher compared to the same period last year. In functional currency, EBIT was 20.5% higher than the first nine months of 2007, primarily due to higher revenues and better margins from customer support services.

- Revenue from the UK Group in the first nine months of 2008 was 4.1% lower compared with the same period last year, but increased 5.9% in local currency. EBIT increased 11.2% over the comparable period in 2007 (22.1% in local currency), in spite of the negative impact of foreign exchange. Adjusting for the gains on the sale of properties and restructuring costs incurred in connection with the UK business support integration, EBIT from continuing operations in the first nine months of 2008, in local currency, would have been 2.6% higher than the comparable period in 2007. The improvement at the Company's UK dealership in all lines of business and the benefit of cost initiatives more than offset the reduction in rental revenues at Hewden.

Finning's net income from continuing operations for the nine months ended September 30, 2008, was $202.8 million compared with $209.6 million in 2007. Diluted EPS from continuing operations for the first nine months of 2008 was $1.16, comparable with the same period in 2007. This was achieved in spite of the negative impact of the stronger Canadian dollar in the first nine months of 2008 compared with the same period last year of approximately $0.19 per share.

Outlook

Finning's outlook for the balance of 2008 has been impacted by the slow-down in economic growth arising out of the global financial crisis. Construction related spending in the U.K. has been lower and this has impacted business levels, particularly in the equipment rental sector. As a result, Hewden's outlook for the balance of 2008 is considerably lower than previously expected. In addition, cost pressures have increased in Finning (Canada) associated with growing the labour force and physical space capacity to meet higher mining-related business volumes. These increased cost pressures, combined with a weaker outlook for western Canadian natural gas drilling activity, and a slower construction sector have caused Finning (Canada)'s outlook for the balance of 2008 to be lower than previously expected. Business levels with Finning (Canada)'s mining customers are expected to remain on plan and results from the Company's South American operations also are expected to continue to be on plan. As a result of these factors, management now expects earnings per share in 2008 are likely to be in a range of $1.50 - $1.60.

Common Share Dividend

The Board of Directors approved a quarterly dividend of $0.11 per common share, payable on December 12, 2008, to shareholders of record on November 27, 2008.

Third Quarter Conference Call

Management will hold an investor conference call on Thursday, November 13, 2008 at 3:00 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 5:00 pm Eastern Time on November 13, 2008, until the end of business day on November 21, 2008. The passcode to access the playback recording is 3272399 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 Annual Results February 18, 2009

Finning International's fourth quarter and annual results for 2008 will be released and an investor conference call will be held on February 18, 2009.

MANAGEMENT'S DISCUSSION AND ANALYSIS

This discussion and analysis of the financial results 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 financial statements and accompanying notes and the management's discussion and analysis included in the Company's 2007 annual report.

Results of Operations

The results from continuing operations include those of acquired businesses from the date of their purchase and exclude results from operations that have been disposed of or are classified as discontinued. Results from operations that qualify as discontinued operations in 2007 have been reclassified to that category in 2007 and prior periods presented unless otherwise noted. Please see the section entitled "Discontinued Operations - Tool Hire Division" for a discussion of these operations.

Third Quarter Overview

-------------------- -------------------- Q3 2008 Q3 2007 Q3 2008 Q3 2007 -------------------- -------------------- ($ millions) (% of revenue) Revenue $ 1,463.2 $ 1,329.1 Gross profit 432.7 390.8 29.6% 29.4% Selling, general & administrative expenses (322.3) (281.9) (22.0)% (21.2)% Other income (expenses) (7.0) 1.0 (0.5)% 0.1% -------------------- -------------------- Earnings from continuing operations before interest and income taxes (EBIT) (1) 103.4 109.9 7.1% 8.3% Finance costs (21.6) (19.3) (1.5)% (1.5)% Provision for income taxes (17.0) (27.0) (1.2)% (2.0)% -------------------- -------------------- Net income from continuing operations 64.8 63.6 4.4% 4.8% Loss from discontinued operations, net of tax - - - - -------------------- -------------------- Net income $ 64.8 $ 63.6 4.4% 4.8% -------------------- -------------------- (1) EBIT as defined above and referred to throughout this Management's Discussion and Analysis (MD&A) 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 MD&A.

