Toromont Industries Ltd. (TSX:TIH) today reported record financial results from
continuing operations for the three and twelve-month periods ended December 31,
2012.
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Three months ended Twelve months ended
December 31 December 31
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millions, except per
share amounts 2012 2011 % change 2012 2011 % change
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Continuing operations
basis:
Revenues $431.1 $408.4 6% $1,507.2 $1,382.0 9%
Operating income $ 61.8 $ 48.2 28% $ 170.3 $ 148.2 15%
Net earnings $ 44.9 $ 34.2 31% $ 120.6 $ 102.7 17%
Earnings per share -
basic $ 0.59 $ 0.44 34% $ 1.57 $ 1.33 18%
Discontinued
operations:
Net earnings $ - $ - n/m $ - $ 143.8 n/m
Earnings per share -
basic $ - $ - n/m $ - $ 1.87 n/m
Total:
Net earnings $ 44.9 $ 34.2 31% $ 120.6 $ 246.5 (51%)
Earnings per share -
basic $ 0.59 $ 0.44 34% $ 1.57 $ 3.20 (51%)
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Note - 2011 net earnings from discontinued operations includes a gain on
disposition of $133.2 million, $1.73 per share basic.
Toromont reported strong results in the fourth quarter with net earnings from
continuing operations increasing 31%, reflecting strong growth in product
support, rental activities and improved margins due to sales mix. For the year,
net earnings increased 17% on the same factors as well as higher new equipment
deliveries.
"We are very pleased with our results for the quarter and year. Revenues from
equipment, product support and rentals were at record levels for the full year
and were at or near record levels for the quarter," said Scott J. Medhurst,
President and Chief Executive Officer of Toromont Industries Ltd. "Each of our
business units set records for the year. Our increased installed base and focus
on product support, combined with increased rental utilization, resulted in
terrific growth in earnings of 17%."
Considering the success achieved in 2012, solid financial position and positive
long-term outlook the Board of Directors increased the quarterly dividend to 13
cents per share. This represents an 8% increase in Toromont's regular quarterly
cash dividend. The next dividend is payable April 1, 2013, to shareholders of
record at the close of business on March 13, 2013. The Company has paid
dividends every year since going public in 1968 and has announced dividend
increases in each of the past 24 years.
Highlights:
-- Net earnings from continuing operations were $44.9 million in the
quarter ($0.59 per share basic), up 31% from $34.2 million reported in
the same quarter last year. The improvement resulted from higher gross
margins, an improved expense ratio, higher revenues and a lower
statutory income tax rate.
-- For the full year, net earnings from continuing operations were $120.6
million ($1.57 per share basic), 17% higher than 2011. Higher revenues,
an improved expense ratio, higher gross margins and a reduction in
statutory income tax rates contributed to the improvement.
-- Equipment Group revenues of $367 million were down 1% in the fourth
quarter versus the similar period of 2011 on lower new and used
equipment sales. Product support and rental revenues were at record
levels for the quarter, up 29% and 26% respectively from the fourth
quarter of 2011. Operating income increased 23% in the quarter compared
to last year on higher gross margins resulting from improved sales mix,
with a higher proportion of product support activities in the current
period, and higher heavy and light rental fleet utilization. Investments
in the rental fleet continue to gain traction. Gross margin improvement
was partially offset by higher expense levels and lower revenues.
-- Equipment Group revenues were $1.3 billion for 2012, 9% higher than last
year with records in equipment sales, product support and rental.
Revenue growth resulted largely from increased mining activity in our
markets. Operating income increased 16% year-over-year on higher
revenues, improved gross margin (largely on sales mix) and a lower
expense ratio.
-- Equipment Group backlogs were $128 million at the end of 2012 compared
to $224 million at this time last year. Significant mining deliveries in
the year drew down the order backlog. Bookings of $156 million in the
fourth quarter were 1% lower than the fourth quarter of 2011. Bookings
in 2012 totalled $614 million compared to $635 million in the prior
year.
-- CIMCO had excellent results for the fourth quarter with revenues of $64
million and operating income of $4.4 million, up from $37 million and
$1.5 million in the fourth quarter of 2011. Significant industrial
package sales revenues in the fourth quarter of 2012 exceeded the
expected decline in recreational package sales. Product support sales
were also strong, up 14%.
-- CIMCO revenues for the year were a record at $197 million, up 6% from
2011. Package sales and product support both reported increases. Higher
industrial revenue exceeded the expected decline in recreational.
Operating income increased 3% for the year, reaching $14.3 million or
7.2% of revenues. Increased income driven by higher revenues was
partially offset by lower gross margins.
-- CIMCO bookings were $23 million in the fourth quarter of 2012 compared
to $27 million for the same period last year. Bookings for the year were
$162 million, 78% higher than 2011 on a significant order from Maple
Leaf Foods. Even excluding this order, bookings for the year were up
25%. Backlogs were $99 million at December 31, 2012, up 94% over 2011.
-- Net earnings were $44.9 million in the quarter ($0.59 per share basic)
and $120.6 million ($1.57 per share basic) for the year. Return on
opening shareholders' equity was 30.1% and return on capital employed
was 28.7%.
-- The Company maintained a strong financial position. Total debt net of
cash to total capitalization was 25%, well within stated capital
targets.
"Toromont is well positioned entering 2013 with momentum in product support and
rental activities, increased equipment populations including large mining units,
record backlogs at CIMCO and a strong balance sheet," continued Mr. Medhurst.
"We expect to see improved performance from our Power Systems Group, are
cautiously optimistic that construction markets will be buoyed by several large
projects and continue to see significant long-term opportunities in mining. Our
team is focused on improving market share by providing exceptional service to
our customers."
Quarterly Conference Call and Webcast
Interested parties are invited to join the quarterly conference call with
investment analysts, in listen-only mode, on Monday, February 11, 2013 at 5:00
p.m. (ET). The call may be accessed by telephone at 1-866-226-1792 (toll free)
or 416-340-2216 (Toronto area). A replay of the conference call will be
available until Monday, February 25, 2013 by calling 1-800-408-3053 or
416-694-9451 and quoting passcode 4173816.
Both the live webcast and the replay of the quarterly conference call can be
accessed at www.toromont.com.
Advisory
Information in this press release that is not a historical fact is
"forward-looking information". Words such as "plans", "intends", "outlook",
"expects", "anticipates", "estimates", "believes", "likely", "should", "could",
"will", "may" and similar expressions are intended to identify statements
containing forward-looking information. Forward-looking information in this
press release is based on current objectives, strategies, expectations and
assumptions which management considers appropriate and reasonable at the time
including, but not limited to, general economic and industry growth rates,
commodity prices, currency exchange and interest rates, competitive intensity
and shareholder and regulatory approvals.
By its nature, forward-looking information is subject to risks and uncertainties
which may be beyond the ability of Toromont to control or predict. The actual
results, performance or achievements of Toromont could differ materially from
those expressed or implied by forward-looking information. Factors that could
cause actual results, performance, achievements or events to differ from current
expectations include, among others, risks and uncertainties related to: business
cycles, including general economic conditions in the countries in which Toromont
operates; commodity price changes, including changes in the price of precious
and base metals; changes in foreign exchange rates, including the Cdn$/US$
exchange rate; the termination of distribution or original equipment
manufacturer agreements; equipment product acceptance and availability of
supply; increased competition; credit of third parties; additional costs
associated with warranties and maintenance contracts; changes in interest rates;
the availability of financing; and, environmental regulation.
Any of the above mentioned risks and uncertainties could cause or contribute to
actual results that are materially different from those expressed or implied in
the forward-looking information and statements included in this press release.
For a further description of certain risks and uncertainties and other factors
that could cause or contribute to actual results that are materially different,
see the risks and uncertainties set out in the "Risks and Risk Management" and
"Outlook" sections of Toromont's most recent annual or interim Management
Discussion and Analysis, as filed with Canadian securities regulators at
www.sedar.com and may also be found at www.toromont.com. Other factors, risks
and uncertainties not presently known to Toromont or that Toromont currently
believes are not material could also cause actual results or events to differ
materially from those expressed or implied by statements containing
forward-looking information.
Readers are cautioned not to place undue reliance on statements containing
forward-looking information that are included in this press release, which are
made as of the date of this press release, and not to use such information for
anything other than their intended purpose. Toromont disclaims any obligation or
intention to update or revise any forward-looking information, whether as a
result of new information, future events or otherwise, except as required by
applicable securities legislation.
About Toromont
Toromont Industries Ltd. operates through two business segments: The Equipment
Group and CIMCO. The Equipment Group includes one of the larger Caterpillar
dealerships by revenue and geographic territory in addition to industry leading
rental operations. CIMCO is a market leader in the design, engineering,
fabrication and installation of industrial and recreational refrigeration
systems. Both segments offer comprehensive product support capabilities. This
press release and more information about Toromont Industries can be found at
www.toromont.com.
Management's Discussion and Analysis
This Management's Discussion and Analysis ("MD&A") comments on the operations,
performance and financial condition of Toromont Industries Ltd. ("Toromont" or
the "Company") as at and for the three and twelve months ended December 31,
2012, compared to the preceding year. This MD&A should be read in conjunction
with the attached unaudited consolidated financial statements and related notes
for the twelve months ended December 31, 2012, the annual MD&A contained in the
2011 Annual Report and the audited annual consolidated financial statements for
the year ended December 31, 2011.
The consolidated financial statements reported herein have been prepared in
accordance with International Financial Reporting Standards ("IFRS") and are
reported in Canadian dollars. The information in this MD&A is current to
February 11, 2013.
Additional information is contained in the Company's filings with Canadian
securities regulators, including the Company's 2011 Annual Report and 2012
Annual Information Form. These filings are available on SEDAR at www.sedar.com
and on the Company's website at www.toromont.com.
CORPORATE PROFILE AND BUSINESS SEGMENTATION
As at December 31, 2012, Toromont employed approximately 3,200 people in 102
locations across Canada and the United States. Toromont is listed on the Toronto
Stock Exchange under the symbol TIH.
Toromont has two reportable operating segments: the Equipment Group and CIMCO.
The Equipment Group is comprised of Toromont CAT, one of the world's larger
Caterpillar dealerships, and Battlefield - The CAT Rental Store, an
industry-leading rental operation. Performance in the Equipment Group is driven
by activity in several industries: road building and other
infrastructure-related activities; mining; residential and commercial
construction; power generation; aggregates; waste management; steel; forestry;
and agriculture. Significant activities include the sale, rental and service of
mobile equipment for Caterpillar and other manufacturers; sale, rental and
service of engines used in a variety of applications including industrial,
commercial, marine, on-highway trucks and power generation; and sale of
complementary and related products, parts and service. Territories include
Ontario, Manitoba, Newfoundland and most of Labrador and Nunavut.
CIMCO is a market leader in the design, engineering, fabrication, installation
and after-sale support of refrigeration systems in industrial and recreational
markets. Results of CIMCO are influenced by conditions in the primary market
segments served: beverage and food processing; cold storage; food distribution;
mining; and recreational ice surfaces. CIMCO offers systems designed to optimize
energy usage through proprietary products such as ECO CHILL. CIMCO has
manufacturing facilities in Canada and the United States and sells its solutions
globally.
PRIMARY OBJECTIVE AND MAJOR STRATEGIES
A primary objective of the Company is to build shareholder value through
sustainable and profitable growth, supported by a strong financial foundation.
To guide its activities in pursuit of this objective, Toromont works toward
specific, long-term financial goals (see section heading "Key Performance
Measures" in this MD&A) and each of its operating groups consistently employs
the following broad strategies:
Expand Markets
Toromont serves diverse markets that offer significant long-term potential for
profitable expansion. Each operating group strives to achieve or maintain
leading positions in markets served. Incremental revenues are derived from
improved coverage, market share gains and geographic expansion. Expansion of the
installed base of equipment provides the foundation for product support growth
and leverages the fixed costs associated with the Company's infrastructure.
Strengthen Product Support
Toromont's parts and service business is a significant contributor to overall
profitability and serves to stabilize results through economic downturns.
Product support activities also represent opportunities to develop closer
relationships with customers and differentiate the Company's product and service
offering. The ability to consistently meet or exceed customers' expectations for
service efficiency and quality is critical, as after-market support is an
integral part of the customer's decision-making process when purchasing
equipment.
Broaden Product Offerings
Toromont delivers specialized capital equipment to a diverse range of customers
and industries. Collectively, hundreds of thousands of different parts are
offered through the Company's distribution channels. The Company expands its
customer base through selectively extending product lines and capabilities. In
support of this strategy, Toromont represents product lines that are considered
leading and generally best-in-class from suppliers and business partners who
continually expand and develop their offerings. Strong relationships with
suppliers and business partners are critical in achieving growth objectives.
Invest in Resources
The combined knowledge and experience of Toromont's people is a key competitive
advantage. Growth is dependent on attracting, retaining and developing employees
with values that are consistent with Toromont's. A highly principled culture,
share ownership and profitability based incentive programs result in a close
alignment of employee and shareholder interests. By investing in employee
training and development, the capabilities and productivity of employees
continually improve to better serve shareholders, customers and business
partners.
Toromont's information technology represents another competitive differentiator
in the marketplace. The Company's selective investments in technology, inclusive
of e-commerce initiatives, strengthen customer service capabilities, generate
new opportunities for growth, drive efficiency and increase returns to
shareholders.
Maintain a Strong Financial Position
A strong, well-capitalized balance sheet creates security and financial
flexibility, and has contributed to the Company's long-term track record of
profitable growth. It is also fundamental to the Company's future success.
BASIS OF PRESENTATION
On June 1, 2011, Toromont completed the spinoff of its natural gas compression
business, Enerflex Ltd. ("Enerflex"). The information presented herein reflects
the spinoff, with Enerflex presented as discontinued operations in all periods.
Results for 2011 include the results of Enerflex for the five months ended May
31, 2011, net of certain costs incurred related to the spinoff transaction,
together with the gain on distribution of Enerflex.
CONSOLIDATED RESULTS OF OPERATIONS
Twelve months ended December 31
($ thousands, except per share
amounts) 2012 2011 $ change % change
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Revenues $1,507,173 $1,381,974 $ 125,199 9%
Cost of goods sold 1,122,765 1,032,599 90,166 9%
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Gross profit 384,408 349,375 35,033 10%
Selling and administrative
expenses 214,130 201,190 12,940 6%
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Operating income 170,278 148,185 22,093 15%
Interest expense 9,714 9,012 702 8%
Interest and investment income (3,974) (3,214) (760) 24%
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Income before income taxes 164,538 142,387 22,151 16%
Income taxes 43,985 39,709 4,276 11%
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Earnings from continuing
operations 120,553 102,678 17,875 17%
Earnings from discontinued
operations - 143,781 (143,781) n/m
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Net earnings $ 120,553 $ 246,459 $(125,906) (51%)
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Earnings per share (basic)
Continuing operations $ 1.57 $ 1.33 $ 0.24 18%
Discontinued operations - 1.87 (1.87) n/m
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$ 1.57 $ 3.20 $ (1.63) (51%)
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Key ratios:
Gross profit as a % of
revenues 25.5% 25.3%
Selling and administrative
expenses as a % of revenues 14.2% 14.6%
Operating income as a % of
revenues 11.3% 10.7%
Income taxes as a % of income
before income taxes 26.7% 27.9%
Revenues increased on higher revenues in both operating groups. Equipment Group
revenues were up 9% with record new equipment sales, rental and product support
activities. CIMCO revenues were up 6% on higher industrial package sales and
product support activities.
