VANCOUVER, British Columbia, Feb. 08, 2022 (GLOBE NEWSWIRE) -- Finning International Inc. (TSX: FTT) (“Finning”, “the Company”, “we”, “our” or “us”) reported fourth quarter and annual 2021 results today. All monetary amounts are in Canadian dollars unless otherwise stated.
HIGHLIGHTS
All comparisons are to Q4 and annual 2020 results unless indicated otherwise.
“Our employees should be proud of the strong results we achieved in 2021, driven by successful execution to deliver on our strategic plan and improve our earnings capacity. We posted annual Adjusted EPS of $2.18 and exceeded our mid-cycle EPS and ROIC targets two quarters ahead of schedule, all while our revenue remained below pre-pandemic levels for the year. Across the business, we saw tremendous momentum in capturing product support opportunities and winning major equipment deals as market activity returned to pre-pandemic levels by the end of the year,” said Scott Thomson, president and CEO of Finning International.
“We expect upcycle demand conditions from the start of 2022 to be supported by ongoing economic growth and strength in commodity prices. We expect supply constraints to persist, and our global teams have been proactively purchasing inventory, sourcing used equipment, and offering rebuilds and rental options to meet strong customer demand. Our 2021 performance sets a strong foundation to capture upcycle opportunities as we remain focused on executing on our strategic plan to grow product support, reduce costs, and reinvest free cash flow to compound our earnings. We continue to target mid-teens and above EPS growth during this sustained upcycle,” concluded Mr. Thomson.
Q4 2021 FINANCIAL SUMMARY
| Quarterly Overview $ millions, except per share amounts | Q4 2021 | Q4 2020 | % change | |||
| Revenue | 1,949 | 1,666 | 17 | |||
| Net revenue | 1,774 | 1,551 | 14 | |||
| EBIT | 157 | 108 | 46 | |||
| EBIT as a percentage of net revenue | 8.9 | % | 6.9 | % | ||
| EBITDA(2) | 241 | 185 | 31 | |||
| EBITDA as a percentage of net revenue(2) | 13.6 | % | 11.9 | % | ||
| Net income attributable to shareholders of Finning | 104 | 72 | 44 | |||
| EPS | 0.66 | 0.45 | 47 | |||
| Free cash flow | 148 | 292 | (50 | ) | ||
| Q4 2021 EBIT and EBITDA by Operation $ millions, except per share amounts | Canada | South America | UK & Ireland | Corporate & Other | Finning Total | EPS | |||||
| EBIT / EPS | 92 | 59 | 12 | (6 | ) | 157 | 0.66 | ||||
| EBIT as a percentage of net revenue | 10.1 | % | 10.1 | % | 4.3 | % | n/m(1) | 8.9 | % | ||
| EBITDA | 142 | 81 | 23 | (5 | ) | 241 | |||||
| EBITDA as a percentage of net revenue | 15.5 | % | 14.0 | % | 8.3 | % | n/m | 13.6 | % | ||
| Q4 2020 EBIT and EBITDA by Operation $ millions, except per share amounts | Canada | South America | UK & Ireland | Corporate & Other | Finning Total | EPS | |||||
| EBIT / EPS | 72 | 41 | 11 | (16 | ) | 108 | 0.45 | ||||
| CEWS support | (13 | ) | - | - | (1 | ) | (14 | ) | (0.07) | ||
| Adjusted EBIT / Adjusted EPS | 59 | 41 | 11 | (17 | ) | 94 | 0.38 | ||||
| Adjusted EBIT as a percentage of net revenue(2)(4) | 7.7 | % | 8.3 | % | 3.7 | % | n/m | 6.1 | % | ||
| Adjusted EBITDA(3)(4) | 106 | 61 | 20 | (16 | ) | 171 | |||||
| Adjusted EBITDA as a percentage of net revenue(2)(4) | 13.7 | % | 12.2 | % | 7.0 | % | n/m | 11.0 | % | ||
Q4 2021 INVESTED CAPITAL AND ROIC SUMMARY
All comparisons are to Q4 2020 results unless indicated otherwise.
| Invested Capital and ROIC | Q4 2021 | Q4 2020 | ||
| Invested capital ($ millions) | ||||
| Consolidated | 3,326 | 3,067 | ||
| Canada | 1,876 | 1,819 | ||
| South America (US dollars) | 809 | 731 | ||
| UK & Ireland (UK pound sterling) | 222 | 188 | ||
| Invested capital turnover(2) (times) | 2.04 | 1.68 | ||
| Working capital to net revenue ratio | 22.9 | % | 28.3 | % |
| Inventory ($ millions) | 1,687 | 1,477 | ||
| Inventory turns (dealership) (times) | 3.09 | 2.79 | ||
| Adjusted ROIC (%) | ||||
| Consolidated | 16.4 | 9.6 | ||
| Canada | 16.9 | 10.5 | ||
| South America | 20.3 | 12.9 | ||
| UK & Ireland | 14.8 | 5.5 | ||
Q4 2021 HIGHLIGHTS BY OPERATION
All comparisons are to Q4 2020 results unless indicated otherwise. All numbers, except ROIC, are in functional currency: Canada – Canadian dollar; South America – USD; UK & Ireland – UK pound sterling (GBP). These variances and ratios for South America and UK & Ireland exclude the foreign currency translation impact from the CAD relative to the USD and GBP, respectively, and are therefore, considered to be specified financial measures. We believe the variances and ratios in functional currency provide meaningful information about operational performance of the reporting segment.