Third quarter consolidated revenues from continuing operations of $1.5 billion increased 10.1% over the third quarter of 2007. Finning achieved record third quarter revenues driven primarily by strong equipment sales and customer support services, particularly in Canada and South America. In the U.K., higher customer support services revenue and cost efficiencies experienced at the Company's UK dealership have partially offset the lower rental activity in the Hewden rental business.

To view the Revenue by Operation graph please click on the following link: http://media3.marketwire.com/docs/ft1.pdf.

Revenues from the Company's Canadian operations in the third quarter of 2008 were the highest third quarter revenues ever recorded by these operations, and were up 17.0% when compared with the same period last year. The high revenues reflect the continued strong market demand and growth in the mining sector, particularly in the Alberta oil sands. Revenues from the Company's operations in South America increased 22.8% compared with the third quarter of 2007 with strong customer support services and new equipment revenues. Revenues were down 6.3% in local currency for the Company's operations in the U.K. compared to the similar period last year, reflecting lower rental and new equipment sales partially offset by improved customer support services. When translated to Canadian dollars, the UK Group's revenues decreased by 12.7% compared with the third quarter of 2007.

From a line of business perspective, strong demand continued in the third quarter of 2008 for both customer support services and new equipment sales. The mining and infrastructure sectors continue to demand new equipment and customer support services have increased to service the larger population of equipment. Used equipment revenues were also higher in the third quarter of 2008 and typically vary depending on product availability, customer buying preferences, and exchange rate considerations. Lower rental revenues in the third quarter of 2008 reflect the lower rental activity in the Hewden rental business.

To view the Revenue by Line of Business graph please click on the following link: http://media3.marketwire.com/docs/ft2b.pdf.

Finning's global order book or backlog (the retail value of new equipment units ordered by customers for future deliveries) of approximately $2.0 billion at the end of the third quarter of 2008 is at a new record level, up approximately 15% from the levels at June 2008 and December 2007. Backlog of orders is up in all operations from December 2007 year end and is further weighted towards mining customers.

The Company is dependent on Caterpillar Inc. (Caterpillar) for the timely supply of parts and equipment to fulfill its deliveries and meet the requirements of the Company's service maintenance contracts. Selected models of large equipment, large engines, and some parts continue to be 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 $432.7 million in the third quarter increased 10.7% over the same period last year. As a percentage of revenue, gross profit for the quarter was 29.6%, comparable with 29.4% in the third quarter of 2007. A higher gross profit as a percentage of revenue (gross profit margin) on a consolidated basis was primarily due to higher margins earned on customer support services. Higher gross profit margin was achieved by the UK Group, primarily due to a revenue mix shift towards higher margined customer support services as well as an improvement in customer support services margins. This was offset by lower gross profit margins earned by the rental business in the U.K. In Canada, gross profit margin was comparable to the same period in 2007 with higher margins earned from customer support services offset by lower margins experienced on the sale of used equipment. The gross profit margin for the Company's South American operations decreased slightly compared with the prior year, primarily due to lower margins earned on certain new equipment sales.

Earnings from continuing operations before interest and income taxes (EBIT) of $103.4 million decreased 5.9% from the previous year's third quarter. EBIT in the third quarter of 2008 included restructuring costs in connection with the back office integration in the U.K. Excluding these restructuring costs which are considered non-recurring, EBIT would have been $105.2 million, 4.3% lower than the third quarter of 2007.

The lower EBIT in the third quarter of 2008 was primarily due to costs incurred in the design of a new information technology system to benefit future periods as well as higher variable operating costs to support the increased level of activity anticipated in the near future for deliveries and product support. This was partially offset by long-term incentive plan (LTIP) charges that were $4.3 million lower in the third quarter of 2008 compared with the same period in 2007. This was primarily due to a lower mark-to-market impact on the valuation of certain stock-based compensation plans in 2008. Mark-to-market volatility was significantly reduced in 2008 through a compensation hedge, the cost of which is recorded in Corporate.