Gross profit margin was 25.5% in 2012 compared with 25.3% in 2011. Gross profit
margins in the Equipment Group were up largely due to sales mix, with a higher
proportion of product support in the current year offset somewhat by competitive
market conditions and additional project costs incurred in the Power Systems
Group. Product support gross margins improved with volumes and better execution
in many operations. CIMCO gross profit margins were down from 2011 on lower
average quoted margins while project execution remained very positive.
Selling and administrative expenses increased 6% from 2011, in part reflecting
the 9% increase in revenues. Compensation was $7.1 million (5%) higher in 2012
compared to 2011 on increased headcount, annual salary increases and higher
annual performance incentives expense. The remaining increase related largely
to higher freight, training and travel costs, reflecting increased business
levels.
Operating income increased on higher revenues, reduced expense levels and
improved gross margins due to mix.
Interest expense increased on higher average debt balances carried to support
increased inventories and rental fleet. Interest income increased reflecting
higher levels of interest on conversion of rental equipment.
The reduced effective income tax rate for 2012 reflects lower statutory rates.
Net earnings in 2012 were $120.6 million and basic earnings per share ("EPS")
were $1.57 per share. This was 17% and 18% higher respectively, than 2011 on a
continuing operations basis.
Earnings from discontinued operations in 2011 included $10.6 million from
Enerflex. In addition, a net gain of $133.2 million, $1.73 per share basic, was
recorded on the spinoff. Including these elements, net earnings in 2011 were
$246.5 million, or $3.20 basic EPS.
Comprehensive income in 2012 was $115.7 million, comprised of net earnings of
$120.6 million and other comprehensive loss of $4.8 million. Other
comprehensive loss included actuarial loss on employee pension plans of $4.2
million after tax.
BUSINESS SEGMENT OPERATING RESULTS
The accounting policies of the segments are the same as those of the
consolidated entity. Management evaluates overall business segment performance
based on revenue growth and operating income relative to revenues. Corporate
expenses are allocated based on each segment's revenue. Interest expense and
interest and investment income are not allocated.
Equipment Group
Twelve months ended December 31
($ thousands) 2012 2011 $ change % change
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Equipment sales and rentals
New $ 564,435 $ 515,046 $ 49,389 10%
Used 144,367 153,326 (8,959) (6%)
Rental 183,777 164,953 18,824 11%
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Total equipment sales and
rentals 892,579 833,325 59,254 7%
Power generation 11,435 12,085 (650) (5%)
Product support 405,880 350,977 54,903 16%
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Total revenues $1,309,894 $1,196,387 $ 113,507 9%
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Operating income $ 156,021 $ 134,314 $ 21,707 16%
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Capital expenditures $ 99,871 $ 82,287 $ 17,585 21%
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Key ratios:
Product support revenues as a
% of total revenues 31.0% 29.3%
Group total revenues as a % of
consolidated revenues 86.9% 86.6%
Operating income as a % of
revenues 11.9% 11.2%
Despite continued global economic uncertainly, demand for the Company's products
and services remained strong.
New equipment sales increased largely due to increased sales of larger, higher
value units. Mobile equipment sales to mining customers increased 50%
year-over-year on significant deliveries from the order backlog. Revenues from
power systems applications were 9% lower. Road construction was strong,
although down 5% from records set last year. A broader product offering
including new Caterpillar vocational truck and Sitech products increased
revenues over $10 million.
Used equipment sales include sales of used equipment purchased for resale,
equipment received on trade-in and sales of Company owned rental fleet. Used
tractor equipment sales were lower year-over-year mainly due to reduced sales
from the Company's rental fleet. Tractor used purchased sales were flat to
prior year. Used equipment sales vary on factors such as product availability
(both new and used), customer demands and the general pricing environment.
Rental revenues were higher on increased investment and improved utilization.
The Company invested $55 million net of disposals in its rental fleet in 2012,
compared to $35 million in the prior year. Utilization of both light and heavy
equipment was good. Light equipment rentals increased 9% year-over-year while
heavy equipment rental increased 28%. Equipment on rent with a purchase option
increased 25%. Power rentals were 26% lower year-over-year. Generally, rental
rates were fairly consistent in both years with continuing competitive market
conditions. Same store sales were the significant contributor, with the new
location in Bracebridge, Ontario, representing less than 10% the year-over-year
increase.
Power generation revenues from Toromont-owned plants were lower, largely
reflecting decreased operating hours at the Waterloo facility due to a reduced
availability of landfill gas.
Product support revenues were a record in 2012, 16% higher than the previous
record set in 2011. Product support revenues in 2012 benefited from an
increased installed base of equipment in our territory coupled with higher
utilization of equipment. Most markets have seen higher product support activity
year-over-year. The Equipment Group added a net 88 technicians in 2012. Both
service and parts revenues set new records in 2012.
Operating income was up, in part reflecting the 9% increase in revenues. Gross
margin as a percentage of revenues increased 40 basis points compared to 2011 on
sales mix, with a larger proportion of product support revenues to total in the
current year. Equipment gross margin was lower in the year on competitive
market conditions, offset by improved product support gross margins. Selling
and administrative expenses increased 7% on the 9% increase in revenues. Higher
costs were reported across a number of areas including compensation, freight,
training and occupancy. Operating income as a percentage of revenues was 11.9%
in 2012 versus 11.2% in 2011.
Capital expenditures in the Equipment Group totalled $99.9 million in 2012.
Replacement and expansion of the rental fleet accounted for $77.6 million of
total investment in 2012. Expenditures of $3.7 million related to new and
expanded facilities to meet current and future growth requirements. Other
capital expenditures included $13.8 million on service and delivery vehicles.
Toromont secured the coterminous Buycrus distribution network from Caterpillar
for $13.7 million. The addition of the former Bucyrus products, now rebranded
CAT, strengthens Toromont's mining offering with a much broader product line
addressing surface and underground mining requirements. Total revenues
associated with former Bucyrus products totalled $24.6 million for the year, of
which $8.8 million was recognized after the acquisition.
($ millions) 2012 2011 $ change % change
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Bookings - year ended December 31 $ 614 $ 635 $ (21) (3%)
Backlogs - as at December 31 $ 128 $ 224 $ (96) (43%)
Bookings in 2012 totalled $614 million, down 3% from 2011. Lower prime and
back-up power systems bookings accounted for approximately half of the decrease
year-over-year.
Backlogs were higher in 2011 due to a significant mining order that was
delivered as scheduled prior to the end of 2012. At December 31, 2012
approximately 30% of the backlog was comprised of mining orders (60% at December
31, 2011) while 34% were power systems projects. Substantially all backlog is
expected to be delivered in 2013. Shortened delivery windows due to process
improvements and increased capacity at Caterpillar have also contributed to
reduced backlogs.
CIMCO
Twelve months ended December 31
($ thousands) 2012 2011 $ change % change
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Package sales $113,586 $103,925 $ 9,661 9%
Product support 83,693 81,662 2,031 2%
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Total revenues $197,279 $185,587 $ 11,692 6%
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Operating income $ 14,257 $ 13,871 $ 386 3%
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Capital expenditures $ 1,440 $ 590 $ 850 144%
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Key ratios:
Product support revenues as a % of
total revenues 42.4% 44.0%
Group total revenues as a % of
consolidated revenues 13.1% 13.4%
Operating income as a % of revenues 7.2% 7.5%
CIMCO reported record results for the year on growth in industrial activity.
Package revenues were up as increased industrial revenues more than compensated
for declines in recreational activities. Industrial revenues in Canada were
strong, up 62%, with a number of jobs progressing including the previously
announced Maple Leaf transformation projects. Recreational revenues in Canada
were down 45% from last year, as anticipated, due to the wind-up of a Canadian
federal stimulus program. US package activities in both recreational and
industrial were lower year-over-year by 20%. US bookings in the fourth quarter
and backlog at year-end were strong.
Product support revenues were up as activity in the US increased 12% while
Canadian markets were steady year-over-year.
Operating income increased reflecting higher revenues and lower expense levels,
partially offset by lower margins. Gross margins were down 80 basis points on
lower average quoted margins, while execution remained favourable. Selling and
administrative expenses increased 3%.
Capital expenditures totalled $1.4 million in 2012. Capital investment was
directed largely at service vehicles to support higher volumes, information
technology assets and branch renovations.
($ millions) 2012 2011 $ change % change
----------------------------------------------------------------------------
Bookings - year ended December 31 $ 162 $ 91 $ 71 78%
Backlogs - as at December 31 $ 99 $ 51 $ 48 94%
Bookings increased substantially year-over-year. Bookings in 2012 included
$49.8 million in previously announced orders from Maple Leaf Foods, $23.6
million of which was revenued in 2012. Excluding these record orders for CIMCO,
bookings were $112 million, still up 25% compared to 2011, reflecting improved
market activity. Recreational bookings were up 34% year-over-year with
increases in both Canada and the US.
Backlogs were higher in all areas - recreational and industrial; Canada and the
US. This is the highest backlog ever at this time of year, and bodes well for
CIMCO entering 2013. Approximately 92% of the backlog is expected to revenue in
2013.
CONSOLIDATED FINANCIAL CONDITION
The Company has maintained a strong financial position for many years. At
December 31, 2012, the ratio of total debt net of cash to total capitalization
was 25%.
Working Capital
The Company's investment in non-cash working capital was $300 million at
December 31, 2012. The major components, along with the changes from December
31, 2011, are identified in the following table.
Change
------------------
$ thousands 2012 2011 $ %
----------------------------------------------------------------------------
Accounts receivable $ 231,518 $ 209,243 $ 22,275 11%
Inventories 327,785 301,937 25,848 9%
Other current assets 4,086 4,718 (632) (13%)
Accounts payable, accrued
liabilities and provisions (194,303) (272,302) 77,998 (29%)
Income taxes payable (3,130) (8,352) 5,222 n/m
Derivative financial instruments (219) (628) 409 n/m
Dividends payable (9,165) (8,433) (731) 9%
Deferred revenue (54,664) (49,100) (5,564) 11%
Current portion of long-term debt (1,372) (1,280) (92) 7%
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Total non-cash working capital $ 300,536 $ 175,803 $124,733 71%
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Accounts receivable increased, largely reflecting the higher revenues and higher
days sales outstanding (DSO). CIMCO accounts receivable increased $17 million or
66% on significant customer billings at the end of 2012. Equipment Group
accounts receivable increased $5 million or 3%. DSO was 45 at December 31, 2012
compared to 40 at the same time last year.
Inventories at December 31, 2012 increased year-over-year, however were
decreased $54.3 million in the fourth quarter of 2012. Equipment Group
inventories were $19 million or 7% higher than this time last year. Higher
inventory on rent with a purchase option (RPO) accounted for 54% of the
increase. Higher inventory levels of certain models of new equipment and higher
parts inventories ($2.6 million) held to support increased demand, accounted for
the remaining increase. CIMCO inventories were $7 million or 65% higher than
this time last year on higher work-in-process.
Accounts payable and accrued liabilities at December 31, 2012 were down $78
million or 29% from this time last year. There was a reduction in order inflow
from a key supplier in the last half of 2012 leading to a reduced outstanding
payable. Payment terms from the key supplier were tightened in 2012, further
reducing the balance.
Income taxes payable reflects amounts owing for current corporate income taxes
less instalments made to date.
Higher dividends payable year-over-year reflect the higher dividend rate. In
2012, the quarterly dividend rate was increased from $0.11 per share to $0.12
per share, a 9% increase.
Deferred revenues represent billings to customers in excess of revenue
recognized. In the Equipment Group, deferred revenues arise on sales of
equipment with residual value guarantees, extended warranty contracts and other
long-term customer support agreements as well as on progress billings on
long-term construction contracts. Equipment Group deferred revenues were 2%
higher than this time last year. In CIMCO, deferred revenues arise on progress
billings in advance of revenue recognition. CIMCO deferred revenues increased
52% on advance payments from customers related to increased industrial projects.
The current portion of long-term debt reflects scheduled principal repayments
due in 2013.
Goodwill and Intangibles
The Company performs impairment tests on its goodwill and intangibles on an
annual basis or as warranted by events or circumstances. The assessment of
goodwill entails estimating the fair value of operations to which the goodwill
relates using the present value of expected discounted future cash flows. This
assessment affirmed goodwill values as at December 31, 2012.
Employee Share Ownership
The Company employs a variety of stock-based compensation plans to align
employees' interests with corporate objectives.
The Company maintains an Executive Stock Option Plan for certain employees and
directors. Stock options have a seven-year term, vest 20% cumulatively on each
anniversary date of the grant and are exercisable at the designated common share
price. At December 31, 2012, 2.6 million options to purchase common shares were
outstanding, of which 1.0 million were exercisable.
The Company offers an Employee Share Ownership Plan whereby employees can
purchase shares by way of payroll deductions. Under the terms of this plan,
eligible employees may purchase common shares of the Company in the open market
at the then current market price. The Company pays a portion of the purchase
price, matching contributions at a rate of $1 for every $3 dollars contributed,
to a maximum of $1,000 per annum per employee. Company contributions vest to the
employee immediately. Company contributions amounting to $0.9 million in 2012
(2011 - $1.1 million) were charged to selling and administrative expense when
paid. A third party administers the Plan.
The Company also offers a deferred share unit (DSU) plan for certain employees
and non-employee directors, whereby they may elect, on an annual basis, to
receive all or a portion of their performance incentive bonus or fees,
respectively, in deferred share units. A DSU is a notional unit that reflects
the market value of a single Toromont common share and generally vests
immediately. DSUs will be redeemed on cessation of employment or directorship.
DSUs have dividend equivalent rights, which are expensed as earned. The Company
records the cost of the DSU Plan as compensation expense.
As at December 31, 2011, DSUs outstanding were 211,872 at a total value of $4.3
million (2011 - 193,728 units at a value of $4.1 million). The liability for
DSUs is included in Accounts Payable and Accrued Liabilities.
Employee Future Benefits
The Company sponsors pension arrangements for substantially all of its
employees, primarily through defined contribution plans in Canada and a 401(k)
matched savings plan in the United States. Certain unionized employees do not
participate in Company-sponsored plans, and contributions are made to these
union-sponsored plans in accordance with respective collective bargaining
agreements. In the case of the defined contribution plans, regular contributions
are made to the employees' individual accounts, which are administered by a plan
trustee, in accordance with the plan document. Future expense for these plans
will vary based on future participation rates.
Approximately 130 employees participate in one of two defined benefit plans:
-- Powell Plan - Consists of personnel of Powell Equipment (acquired by
Toromont in 2001); and
-- Other plan assets and obligations - Provides for certain retirees and
terminated vested employees of businesses previously acquired by the
Company as well as for retired participants of the defined contribution
plan who, in accordance with the plan provisions, have elected to
receive a pension directly from the plan.