Canada
South America
United Kingdom & Ireland
Q4 2021 MARKET UPDATE AND BUSINESS OUTLOOK
The discussion of our expectations relating to the market and business outlook in this section is forward-looking information that is based upon the assumptions and subject to the material risks discussed under the heading “Forward-Looking Information Caution” at the end of this news release. Actual outcomes and results may vary significantly.
Canada
Strong commodity prices and broad-based economic growth in Western Canada in 2022 are expected to create robust demand for equipment and product support across all sectors.
The federal and provincial governments’ infrastructure programs and private sector investments in natural gas, carbon capture, utilization and storage, and various power projects are expected to drive demand for construction equipment and product support, heavy equipment rentals, and prime and standby electric power generation. Our focus remains on executing our strategy to capture product support market share in construction. We are leveraging our digital platform, CUBIQ™, and further building on our success with construction rebuilds and customer value agreements (CVAs).
Healthy commodity markets, including base and precious metals, oil, natural gas, metallurgical coal, lumber, uranium, and potash provide a positive backdrop for activity in Western Canada. In the oil sands, capital expenditures have begun to increase in response to recovering demand. We expect the large and aging mining equipment population in Western Canada to continue driving demand for product support, including rebuilds, and opportunities for fleet renewals.
South America
We expect a strong copper price to continue driving improved mining activity in Chile in 2022. The projected increase in copper production(5), large and mature equipment population, and declining ore grades are expected to support growing demand for mining parts and service, and fleet replacement.
We are closely monitoring the economic and constitutional reform process in Chile, and our current outlook assumes a moderate increase in mining royalties. While the timing of investment decisions related to greenfield and new expansion projects remains uncertain, we are constructive about long-term copper mining growth in Chile. We are in a great position to capture opportunities for new mining equipment and autonomous solutions for brownfield expansions and greenfield projects in the next mining upcycle.
Our positive outlook for the Chilean construction sector is predicated on strong demand for mining infrastructure and the government’s infrastructure investment program.
In Argentina, while we expect to benefit from improved activity in construction, oil and gas, and mining, the overall business environment in the country continues to be challenging. We remain focused on managing fiscal, regulatory, and currency risks, including high inflation and ARS devaluation expected in 2022.
UK & Ireland
Continued HS2 construction activity coupled with government investments in other infrastructure projects are expected to drive strong demand for construction equipment in the UK in 2022.
HS2 Phase 1, from London to Birmingham, is projected to require approximately 1,500 units of heavy construction equipment, representing a total industry opportunity of nearly £500 million from 2021 to 2024. By the end of 2021, we had captured more than £200 million of equipment orders for this project. Most Caterpillar machines working on the HS2 project are supported by a range of Finning customer value agreements, and our construction customers have the option to benefit from our CUBIQTM platform and our construction apps. We are well-positioned to continue capturing a large share of opportunities for the remainder of HS2 Phase 1.
Strong demand for our power systems solutions, including in the data centre market, is expected to continue. We have a solid backlog of power systems projects for deliveries in 2022. Cloud data centre capacity is projected to continue to grow over the next few years(6), and with our successful track record of project execution, we are well positioned to capture opportunities related to this trend.
Upcycle and Shift to Growth
Our market outlook is positive in all our regions. We expect upcycle demand conditions from the start of 2022 to be supported by ongoing economic growth and strength in commodity prices. We expect challenges in the global supply chain to persist, resulting in longer lead times for equipment and parts in all regions and driving strong demand for used equipment, rentals, and rebuilds.
We have exceeded our mid-cycle EPS and ROIC targets two quarters ahead of schedule, and we continue to proactively manage our business with the objective of improving our earnings capacity and compounding our earnings at each successive mid-cycle point. We continue to target mid-teens and above EPS growth during this sustained upcycle.
We continue to drive fixed cost reduction initiatives globally, targeting further improvements across people, facilities, and supply chain productivity, and we expect to make further progress towards reducing our SG&A as a percentage of net revenue. However, it will take us longer than the previously communicated time frame of Q3 2021 to Q2 2022 to average 17% SG&A as a percentage of net revenue over the four-quarter period. This is primarily due to lower than projected new equipment deliveries in the second half of 2021 as a result of constrained supply, and higher than projected product support growth rates in Q4 2021, as well as inflationary headwinds. We remain committed to delivering fixed cost reduction initiatives, productivity gains, and strong operating leverage going forward.
As we continue to make strategic investments in our facilities network, digital platform, and rental fleet, our 2022 net capital expenditures and net rental fleet additions are expected to be in the range of $240 million to $280 million. We continue to advance our M&A strategy and expect to deploy capital with an initial focus on complementary businesses in the small to medium size range that are aligned with our product support growth strategy, drive improved outcomes for our customers, and deliver attractive rates of return.
We are monitoring the spread of the Omicron variant in our regions, particularly as it affects the staffing levels of our and our customers’ operations. We are leveraging the COVID-19 mitigation protocols we developed at the beginning of the pandemic and expect to successfully manage our day-to-day operations through the Omicron wave.