To view the EBIT by Operation - continuing operations graph please click on the following link: http://media3.marketwire.com/docs/ft3b.pdf.

Higher selling, general, and administrative levels in the third quarter of 2008 were incurred in Canada to support growth and expansion in the Alberta oil sands.

Consolidated net income from continuing operations of $64.8 million increased 1.9% in the third quarter of 2008 compared with the same period in 2007.

Basic Earnings Per Share (EPS) from continuing operations for the quarter was $0.38 compared with $0.35 in the same period last year, an increase of 8.6%.

Cash Flow

Cash flow after changes in working capital for the third quarter was $84.1 million, down from cash flow of $115.3 million generated in the same period last year. Strong demand, particularly in South America, from mining customers resulted in increased investments in inventory for committed orders for deliveries in the fourth quarter of 2008 and early 2009. The Company's South American operations also experienced an increase in accounts receivable at the end of the quarter, as a result of the strong demand. 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 $68.0 million in the third quarter of 2008, which was $70.9 million lower than the same period in 2007. Demand for rental assets was up in all operations in 2007 but particularly Finning (Canada) which experienced higher demand for all rental lines of business. With lower utilization of rental assets in 2008, asset additions were moderated and underutilized assets were considered for sale.

As a result of these items, cash flow provided by operating activities was $14.8 million in the third quarter of 2008, an improvement from the use of cash of $22.5 million in the comparative period in 2007.

During the third quarter of 2008, under the normal course issuer bid in place, the Company repurchased and cancelled 1,385,346 common shares at an average price of $23.52. 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 Overview

-------------------- -------------------- September 30 September 30 -------------------- -------------------- YTD 2008 YTD 2007 YTD 2008 YTD 2007 -------------------- -------------------- ($ millions) (% of revenue) Revenue $4,424.7 $4,202.7 Gross profit 1,282.5 1,190.3 29.0% 28.3% Selling, general & administrative expenses (961.1) (847.3) (21.7)% (20.1)% Other income (expenses) (0.2) 0.6 - - -------------------- -------------------- Earnings from continuing operations before interest and income taxes (1) 321.2 343.6 7.3% 8.2% Finance costs (61.9) (53.9) (1.4)% (1.3)% Provision for income taxes (56.5) (80.1) (1.3)% (1.9)% -------------------- -------------------- Net income from continuing operations 202.8 209.6 4.6% 5.0% Loss from discontinued operations, net of tax - (2.0) - (0.1)% -------------------- -------------------- Net income $ 202.8 $ 207.6 4.6% 4.9% -------------------- -------------------- (1) EBIT as defined above and referred to throughout this MD&A 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 MD&A.

For the nine month period ending September 30, 2008, revenues from continuing operations of $4.4 billion increased 5.3% over the same period last year, in spite of the negative impact from the significant strength of the Canadian dollar relative to the U.S. dollar and the U.K. pound sterling in the first half of the year.

On a consolidated basis, strong demand continued in the first nine months of 2008 for new equipment and customer support services. New equipment sales continued to dominate revenue growth as a result of extremely strong demand for equipment, primarily in the mining and infrastructure sectors, particularly in Canada.

To view the Revenue by Operation and Revenue by Line of Business graphs please click on the following link: http://media3.marketwire.com/docs/ft4.pdf.

Gross profit of almost $1.3 billion in the first nine months of the year increased 7.7% over the same period last year, and gross profit as a percentage of revenue of 29.0% was higher compared with 28.3% in the first nine months of 2007. The gross profit margin in the Company's Canadian and South American operations was higher when compared to the first nine months of the prior year primarily due to price realization as well as a revenue mix shift towards higher margined customer support services in South America. The UK Group had a lower gross profit margin, reflecting lower rental utilization rates earned from the UK rental business partially offset by higher gross profit margins earned from the UK dealership.

EBIT of $321.2 million decreased 6.5% compared with the first nine months of 2007. Results from the nine months of 2008 included gains on the sale of certain properties in Hewden, offset by non-recurring costs related to the integration and transition of Collicutt Energy Services Ltd. (Collicutt) and business support restructuring costs in the U.K. Adjusting for these non-recurring items, EBIT for the nine months ended September 30, 2008 would have been $323.7 million, 5.8% lower than the same period in 2007.