The Company also has a defined benefit pension arrangement for certain senior
executives that provides for a supplementary retirement payout in excess of
amounts provided for under the registered plan. This Executive Plan is a
non-contributory pension arrangement and is solely the obligation of the
Company. The Company is not obligated to fund this plan but is obligated to pay
benefits under the terms of the plan as they come due. The Company has posted
letters of credit to secure the obligations under this plan, which were $20.2
million as at December 31, 2012. As there are only nominal plan assets, the
impact of volatility in financial markets on pension expense and contributions
for this plan are insignificant.
Financial markets continued to be volatile in 2012. The return on plan assets
was $4.3 million or 8%, improved from $1.7 million or 3% in 2011, and comparing
favourably to the expected long-term average return of 7%. The present value of
pension obligations increased $4,360 in 2012, partly due to a decline in
long-term interest rates. As a result, the funded status of the plans declined
slightly from a deficit of $26.2 million at December 31, 2011 to a deficit of
$26.8 million at December 31, 2012. These deficits included $19.6 million and
$20.3 million respectively relating to the Executive Plan, which as described
above is essentially an unfunded arrangement. The Company expects pension
expense and cash pension contributions for 2013 to be similar to 2012 levels.
The Company estimates a long-term return on plan assets of 7%. While there is no
assurance that the plan will be able to generate this assumed rate of return
each year, management believes that it is a reasonable longer-term estimate.
A key assumption in pension accounting is the discount rate. This rate is set
with regard to the yield on high-quality corporate bonds of similar average
duration to the cash flow liabilities of the Plans. Yields are volatile and can
deviate significantly from period to period.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that have, or are
reasonably likely to have, a current or future effect on its results of
operations or financial condition.
Legal and Other Contingencies
Due to the size, complexity and nature of the Company's operations, various
legal matters are pending. Exposure to these claims is mitigated through levels
of insurance coverage considered appropriate by management and by active
management of these matters. In the opinion of management, none of these matters
will have a material effect on the Company's consolidated financial position or
results of operations.
Normal Course Issuer Bid
Toromont believes that, from time to time, the purchase of its common shares at
prevailing market prices may be a worthwhile investment and in the best
interests of both Toromont and its shareholders. As such, the normal course
issuer bid with the TSX was renewed in 2012. This issuer bid allows the Company
to purchase up to approximately 6.4 million of its common shares, representing
10% of common shares in the public float, in the year ending August 30, 2013.
The actual number of shares purchased and the timing of any such purchases will
be determined by Toromont. All shares purchased under the bid will be cancelled.
In 2012, the Company purchased and cancelled 666,039 shares for $14.1 million
(average cost of $21.23 per share). In 2011, the Company purchased and cancelled
720,004 shares for $12.2 million (average cost of $16.96 per share).
Outstanding Share Data
As at the date of this MD&A, the Company had 76,453,008 common shares and
2,519,005 share options outstanding.
Dividends
Toromont pays a quarterly dividend on its outstanding common shares and has
historically targeted a dividend rate that approximates 30% of trailing earnings
from continuing operations.
During 2012, the Company declared dividends of $0.48 per common share, $0.12 per
quarter. In 2011, the Company also declared dividends of $0.41 per common share,
adjusting for the allocation of dividends for the spinoff of Enerflex.
LIQUIDITY AND CAPITAL RESOURCES
Sources of Liquidity
Toromont's liquidity requirements can be met through a variety of sources,
including cash generated from operations, long- and short-term borrowings and
the issuance of common shares. Borrowings are obtained through a variety of
senior debentures, notes payable and committed long-term credit facilities.
The Company amended its Canadian credit facility in conjunction with the spinoff
of Enerflex and commensurate with anticipated future requirements. Outstanding
borrowings under the previous facility were repaid in part from funds received
relating to inter-company borrowings on spinoff. The committed amount was
reduced from $600 million to $200 million while the maturity date was extended
from June 2012 to June 2015. The US credit facility of US $20 million was
terminated coincident with the spinoff with no penalty. The Canadian facility
was further amended in September 2012 to extend the term of the facility to
September 2017 at improved rates.
As at December 31, 2012, $26.5 million was drawn on the $200 million Canadian
facility. Letters of credit utilized an additional $24.1 million of the
facility.
Cash at December 31, 2012 was $2.4 million, compared to $75.3 million at
December 31, 2011. Cash balances were drawn down in 2012 on a number of
factors, including higher investments in rental assets and working capital.
The Company expects that continued cash flows from operations in 2013 and
currently available credit facilities will be more than sufficient to fund
requirements for investments in working capital and capital assets.
Principal Components of Cash Flow
Cash from operating, investing and financing activities, as reflected in the
Consolidated Statements of Cash Flows, are summarized in the following table:
Twelve months ended
December 31
$ thousands 2012 2011
----------------------------------------------------------------------------
Cash, beginning of year $ 75,319 $ 174,089
Cash, provided by (used in):
Operating activities
Operations - continuing operations 161,830 136,546
Change in non-cash working capital and other (124,475) (39,731)
Discontinued operations - 57,433
----------------------------------------------------------------------------
37,355 154,248
Investing activities
Continuing operations (91,205) (55,941)
Discontinued operations - 140,115
----------------------------------------------------------------------------
(91,205) 84,174
Financing activities (19,033) (337,311)
----------------------------------------------------------------------------
Effect of foreign exchange on cash balances (53) 119
----------------------------------------------------------------------------
Decrease in cash in the year (72,936) (98,770)
----------------------------------------------------------------------------
Cash, end of year $ 2,383 $ 75,319
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash Flows from Operating Activities
Operating activities provided $37.4 million in 2012 compared to $96.8 million in
2011 on a continuing operations basis. Net earnings adjusted for items not
requiring cash were 19% higher than last year on higher revenues and improved
operating margins. Non-cash working capital and other used $124.5 million
compared to $39.7 million in 2011. Discontinued operations provided $57.4
million in cash flow in 2011.
The components and changes in working capital are discussed in more detail in
this MD&A under the heading "Consolidated Financial Condition."
Cash Flows from Investing Activities
Investing activities at continuing operations used $91 million in 2012 compared
to $56 million in 2010.
Net rental fleet additions (purchases less proceeds of disposition) totalled $55
million in 2012 compared to $34.8 million in 2011. Additional investments in the
rental fleet were made in the current year in light of stronger demand on
improved market conditions, the existing fleet age profile and the expansion of
our heavy rental operations.
Investments in property, plant and equipment in 2012 totalled $23.7 million
compared to $25.0 million in 2011. Additions in 2012 were largely made within
the Equipment Group. Capital additions included $4.1 million for land and
buildings for new and expanded branches, $14.3 million for service vehicles, and
$3.2 million for machinery and equipment. Additions in 2011 included $10.4
million for land and buildings acquired for new branch locations, $7.8 million
for service vehicles and $2.8 million for information technology assets.
In 2012, Toromont acquired from Caterpillar the assets associated with the
former coterminous Bucyrus distribution network for US $13.5 million ($13.7
million).
Investing activities at discontinued operations in 2011 included cash received
from Enerflex Ltd. in repayment of intercompany debt of $173.3 million owing to
the Company on spinoff.
Cash Flows from Financing Activities
Financing activities used $19.0 million in 2012 and $337.3 million in 2011.
Significant sources and uses of cash in 2012 included:
-- Drawings on the credit facility of $26.5 million
-- Dividends paid to common shareholders of $36 million or $0.47 cents per
share;
-- Normal course purchase and cancellation of common shares of $14.1
million, 666,039 shares at an average cost of $21.23; and
-- Cash received on exercise of share options of $6.2 million.
Significant sources and uses of cash in 2011 included:
-- Decrease in long-term debt of $286.9 million. The acquisition financing
from the purchase of Enerflex Systems Income Fund ("ESIF") was fully
repaid, in conjunction with the spinoff. Repayment was funded
principally with amounts received by the Company from Enerflex in
repayment of its intercompany debt;
-- Dividends paid to common shareholders of $40.9 million or $0.53 cents
per share;
-- Normal course purchase and cancellation of common shares of $12.2
million, 720,004 shares at an average cost of $16.96; and
-- Proceeds received on the exercise of stock options of $3.2 million.
OUTLOOK
The substantial growth in product support, fueled by the increased installed
base in the Equipment Group, bodes well for the Company's continued success.
Within the Equipment Group, although market conditions are increasingly
competitive, we are cautiously optimistic that construction markets will be
reasonably robust, driven by large construction projects. Future prospects are
linked to general economic conditions and governmental investment levels.
Management continues to track a number of large construction projects, which are
expected to contribute to future results. Improved performance in the Power
Systems Group is also expected to further contribute to 2013 results. In
addition, we have invested in the rental business and believe that this will
continue to contribute to growth.
Although market signals are mixed, engagement levels remain high with respect to
mining projects in Toromont's territories. The product support contribution and
opportunity is expected to continue to grow, however it is not anticipated that
2013 will see a replication of the record 2012 equipment sales into mining
projects. The opportunity is high for a resumption of significant deliveries
into 2014 and beyond, dependent on projects advancing and Toromont's success in
winning the business. The timing of mining projects is expected to have an
impact on the earnings pattern.
The parts and service business has seen significant growth and provides a
measure of stability, driven by the larger installed base of equipment in the
field. The number of technicians has increased, service shops are very active
and work-in-process levels remain strong.
Toromont's expanded product offering contributes to growth on multiple fronts.
Firstly, the Equipment Group benefits from Caterpillar's expanding product
line-up including the former Bucyrus and MWM products, which the Company now
represents. In addition, the Equipment Group represents complementary product
lines with recent and expanding opportunities including Sitech and Metso. CIMCO
has also expanded its product offering to include CO2-based solutions, which are
expected to contribute to its growth.
At CIMCO, strong industrial bookings in Canada are an encouraging sign with
respect to future prospects. Canadian recreational bookings continue, albeit at
lower levels due to recent significant spending. This is expected to ramp back
up over time, due in part to a recently introduced Quebec provincial program to
replace CFC and HFC refrigerants in recreational facilities. The product support
business remains a focus for growth with encouraging results in the United
States.
The Company has historically demonstrated its success in delivering good
profitability through changing market conditions. We expect to continue to do
so.
CONTRACTUAL OBLIGATIONS
Contractual obligations are set out in the following table. Management believes
that these obligations will be met comfortably through cash generated from
operations and existing long-term financing facilities.
Payments due by
period 2013 2014 2015 2013 2017 Thereafter Total
----------------------------------------------------------------------------
Long-term Debt
- principal $ 1,372 $ 1,471 $126,576 $1,690 $28,358 $ 2,963 $162,430
- interest 7,619 7,521 6,067 1,152 849 1,480 24,688
Accounts
payable 203,468 - - - - - 203,468
Operating
Leases 2,606 2,017 1,482 1,329 227 1,726 9,387
----------------------------------------------------------------------------
$215,065 $11,009 $134,125 $4,171 $29,434 $ 6,169 $399,973
----------------------------------------------------------------------------
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KEY PERFORMANCE MEASURES
Management reviews and monitors its activities and the performance indicators it
believes are critical to measuring success. Some of the key financial
performance measures are summarized in the following table. Others include, but
are not limited to, measures such as market share, fleet utilization, customer
and employee satisfaction and employee health and safety.
Years ended December 31, 2012 2011 2010 2009 (3) 2008
----------------------------------------------------------------------------
Expanding Markets and Broadening
Product Offerings
Revenue growth (1) 9.1% 14.5% 14.8% -18.7% 0.7%
Revenue per employee (thousands)
(1) $ 481 $ 465 $ 423 $ 364 $ 430
Strengthening Product Support
Product support revenue growth (1) 13.2% 12.6% 7.4% -3.0% 4.2%
Investing in Our Resources
Investment in information
technology (millions) (1) $12.6 $12.1 $ 10.1 $ 10.6 $ 10.9
Return on capital employed (2) 28.7% 32.4% 10.8% 21.1% 26.4%
Strong Financial Position
Non-cash working capital
(millions) (1) $ 301 $ 176 $ 136 $ 172 $ 197
Total debt, net of cash to total
capitalization 25% 13% 17% -6% 4%
Book value (shareholders' equity)
per share $6.24 $5.27 $15.50 $13.17 $12.06
Build Shareholder Value
Basic earnings per share growth
(1) 18.1% 32.5% 9.6% -18.3% -12.7%
Dividends per share growth (4) 17.0% 16.1% 3.3% 7.1% 16.7%
Return on equity (5) 30.1% 28.9% 9.1% 15.5% 21.5%
(1) Metric presents results on a continuing operations basis.
(2) Return on capital employed is defined in the section titled "Non-IFRS
Financial Measures". 2011 ROCE was calculated excluding earnings and
capital employed from discontinued operations.
(3) Financial statements for 2009 and previous reflect Canadian GAAP. These
were not restated to IFRS.
(4) Dividends per share growth in 2011 reflects the announced increase in
dividend subsequent to apportionment of dividend to Enerflex subsequent to
spinoff.
(5) Return on equity is defined in the section titled "Non-IFRS Financial
Measures". 2011 ROE was calculated excluding earnings and equity from
discontinued operations.
While the global recession interrupted the steady string of growth across key
performance measures, profitability endured and the balance sheet continued to
strengthen. This has been discussed at length throughout this MD&A.
Measuring Toromont's results against these strategies over the past five years
illustrates that the Company has made significant progress.
Since 2008, revenues increased at an average annual rate of 4.1%. Product
support revenue growth has averaged 6.9% annually. Revenue growth in continuing
operations has been a result of:
-- Increased customer demand in certain market segments, most notably
mining;
-- Additional product offerings over the years from Caterpillar and other
suppliers;
-- Organic growth through increased rental fleet size and additional
branches;
-- Increased customer demand for formal product support agreements;
-- Governmental funding programs such as the RinC program which provided
support for recreational spending; and
-- Acquisitions, primarily within the Equipment Group's rental operations.
Over the same five-year period, revenue growth has been constrained at times by
a number of factors including:
-- General economic weakness, which has negatively impacted revenues since
the latter part of 2008 through to early 2010;
-- Inability to source equipment from suppliers to meet customer demand or
delivery schedules; and
-- Declines in underlying market conditions such as depressed US industrial
markets.
Changes in the Canadian/U.S. exchange rate also impacts reported revenues as the
exchange rate impacts on the purchase price of equipment that in turn is
reflected in selling prices.
Toromont has generated significant competitive advantage over the past years by
investing in its resources, in part to increase productivity levels.
Toromont continues to maintain a strong balance sheet. Leverage, as represented
by the ratio of total debt, net of cash, to total capitalization (net debt plus
shareholders' equity), was 25%, well within targeted levels.
Toromont has a history of progressive earnings per share growth. This trend was
not continued in 2009 due to the weak economic environment, which reduced
revenues. In 2010, earnings per share were negatively impacted by the issuance
of shares in the year for the acquisition of ESIF. In 2011, on a continuing
operations basis, earnings per share increased 32.5%, in line with earnings
growth. In 2012, EPS increased 18% on a continuing operations basis.