CORPORATE AND BUSINESS DEVELOPMENTS
Dividend
The Board of Directors has approved a quarterly dividend of $0.225 per share, payable on March 10, 2022 to shareholders of record on February 24, 2022. This dividend will be considered an eligible dividend for Canadian income tax purposes.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
| $ millions, except per share amounts | Three months ended December 31 | Twelve months ended December 31 | |||||||||||||
| 2021 | 2020 | % change fav (unfav) | 2021 | 2020 | % change fav (unfav) | ||||||||||
| New equipment | 562 | 500 | 13 | 2,189 | 1,671 | 31 | |||||||||
| Used equipment | 124 | 93 | 33 | 409 | 308 | 33 | |||||||||
| Equipment rental | 68 | 49 | 39 | 235 | 196 | 20 | |||||||||
| Product support | 982 | 877 | 12 | 3,728 | 3,473 | 7 | |||||||||
| Net fuel and other | 38 | 32 | 20 | 135 | 120 | 12 | |||||||||
| Net revenue | 1,774 | 1,551 | 14 | 6,696 | 5,768 | 16 | |||||||||
| Gross profit | 484 | 418 | 16 | 1,801 | 1,570 | 15 | |||||||||
| Gross profit as a percentage of net revenue(2) | 27.3 | % | 26.9 | % | 26.9 | % | 27.2 | % | |||||||
| SG&A | (328 | ) | (324 | ) | (1 | ) | (1,266 | ) | (1,245 | ) | (2 | ) | |||
| SG&A as a percentage of net revenue | (18.5 | )% | (20.9 | )% | (18.9 | )% | (21.6 | )% | |||||||
| Equity earnings of joint ventures | 1 | - | 2 | 3 | |||||||||||
| Other income | - | 14 | 15 | 115 | |||||||||||
| Other expenses | - | - | - | (51 | ) | ||||||||||
| EBIT | 157 | 108 | 46 | 552 | 392 | 41 | |||||||||
| EBIT as a percentage of net revenue | 8.9 | % | 6.9 | % | 8.2 | % | 6.8 | % | |||||||
| Adjusted EBIT | 157 | 94 | 67 | 537 | 328 | 63 | |||||||||
| Adjusted EBIT as a percentage of net revenue | 8.9 | % | 6.1 | % | 8.0 | % | 5.7 | % | |||||||
| Net income attributable to shareholders of Finning | 104 | 72 | 44 | 364 | 232 | 57 | |||||||||
| Basic EPS | 0.66 | 0.45 | 47 | 2.26 | 1.43 | 58 | |||||||||
| Adjusted EPS | 0.66 | 0.38 | 71 | 2.18 | 1.14 | 90 | |||||||||
| EBITDA | 241 | 185 | 31 | 871 | 700 | 24 | |||||||||
| EBITDA as a percentage of net revenue | 13.6 | % | 11.9 | % | 13.0 | % | 12.1 | % | |||||||
| Adjusted EBITDA | 241 | 171 | 41 | 856 | 636 | 34 | |||||||||
| Adjusted EBITDA as a percentage of net revenue | 13.6 | % | 11.0 | % | 12.8 | % | 11.0 | % | |||||||
| Free cash flow | 148 | 292 | (50 | ) | 300 | 870 | (66 | ) | |||||||
| Dec 31, 2021 | Dec 31, 2020 | ||||||||||||||
| Invested capital | 3,326 | 3,067 | |||||||||||||
| Invested capital turnover (times) | 2.04 | 1.68 | |||||||||||||
| Net debt to Adjusted EBITDA ratio | 1.1 | 1.4 | |||||||||||||
| Adjusted ROIC | 16.4 | % | 9.6 | % | |||||||||||
To access Finning's complete Q4 and annual 2021 results, please visit our website at https://www.finning.com/en_CA/company/investors.html
Q4 2021 INVESTOR CALL
The Company will hold an investor call on February 9, 2022 at 10:00 am Eastern Time. Dial-in numbers: 1-800-319-4610 (Canada and US), 1-416-915-3239 (Toronto area), 1-604-638-5340 (international). The investor call will be webcast live and archived for three months. The webcast and accompanying presentation can be accessed at https://www.finning.com/en_CA/company/investors.html.
ABOUT FINNING
Finning International Inc. (TSX: FTT) is the world’s largest Caterpillar dealer delivering unrivalled service to customers for nearly 90 years. Headquartered in Surrey, British Columbia, we provide Caterpillar equipment, parts, services, and performance solutions in Western Canada, Chile, Argentina, Bolivia, the United Kingdom, and Ireland.
CONTACT INFORMATION
Amanda Hobson
Senior Vice President, Investor Relations and Treasury
Phone: 604-331-4865
Email: FinningIR@finning.com
https://www.finning.com
FOOTNOTES
| (1) | Earnings Before Finance Costs and Income Taxes (EBIT); Basic Earnings per Share (EPS); Earnings Before Finance Costs, Income Taxes, Depreciation and Amortization (EBITDA); Selling, General & Administrative Expenses (SG&A); Return on Invested Capital (ROIC); not meaningful (n/m). |
| (2) | See “Description of Specified Financial Measures and Reconciliations” later in this Earnings Release. |
| (3) | These are non-GAAP financial measures. See “Description of Specified Financial Measures and Reconciliations” later in this Earnings Release. |
| (4) | Certain financial measures were impacted by significant items management does not consider indicative of operational and financial trends either by nature or amount; these significant items are described starting on page 8 of this Earnings Release. The financial measures that have been adjusted to take into account these items are referred to as “Adjusted measures”. |
| (5) | The Chilean Copper Commission (Cochilco) - Proyección de la producción de cobre en Chile 2020 – 2031; DEPP 29/2020; Registro Propiedad Intelectual © N° 2020-A-10631 |
| (6) | UK Data Center Market – Investment Analysis and Growth Opportunities Publication (2020-2025); Ireland Data Center Market – Growth, Trends and Forecasts Publication (2020-2025) |
Description of Specified Financial Measures and Reconciliations
Specified Financial Measures
We believe that certain specified financial measures, including non-GAAP financial measures, provide users of our Earnings Release with important information regarding the operational performance and related trends of our business. The specified financial measures we use do not have any standardized meaning prescribed by GAAP and therefore may not be comparable to similar measures presented by other issuers. Accordingly, specified financial measures should not be considered as a substitute or alternative for financial measures determined in accordance with GAAP (GAAP financial measures). By considering these specified financial measures in combination with the comparable GAAP financial measures (where available) we believe that users are provided a better overall understanding of our business and financial performance during the relevant period than if they simply considered the GAAP financial measures alone.