The lower EBIT in the first nine months of 2008 was also a result of a stronger Canadian dollar and higher variable operating costs to support the increased level of activity anticipated for deliveries and product support. This was partially offset by LTIP charges that were $19.6 million lower in the first nine months of 2008 compared with the same period in 2007. This was primarily due to a lower mark-to-market impact on the valuation of certain stock-based compensation plans, net of hedging activity, in 2008.

To view the EBIT by Operation - continuing operations graph please click on the following link: http://media3.marketwire.com/docs/ft5.pdf.

Net income from continuing operations of $202.8 million was down 3.2% in the first nine months of 2008.

Basic EPS from continuing operations for the nine months ended September 30, 2008 was $1.17, comparable with the same period last year. The total negative impact due to the stronger Canadian dollar in 2008 compared to the nine months of the prior year was approximately $0.19 per share.

Cash flow after changes in working capital for the nine months ended September 30, 2008 was $109.1 million, compared with cash flow of $183.1 million generated in the same period last year. Throughout all operations, management continues to focus on improving cash cycle times and operating efficiencies while ensuring appropriate levels of working capital exist to support current activity levels.

The Company made a net investment in rental assets of $213.2 million in the first nine months of 2008, which was $247.2 million lower than the same period in 2007. As a result of softening demand, rental investment moderated in 2008 compared to the very high demand for rental assets in 2007, particularly at the Company's Canadian and Hewden operations.

As a result of these items, cash flow used by operating activities was $104.5 million in the first nine months of 2008, an improvement from the use of cash of $264.0 million in the comparative period in 2007.

Foreign Exchange

The Company's reporting currency is the Canadian dollar. However, due to the geographical diversity of the Company's operations, a significant portion of revenue and operating expenses are in a different currency. The most significant currencies the Company transacts business in are the Canadian dollar, the U.S. dollar, and the U.K. pound sterling. The most significant foreign exchange impact on the Company's net income is the translation of foreign currency based earnings into Canadian dollars.

The impact in the third quarter of 2008 was not significant as the Canadian dollar traded relative to the U.S. dollar, on average, at approximately the same level as the third quarter of last year. However, compared to the first nine months of 2007, foreign exchange had a significant negative impact on consolidated revenues in the first nine months of 2008 compared to the prior year of approximately $335 million due to the stronger Canadian dollar relative to the U.S. dollar (7.9% stronger than the first nine months of 2007) and the U.K. pound sterling (9.7% stronger than the first nine months of 2007). As a result, net income was negatively impacted by approximately $0.19 per share in the nine months ended September 30, 2008 compared to the prior year.

The movement of the Canadian dollar relative to the U.S. dollar and the U.K. pound sterling will affect Finning's results. The sensitivity of the Company's net earnings to fluctuations in the average annual foreign exchange rates is summarized on page 26.

The following tables provide details of revenue and EBIT contribution by operation and the foreign exchange impact for the nine months ended September 30, 2008.

------------------------------------------------------------------------- Nine months ended September 30 South UK Consoli- ($ millions) Canada America Group dated ------------------------------------------------------------------------- Revenues - Q3 YTD 2007 $ 2,185.9 $ 977.6 $ 1,039.2 $ 4,202.7 Foreign exchange impact (158.4) (73.8) (103.8) (336.0) Operating revenue increase 363.4 133.5 61.1 558.0 ------------------------------------------------------------------------- Revenues - Q3 YTD 2008 $ 2,390.9 $ 1,037.3 $ 996.5 $ 4,424.7 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Total revenue increase (decrease) $ 205.0 $ 59.7 $ (42.7) $ 222.0 - percentage increase (decrease) 9.4% 6.1% (4.1)% 5.3% - percentage increase, excluding foreign exchange 16.6% 13.7% 5.9% 13.3% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Nine months ended September 30 South UK Consoli- ($ millions) Canada America Group Other dated ------------------------------------------------------------------------- EBIT - Q3 YTD 2007 $ 217.0 $ 99.2 $ 56.9 $ (29.5) $343.6 Foreign exchange impact (27.3) (14.1) (5.6) - (47.0) Operating EBIT increase (decrease) (2.3) 24.8 12.0 (9.9) 24.6 ------------------------------------------------------------------------- EBIT - Q3 YTD 2008 $ 187.4 $ 109.9 $ 63.3 $ (39.4) $321.2 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Total EBIT increase (decrease) $ (29.6) $ 10.7 $ 6.4 $ (9.9) $(22.4) - percentage increase (decrease) (13.6)% 10.8% 11.2% 33.6% (6.5)% - percentage increase (decrease), excluding foreign exchange (1.1)% 25.0% 21.1% 33.6% 7.2%