Toromont has paid dividends consistently since 1968, and has increased the
dividend in each of the last 22 years. In 2012, the regular quarterly dividend
rate was increased 9% from $0.11 to $0.12 per share. In 2011, the dividend rate
was apportioned between Toromont and Enerflex in conjunction with the spinoff of
Enerflex, such that shareholders received the same dividend in total. Subsequent
to the spinoff, Toromont increased the quarterly dividend rate 10%.
CONSOLIDATED RESULTS OF OPERATIONS FOR THE FOURTH QUARTER 2012
Three months ended December 31
($ thousands, except per share
amounts) 2012 2011 $ change % change
----------------------------------------------------------------------------
Revenues $431,068 $408,432 $22,636 6%
Cost of goods sold 312,109 304,665 7,444 2%
----------------------------------------------------------------------------
Gross profit 118,959 103,767 15,192 15%
Selling and administrative expenses 57,149 55,549 1,600 3%
----------------------------------------------------------------------------
Operating income 61,810 48,218 13,592 28%
Interest expense 2,747 2,124 623 29%
Interest and investment income (1,887) (1,364) (523) 38%
----------------------------------------------------------------------------
Income before income taxes 60,950 47,458 13,492 28%
Income taxes 16,023 13,235 2,788 21%
----------------------------------------------------------------------------
Net earnings $ 44,927 $ 34,223 $10,704 31%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Earnings per share (basic) $ 0.59 $ 0.44 $ 0.15 34%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Key ratios:
Gross profit as a % of revenues 27.6% 25.4%
Selling and administrative expenses
as a % of revenues 13.3% 13.6%
Operating income as a % of revenues 14.3% 11.8%
Income taxes as a % of income before
income taxes 26.3% 27.9%
Results in the fourth quarter of 2012 were a record for revenues and earnings on
a continuing operations basis.
Revenues were 6% higher in the fourth quarter of 2012 compared to the same
period last year on a 70% increase in revenues at CIMCO, partially offset by a
1% decline in Equipment Group revenues.
Gross profit increased 15% in the fourth quarter over last year on the higher
sales volumes and an improved sales mix. Gross profit margin was 27.6% in 2012
compared to 25.4% in 2011. Equipment Group margins improved on sales mix, with a
higher proportion of product support revenues to total, as well as improved
rental margins on higher utilization. Lower margins were reported at CIMCO on
sales mix, with a lower proportion of product support revenues to total.
Selling and administrative expenses increased $1.6 million or 3% versus the
comparable period of the prior year. Compensation was higher by $2.3 million on
annual increases, higher staffing levels and higher profit sharing accruals on
the higher income. Bad debt expense was $2.4 million higher in the fourth
quarter of 2012 compared to last year on higher allowance for doubtful accounts.
Expenses in 2012 included a $0.3 million insurance recovery related to a fire at
CIMCO's Mobile, Alabama office. Certain marketing related costs including
non-charge rentals and allowances were lower in the fourth quarter of 2012
compared to 2011. Selling and administrative expenses as a percentage of
revenues were 13.3% versus 13.6% in the comparable period last year.
Interest expense was $2.7 million in the fourth quarter of 2012, up $0.6 million
from the similar period last year on higher debt balances required to support
increased inventory levels and investments in rental fleet.
Interest income was $1.9 million in the fourth quarter of 2012, up $0.5 million
from last year on higher interest on conversions of rental equipment with
purchase options.
The effective income tax rate in the quarter was 26.3% compared to 27.9% in the
same period last year. The lower tax rate reflects lower statutory rates.
Net earnings in the quarter were $44.9 million, up 31% from 2011. Basic earnings
per share were $0.59, up 34% from the fourth quarter of 2011.
Fourth Quarter Results of Operations in the Equipment Group
Three months ended December 31
($ thousands) 2012 2011 $ change % change
----------------------------------------------------------------------------
Equipment sales and rentals
New $151,436 $187,677 $(36,241) (19%)
Used 41,539 46,763 (5,224) (11%)
Rental 57,234 45,259 11,975 26%
----------------------------------------------------------------------------
Total equipment sales and rentals 250,209 279,699 (29,490) (11%)
Power generation 2,816 2,720 96 4%
Product support 114,377 88,627 25,750 29%
----------------------------------------------------------------------------
Total revenues $367,402 $371,046 $ (3,644) (1%)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operating income $ 57,449 $ 46,690 $ 10,759 23%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Bookings ($ millions) $ 156 $ 157 $ (1) (1%)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Key ratios:
Product support revenues as a % of
total revenues 31.1% 23.9%
Group total revenues as a % of
consolidated revenues 85.2% 90.8%
Operating income as a % of revenues 15.6% 12.6%
New and used equipment sales decreased as significant deliveries to mining
customers in the fourth quarter of 2011 were not matched in the current year.
This accounted for approximately 75% of the decline, with no one market being a
significant component of the balance.
Rental revenues increased sizeably on a larger rental fleet and higher fleet
utilization. All categories of rentals were higher including light equipment,
heavy equipment, equipment on rent with purchase options and power. Rental
rates have been largely consistent with the prior year, with continuing
competitive market conditions.
Product support revenues achieved record levels due to double-digit growth in
both parts and service. Improved market conditions and a larger installed base
of equipment in territory combined with marketing initiatives have driven higher
activity levels.
Operating income increased on improved gross margins. Gross margins were up 340
basis points in the quarter on sales mix, with a higher proportion of product
support and rentals to total. Rental margins improved on higher utilization.
Selling and administrative expenses were 2% higher than the comparable quarter
last year, on higher compensation and bad debt expense offset by lower marketing
expenses. Operating income as a percentage of revenues was 15.6% compared to
12.6% in the fourth quarter of 2011.
Bookings in the fourth quarter of 2012 were $156 million, down 1% from the
similar period last year.
Fourth Quarter Results of Operations in CIMCO
Three months ended December 31
($ thousands) 2012 2011 $ change % change
----------------------------------------------------------------------------
Package sales $41,786 $18,261 $ 23,525 129%
Product support 21,880 19,125 2,755 14%
----------------------------------------------------------------------------
Total revenues $63,666 $37,386 $ 26,280 70%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operating income $ 4,361 $ 1,528 $ 2,833 185%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Bookings ($ millions) $ 23 $ 27 $ (4) (15%)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Key ratios:
Product support revenues as a % of
total revenues 34.4% 51.2%
Group total revenues as a % of
consolidated revenues 14.8% 9.2%
Operating income as a % of revenues 6.8% 4.1%
Package revenues in the quarter were more than double those seen in 2011.
Industrial revenues in Canada were a substantial contributor, with a number of
projects progressing including those previously announced for Maple Leaf Foods.
Recreational revenues in Canada were down 14% from last year, as anticipated, as
a federal stimulus program ended in 2011. US package activity in both
recreational and industrial were lower year-over-year reflecting continued lower
market activity on economic conditions.
Product support revenues rose on increased activity in both Canada and the US.
Increased operating income largely reflects the increase in revenues. Gross
margins were down 410 basis points on sales mix, with a significantly higher
proportion of package revenues to total. Selling and administrative expenses
increased 11% year-over-year.
Bookings in the quarter totalled $23 million, down 15% from the similar quarter
last year. Canadian bookings were lower while US bookings were very good.
QUARTERLY RESULTS
The following table summarizes unaudited quarterly consolidated financial data
for the eight most recently completed quarters. This quarterly information is
unaudited but has been prepared on the same basis as the 2012 annual unaudited
consolidated financial statements.
$ thousands, except per share amounts Q1 2012 Q2 2012 Q3 2012 Q4 2012
------------------------------------
Revenues
Equipment Group $245,799 $334,300 $362,393 $367,402
CIMCO 35,660 45,307 52,646 63,666
------------------------------------
Total revenues $281,459 $379,607 $415,039 $431,068
------------------------------------
------------------------------------
Net earnings $ 17,240 $ 25,653 $ 32,733 $ 44,927
Per share information:
Earnings per share - basic $ 0.22 $ 0.34 $ 0.43 $ 0.59
Earnings per share - diluted $ 0.22 $ 0.33 $ 0.43 $ 0.59
Dividends paid per share $ 0.11 $ 0.12 $ 0.12 $ 0.12
Weighted average common shares
outstanding - Basic (in thousands) 76,786 76,761 76,289 76,352
$ thousands, except per share amounts Q1 2011 Q2 2011 Q3 2011 Q4 2011
------------------------------------
Revenues
Equipment Group $221,030 $289,191 $315,120 $371,046
CIMCO 40,579 55,453 52,169 37,386
------------------------------------
Total revenues $261,609 $344,644 $367,289 $408,432
------------------------------------
------------------------------------
Net earnings
Continuing operations $ 13,803 $ 23,722 $ 30,930 $ 34,223
Discontinued operations 7,821 135,960 - $ -
------------------------------------
$ 21,624 $159,682 $ 30,930 $ 34,223
------------------------------------
------------------------------------
Per share information:
Earnings per share - basic
Continuing operations $ 0.18 $ 0.31 $ 0.40 $ 0.44
Discontinued operations 0.10 1.77 - -
------------------------------------
$ 0.28 $ 2.08 $ 0.40 $ 0.44
------------------------------------
------------------------------------
Earnings per share - diluted
Continuing operations $ 0.18 $ 0.30 $ 0.40 $ 0.44
Discontinued operations 0.10 1.76 - -
------------------------------------
$ 0.28 $ 2.06 $ 0.40 $ 0.44
------------------------------------
------------------------------------
Dividends paid per share $ 0.16 $ 0.10 $ 0.10 $ 0.11
Weighted average common shares
outstanding - Basic (in thousands) 77,163 77,204 77,095 76,604
Interim period revenues and earnings historically reflect significant
variability from quarter to quarter.
The Equipment Group has historically had a distinct seasonal trend in activity
levels. Lower revenues are recorded during the first quarter due to winter
shutdowns in the construction industry. The fourth quarter has typically been
the strongest due in part to the timing of customers' capital investment
decisions, delivery of equipment from suppliers for customer-specific orders and
conversions of equipment on rent with a purchase option. In the future,
fluctuations in mining-related business may distort this trend somewhat due to
the timing of significant deliveries in any given quarter.
CIMCO also has historically had a distinct seasonal trend in results due to
timing of construction activity. Prior to the increase in activities associated
with the recent Federal stimulus program, CIMCO had traditionally posted a loss
in the first quarter. Profitability increased in subsequent quarters as activity
levels and resultant revenues increased.
As a result of the historical seasonal sales trends, inventories increase
through the year in order to meet the expected demand for delivery in the fourth
quarter of the fiscal year, while accounts receivable are highest at year end.
SELECTED ANNUAL INFORMATION
(in thousands, except per share amounts) 2012 2011 2010
----------------------------------------------------------------------------
Revenues $1,507,173 $1,381,974 $1,207,028
Net earnings - continuing operations $ 120,553 $ 102,678 $ 76,659
Net earnings $ 120,553 $ 246,459 $ 103,912
Earnings per share - continuing operations
- Basic $ 1.57 $ 1.33 $ 1.00
- Diluted $ 1.56 $ 1.32 $ 0.99
Earnings per share
- Basic $ 1.57 $ 3.20 $ 1.36
- Diluted $ 1.56 $ 3.18 $ 1.35
Dividends declared per share $ 0.48 $ 0.48 $ 0.62
Total assets $ 936,170 $ 913,331 $2,271,763
Total long-term debt $ 159,767 $ 134,095 $ 419,929
Weighted average common shares outstanding,
basic (millions) 76.5 77.0 76.2
Revenues grew 9% in 2012 and 14% in 2011 on improved market conditions and
significant mining activity within the Equipment Group.
Net earnings from continuing operations improved 18% in 2012 and 34% in 2011 on
the higher revenues, generally improving margins and relatively slower growth in
selling and administrative expenses.
Net earnings in 2010 and 2011 include results from discontinued operations,
Enerflex. Toromont completed the acquisition of ESIF in 2010. Net earnings from
discontinued operations in 2011 represent five months of results to May 31,
2011. Additionally, a net gain of $133.2 million was recognized on spinoff.
Earnings per share have generally followed earnings.
Dividends have generally increased in proportion to trailing earnings growth. In
2011, in conjunction with the spinoff, the regular quarterly dividend was
apportioned between Toromont and Enerflex. The previous dividend rate of $0.16
per share was allocated $0.10 to Toromont and $0.06 to Enerflex, thereby keeping
shareholders whole. Subsequent to the spinoff, Toromont announced a 10% increase
in its dividend rate to $0.11 per share. The dividend rate was increased again
in 2012 by 9% to $0.12 per share. The Company has announced dividend increases
in each of the past 23 years.
Total assets increased in 2010 on the acquisition of ESIF. Total assets acquired
were approximately $1 billion. Total assets decreased in 2011 on the spinoff of
Enerflex. Total assets at Enerflex at the time of spinoff were approximately
$1.4 billion.
Long-term debt increased in 2010 on financing assumed to fund the acquisition of
ESIF. In conjunction with the spinoff, certain financing was repaid. Total debt
net of cash to total capitalization was 25% at December 31, 2012, well within
target levels.
RISKS AND RISK MANAGEMENT
In the normal course of business, Toromont is exposed to risks that may
potentially impact its financial results in any or all of its business segments.
The Company and each operating segment employ risk management strategies with a
view to mitigating these risks on a cost-effective basis.
Business Cycle
Expenditures on capital goods have historically been cyclical, reflecting a
variety of factors including interest rates, foreign exchange rates, consumer
and business confidence, commodity prices, corporate profits, credit conditions
and the availability of capital to finance purchases. Toromont's customers are
typically affected, to varying degrees, by these factors and trends in the
general business cycle within their respective markets. As a result, Toromont's
financial performance is affected by the impact of such business cycles on the
Company's customer base.
Commodity prices, and, in particular, changes in the view on long-term trends,
affect demand for the Company's products and services in the Equipment Group.
Commodity price movements in base metals sectors in particular can have an
impact on customers' demands for equipment and customer service. With lower
commodity prices, demand is reduced as development of new projects is often
stopped and existing projects can be curtailed, both leading to less demand for
heavy equipment.
The business of the Company is diversified across a wide range of industry
market segments, serving to temper the effects of business cycles on
consolidated results. Continued diversification strategies such as expanding the
Company's customer base, broadening product offerings and geographic
diversification are designed to moderate business cycle impacts. The Company has
focused on the sale of specialized equipment and ongoing support through parts
distribution and skilled service. Product support growth has been, and will
continue to be, fundamental to the mitigation of downturns in the business
cycle. The product support business contributes significantly higher profit
margins and is typically subject to less volatility than equipment supply
activities.
Product and Supply
The Equipment Group purchases most of its equipment inventories and parts from
Caterpillar under a dealership agreement that dates back to 1993. As is
customary in distribution arrangements of this type, the agreement with
Caterpillar can be terminated by either party upon 90 days' notice. In the event
Caterpillar terminates, it must repurchase substantially all inventories of new
equipment and parts at cost. Toromont has maintained an excellent relationship
with Caterpillar for 19 years and management expects this will continue going
forward.