We use KPIs to consistently measure performance against our priorities across the organization. Some of our KPIs are specified financial measures.
There may be significant items that we do not consider indicative of our operational and financial trends, either by nature or amount. We exclude these items when evaluating our operating financial performance. These items may not be non-recurring, but we believe that excluding these significant items from GAAP financial measures provides a better understanding of our financial performance when considered in conjunction with the GAAP financial measures. Financial measures that have been adjusted to take into account these significant items are referred to as “Adjusted measures”. Adjusted measures are specified financial measures and are intended to provide additional information to readers of the Earnings Release.
Descriptions and components of the specified financial measures we use in this Earnings Release are set out below. Where applicable, quantitative reconciliations from certain specified financial measures to their most directly comparable GAAP financial measures (specified, defined, or determined under GAAP and used in our consolidated financial statements) are also set out below.
Adjusted basic EPS
Adjusted basic EPS excludes the after-tax per share impact of significant items that we do not consider to be indicative of operational and financial trends either by nature or amount to provide a better overall understanding of our underlying business performance. The tax impact of each significant item is calculated by applying the relevant applicable tax rate for the jurisdiction in which the significant item occurred. The after-tax per share impact of significant items is calculated by dividing the after-tax amount of significant items by the weighted average number of common shares outstanding during the period.
A reconciliation between basic EPS (the most directly comparable GAAP financial measure) and Adjusted basic EPS can be found on page 9 of this Earnings Release.
EBITDA, Adjusted EBITDA, and Adjusted EBIT
EBITDA is defined as earnings before finance costs, income taxes, depreciation, and amortization. We use EBITDA to assess and evaluate the financial performance of our reportable segments. We believe that EBITDA improves comparability between periods by eliminating the impact of finance costs, income taxes, depreciation, and amortization.
Adjusted EBIT and Adjusted EBITDA exclude items that we do not consider to be indicative of operational and financial trends, either by nature or amount, to provide a better overall understanding of our underlying business performance.
EBITDA is calculated by adding depreciation and amortization to EBIT. Adjusted EBITDA is calculated by adding depreciation and amortization to Adjusted EBIT.
The most directly comparable GAAP financial measure to EBITDA, Adjusted EBITDA, and Adjusted EBIT is EBIT.
A reconciliation from EBIT to EBITDA, Adjusted EBIT, and Adjusted EBITDA for our consolidated operations is as follows:
| 3 months ended | 2021 | 2020 | ||||||||||||||
| ($ millions) | Dec 31 | Sep 30 | Jun 30 | Mar 31 | Dec 31 | Sep 30 | Jun 30 | Mar 31 | ||||||||
| EBIT | 157 | 150 | 137 | 108 | 108 | 138 | 52 | 94 | ||||||||
| Depreciation and amortization | 84 | 80 | 78 | 77 | 77 | 77 | 78 | 76 | ||||||||
| EBITDA | 241 | 230 | 215 | 185 | 185 | 215 | 130 | 170 | ||||||||
| EBIT | 157 | 150 | 137 | 108 | 108 | 138 | 52 | 94 | ||||||||
| Significant items: | ||||||||||||||||
| CEWS support | — | — | — | (10 | ) | (14 | ) | (37 | ) | (64 | ) | — | ||||
| Return on our investment in Energyst | — | — | — | (5 | ) | — | — | — | — | |||||||
| Severance costs | — | — | — | — | — | — | 42 | — | ||||||||
| Facility closures, restructuring costs, and | ||||||||||||||||
| impairment losses | — | — | — | — | — | — | 9 | — | ||||||||
| Adjusted EBIT | 157 | 150 | 137 | 93 | 94 | 101 | 39 | 94 | ||||||||
| Depreciation and amortization | 84 | 80 | 78 | 77 | 77 | 77 | 78 | 76 | ||||||||
| Adjusted EBITDA | 241 | 230 | 215 | 170 | 171 | 178 | 117 | 170 | ||||||||
The impact on provision for income taxes of significant items was as follows:
| 3 months ended | 2021 | 2020 | |||||||||||
| ($ millions) | Dec 31 | Sep 30 | Jun 30 | Mar 31 | Dec 31 | Sep 30 | Jun 30 | Mar 31 | |||||
| Significant items: | |||||||||||||
| CEWS support | — | — | — | 2 | 4 | 10 | 16 | — | |||||
| Severance costs | — | — | — | — | — | — | (10 | ) | — | ||||
| Facility closures, restructuring costs, | |||||||||||||
| and impairment losses | — | — | — | — | — | — | (2 | ) | — | ||||
| Provision for income taxes on significant | |||||||||||||
| items | — | — | — | 2 | 4 | 10 | 4 | — | |||||
A reconciliation from basic EPS to Adjusted basic EPS for our consolidated operations is as follows:
| 3 months ended | 2021 | 2020 | ||||||||||||||
| ($) | Dec 31 | Sep 30 | Jun 30 | Mar 31 | Dec 31 | Sep 30 | Jun 30 | Mar 31 | ||||||||
| Basic EPS | 0.66 | 0.61 | 0.56 | 0.43 | 0.45 | 0.54 | 0.12 | 0.33 | ||||||||
| Significant items: | ||||||||||||||||
| CEWS support | — | — | — | (0.05 | ) | (0.07 | ) | (0.17 | ) | (0.30 | ) | — | ||||
| Return on our investment in Energyst | — | — | — | (0.03 | ) | — | — | — | — | |||||||
| Severance costs | — | — | — | — | — | — | 0.20 | — | ||||||||
| Facility closures, restructuring costs, | ||||||||||||||||
| and impairment losses | — | — | — | — | — | — | 0.04 | — | ||||||||
| Adjusted basic EPS (1) | 0.66 | 0.61 | 0.56 | 0.35 | 0.38 | 0.37 | 0.06 | 0.33 | ||||||||
(1) The per share impact for each quarter has been calculated using the weighted average number of common shares outstanding during the respective quarters; therefore, quarterly amounts may not add to the annual or year-to-date total.