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.

------------------------------------------------------------------------- Three months ended Revenue September 30, 2008 South UK Consoli- percen- ($ millions) Canada America Group dated tage ------------------------------------------------------------------------- New mobile equipment $ 270.9 $ 152.3 $ 89.8 $ 513.0 35.1% New power & energy systems 72.4 44.0 43.3 159.7 10.9% Used equipment 67.6 7.0 35.5 110.1 7.5% Equipment rental 81.3 14.1 92.2 187.6 12.8% Customer support services 253.7 171.3 63.8 488.8 33.4% Other 3.0 1.0 - 4.0 0.3% ------------------------------------------------------------------------- Total $ 748.9 $ 389.7 $ 324.6 $ 1,463.2 100.0% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Revenue percentage by operations 51.2% 26.6% 22.2% 100% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Three months ended Revenue September 30, 2007 South UK Consoli- percen- ($ millions) Canada America Group dated tage ------------------------------------------------------------------------- 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% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Nine months ended Revenue September 30, 2008 South UK Consoli- percen- ($ millions) Canada America Group dated tage ------------------------------------------------------------------------- New mobile equipment $ 1,108.3 $ 380.4 $ 263.4 $ 1,752.1 39.6% New power & energy systems 147.4 116.6 153.2 417.2 9.4% Used equipment 175.3 26.5 106.5 308.3 7.0% Equipment rental 215.0 43.5 281.7 540.2 12.2% Customer support services 733.8 467.3 191.7 1,392.8 31.5% Other 11.1 3.0 - 14.1 0.3% ------------------------------------------------------------------------- Total $ 2,390.9 $ 1,037.3 $ 996.5 $ 4,424.7 100.0% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Revenue percentage by operations 54.0% 23.4% 22.6% 100.0% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Nine months ended Revenue September 30, 2007 South UK Consoli- percen- ($ millions) Canada America Group dated tage ------------------------------------------------------------------------- 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%

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), and a 25% interest in PipeLine Machinery International (PLM). On January 15, 2008, Finning (Canada) acquired the issued and outstanding common shares of Collicutt, a leading Canadian oilfield service company. The results of Collicutt's operations have been included in the consolidated financial statements since the acquisition date.

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

-------------------------------------------------------------------------- Three months ended Nine months ended September 30 September 30 ---------------------------------------------- ($ millions) 2008 2007 2008 2007 -------------------------------------------------------------------------- Revenue from external sources $ 748.9 $ 639.9 $ 2,390.9 $ 2,185.9 Operating costs (639.0) (526.6) (2,082.2) (1,843.6) Depreciation and amortization (45.1) (46.0) (119.3) (124.9) Other expenses (1.3) - (2.0) (0.4) -------------------------------------------------------------------------- Earnings before interest and taxes $ 63.5 $ 67.3 $ 187.4 $ 217.0 -------------------------------------------------------------------------- -------------------------------------------------------------------------- Earnings before interest and taxes - as a percentage of revenue 8.5% 10.5% 7.8% 9.9% - as a percentage of consolidated earnings before interest and taxes 61.4% 61.2% 58.4% 63.1%

Third quarter revenues from the Canadian operations of $748.9 million were 17.0% above the same period in 2007. Revenues from most lines of business in Canada increased over 2007 levels, most notably in new and used equipment, and customer support services.

Revenues from new equipment continued to be strong in the third quarter, attributable primarily to continued market demand and growth in the mining sectors, particularly the Alberta oil sands.