Toromont is dependent on the continued market acceptance of Caterpillar's
products. It is believed that Caterpillar has a solid reputation as a
high-quality manufacturer, with excellent brand recognition and customer support
as well as leading market shares in many of the markets it serves. However,
there can be no assurance that Caterpillar will be able to maintain its
reputation and market position in the future. Any resulting decrease in the
demand for Caterpillar products could have a material adverse impact on the
Company's business, results of operations and future prospects.
Toromont is also dependent on Caterpillar for timely supply of equipment and
parts. From time to time during periods of intense demand, Caterpillar may find
it necessary to allocate its supply of particular products among its dealers.
Such allocations of supply have not, in the past, proven to be a significant
impediment in the conduct of business. However, there can be no assurance that
Caterpillar will continue to supply its products in the quantities and
timeframes required by customers.
Competition
The Company competes with a large number of international, national, regional
and local suppliers in each of its markets. Although price competition can be
strong, there are a number of factors that have enhanced the Company's ability
to compete throughout its market areas including: the range and quality of
products and services; ability to meet sophisticated customer requirements;
distribution capabilities including number and proximity of locations; financing
offered by Caterpillar Finance; e-commerce solutions; reputation and financial
strength.
Increased competitive pressures or the inability of the Company to maintain the
factors that have enhanced its competitive position to date could adversely
affect the Company's business, results of operations or financial condition.
The Company relies on the skills and availability of trained and experienced
tradesmen and technicians in order to provide efficient and appropriate services
to customers. Hiring and retaining such individuals is critical to the success
of these businesses. Demographic trends are reducing the number of individuals
entering the trades, making access to skilled individuals more difficult. The
Company has several remote locations which make attracting and retaining skilled
individuals more difficult.
Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist of cash equivalents, accounts receivable and derivative
financial instruments. The carrying amount of assets included on the balance
sheet represents the maximum credit exposure.
When the Company has cash on hand it may be invested in short-term instruments,
such as money market deposits. The Company manages its credit exposure
associated with cash equivalents by ensuring there is no significant
concentration of credit risk with a single counterparty, and by dealing only
with highly rated financial institutions as counterparties.
The Company has accounts receivable from a large diversified customer base, and
is not dependent on any single customer or industry. The Company has accounts
receivable from customers engaged in various industries including construction,
mining, food and beverage, and governmental agencies. Management does not
believe that any single industry represents significant credit risk. These
customers are based predominately in Canada.
The credit risk associated with derivative financial instruments arises from the
possibility that the counterparties may default on their obligations. In order
to minimize this risk, the Company enters into derivative transactions only with
highly rated financial institutions.
Warranties and Maintenance Contracts
Toromont provides warranties for most of the equipment it sells, typically for a
one-year period following sale. The warranty claim risk is generally shared
jointly with the equipment manufacturer. Accordingly, liability is generally
limited to the service component of the warranty claim, while the manufacturer
is responsible for providing the required parts.
The Company also enters into long-term maintenance and repair contracts, whereby
it is obligated to maintain equipment for its customers. The length of these
contracts varies generally from two to five years. The contracts are typically
fixed price on either machine hours or cost per hour, with provisions for
inflationary and exchange adjustments. Due to the long-term nature of these
contracts, there is a risk that maintenance costs may exceed the estimate,
thereby resulting in a loss on the contract. These contracts are closely
monitored for early warning signs of cost overruns. In addition, the
manufacturer may, in certain circumstances, share in the cost overruns if
profitability falls below a certain threshold.
Foreign Exchange
The rate of exchange between the Canadian and U.S. dollar has an impact on
revenue trends. The Canadian dollar averaged on par with the U.S. dollar in 2012
compared to US $0.99 in 2011, a 1.0% decrease. As nearly all of the equipment
and parts sold in the Equipment Group are sourced in U.S. dollars, and Canadian
dollar sales prices generally reflect changes in the rate of exchange, a
stronger Canadian dollar can adversely affect revenues. The impact is not
readily estimable as it is largely dependent on when customers order the
equipment versus when it was sold. Bookings in a given period would more closely
follow period-over-period changes in exchange rates. Sales of parts come from
inventories maintained to service customer requirements. As a result, constant
parts replenishment means that there is a lagging impact of changes in exchange
rates. In CIMCO, sales are largely affected by the same factors. In addition,
revenues from CIMCO's US subsidiary reflect changes in exchange rates on the
translation of results, although this is not significant.
The Company transacts business in multiple currencies, the most significant of
which are the Canadian dollar and the U.S. dollar. As a result, the Company has
foreign currency exposure with respect to items denominated in foreign
currencies.
The Company sources the majority of its products and major components from the
United States. Consequently, reported costs of inventory and the transaction
prices charged to customers for equipment and parts are affected by the relative
strength of the Canadian dollar. The Company mitigates exchange rate risk by
entering into foreign currency contracts to fix the cost of imported inventory
where appropriate.
In addition, pricing to customers is customarily adjusted to reflect changes in
the Canadian dollar landed cost of imported goods. Foreign exchange contracts
reduce volatility by fixing landed costs related to specific customer orders and
establishing a level of price stability for high-volume goods such as spare
parts.
The Company does not enter into foreign exchange forward contracts for
speculative purposes. The gains and losses on the foreign exchange forward
contracts designated as cash flow hedges are intended to offset the translation
losses and gains on the hedged foreign currency transactions when they occur.
As a result, the foreign exchange impact on earnings with respect to
transactional activity is not significant.
Interest Rate
The Company minimizes its interest rate risk by managing its portfolio of
floating and fixed rate debt, as well as managing the term to maturity.
At December 31, 2012, 84% of the Company's debt portfolio was comprised of fixed
rate debt. Fixed rate debt exposes the Company to future interest rate movements
upon refinancing the debt at maturity. Floating rate debt exposes the Company to
fluctuations in short-term interest rates by causing related interest payments
and finance expense to vary.
The Company's fixed rate debt matures between 2015 and 2019.
Further, the fair value of the Company's fixed rate debt obligations may be
negatively affected by declines in interest rates, thereby exposing the Company
to potential losses on early settlements or refinancing. The Company does not
intend to settle or refinance any existing debt before maturity.
Financing Arrangements
The Company requires capital to finance its growth and to refinance its
outstanding debt obligations as they come due for repayment. If the cash
generated from the Company's business, together with the credit available under
existing bank facilities, is not sufficient to fund future capital requirements,
the Company will require additional debt or equity financing in the capital
markets. The Company's ability to access capital markets on terms that are
acceptable will be dependent upon prevailing market conditions, as well as the
Company's future financial condition. Further, the Company's ability to increase
its debt financing may be limited by its financial covenants or its credit
rating objectives. The Company maintains a conservative leverage structure and
although it does not anticipate difficulties, there can be no assurance that
capital will be available on suitable terms and conditions, or that borrowing
costs and credit ratings will not be adversely affected.
Environmental Regulation
Toromont's customers are subject to significant and ever-increasing
environmental legislation and regulation. This legislation can impact Toromont
in two ways. First, it may increase the technical difficulty in meeting
environmental requirements in product design, which could increase the cost of
these businesses' products. Second, it may result in a reduction in activity by
Toromont's customers in environmentally sensitive areas, in turn reducing the
sales opportunities available to Toromont.
Toromont is also subject to a broad range of environmental laws and regulations.
These may, in certain circumstances, impose strict liability for environmental
contamination, which may render Toromont liable for remediation costs, natural
resource damages and other damages as a result of conduct that was lawful at the
time it occurred or the conduct of, or conditions caused by, prior owners,
operators or other third parties. In addition, where contamination may be
present, it is not uncommon for neighbouring land owners and other third parties
to file claims for personal injury, property damage and recovery of response
costs. Remediation costs and other damages arising as a result of environmental
laws and regulations, and costs associated with new information, changes in
existing environmental laws and regulations or the adoption of new environmental
laws and regulations could be substantial and could negatively impact Toromont's
business, results of operations or financial condition.
Spinoff Transaction Risk
Although the spinoff of Enerflex as a separate, publicly traded company is
complete, the transaction exposes Toromont to certain ongoing risks. The spinoff
was structured to comply with all the requirements of the public company
"butterfly rules" in the Income Tax Act. However, there are certain requirements
of these rules that depend on events occurring after completion of the spinoff
or that may not be within the control of Toromont and/or Enerflex. If these
requirements are not met, Toromont could be exposed to significant tax
liabilities which could have a material effect on the financial position of
Toromont. In addition, Toromont has agreed to indemnify Enerflex for certain
liabilities and obligations related to its business at the time of the spinoff.
These indemnification obligations could be significant. These risks are more
fully described in the Management Information Circular relating to the Plan of
Arrangement dated April 11, 2011 which is available at www.sedar.com.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's significant accounting policies are described in Note 1 to the
unaudited consolidated interim financial statements.
The preparation of the Company's consolidated financial statements in conformity
with IFRS requires management to make judgments, estimates and assumptions that
affect the reported amounts of revenues, expenses, assets and liabilities, and
the disclosure of contingent liabilities, at the end of the reporting period.
However, uncertainty about these assumptions and estimates could result in
outcomes that require a material adjustment to the carrying amount of the asset
or liability affected in future periods.
In making estimates and judgments, management relies on external information and
observable conditions where possible, supplemented by internal analysis as
required. Management reviews its estimates and judgements on an ongoing basis.
In the process of applying the Company's accounting policies, management has
made the following judgments, estimates and assumptions which have the most
significant effect on the amounts recognized in the consolidated financial
statements. The critical accounting policies and estimates described below
affect the operating segments similarly, and therefore are not discussed on a
segmented basis.
Property, Plant and Equipment
Fixed assets are stated at cost less accumulated depreciation, including asset
impairment losses. Depreciation is calculated using the straight-line method
over the estimated useful lives of the assets. The estimated useful lives of
fixed assets are reviewed on an annual basis. Assessing the reasonableness of
the estimated useful lives of fixed assets requires judgment and is based on
currently available information.
Fixed assets are also reviewed for potential impairment on a regular basis or
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. In cases where the undiscounted expected future cash
flows are less than the carrying amount, an impairment loss is recognized.
Impairment losses on long-lived assets are measured as the amount by which the
carrying value of an asset or asset group exceeds its fair value, as determined
by the discounted future cash flows of the asset or asset group. In estimating
future cash flows, the Company uses its best estimates based on internal plans
that incorporate management's judgments as to the remaining service potential of
the fixed assets. Changes in circumstances, such as technological advances and
changes to business strategy can result in actual useful lives and future cash
flows differing significantly from estimates. The assumptions used, including
rates and methodologies, are reviewed on an ongoing basis to ensure they
continue to be appropriate. Revisions to the estimated useful lives of fixed
assets or future cash flows constitute a change in accounting estimate and are
applied prospectively.
Income Taxes
Income tax rules and regulations in the countries in which the Company operates
and income tax treaties between these countries are subject to interpretation
and require estimates and assumptions in determining the Company's consolidated
income tax provision that may be challenged by the taxation authorities.
Estimates and judgments are made for uncertainties which exist with respect to
the interpretation of complex tax regulations, changes in tax laws and the
amount and timing of future taxable income. Changes or differences in these
estimates or assumptions may result in changes to the current or deferred tax
balances on the consolidated statement of financial position, a charge or credit
to income tax expense in the income statement and may result in cash payments or
receipts.
Impairment of Non-financial Assets
Impairment exists when the carrying value of an asset or cash generating unit
exceeds its recoverable amount, which is the higher of its fair value less costs
to sell and its value in use. The fair value less costs to sell calculation is
based on available data from binding sales transactions in an arm's length
transaction of similar assets or observable market prices less incremental costs
for disposing of the asset. The value in use calculation is based on a
discounted cash flow model. The cash flows are derived from the budget for the
next five years and do not include restructuring activities that the Company is
not yet committed to or significant future investments that will enhance the
asset's performance of the cash generating unit being tested. The recoverable
amount is most sensitive to the discount rate used for the discounted cash flow
model as well as the expected future cash inflows and the growth rate used for
extrapolation purposes.
Revenue Recognition
The Company generates revenue from the assembly and manufacture of equipment
using the percentage-of-completion method. This method requires management to
make a number of estimates and assumptions surrounding: the expected
profitability of the contract; the estimated degree of completion based on cost
progression; and other detailed factors. Although these factors are routinely
reviewed as part of the project management process, changes in these estimates
or assumptions could lead to changes in the revenues recognized in a given
period.
The Company also generates revenue from long-term maintenance and repair
contracts whereby it is obligated to maintain equipment for its customers. The
contracts are typically fixed price on either machine hours or cost per hour,
with provisions for inflationary and exchange adjustments. Revenue is recognized
using the percentage-of-completion method based on work completed. This method
requires management to make a number of estimates and assumptions surrounding:
machine usage; machine performance; future parts and labour pricing;
manufacturers' warranty coverage; and other detailed factors. These factors are
routinely reviewed as part of the contract management process; however changes
in these estimates or assumptions could lead to changes in the revenues and cost
of goods sold recognized in a given period.
Inventories
Management is required to make an assessment of the net realizable value of
inventory at each reporting period. Management incorporates estimates and
judgments that take into account current market prices, current economic trends
and past experiences in the measurement of net realizable value.
Employee Future Benefits Expense
The net obligations associated with the defined benefit pension plans are
actuarially valued using: the projected unit credit method; management's best
estimates for long-term expected rate of return on assets; salary escalation and
life expectancy; and a current market discount rate. All assumptions are
reviewed at each reporting date.
Share-based Compensation
Estimating the fair value for share-based payment transactions requires
determining the most appropriate inputs to the valuation model including: the
expected life of the share option; volatility; and dividend yield.
FUTURE ACCOUNTING STANDARDS
A number of new standards, amendments to standards and interpretations have been
issued but are not yet effective for the financial year ending December 31,
2012, and accordingly, have not been applied in preparing these consolidated
financial statements.
Consolidated Financial Statements - On May 12, 2011, IASB issued IFRS 10 -
Consolidated Financial Statements. This IFRS replaces portions of IAS 27 -
Consolidated and Separate Financial Statements that addresses consolidation, and
supersedes SIC-12 in its entirety. The objective of IFRS 10 is to define the
principles of control and establish the basis of determining when and how an
entity should be included within a set of consolidated financial statements. IAS
27 has been amended for the issuance of IFRS 10 and retains guidance only for
separate financial statements.
Joint Arrangements - On May 12, 2011, the IASB issued IFRS 11 - Joint Ventures.
IFRS 11 supersedes IAS 31 - Interest in Joint Ventures and SIC-13 - Jointly
Controlled Entities - Non Monetary Contributions by Venturers. Through an
assessment of the rights and obligations in an arrangement, IFRS 11 establishes
principles to determine the type of joint arrangement and guidance for financial
reporting activities required by the entities that have an interest in
arrangements that are controlled jointly.
As a result of the issuance of IFRS 10 and IFRS 11, IAS 28 - Investments in
Associates and Joint Ventures has been amended to correspond to the guidance
provided in IFRS 10 and IFRS 11.