A reconciliation from EBIT to Adjusted EBIT and Adjusted EBITDA for our Canadian operations is as follows:
| 3 months ended | 2021 | 2020 | ||||||||||||||
| ($ millions) | Dec 31 | Sep 30 | Jun 30 | Mar 31 | Dec 31 | Sep 30 | Jun 30 | Mar 31 | ||||||||
| EBIT | 92 | 84 | 82 | 69 | 72 | 93 | 63 | 60 | ||||||||
| Significant items: | ||||||||||||||||
| CEWS support | — | — | — | (10 | ) | (13 | ) | (35 | ) | (60 | ) | — | ||||
| Severance costs | — | — | — | — | — | — | 20 | — | ||||||||
| Facility closures, restructuring costs, and | ||||||||||||||||
| impairment losses | — | — | — | — | — | — | 5 | — | ||||||||
| Adjusted EBIT | 92 | 84 | 82 | 59 | 59 | 58 | 28 | 60 | ||||||||
| Depreciation and amortization | 50 | 48 | 47 | 46 | 47 | 48 | 47 | 43 | ||||||||
| Adjusted EBITDA | 142 | 132 | 129 | 105 | 106 | 106 | 75 | 103 | ||||||||
A reconciliation from EBIT to Adjusted EBIT and Adjusted EBITDA for our South American operations is as follows:
| 3 months ended | 2021 | 2020 | ||||||||||
| ($ millions) | Dec 31 | Sep 30 | Jun 30 | Mar 31 | Dec 31 | Sep 30 | Jun 30 | Mar 31 | ||||
| EBIT | 59 | 58 | 51 | 41 | 41 | 40 | 2 | 38 | ||||
| Significant items: | ||||||||||||
| Severance costs | — | — | — | — | — | — | 17 | — | ||||
| Facility closures, restructuring costs, and | ||||||||||||
| impairment losses | — | — | — | — | — | — | 4 | — | ||||
| Adjusted EBIT | 59 | 58 | 51 | 41 | 41 | 40 | 23 | 38 | ||||
| Depreciation and amortization | 22 | 22 | 20 | 20 | 20 | 19 | 22 | 22 | ||||
| Adjusted EBITDA | 81 | 80 | 71 | 61 | 61 | 59 | 45 | 60 | ||||
A reconciliation from EBIT to Adjusted EBIT and Adjusted EBITDA for our UK & Ireland operations is as follows:
| 3 months ended | 2021 | 2020 | |||||||||||
| ($ millions) | Dec 31 | Sep 30 | Jun 30 | Mar 31 | Dec 31 | Sep 30 | Jun 30 | Mar 31 | |||||
| EBIT | 12 | 17 | 17 | 7 | 11 | 9 | (5 | ) | 1 | ||||
| Significant item: | |||||||||||||
| Severance costs | — | — | — | — | — | — | 4 | — | |||||
| Adjusted EBIT | 12 | 17 | 17 | 7 | 11 | 9 | (1 | ) | 1 | ||||
| Depreciation and amortization | 11 | 10 | 10 | 10 | 9 | 9 | 9 | 10 | |||||
| Adjusted EBITDA | 23 | 27 | 27 | 17 | 20 | 18 | 8 | 11 | |||||
A reconciliation from EBIT to Adjusted EBIT and Adjusted EBITDA for our Other operations is as follows:
| 3 months ended | 2021 | 2020 | ||||||||||||||||||
| ($ millions) | Dec 31 | Sep 30 | Jun 30 | Mar 31 | Dec 31 | Sep 30 | Jun 30 | Mar 31 | ||||||||||||
| EBIT | (6 | ) | (9 | ) | (13 | ) | (9 | ) | (16 | ) | (4 | ) | (8 | ) | (5 | ) | ||||
| Significant items: | ||||||||||||||||||||
| CEWS support | — | — | — | — | (1 | ) | (2 | ) | (4 | ) | — | |||||||||
| Return on our investment in Energyst | — | — | — | (5 | ) | — | — | — | — | |||||||||||
| Severance costs | — | — | — | — | — | — | 1 | — | ||||||||||||
| Adjusted EBIT | (6 | ) | (9 | ) | (13 | ) | (14 | ) | (17 | ) | (6 | ) | (11 | ) | (5 | ) | ||||
| Depreciation and amortization | 1 | — | 1 | 1 | 1 | 1 | — | 1 | ||||||||||||
| Adjusted EBITDA | (5 | ) | (9 | ) | (12 | ) | (13 | ) | (16 | ) | (5 | ) | (11 | ) | (4 | ) | ||||
EBITDA to Free Cash Flow Conversion
EBITDA to free cash flow conversion is calculated as free cash flow divided by EBITDA. We use EBITDA to free cash flow conversion to assess our efficiency in turning EBITDA into cash.