Customer support services revenues in the third quarter of 2008 continued to grow and were 10.7% higher in comparison with the same period in 2007. This increase occurred in spite of no longer earning any revenues from the fuels and lubricants distribution business with Shell Canada which was terminated in the fourth quarter of 2007. Revenues from the Shell business were approximately $27 million in the third quarter of 2007.

Used equipment revenues in the third quarter of 2008 were 49.2% higher in comparison with the same period in 2007.

To view the Canada - Revenue by Line of Business graphs please click on the following link: http://media3.marketwire.com/docs/ft7.pdf.

In Canada, overall gross profit as a percentage of revenue in the third quarter of 2008 was comparable with the same period in 2007, reflecting higher margins from customer support services offset by lower margins earned on the sale of used equipment.

The higher selling, general, and administrative (SG&A) costs in the third quarter of 2008 were primarily incurred to meet the long term strategic growth objectives of the Canadian operations, including an increase in our product support capability and our support of the higher activity levels in the oil sands. The SG&A increase was driven by an increased investment in people, as headcount for Finning (Canada) increased by over 700 or approximately 20% compared to September 2007. Approximately one-half of the year over year increase was due to the development of a heavy equipment centre of excellence in Red Deer, Alberta.

EBIT totalled $63.5 million in the third quarter of 2008 compared with $67.3 million in the same period in 2007. EBIT margin (EBIT divided by revenues) of the Canadian operating segment was 8.5% in the third quarter of 2008, down from 10.5% last year. The decline in EBIT margin is attributed primarily to the increase in SG&A costs required to meet the strong demand in the Alberta oil sands and from the Collicutt acquisition. Foreign exchange did not have a significant impact on EBIT as the Canadian dollar relative to the U.S. dollar in the three months ended September 30, 2008 was comparable to the same period last year.

Finning (Canada)'s order book at the end of the third quarter of 2008 achieved a new record level. Although global economic conditions are currently weaker, growth in mining is expected to continue to counter weakness in other market areas.

Revenues for the nine months ended September 30, 2008 increased 9.4% to $2,390.9 million. Quarterly trends noted above also apply to the year-to-date results of the Company's Canadian operations. The Canadian operations contributed EBIT of $187.4 million for the nine months ended September 30, 2008, compared with $217.0 million for the same period in the prior year, a decrease of 13.6%. Foreign exchange had a $27.3 million negative impact on EBIT for the first nine months of 2008 due to the 7.9% strengthening of the Canadian dollar relative to the U.S. dollar year over year. In addition, in the first quarter of 2008, the Company completed the acquisition of Collicutt and incurred costs in the first two quarters of 2008 to integrate and transition the Collicutt operations to support Finning customer service work. Excluding the costs incurred with this integration and transition, the 2008 EBIT margin in the first nine months of 2008 would have been 8.5% compared with 9.9% achieved in the first nine months of 2007. This decrease reflects the negative impact of foreign exchange and higher costs incurred in the first nine months of 2008 to meet anticipated future customer demand.

The aggregate purchase price on the acquisition of Collicutt was $135.3 million. The purchase price was funded through $84.3 million in cash, and 15,403 common shares of the Company with a value of $0.4 million. Acquisition costs of $5.8 million were incurred and paid on the transaction. On the date of the acquisition, the Company repaid $44.8 million of Collicutt's existing bank debt resulting in aggregate consideration of $135.3 million.

This acquisition provides Finning (Canada) with the opportunity to expand its capacity of regional branches to enable Finning to undertake more customer service work, accelerate throughput of new equipment prepared for delivery to customers, and increase the ability to undertake machine overhaul and rebuild work. Finning (Canada) has relocated its Edmonton-based new equipment preparation and used parts work to its new facilities in Red Deer, Alberta. This heavy equipment centre of excellence is expected to free up existing service facility capacity and give the Company the opportunity to develop a mining/heavy equipment overhaul rebuild capability in Red Deer. The transition plan is progressing well and is ahead of schedule.