Disclosure of Interests in Other Entities - On May 12, 2011, the IASB issued
IFRS 12 - Disclosure of Interests in Other Entities. This IFRS requires
extensive disclosures relating to a company's interests in subsidiaries, joint
arrangements, associates, and unconsolidated structured entities. This IFRS
enables users of the financial statements to evaluate the nature and risks
associated with its interests in other entities and the effects of those
interests on its financial position and performance.
IFRS 10, 11 and 12, and the amendments to IAS 27 and 28 are all effective for
annual periods beginning on or after January 1, 2013. Early adoption is
permitted, so long as IFRS 10, 11 and 12, and the amendments to IAS 27 and 28
are adopted at the same time. However, entities are permitted to incorporate any
of the disclosure requirements in IFRS 12 into their financial statements
without early adopting IFRS 12.
Fair Value Measurement - On May 12, 2011, the IASB issued IFRS 13 - Fair Value
Measurement, which defines fair value, provides guidance in a single IFRS
framework for measuring fair value and identifies the required disclosures
pertaining to fair value measurement. This standard is effective for annual
periods beginning on or after January 1, 2013, and early adoption is permitted.
Employee Benefits - On June 16, 2011 the IASB revised IAS 19 - Employee
Benefits. The revisions include the elimination of the option to defer the
recognition of gains and losses, enhancing the guidance around measurement of
plan assets and defined benefit obligations, streamlining the presentation of
changes in assets and liabilities arising from defined benefit plans and
introduction of enhanced disclosures for defined benefit plans. The amendments
are effective for annual periods beginning on or after January 1, 2013.
Presentation of Financial Statements - On June 16, 2011 the IASB issued
amendments to IAS 1 - Presentation of Financial Statements. The amendments
enhance the presentation of Other Comprehensive Income ("OCI") in the financial
statements, primarily by requiring the components of OCI to be presented
separately for items that may be reclassified to the statement of earnings from
those that remain in equity. The amendments are effective for annual periods
beginning on or after July 1, 2012.
Financial Instruments - In November 2009, the IASB issued IFRS 9 - Financial
Instruments, which replaced the classification and measurement requirements in
IAS 39 - Financial Instruments: Recognition and Measurement for financial
assets. In October 2010, the IASB issued additions to IFRS 9 regarding
requirements for classifying and measuring financial liabilities. The IFRS 9
requirements are currently expected to be effective for annual periods beginning
on or after January 1, 2013, although this has been tentatively deferred until
January 1, 2015. IFRS 9 must be applied retrospectively. Earlier adoption is
permitted.
The Company is currently assessing the impact of these new standards and
amendments on its financial statements.
RESPONSIBILITY OF MANAGEMENT AND THE BOARD OF DIRECTORS
Management is responsible for the information disclosed in this MD&A and the
accompanying consolidated financial statements, and has in place appropriate
information systems, procedures and controls to ensure that information used
internally by management and disclosed externally is materially complete and
reliable. In addition, the Company's Audit Committee, on behalf of the Board of
Directors, provides an oversight role with respect to all public financial
disclosures made by the Company, and has reviewed and approved this MD&A and the
accompanying consolidated financial statements. The Audit Committee is also
responsible for determining that management fulfills its responsibilities in the
financial control of operations, including disclosure controls and procedures
and internal control over financial reporting.
DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROL OVER FINANCIAL REPORTING
The Chief Executive Officer and the Chief Financial Officer, together with other
members of management, have evaluated the effectiveness of the Company's
disclosure controls and procedures and internal controls over financial
reporting as at December 31, 2012, using the internal control integrated
framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on that evaluation, they have concluded that the design and
operation of the Company's disclosure controls and procedures were adequate and
effective as at December 31, 2012, to provide reasonable assurance that a)
material information relating to the Company and its consolidated subsidiaries
would have been known to them and by others within those entities, and b)
information required to be disclosed is recorded, processed, summarized and
reported within required time periods. They have also concluded that the design
and operation of internal controls over financial reporting were adequate and
effective as at December 31, 2012, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial reporting in
accordance with IFRS.
There have been no changes in the design of the Company's internal controls over
financial reporting during 2012 that would materially affect, or is reasonably
likely to materially affect, the Company's internal controls over financial
reporting.
While the Officers of the Company have evaluated the effectiveness of disclosure
controls and procedures and internal control over financial reporting as at
December 31, 2012 and have concluded that these controls and procedures are
being maintained as designed, they expect that the disclosure controls and
procedures and internal controls over financial reporting may not prevent all
errors and fraud. A control system, no matter how well conceived or operated,
can only provide reasonable, not absolute, assurance that the objectives of the
control system are met.
NON-IFRS FINANCIAL MEASURES
The success of the Company and business unit strategies is measured using a
number of key performance indicators, which are outlined below. These measures
are also used by management in its assessment of relative investments in
operations. These key performance indicators are not measurements in accordance
with IFRS. It is possible that these measures will not be comparable to similar
measures prescribed by other companies. They should not be considered as an
alternative to net income or any other measure of performance under IFRS.
Operating Income and Operating Margin
Each business segment assumes responsibility for its operating results as
measured by, amongst other factors, operating income, which is defined as income
before income taxes, interest income and interest expense. Financing and related
interest charges cannot be attributed to business segments on a meaningful basis
that is comparable to other companies. Business segments and income tax
jurisdictions are not synonymous, and it is believed that the allocation of
income taxes distorts the historical comparability of the performance of the
business segments. Consolidated and segmented operating income is reconciled to
net earnings in tables where used in this MD&A.
Operating income margin is calculated by dividing operating income by total
revenue.
Return on Equity and Return on Capital Employed
Return on equity ("ROE") is monitored to assess the profitability of the
consolidated Company. ROE is calculated by dividing net earnings by opening
shareholders' equity (adjusted for shares issued and redeemed during the year).
Opening shareholders' equity in 2011 was also adjusted to remove both net
earnings and equity associated with discontinued operations.
Return on capital employed ("ROCE") is a key performance indicator that is
utilized to assess both current operating performance and prospective
investments. The numerator used for the calculation is income before income
taxes, interest expense and interest income (excluding interest on rental
conversions). The denominator in the calculation is the monthly average capital
employed, which is defined as net debt plus shareholders' equity.
Working Capital and Non-Cash Working Capital
Working capital is defined as current assets less current liabilities. Non-cash
working capital is defined as working capital less cash and equivalents.
Net Debt to Total Capitalization
Net debt is defined as total long-term debt less cash and cash equivalents.
Total capitalization is defined as net debt plus shareholders' equity. The ratio
of net debt to total capitalization is determined by dividing net debt by total
capitalization.
TOROMONT INDUSTRIES LTD.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Unaudited)
December 31 December 31
($ thousands) Note 2012 2011
----------------------------------------------------------------------------
Assets
Current assets
Cash $ 2,383 $ 75,319
Accounts receivable 3 231,518 209,243
Inventories 4 327,785 301,937
Derivative financial instruments 43 12
Other current assets 4,086 4,718
----------------------------------------------------------------------------
Total current assets 565,815 591,229
Property, plant and equipment 5 157,993 151,928
Rental equipment 5 158,932 135,362
Derivative financial instruments - 418
Other assets 6 12,614 8,195
Deferred tax assets 15 13,697 12,749
Goodwill and intangible assets 7 27,119 13,450
----------------------------------------------------------------------------
Total assets $ 936,170 $ 913,331
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities
Current liabilities
Accounts payable, accrued liabilities and
provisions 8 $ 203,468 $ 280,735
Deferred revenues 54,664 49,100
Current portion of long-term debt 9 1,372 1,280
Derivative financial instruments 262 640
Income taxes payable 3,130 8,352
----------------------------------------------------------------------------
Total current liabilities 262,896 340,107
Deferred revenues 11,337 10,387
Long-term debt 9 158,395 132,815
Accrued pension liability 19 26,840 26,161
Derivative financial instruments 127 -
Shareholders' equity
Share capital 10 270,900 265,436
Contributed surplus 11 5,957 5,890
Retained earnings 199,486 131,643
Accumulated other comprehensive income 232 892
----------------------------------------------------------------------------
Shareholders' equity 476,575 403,861
----------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 936,170 $ 913,331
----------------------------------------------------------------------------
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See accompanying notes
TOROMONT INDUSTRIES LTD.
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
Years ended December 31 ($ thousands, except
share amounts) Note 2012 2011
----------------------------------------------------------------------------
Revenues $ 1,507,173 $ 1,381,974
Cost of goods sold 1,122,765 1,032,599
----------------------------------------------------------------------------
Gross profit 384,408 349,375
Selling and administrative expenses 214,130 201,190
----------------------------------------------------------------------------
Operating income 170,278 148,185
Interest expense 14 9,714 9,012
Interest and investment income 14 (3,974) (3,214)
----------------------------------------------------------------------------
Income before income taxes 164,538 142,387
Income taxes 15 43,985 39,709
----------------------------------------------------------------------------
Net earnings from continuing operations 120,553 102,678
Net gain on spinoff of Enerflex 25 - 133,164
Earnings from discontinued operations 25 - 10,617
----------------------------------------------------------------------------
Net earnings $ 120,553 $ 246,459
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Earnings (losses) attributable to :
Common shareholders $ 120,553 $ 247,082
Non-controlling interests $ - $ (623)
Basic earnings per share
Continuing operations 16 $ 1.57 $ 1.33
Discontinued operations 16 - 1.87
----------------------------------------------------------------------------
$ 1.57 $ 3.20
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Diluted earnings per share
Continuing operations 16 $ 1.56 $ 1.32
Discontinued operations 16 - 1.86
----------------------------------------------------------------------------
$ 1.56 $ 3.18
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted average number of shares outstanding
Basic 76,549,792 77,013,509
Diluted 77,086,929 77,393,253
See accompanying notes
TOROMONT INDUSTRIES LTD.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Years ended December 31 ($ thousands) 2012 2011
----------------------------------------------------------------------------
Net earnings $120,553 $246,459
Other comprehensive income (loss):
Unrealized loss on translation of financial statements
of foreign operations (121) (6,250)
Change in fair value of derivatives designated as cash
flow hedges, net of income tax (recovery) (2012 -
($650); 2011 - $2,245) (1,619) 4,552
Loss (gain) on derivatives designated as cash flow
hedges transferred to net earnings, net of income tax
(recovery) (2012 - $435; 2011 - ($719)) 1,080 (1,662)
Loss on translation of financial statements of foreign
operations transferred to net earnings on spinoff of
Enerflex - 18,015
Actuarial losses on pension plans, net of income tax
recovery (2012 - $1,505; 2011 - $2,411) (4,176) (7,234)
----------------------------------------------------------------------------
Other comprehensive (loss) income (4,836) 7,421
----------------------------------------------------------------------------
Comprehensive income $115,717 $253,880
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Comprehensive loss attributable to non-controlling
interests $ - $ (623)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes
TOROMONT INDUSTRIES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Years ended December 31 ($ thousands) Note 2012 2011
----------------------------------------------------------------------------
Operating activities
Net earnings from continuing operations $ 120,553 $ 102,678
Items not requiring cash and cash equivalents
Depreciation and amortization 52,818 45,863
Stock-based compensation 11 1,659 1,001
Accrued pension liability (5,002) (3,335)
Deferred income taxes 769 (1,450)
Gain on sale of rental equipment and
property, plant and equipment (8,967) (8,211)
Cash flow from discontinued operations - 26,028
----------------------------------------------------------------------------
161,830 162,574
Net change in non-cash working capital and
other from continuing operations 21 (124,475) (39,731)
Net change in non-cash working capital and
other from discontinued operations 25 - 31,405
----------------------------------------------------------------------------
Cash provided by operating activities 37,355 154,248
----------------------------------------------------------------------------
Investing activities
Additions to:
Rental equipment (77,611) (57,860)
Property, plant and equipment (23,700) (25,017)
Proceeds on disposal of:
Rental equipment 22,562 23,040
Property, plant and equipment 1,504 4,080
Increase in other assets (291) (184)
Increase in intangible assets (13,669) -
Discontinued operations 25 - 140,115
----------------------------------------------------------------------------
Cash (used in) provided by investing activities (91,205) 84,174
----------------------------------------------------------------------------
Financing activities
Increase in term credit facility debt 26,547 -
Repayment of long-term debt (1,280) (286,888)
Financing costs (369) (575)
Dividends 10 (35,996) (40,877)
Shares purchased for cancellation (14,137) (12,213)
Cash received on exercise of stock options 6,202 3,242
----------------------------------------------------------------------------
Cash used in financing activities (19,033) (337,311)
----------------------------------------------------------------------------
Effect of exchange rate changes on cash
denominated in foreign currency (53) 119
----------------------------------------------------------------------------
Decrease in cash and cash equivalents (72,936) (98,770)
Cash and cash equivalents at beginning of year 75,319 174,089
----------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 2,383 $ 75,319
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Supplemental cash flow information (note 21)
See accompanying notes
TOROMONT INDUSTRIES LTD.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(Unaudited)
----------------------------------------------------------------------------
Foreign
currency
Share Contributed Retained translation
($ thousands) Note capital surplus earnings adjustments
----------------------------------------------------------------------------
At January 1, 2012 $ 265,436 $ 5,890 $ 131,643 $ 545
Net earnings - - 120,553 -
Other comprehensive
loss - - (4,176) (121)
Shares purchased for
cancellation 10 (2,330) - (11,806) -
Effect of stock
compensation plans 7,794 67 - -
Dividends 10 - - (36,728) -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
At December 31, 2012 $ 270,900 $ 5,957 $ 199,486 $ 424
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total
accumulated
Cash other Non-
flow comprehensive controlling
($ thousands) Note hedges income Interest Total
----------------------------------------------------------------------------
At January 1, 2012 $ 347 $ 892 $ - $ 403,861
Net earnings - - - 120,553
Other comprehensive
loss (539) (660) - (4,836)
Shares purchased for
cancellation 10 - - - (14,136)
Effect of stock
compensation plans - - - 7,861
Dividends 10 - - - (36,728)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
At December 31, 2012 $ (192) $ 232 $ - $ 476,575
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Foreign
currency
Share Contributed Retained translation
($ thousands) Note capital surplus earnings adjustments
----------------------------------------------------------------------------
At January 1, 2011 $ 469,080 $ 10,882 $ 729,694 $ (11,220)
Net earnings - - 246,459 -
Enerflex spinoff 25 (205,332) (5,081) (790,560) -
Other comprehensive
(loss) income - - (7,234) (6,250)
Translation losses
recognized on
Enerflex spinoff 25 - - - 18,015
Shares purchased for
cancellation 10 (2,467) - (9,748) -
Effect of stock
compensation plans 4,155 89 - -
Dividends 10 - - (36,968) -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
At December 31, 2011 $ 265,436 $ 5,890 $ 131,643 $ 545
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total
accumulated
Cash other Non-
flow comprehensive controlling
($ thousands) Note hedges income Interest Total
----------------------------------------------------------------------------
At January 1, 2011 $(2,543) $ (13,763) $ 945 $ 1,196,838
Net earnings - - (623) 245,836
Enerflex spinoff 25 (4,950) (4,950) (322) (1,006,245)
Other comprehensive
(loss) income 7,840 1,590 - (5,644)
Translation losses
recognized on
Enerflex spinoff 25 - 18,015 - 18,015
Shares purchased for
cancellation 10 - - - (12,215)
Effect of stock
compensation plans - - - 4,244
Dividends 10 - - - (36,968)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
At December 31, 2011 $ 347 $ 892 $ - $ 403,861
----------------------------------------------------------------------------
----------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
December 31, 2012
($ thousands except where otherwise indicated)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Corporate Information
Toromont Industries Ltd. (the "Company" or "Toromont") is a limited company
incorporated and domiciled in Canada whose shares are publicly traded on the
Toronto Stock Exchange under the symbol TIH. The registered office is located at
3131 Highway 7 West, Concord, Ontario, Canada.
Toromont operates through two business segments: The Equipment Group and CIMCO.