Equipment Backlog
Equipment backlog is defined as the retail value of new equipment units ordered by customers for future deliveries. We use equipment backlog as a measure of projecting future new equipment deliveries. There is no directly comparable GAAP financial measure for equipment backlog.
Free Cash Flow
Free cash flow is defined as cash flow provided by or used in operating activities less net additions to property, plant, and equipment and intangible assets, as disclosed in our financial statements. We use free cash flow to assess cash operating performance, including working capital efficiency. Consistent positive free cash flow generation enables us to re-invest capital to grow our business and return capital to shareholders. A reconciliation of free cash flow is as follows:
| 3 months ended | 2021 | 2020 | |||||||||||||||||
| ($ millions) | Dec 31 | Sep 30 | Jun 30 | Mar 31 | Dec 31 | Sep 30 | Jun 30 | Mar 31 | |||||||||||
| Cash flow provided by (used in) operating | 193 | 212 | 8 | 12 | 317 | 340 | 319 | (14 | ) | ||||||||||
| activities | |||||||||||||||||||
| Additions to property, plant, and equipment | |||||||||||||||||||
| and intangible assets | (45 | ) | (38 | ) | (17 | ) | (33 | ) | (34 | ) | (26 | ) | (17 | ) | (38 | ) | |||
| Proceeds on disposal of property, plant, and | |||||||||||||||||||
| equipment | — | 2 | 5 | 1 | 9 | 2 | 10 | 2 | |||||||||||
| Free cash flow | 148 | 176 | (4 | ) | (20 | ) | 292 | 316 | 312 | (50 | ) | ||||||||
Inventory Turns (Dealership)
Inventory turns (dealership) is the number of times our dealership inventory is sold and replaced over a period. We use inventory turns (dealership) to measure asset utilization. Inventory turns (dealership) is calculated as annualized cost of sales (excluding cost of sales related to the mobile refuelling operations) for the last six months divided by average inventory (excluding fuel inventory), based on an average of the last two quarters. Cost of sales related to the dealership and inventory related to the dealership are calculated as follows:
| 3 months ended | 2021 | 2020 | ||||||||
| ($ millions) | Dec 31 | Sep 30 | Dec 31 | Sep 30 | ||||||
| Cost of sales | 1,465 | 1,443 | 1,248 | 1,163 | ||||||
| Cost of sales related to mobile refuelling operations | (190 | ) | (170 | ) | (129 | ) | (124 | ) | ||
| Cost of sales related to the dealership | 1,275 | 1,273 | 1,119 | 1,039 | ||||||
| 2021 | 2020 | |||||||||
| ($ millions) | Dec 31 | Sep 30 | Dec 31 | Sep 30 | ||||||
| Inventory | 1,687 | 1,627 | 1,477 | 1,626 | ||||||
| Fuel inventory | (9 | ) | (6 | ) | (3 | ) | (2 | ) | ||
| Inventory related to the dealership | 1,678 | 1,621 | 1,474 | 1,624 | ||||||
Invested Capital
Invested capital is calculated as net debt plus total equity. Invested capital is also calculated as total assets less total liabilities, excluding net debt. Net debt is calculated as short-term and long-term debt, net of cash and cash equivalents. We use invested capital as a measure of the total cash investment made in Finning and each reportable segment. Invested capital is used in a number of different measurements (ROIC, Adjusted ROIC, invested capital turnover) to assess financial performance against other companies and between reportable segments. Invested capital is calculated as follows:
| 2021 | 2020 | |||||||||||||||||
| ($ millions) | Dec 31 | Sep 30 | Jun 30 | Mar 31 | Dec 31 | Sep 30 | Jun 30 | Mar 31 | ||||||||||
| Cash and cash equivalents | (502 | ) | (518 | ) | (378 | ) | (469 | ) | (539 | ) | (453 | ) | (338 | ) | (260 | ) | ||
| Short-term debt | 374 | 419 | 114 | 103 | 92 | 217 | 158 | 329 | ||||||||||
| Current portion of long-term debt | 190 | 191 | 386 | 326 | 201 | 200 | 200 | 200 | ||||||||||
| Non-current portion of long-term debt | 921 | 923 | 903 | 973 | 1,107 | 1,136 | 1,348 | 1,381 | ||||||||||
| Net debt | 983 | 1,015 | 1,025 | 933 | 861 | 1,100 | 1,368 | 1,650 | ||||||||||
| Total equity | 2,343 | 2,320 | 2,252 | 2,244 | 2,206 | 2,184 | 2,127 | 2,233 | ||||||||||
| Invested capital | 3,326 | 3,335 | 3,277 | 3,177 | 3,067 | 3,284 | 3,495 | 3,883 | ||||||||||
Invested Capital Turnover
We use invested capital turnover to measure capital efficiency. Invested capital turnover is calculated as net revenue for the last twelve months divided by average invested capital of the last four quarters.
Net Debt to Adjusted EBITDA Ratio
This ratio is calculated as net debt divided by Adjusted EBITDA for the last twelve months. We use this ratio to assess operating leverage and ability to repay debt. This ratio approximates the length of time, in years, that it would take us to repay debt, with net debt and Adjusted EBITDA held constant.
Net Revenue, Gross Profit as a % of Net Revenue, SG&A as a % of Net Revenue, EBITDA as a % of Net Revenue, and EBIT as a % of Net Revenue
Net revenue is defined as total revenue less the cost of fuel related to the mobile refuelling operations in our Canadian operations. As these fuel costs are pass-through in nature for this business, we view net revenue as more representative than revenue in assessing the performance of the business because the rack price for the cost of fuel is fully passed through to the customer and is not in our control. For our South American and UK & Ireland operations, net revenue is the same as total revenue.