Finning, Finning (Canada), and OEM have been involved in legal proceedings for the past three 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. These proceedings have been described in prior quarterly disclosures and further proceedings are currently taking place before the Alberta Labour Relations Board (ALRB). At this time, Finning, Finning (Canada), and OEM are confident that they can manage the operational impacts of these ALRB proceedings.

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) 2008 2007 2008 2007 -------------------------------------------------------------------------- Revenue from external sources $ 389.7 $ 317.4 $ 1,037.3 $ 977.6 Operating costs (343.9) (283.5) (903.1) (859.0) Depreciation and amortization (8.3) (7.0) (23.8) (20.4) Other income (expenses) (0.3) 1.0 (0.5) 1.0 -------------------------------------------------------------------------- Earnings before interest and taxes $ 37.2 $ 27.9 $ 109.9 $ 99.2 -------------------------------------------------------------------------- -------------------------------------------------------------------------- Earnings before interest and taxes - as a percentage of revenue 9.5% 8.8% 10.6% 10.1% - as a percentage of consolidated earnings before interest and taxes 36.0% 25.4% 34.2% 28.9%

Revenues were very strong in the third quarter of 2008 at $389.7 million, 22.8% higher than the third quarter of 2007, reflecting higher revenues from most lines of business, particularly in customer support services and new equipment sales. Power and energy system revenues were also up compared with the prior year, primarily in Chile with higher demand for energy.

Strong growth in customer support services continues and is primarily 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 as well as the increased coverage across the region as a result of Finning's investment in branches.

To view the South America - Revenue by Line of Business graphs please click on the following link: http://media3.marketwire.com/docs/ft8.pdf.

Gross profit increased 19.6% in the third quarter of 2008 compared with the comparative period in 2007 and was up in most lines of business. Gross profit decreased slightly as a percentage of revenue.

Although SG&A costs have increased in absolute dollars, they have decreased as a percentage of revenue in the third quarter of 2008 compared with 2007. In order to meet customer service demand and the increasing number of service maintenance contracts, over 350 additional revenue-generating employees and support staff have been hired, representing a 6% increase over September 2007 levels. As a result of the increased headcount, SG&A expenses included higher salaries and benefit costs in the third quarter of 2008. The increase in other SG&A costs was mostly volume driven with higher associated selling costs, and continued to reflect the upward pressure of inflationary increases. Where possible, price increases have been implemented to offset rising costs. Foreign exchange did not have a significant impact on EBIT as the Canadian dollar relative to the U.S. dollar in the three months ended September 30, 2008 was comparable to the same period last year.

EBIT of the Company's South American operations of $37.2 million for the three months ended September 30, 2008 improved significantly from the third quarter of 2007, up 33.3%. This increase was driven by the higher volumes noted above and cost initiatives. EBIT as a percentage of revenue for Finning South America increased to 9.5%, up from 8.8% in the third quarter of 2007.

For the nine months ended September 30, 2008, revenue increased 6.1% to $1,037.3 million. This increase occurred in spite of the significant negative impact on the translation of revenues in the first nine months of 2008 with a 7.9% stronger Canadian dollar relative to the functional currency, the U.S. dollar, year over year. In functional currency, revenue increased by 14.6%, reflecting very strong growth in customer support services. For the first nine months of 2008, EBIT of $109.9 million was 10.8% higher compared to the same period last year, reflecting the quarterly trends noted above. Foreign exchange had a $14.1 million negative impact on EBIT for the first nine months of 2008 as compared to the same period in the prior year. In functional currency, EBIT was 20.5% higher than the first nine months of 2007 and EBIT as a percentage of revenue for Finning South America improved to 10.6%, up from 10.1% in the same period in 2007. This improvement was a result of higher price realization as well as a higher proportion of customer support services revenues in the first nine months of 2008 which earns a higher margin.

In the third quarter and early in the fourth quarter of 2008, the Company successfully renewed the collective agreements with the three unions representing the vast majority of Finning (Chile) employees. The new collective agreements have a four year term, which include an enhanced wage settlement. The contract enhancement will assist our South American operations retain and attract employees needed to meet future demand.

United Kingdom ("UK") Group

The Company's UK Group includes the following four market units: Heavy Construction, General Construction, Power Systems, and Rental (Hewden).