The Equipment Group includes one of the larger Caterpillar dealerships by
revenue and geographic territory in addition to industry-leading rental
operations. CIMCO is a market leader in the design, engineering, fabrication and
installation of industrial and recreational refrigeration systems. Both segments
offer comprehensive product support capabilities. Toromont employs over 3,000
people in almost 100 locations.
Statement of Compliance
These consolidated unaudited financial statements are prepared in accordance
with International Financial Reporting Standards ("IFRS"), as issued by the
International Accounting Standards Board ("IASB").
These consolidated unaudited financial statements were authorized for issue by
the Audit Committee of the Board of the Directors on February 11, 2013.
Basis of Preparation
These consolidated financial statements were prepared on a historical cost
basis, except for derivative instruments that have been measured at fair value.
The consolidated financial statements are presented in Canadian dollars and all
values are rounded to the nearest thousands, except where otherwise indicated.
Basis of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries.
Subsidiaries are fully consolidated from the date of acquisition, being the date
on which the Company obtains control, and continue to be consolidated until the
date that such control ceases. The financial statements of the subsidiaries are
prepared for the same reporting period as the parent company, using consistent
accounting policies. All intra-group balances, income and expenses and
unrealized gains and losses resulting from intra-group transactions are
eliminated in full.
Non-controlling interests represent the portion of net earnings and net assets
that is not held by the Company and are presented separately in the consolidated
income statements and within equity in the consolidated statements of financial
position.
Business Combinations and Goodwill
Business combinations are accounted for using the acquisition method. The cost
of an acquisition is measured as the aggregate of consideration transferred,
measured at acquisition date fair value. Acquisition costs are expensed as
incurred.
Goodwill is initially measured at cost, being the excess of the cost of the
business combination over the Company's share in the net fair value of the
acquiree's identifiable assets, liabilities and contingent liabilities. If the
cost of acquisition is less than the fair value of the net assets of the
subsidiary acquired, the difference is recognized directly in the consolidated
income statements.
After initial recognition, goodwill is measured at cost less any accumulated
impairment losses. For the purpose of impairment testing, goodwill acquired in a
business combination is, from the acquisition date, allocated to each of the
Company's cash-generating units ("CGUs") that are expected to benefit from the
synergies of the combination, irrespective of whether other assets or
liabilities of the acquiree are assigned to those units.
Where goodwill forms part of a CGU and part of the operation within that unit is
disposed of, the goodwill associated with the operation disposed of is included
in the carrying amount of the operation when determining the gain or loss on
disposal of the operation. Goodwill disposed of in this circumstance is measured
based on the relative fair values of the operation disposed of and the portion
of the CGU retained.
Cash and Cash Equivalents
Cash and cash equivalents consist of petty cash, demand deposits and short-term
deposits with an original maturity of three months or less. Cash and cash
equivalents are recorded at cost, which approximates market value.
Accounts Receivable
Accounts receivable are amounts due from customers for merchandise sold or
services performed in the ordinary course of business. If collection is expected
in one year or less (or in the normal operating cycle of the business, if
longer), they are classified as current assets. If not, they are presented as
non-current assets.
Accounts receivable are recognized initially at fair value and subsequently
measured at amortized cost using the effective interest method, less provision
for impairment.
The Company maintains an allowance for doubtful accounts to provide for
impairment of trade receivables. The expense relating to doubtful accounts is
included within "Selling and administrative expenses" in the consolidated income
statements.
Inventories
Inventories are valued at the lower of cost and net realizable value.
Cost of equipment, repair and distribution parts and direct materials include
purchase cost and costs incurred in bringing each product to its present
location and condition. Serialized inventory is determined on a specific-item
basis. Non-serialized inventory is determined based on a weighted-average actual
cost.
Cost of work-in-process includes cost of direct materials, labour and an
allocation of manufacturing overheads, excluding borrowing costs, based on
normal operating capacity.
Cost of inventories includes the transfer of gains and losses on qualifying cash
flow hedges, recognized in other comprehensive income, in respect of the
purchase of inventory.
Net realizable value is the estimated selling price in the ordinary course of
business, less estimated costs of completion and the estimated costs necessary
to make the sale.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost, net of accumulated
depreciation and accumulated impairment losses, if any.
Depreciation is recognized principally on a straight-line basis over the
estimated useful lives of the assets. Estimated useful lives range from 20 to 30
years for buildings, three to 10 years for equipment and 20 years for power
generation assets. Leasehold improvements and lease inducements are amortized on
a straight-line basis over the term of the lease. Land is not depreciated.
The assets' residual values, useful lives and methods of depreciation are
reviewed at each financial year end and adjusted prospectively, if appropriate.
Rental Equipment
Rental equipment is recorded at cost, net of accumulated depreciation and
accumulated impairment losses, if any. Depreciation is recognized principally on
a straight-line basis over the estimated useful lives of the assets, which range
from one to 10 years.
Intangible Assets
Intangible assets acquired separately are measured on initial recognition at
cost. Following initial recognition, intangible assets are carried at cost less
any accumulated amortization and accumulated impairments losses. The useful
lives of intangible assets are assessed as either finite or indefinite. The
assessment of indefinite life is reviewed annually to determine whether the
indefinite life continues to be supportable. Intangible assets with indefinite
useful lives are not amortized, but are tested for impairment annually.
Provisions
Provisions are recognized when the Company has a present obligation, legal or
constructive, as a result of a past event, it is probable that an outflow of
resources embodying economic benefits will be required to settle the obligation
and a reliable estimate can be made of the amount of the obligation.
Provisions for warranty costs are recognized when the product is sold or service
provided. Initial recognition is based on historical experience.
Financial Instruments
The Company determines the classification of its financial assets and
liabilities at initial recognition. Initially, all financial assets and
liabilities are recognized at fair value. Regular-way trades of financial assets
and liabilities are recognized on the trade date. Transaction costs are expensed
as incurred except for loans and receivables and loans and borrowings, in which
case transaction costs are included in initial cost.
Financial Assets
Subsequent measurement of financial assets depends on the classification. The
Company has made the following classifications:
-- Cash and cash equivalents are classified as held for trading and as such
are measured at fair value, with changes in fair value being included in
profit or loss.
-- Accounts receivable are classified as loans and receivables and are
recorded at amortized cost using the effective interest rate method,
less provisions for doubtful accounts.
-- Derivatives are classified as held for trading and are measured at fair
value with changes in fair value being included in profit or loss,
unless they are designated as effective hedging instruments, in which
case changes in fair value are included in other comprehensive income.
The Company assesses at each statement of financial position date whether there
is any objective evidence that a financial asset or a group of financial assets
is impaired.
Financial Liabilities
Subsequent measurement of financial liabilities depends on the classification.
The Company has made the following classifications:
-- Accounts payable and accrued liabilities are classified as financial
liabilities held for trading and as such are measured at fair value,
with changes in fair value being included in profit or loss.
-- Long-term debt is classified as loans and borrowings and as such is
subsequently measured at amortized cost using the effective interest
rate method. Discounts, premiums and fees on acquisition are taken into
account in determining amortized cost.
-- Derivatives are classified as held for trading and are measured at fair
value with changes in fair value being included in profit or loss,
unless they are designated as effective hedging instruments, in which
case changes in fair value are included in other comprehensive income.
Fair Value of Financial Instruments
The Company uses the following hierarchy for determining and disclosing the fair
value of financial instruments by valuation technique:
-- Level 1 - unadjusted quoted prices in active markets for identical
assets or liabilities
-- Level 2 - other techniques for which all inputs that have a significant
effect on the recorded fair value are observable, either directly or
indirectly
-- Level 3 - techniques that use inputs that have a significant effect on
the recorded fair value that are not based on observable market data
Derivative Financial Instruments and Hedge Accounting
Derivative financial arrangements are used to hedge exposure to fluctuations in
exchange rates. Such derivative financial instruments are initially recognized
at fair value on the date on which a derivative contract is entered into and are
subsequently measured at fair value. Derivatives are carried as financial assets
when the fair value is positive and as financial liabilities when the fair value
is negative.
Any gains or losses arising from changes in the fair value of derivatives are
taken directly to the income statement, except for the effective portion of cash
flow hedges, which is recognized in other comprehensive income.
At inception, the Company designates and documents the hedge relationship
including identification of the transaction and the risk management objectives
and strategy for undertaking the hedge. The Company also documents its
assessment, both at hedge inception and on an ongoing basis, of whether the
derivatives that are used in hedging transactions are highly effective in
offsetting changes in fair values or cash flows of hedged items.
The Company has designated certain derivatives as cash flow hedges. These are
hedges of firm commitments and highly probable forecast transactions. The
effective portion of changes in the fair value of derivatives that are
designated as a cash flow hedge is recognized in other comprehensive income. The
gain or loss relating to the ineffective portion is recognized immediately in
the income statement. Additionally:
-- If a hedge of a forecast transaction subsequently results in the
recognition of a non-financial asset, the associated gains or losses
that were recognized in other comprehensive income are included in the
initial cost or other carrying amount of the asset;
-- For cash flow hedges other than those identified above, amounts
accumulated in other comprehensive income are recycled to the income
statement in the period when the hedged item will affect earnings (for
instance, when the forecast sale that is hedged takes place);
-- When a hedging instrument expires or is sold, or when a hedge no longer
meets the criteria for hedge accounting, any cumulative gain or loss in
other comprehensive income remains in other comprehensive income and is
recognized when the forecast transaction is ultimately recognized in the
income statement; and
-- When a forecast transaction is no longer expected to occur, the
cumulative gain or loss that was reported in other comprehensive income
is immediately recognized in the income statement.
Impairment of Non-financial Assets
The Company assesses at each reporting date whether there is an indication that
an asset may be impaired. If any indication exists, or when annual impairment
testing for an asset is required, the Company estimates the asset's recoverable
amount. The recoverable amount is the higher of an asset's fair value less costs
to sell and its value in use. For the purposes of assessing impairment, assets
are grouped at the lowest levels for which there are separately identifiable
cash flows (CGUs). In determining fair value less costs to sell, recent market
transactions are taken into account, if available. In assessing value in use,
the estimated further cash flows are discounted to their present value using a
pre-tax discount rate that reflects current market assessments of the time value
of money and the risks specific to the asset. An impairment loss is recognized
for the amount by which the asset's carrying amount exceeds its recoverable
amount. Impairment losses are recognized in the income statement.
The Company bases its impairment calculation on detailed budgets which are
prepared for each of the CGUs and generally cover a period of three years. For
longer periods, a long-term growth rate is calculated and applied to project
future cash flows after the third year.
For assets other than goodwill, an assessment is made at each reporting date
whether there is any indication that previously recognized impairment losses may
no longer exist or may have decreased. If such indication exists, the Company
estimates the asset's recoverable amount. A previously recognized impairment
loss is reversed only if there has been a change in the assumptions used to
determine the asset's recoverable amount since the last impairment loss was
recognized. The reversal is limited so that the carrying amount of the asset
does not exceed its recoverable amount, nor exceed the carrying amount that
would have been determined, net of depreciation, had no impairment loss been
recognized for the asset in prior years. Such reversal is recognized in the
income statement.
Goodwill is tested for impairment annually during the fourth quarter of the year
and when circumstances indicate that the carrying value may be impaired.
Revenue Recognition
Revenue is recognized to the extent that it is probable that the economic
benefits will flow to the Company and the revenue can be reliably measured.
Revenue is measured at the fair value of the consideration received, excluding
discounts, rebates, sales taxes and duty. The following specific recognition
criteria must also be met before revenue is recognized:
-- Revenues from the sale of equipment are recognized when the significant
risks and rewards of ownership of the goods have passed to the buyer,
usually on shipment of the goods and/or invoicing.
-- Revenues from the sale of equipment for which the Company has provided a
guarantee to repurchase the equipment at predetermined residual values
and dates are accounted for as operating leases. Revenues are recognized
over the period extending to the date of the residual value guarantee.
-- Revenues from the sale of equipment systems involving design,
manufacture, installation and start-up are recorded using the
percentage-of-completion method. Percentage-of-completion is normally
measured by reference to costs incurred to date as a percentage of total
estimated cost for each contract. Any foreseeable losses on such
projects are recognized immediately in profit or loss as identified.
-- Revenues from equipment rentals are recognized in accordance with the
terms of the relevant agreement with the customer, generally on a
straight-line basis over the term of the agreement.
-- Product support services include sales of parts and servicing of
equipment. For the sale of parts, revenues are recognized when the part
is shipped to the customer. For servicing of equipment, revenues are
recognized on completion of the service work.
-- Revenues from long-term maintenance contracts and separately priced
extended warranty contracts are recognized on a percentage-of-completion
basis proportionate to the service work that has been performed based on
the parts and labour service provided. These contracts are closely
monitored for performance. Any losses estimated during the term of the
contract are recognized when identified. At the completion of the
contract, any remaining profit on the contract is recognized as revenue.
-- Interest income is recognized using the effective interest method.
Foreign Currency Translation
The functional and presentation currency of the Company is the Canadian dollar.
Each of the Company's subsidiaries determines its functional currency and items
included in the financial statements of each subsidiary are measured using that
functional currency.
Transactions in foreign currencies are initially recorded at the functional
currency rate prevailing at the date of the transaction or at the average rate
for the period when this is a reasonable approximation. Monetary assets and
liabilities denominated in foreign currencies are retranslated at the functional
currency spot rate of exchange as at the reporting date. All differences are
taken directly to profit or loss. Non-monetary items that are measured in terms
of historical cost in a foreign currency are translated using the exchange rates
as at the dates of the initial transactions.
The assets and liabilities of foreign operations (having a functional currency
other than the Canadian dollar) are translated into Canadian dollars at the rate
of exchange prevailing at the statement of financial position date and the
statements of earnings are translated at the average exchange rate for the
period. The exchange differences arising on translation are recognized in
accumulated other comprehensive income in shareholders' equity. On disposal of a
foreign operation, the deferred cumulative amount recognized in equity is
recognized in the income statement.
Share-based Payment Transactions
The Company operates both equity-settled and cash-settled share-based
compensation plans under which the Company receives services from employees,
including senior executives and directors, as consideration for equity
instruments of the Company or cash payments.
For equity-settled plans, expense is based on the fair value of the awards
granted determined using the Black-Scholes option pricing model and the best
estimate of the number of equity instruments that will ultimately vest. For
awards with graded vesting, each tranche is considered to be a separate grant
based on its respective vesting period. The fair value of each tranche is
determined separately on the date of grant and is recognized as stock-based
compensation expense, net of forfeiture estimate, over the term of its
respective vesting period.