We use these specified financial measures to assess and evaluate the financial performance or profitability of our reportable segments. We may also calculate these financial measures using Adjusted EBITDA and Adjusted EBIT to exclude significant items we do not consider to be indicative of operational and financial trends either by nature or amount to provide a better overall understanding of our underlying business performance.
The most directly comparable GAAP financial measure to net revenue is total revenue. The ratios are calculated, respectively, as gross profit divided by net revenue, SG&A divided by net revenue, EBITDA divided by net revenue, and EBIT divided by net revenue. Net revenue is calculated as follows:
| 3 months ended | 2021 | 2020 | ||||||||||||||||
| ($ millions) | Dec 31 | Sep 30 | Jun 30 | Mar 31 | Dec 31 | Sep 30 | Jun 30 | Mar 31 | ||||||||||
| Total revenue | 1,949 | 1,904 | 1,845 | 1,596 | 1,666 | 1,553 | 1,419 | 1,558 | ||||||||||
| Cost of fuel | (175 | ) | (156 | ) | (140 | ) | (127 | ) | (115 | ) | (110 | ) | (84 | ) | (119 | ) | ||
| Net revenue | 1,774 | 1,748 | 1,705 | 1,469 | 1,551 | 1,443 | 1,335 | 1,439 | ||||||||||
ROIC and Adjusted ROIC
ROIC is defined as EBIT for the last twelve months divided by average invested capital of the last four quarters, expressed as a percentage.
We view ROIC as a useful measure for capital allocation decisions that drive profitable growth and attractive returns to shareholders. We also calculate Adjusted ROIC using Adjusted EBIT to exclude significant items that we do not consider to be indicative of operational and financial trends either by nature or amount to provide a better overall understanding of our underlying business performance.
Working Capital & Working Capital to Net Revenue Ratio
Working capital is defined as total current assets (excluding cash and cash equivalents) less total current liabilities (excluding short-term debt and current portion of long-term debt). We view working capital as a measure for assessing overall liquidity.
The working capital to net revenue ratio is calculated as average working capital of the last four quarters, divided by net revenue for the last twelve months. We use this KPI to assess the efficiency in our use of working capital to generate net revenue.
Working capital is calculated as follows:
| 2021 | 2020 | |||||||||||||||||
| ($ millions) | Dec 31 | Sep 30 | Jun 30 | Mar 31 | Dec 31 | Sep 30 | Jun 30 | Mar 31 | ||||||||||
| Total current assets | 3,619 | 3,620 | 3,416 | 3,319 | 3,214 | 3,261 | 3,416 | 3,828 | ||||||||||
| Cash and cash equivalents | (502 | ) | (518 | ) | (378 | ) | (469 | ) | (539 | ) | (453 | ) | (338 | ) | (260 | ) | ||
| Total current assets in working capital | 3,117 | 3,102 | 3,038 | 2,850 | 2,675 | 2,808 | 3,078 | 3,568 | ||||||||||
| Total current liabilities | 2,155 | 2,156 | 1,942 | 1,817 | 1,623 | 1,717 | 1,735 | 2,112 | ||||||||||
| Short-term debt | (374 | ) | (419 | ) | (114 | ) | (103 | ) | (92 | ) | (217 | ) | (158 | ) | (329 | ) | ||
| Current portion of long-term debt | (190 | ) | (191 | ) | (386 | ) | (326 | ) | (201 | ) | (200 | ) | (200 | ) | (200 | ) | ||
| Total current liabilities in working capital | 1,591 | 1,546 | 1,442 | 1,388 | 1,330 | 1,300 | 1,377 | 1,583 | ||||||||||
| Working capital | 1,526 | 1,556 | 1,596 | 1,462 | 1,345 | 1,508 | 1,701 | 1,985 | ||||||||||
FORWARD-LOOKING INFORMATION CAUTION
This news release contains information that is forward-looking. Information is forward-looking when we use what we know and expect today to give information about the future. All forward-looking information in this news release is subject to this disclaimer including the assumptions and material risk factors referred to below. Forward-looking information in this news release includes, but is not limited to, the following: our expectation of upcycle demand conditions from the start of 2022 (assumes ongoing economic growth and strength in commodity prices), that supply constraints will persist; our strong foundation to capture upcycle opportunities; our strategic plan to grow product support, reduce costs, and reinvest free cash flow to compound our earnings; our target mid-teens and above EPS growth during this sustained upcycle; delivery during 2022 on an oil sands operator’s order for 20 Caterpillar 797F off-highway trucks; our expectation that these trucks will enhance fuel efficiency, reduce carbon footprint per tonne and improve emissions; all information in the “Q4 2021 Market Update and Business Outlook” section of this news release regarding our expectations for Canada (based on assumptions of strong commodity prices and broad-based economic growth in Western Canada, federal and provincial government infrastructure programs and private sector investments in natural gas, carbon capture, utilization and storage and power projects, and our ability to leverage CUBIQ™ and drive continued success with construction rebuilds and CVAs, and continued capital expenditures in the oil sands), South America (based on assumptions related to Chile of a continued strong copper price, a projected increase in copper production, a moderate increase in mining royalties, a strong demand for mining infrastructure and the government’s infrastructure investment program), the UK & Ireland (based on assumptions of continued government investments in infrastructure projects and projections of continued growth in cloud data centre capacity) and the upcycle and shift to growth (based on assumptions of ongoing economic growth and strength in commodity prices and that we will successfully mitigate the effects of persistent challenges in the global supply chain, drive improved earnings capacity and fixed cost reduction initiatives and manage our day-to-day operations through the Omicron wave); and the Canadian income tax treatment of the quarterly dividend. All such forward-looking information is provided pursuant to the ‘safe harbour’ provisions of applicable Canadian securities laws.