In July 2007, Hewden sold its Tool Hire Division. The results from the Tool Hire Division are recorded as discontinued operations with prior period results restated accordingly.

In the first quarter of 2008, Finning announced that it would centralize the business support services of its Finning UK Group into a single location at Cannock, England. As a result, Hewden will be closing its administration offices in Tannochside, near Glasgow, and strengthening a Hewden operational support team in Manchester.

Combined with investments in new information technology last year, the move is designed to achieve lower overall costs and better integrated information technology, finance, and other support services across the Finning UK Group.

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

-------------------------------------------------------------------------- Three months ended Nine months ended September 30 September 30 ---------------------------------------------- ($ millions) 2008 2007 2008 2007 -------------------------------------------------------------------------- Revenue from external sources $ 324.6 $ 371.8 $ 996.5 $ 1,039.2 Operating costs (275.1) (315.4) (849.3) (881.9) Depreciation and amortization (31.1) (33.7) (95.3) (100.4) Other income (expenses) (1.2) - 11.4 - -------------------------------------------------------------------------- Earnings before interest and taxes $ 17.2 $ 22.7 $ 63.3 $ 56.9 -------------------------------------------------------------------------- -------------------------------------------------------------------------- Earnings before interest and taxes - as a percentage of revenue 5.3% 6.1% 6.4% 5.5% - as a percentage of consolidated earnings before interest and taxes 16.6 20.7% 19.7% 16.6%

The UK Group's revenues for the third quarter of 2008 of $324.6 million were down 12.7% from the same period last year. Foreign exchange continued to have a negative impact on the translation of revenues due to the 6.9% strengthening of the Canadian dollar relative to the U.K. pound sterling year over year. In local currency, revenues were 6.3% lower compared with the third quarter of 2007.

In local currency, revenues from customer support services and used equipment sales improved compared with the third quarter of 2007. Revenues from other lines of business in the third quarter of 2008 were lower compared to the same period last year. New equipment revenues were lower in 2008 due to a single significant sale to the coal mining sector recorded in the third quarter of 2007.

Rental revenues continue to be affected by lower utilization rates at Hewden. This business unit is being reorganized to improve its focus on delivering on its commitments to customers, reducing its overall cost structure, and improving the performance of its assets.

To view the UK Group - Revenue by Line of Business graphs please click on the following link: http://media3.marketwire.com/docs/ft9.pdf.

Gross profit for the third quarter of 2008 was lower compared with the same period last year in absolute terms, but increased as a percentage of revenue due to a revenue mix shift towards higher margined customer support services as well as an increase in margins from customer support services. The rental business continued to experience lower margins.

SG&A costs were lower in the third quarter of 2008 in absolute terms compared with 2007 but were slightly higher as a percentage of revenue. The improvement is a result of various initiatives and management's focus on realizing cost efficiencies.

Further to the reorganization of the UK Group business model in the fourth quarter of 2006, it was announced in the first quarter of 2008 that the Hewden Tannochside office located in Scotland would be closed. The business support functions of the UK Group will be integrated into one operation located in Cannock, England, that will provide common head office services, generating additional synergies among the four UK market units. Other expenses for the third quarter of 2008 included restructuring costs of approximately $1.8 million incurred in connection with the integration. A further $6 million is anticipated to be spent during the remainder of 2008 and early 2009. This integration will promote efficiencies and is expected to substantially reduce administrative support costs over time when the business units move to one common system.

In the third quarter of 2008, the UK Group contributed $17.2 million of EBIT, a 24.2% decrease compared with that achieved in the third quarter of 2007. In local currency, after adjusting for the restructuring costs noted above, EBIT would have been lower by 10.1% compared with the same period last year.

EBIT as a percentage of revenue for the UK Group was 5.3% in the third quarter of 2008 compared with 6.1% in the same period last year. Excluding the restructuring costs, the third quarter 2008 EBIT margin would have been 5.9%, comparable with the third quarter of 2007.

For the nine months ended September 30, 2008, revenues of $996.5 millio

More News:   Market Updates | Stock Alerts | All Trading News | Stock Index