Unless we indicate otherwise, forward-looking information in this news release reflects our expectations at the date in this news release. Except as may be required by Canadian securities laws, we do not undertake any obligation to update or revise any forward-looking information, whether as a result of new information, future events, or otherwise.
Forward-looking information, by its very nature, is subject to numerous risks and uncertainties and is based on a number of assumptions. This gives rise to the possibility that actual results could differ materially from the expectations expressed in or implied by such forward-looking information and that our business outlook, objectives, plans, strategic priorities and other information that is not historical fact may not be achieved. As a result, we cannot guarantee that any forward-looking information will materialize.
Factors that could cause actual results or events to differ materially from those expressed in or implied by this forward-looking information include: the impact and duration of the COVID-19 pandemic and measures taken by governments and businesses in response; general economic and market conditions and economic and market conditions in the regions where we operate; foreign exchange rates; commodity prices; the impact of changes in the UK’s trade relationship with the European Union as a result of Brexit; the level of customer confidence and spending, and the demand for, and prices of, our products and services; our ability to maintain our relationship with Caterpillar; our dependence on the continued market acceptance of our products, including Caterpillar products, and the timely supply of parts and equipment; our ability to continue to sustainably reduce costs and improve productivity and operational efficiencies while continuing to maintain customer service; our ability to manage cost pressures as growth in revenue occurs; our ability to negotiate satisfactory purchase or investment terms and prices, obtain necessary regulatory or other approvals, and secure financing on attractive terms or at all; our ability to manage our growth strategy effectively; our ability to effectively price and manage long-term product support contracts with our customers; our ability to reduce costs in response to slowing activity levels; our ability to drive continuous cost efficiency in a recovering market; our ability to attract sufficient skilled labour resources as market conditions, business strategy or technologies change; our ability to negotiate and renew collective bargaining agreements with satisfactory terms for our employees and us; the intensity of competitive activity; our ability to maintain a safe and healthy work environment across all regions; our ability to raise the capital needed 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 in the regions where we carry on business; our ability to respond to climate change-related risks; the occurrence of natural disasters, pandemic outbreaks, geo-political events, acts of terrorism, social unrest or similar disruptions; fluctuations in defined benefit pension plan contributions and related pension expenses; the availability of insurance at commercially reasonable rates and whether the amount of insurance coverage will be adequate to cover all liability or loss that we incur; the potential of warranty claims being greater than we anticipate; the integrity, reliability and availability of, and benefits from, information technology and the data processed by that technology; and our ability to protect our business from cybersecurity threats or incidents; the actual impact of the COVID-19 pandemic; and, with respect to our normal course issuer bid, our share price from time to time and our decisions about use of capital. Forward-looking information is provided in this news release for the purpose of giving information about our 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 information for any other purpose.
Forward-looking information provided in this news release is based on a number of assumptions that we believed were reasonable on the day the information was given, including but not limited to the specific assumptions stated above; that we will be able to successfully manage our business through the current challenging times involving the effects of the COVID-19 response, stretched supply chains, competitive talent markets, and changing commodity prices, and successfully implement our COVID-19 risk management plans; an undisrupted market recovery, for example, undisrupted by COVID-19 impacts, commodity price volatility or social unrest; the successful execution of our profitability drivers; that increased maintenance work by mining customers following the lessening of COVID-19 restrictions and protocols will continue; that our cost actions to drive earnings capacity in a recovery can be sustained; that commodity prices will remain at constructive levels; that our customers will not curtail their activities; that general economic and market conditions will improve; that the level of customer confidence and spending, and the demand for, and prices of, our products and services will be maintained; that present supply chain challenges will not materially impact large project deliveries in our backlog; our ability to successfully execute our plans and intentions; our ability to attract and retain skilled staff; market competition will remain at similar levels; the products and technology offered by our competitors will be as expected; that identified opportunities for growth will result in revenue; that we have sufficient liquidity to meet operational needs; consistent and stable legislation in the various countries in which we operate; no disruptive changes in the technology environment and that our current good relationships with Caterpillar, our customers and our suppliers, service providers and other third parties will be maintained; sustainment of strengthened oil prices and the Alberta government will not re-impose production curtailments; quoting activity for requests for proposals for equipment and product support is reflective of opportunities; that there will be a moderate increase in mining royalties in Chile; and strong recoveries in our regions, particularly in Chile and the UK. Some of the assumptions, risks, and other factors which could cause results to differ materially from those expressed in the forward-looking information contained in this news release are discussed in our current AIF and in our annual and most recent quarterly MD&A for the financial risks, including for updated risks related to the COVID-19 pandemic.
We caution readers that the risks described in our AIF and in our annual and most recent quarterly MD&A are not the only ones that could impact us. We cannot accurately predict the full impact that COVID-19 will have on our business, results of operations, financial condition or the demand for our services, due in part to the uncertainties relating to the ultimate geographic spread of the virus, the severity of the disease, the duration of the outbreak, the steps our customers and suppliers may take in current circumstances, including slowing or halting operations, the duration of travel and quarantine restrictions imposed by governments and other steps that may be taken by governments to respond to the pandemic. Additional risks and uncertainties not currently known to us or that are currently deemed to be immaterial may also have a material adverse effect on our business, financial condition, or results of operation.