For cash-settled plans, the expense is determined based on the fair value of the
liability incurred at each award date and at each subsequent statement of
financial position date until the award is settled. The fair value of the
liability is measured by applying quoted market prices. Changes in fair value
are recognized in the income statement in selling and administrative expenses.
Employee Future Benefits
For defined contribution plans, the pension expense recorded in the income
statement is the amount of the contributions the Company is required to pay in
accordance with the terms of the plans.
For defined benefit plans, the pension expense is determined separately for each
plan using the following policies:
-- The cost of pensions earned by employees is actuarially determined using
the projected unit credit method pro-rated on length of service and
management's best estimate assumptions to value its pensions using a
measurement date of December 31;
-- For the purpose of calculating the expected return on plan assets, those
assets are valued at fair value;
-- Past service costs from plan amendments are recognized immediately in
net earnings to the extent that the benefits have vested; otherwise,
they are amortized on a straight-line basis over the vesting period;
-- Actuarial gains and losses arising from experience adjustments and
changes in actuarial assumptions are recognized in retained earnings and
included in the statement of comprehensive income in the period in which
they occur.
Income Taxes
Current income tax assets and liabilities are measured at the amount expected to
be recovered from or paid to the taxation authorities.
Deferred tax is provided using the liability method on temporary differences
between the tax bases of assets and liabilities and their carrying amounts for
financial reporting purposes at the reporting date. Deferred tax assets and
liabilities are measured using enacted or substantively enacted income tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in income tax rates is recognized in the
income statement in the period that includes the date of substantive enactment.
The Company assesses recoverability of deferred tax assets based on the
Company's estimates and assumptions. Deferred tax assets are recorded at an
amount that the Company considers probable to be realized.
Current and deferred income taxes relating to items recognized directly in
shareholders' equity are also recognized directly in shareholders' equity.
Leases
The determination of whether an arrangement is, or contains, a lease is based on
the substance of the arrangement at inception date. Leases which transfer
substantially all of the benefits and risks of ownership of the property to the
lessee are classified as finance leases; all other leases are classified as
operating leases. Classification is re-assessed if the terms of the lease are
changed.
Toromont as Lessee
Operating lease payments are recognized as an operating expense in the income
statement on a straight-line basis over the lease term. Benefits received and
receivable as an incentive to enter into an operating lease are deferred and
amortized on a straight-line basis over the term of the lease.
Toromont as Lessor
Rental income from operating leases is recognized on a straight-line basis over
the term of the relevant lease. Initial direct costs incurred in negotiating and
arranging an operating lease are added to the carrying amount of the leased
asset and recognized on a straight-line basis over the lease term.
Borrowing Costs
Borrowing costs directly attributable to the acquisition, construction or
production of an asset that necessarily takes a substantial period of time to
get ready for its intended use or sale are capitalized as part of the cost of
the respective asset. All other borrowing costs are expensed in the period they
occur.
Standards Issued But Not Yet Effective
A number of new standards, amendments to standards and interpretations have been
issued but are not yet effective for the financial year ended December 31, 2012,
and accordingly, have not been applied in preparing these consolidated financial
statements.
Consolidated Financial Statements - On May 12, 2011, the IASB issued IFRS 10 -
Consolidated Financial Statements. This IFRS replaces portions of IAS 27 -
Consolidated and Separate Financial Statements that addresses consolidation, and
supersedes SIC-12 in its entirety. The objective of IFRS 10 is to define the
principles of control and establish the basis of determining when and how an
entity should be included within a set of consolidated financial statements. IAS
27 has been amended for the issuance of IFRS 10 and retains guidance only for
separate financial statements.
Joint Arrangements - On May 12, 2011, the IASB issued IFRS 11 - Joint Ventures.
IFRS 11 supersedes IAS 31 - Interest in Joint Ventures and SIC-13 - Jointly
Controlled Entities - Non Monetary Contributions by Venturers. Through an
assessment of the rights and obligations in an arrangement, IFRS 11 establishes
principles to determine the type of joint arrangement and guidance for financial
reporting activities required by the entities that have an interest in
arrangements that are controlled jointly.
As a result of the issuance of IFRS 10 and IFRS 11, IAS 28 - Investments in
Associates and Joint Ventures has been amended to correspond to the guidance
provided in IFRS 10 and IFRS 11.
Disclosure of Interests in Other Entities - On May 12, 2011, the IASB issued
IFRS 12 - Disclosure of Interests in Other Entities. This IFRS requires
extensive disclosures relating to a company's interests in subsidiaries, joint
arrangements, associates and unconsolidated structured entities. This IFRS
enables users of the financial statements to evaluate the nature and risks
associated with its interests in other entities and the effects of those
interests on its financial position and performance.
IFRS 10, 11 and 12, and the amendments to IAS 27 and 28 are all effective for
annual periods beginning on or after January 1, 2013. Early adoption is
permitted, as long as IFRS 10, 11 and 12, and the amendments to IAS 27 and 28
are adopted at the same time. However, entities are permitted to incorporate any
of the disclosure requirements in IFRS 12 into their financial statements
without early adopting IFRS 12. The Company is currently assessing the impact of
these new standards and amendments on its consolidated financial statements.
Fair Value Measurement - On May 12, 2011, the IASB issued IFRS 13 - Fair Value
Measurement, which defines fair value, provides guidance in a single IFRS
framework for measuring fair value and identifies the required disclosures
pertaining to fair value measurement. This standard is effective for annual
periods beginning on or after January 1, 2013, and early adoption is permitted.
The Company is currently assessing the impact of the new standard on its
consolidated financial statements.
Employee Benefits - On June 16, 2011, the IASB revised IAS 19 - Employee
Benefits. The revisions include the elimination of the option to defer the
recognition of gains and losses, enhancing the guidance around measurement of
plan assets and defined benefit obligations, streamlining the presentation of
changes in assets and liabilities arising from defined benefit plans and the
introduction of enhanced disclosures for defined benefit plans. The amendments
are effective for annual periods beginning on or after January 1, 2013. The
Company is currently assessing the impact of the amendments on its consolidated
financial statements.
Presentation of Financial Statements - On June 16, 2011, the IASB issued
amendments to IAS 1 - Presentation of Financial Statements. The amendments
enhance the presentation of other comprehensive income ("OCI") in the financial
statements, primarily by requiring the components of OCI to be presented
separately for items that may be reclassified to the statement of earnings from
those that remain in equity. The amendments are effective for annual periods
beginning on or after July 1, 2012. The Company is currently assessing the
impact of the amendments on its consolidated financial statements.
Financial Instruments - In November 2009, the IASB issued IFRS 9 - Financial
Instruments, which replaced the classification and measurement requirements in
IAS 39 - Financial Instruments: Recognition and Measurement for financial
assets. In October 2010, the IASB issued additions to IFRS 9 regarding
requirements for classifying and measuring financial liabilities. The IFRS 9
requirements are effective for annual periods beginning on or after January 1,
2015. IFRS 9 must be applied retrospectively. Earlier adoption is permitted. The
Company is currently assessing the impact of adopting IFRS 9 on its consolidated
financial statements.
1. Significant Accounting Estimates and Assumptions
The preparation of the Company's consolidated financial statements in conformity
with IFRS requires management to make judgments, estimates and assumptions that
affect the reported amounts of revenues, expenses, assets and liabilities, and
the disclosure of contingent liabilities, at the end of the reporting period.
However, uncertainty about these assumptions and estimates could result in
outcomes that require a material adjustment to the carrying amount of the asset
or liability affected in future periods.
In making estimates and judgments, management relies on external information and
observable conditions where possible, supplemented by internal analysis as
required. Management reviews its estimates and judgements on an ongoing basis.
In the process of applying the Company's accounting policies, management has
made the following judgments, estimates and assumptions which have the most
significant effect on the amounts recognized in the consolidated financial
statements.
Property, Plant and Equipment - Depreciation is calculated based on the
estimated useful lives of the assets and estimated residual values.
When determining the value in use of property, plant and equipment during
impairment testing, the Company uses the following critical estimates: the
timing of forecasted revenues; future selling prices and margins; maintenance
and other capital expenditures; and discount rates.
Changes in circumstances, such as technological advances and changes to business
strategy, can result in actual useful lives, residual values and future cash
flows differing significantly from estimates. The assumptions used are reviewed
on an ongoing basis to ensure they continue to be appropriate.
Income Taxes - Estimates and judgments are made for uncertainties which exist
with respect to the interpretation of complex tax regulations, changes in tax
laws, and the amount and timing of future taxable income.
Revenue Recognition - The Company generates revenue from the assembly and
manufacture of equipment using the percentage-of-completion method. This method
requires management to make a number of estimates and assumptions surrounding:
the expected profitability of the contract; the estimated degree of completion
based on cost progression; and other detailed factors. Although these factors
are routinely reviewed as part of the project management process, changes in
these estimates or assumptions could lead to changes in the revenues recognized
in a given period.
The Company also generates revenue from long-term maintenance and repair
contracts whereby it is obligated to maintain equipment for its customers. The
contracts are typically fixed price on either machine hours or cost per hour,
with provisions for inflationary and exchange adjustments. Revenue is recognized
using the percentage-of-completion method based on work completed. This method
requires management to make a number of estimates and assumptions surrounding:
machine usage; machine performance; future parts and labour pricing;
manufacturers' warranty coverage; and other detailed factors. These factors are
routinely reviewed as part of the contract management process; however changes
in these estimates or assumptions could lead to changes in the revenues and cost
of goods sold recognized in a given period.
Inventories - Management is required to make an assessment of the net realizable
value of inventory at each reporting period. Management incorporates estimates
and judgments that take into account current market prices, current economic
trends and past experience in the measurement of net realizable value.
Employee Future Benefits Expense - The net obligations associated with the
defined benefit pension plans are actuarially valued using: the projected unit
credit method; management's best estimates for long-term expected rate of return
on plan assets; salary escalation and life expectancy; and a current market
discount rate. All assumptions are reviewed at each reporting date.
Share-based Compensation - Estimating the fair value for share-based payment
transactions requires determining the most appropriate inputs to the valuation
model including: the expected life of the share option; volatility; and dividend
yield.
3. ACCOUNTS RECEIVABLE
December 31 December 31
2012 2011
----------------------------------------------------------------------------
Trade receivables $ 221,999 $ 200,009
Less: allowance for doubtful accounts (5,496) (5,574)
----------------------------------------------------------------------------
Trade receivables - net 216,503 194,435
Other receivables 15,015 14,808
----------------------------------------------------------------------------
Trade and other receivables $ 231,518 $ 209,243
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The aging of gross trade receivables at each reporting date was as follows:
December 31 December 31
2012 2011
----------------------------------------------------------------------------
Current to 90 days $ 211,750 $ 189,069
Over 90 days 10,249 10,940
----------------------------------------------------------------------------
$ 221,999 $ 200,009
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following table presents the movement in the Company's allowance for
doubtful accounts:
Movement of provision
December 31 December 31
2012 2011
----------------------------------------------------------------------------
Balance, beginning of year $ 5,574 $ 5,096
Provisions and revisions, net (78) 478
----------------------------------------------------------------------------
Balance, end of year $ 5,496 $ 5,574
----------------------------------------------------------------------------
----------------------------------------------------------------------------
4. INVENTORIES
December 31 December 31
2012 2011
----------------------------------------------------------------------------
Equipment $ 219,549 $ 204,936
Repair and distribution parts 76,783 73,725
Direct materials 2,598 2,606
Work-in-process 28,855 20,670
----------------------------------------------------------------------------
$ 327,785 $ 301,937
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The amount of inventory recognized as an expense and included in cost of goods
sold accounted for other than by the percentage-of-completion method during 2012
was $885 million (2011 - $844 million). The cost of goods sold includes
inventory write-downs pertaining to obsolescence and aging together with
recoveries of past write-downs upon disposition. A net reversal of write-downs
of $0.2 million was recorded in 2012. The amounts charged to the consolidated
income statement and included in cost of goods sold on a net basis for inventory
valuation issues during 2011 was $1.7 million.
5.PROPERTY, PLANT AND EQUIPMENT
Land Buildings Equipment
----------------------------------------------------------------------------
Cost
December 31, 2011 $ 45,635 $ 110,297 $ 107,380
Additions 385 3,750 18,823
Disposals - (835) (7,755)
Currency translation
effects (3) (12) (8)
----------------------------------------------------------------------------
December 31, 2012 $ 46,017 $ 113,200 $ 118,440
Accumulated
depreciation
December 31, 2011 $ - $ 49,576 $ 79,554
Depreciation charge - 4,715 10,375
Depreciation of
disposals - (454) (7,558)
Currency translation
effects - (2) (10)
----------------------------------------------------------------------------
December 31, 2012 $ - $ 53,835 $ 82,361
----------------------------------------------------------------------------
Net book value -
December 31, 2012 $ 46,017 $ 59,365 $ 36,079
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Power Generation Total Rental Equipment
----------------------------------------------------------------------------
Cost
December 31, 2011 $ 37,992 $ 301,304 $ 262,468
Additions 301 23,259 73,531
Disposals (2) (8,592) (36,587)
Currency translation
effects - (23) -
----------------------------------------------------------------------------
December 31, 2012 $ 38,291 $ 315,948 $ 299,412
Accumulated
depreciation
December 31, 2011 $ 20,246 $ 149,376 $ 127,106
Depreciation charge 1,515 16,605 35,440
Depreciation of
disposals (2) (8,014) (22,066)
Currency translation
effects - (12) -
----------------------------------------------------------------------------
December 31, 2012 $ 21,759 $ 157,955 $ 140,480
----------------------------------------------------------------------------
Net book value -
December 31, 2012 $ 16,532 $ 157,993 $ 158,932
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Land Buildings Equipment
----------------------------------------------------------------------------
Cost
December 31, 2010 $ 46,268 $ 102,152 $ 99,125
December 31, 2010 -
Enerflex - $ - $ -
Business combinations - - -
Reclassifications - - -
Additions 1,860 8,513 15,088
Disposals (2,496) (380) (6,843)
Currency translation
effects 3 12 10
----------------------------------------------------------------------------
December 31, 2011 $ 45,635 $ 110,297 $ 107,380
Accumulated
depreciation
December 31, 2010 $ - $ 45,779 $ 78,211
December 31, 2010 -
Enerflex $ - $ - $ -
Reclassifications 0 0 0
Depreciation charge - 4,175 8,091
Depreciation of
disposals - (380) (6,756)
Impairment Reversal - - -
Currency translation
effects - 2 8
----------------------------------------------------------------------------
December 31, 2011 $ - $ 49,576 $ 79,554
----------------------------------------------------------------------------
Net book value -
December 31, 2011 $ 45,635 $ 60,721 $ 27,826
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Power Generation Total Rental Equipment
----------------------------------------------------------------------------
Cost
December 31, 2010 $ 37,736 $ 285,281 $ 235,183
December 31, 2010 -
Enerflex $ - - $ -
Business combinations - - -
Reclassifications - - -
Additions 278 25,739 62,205
Disposals (22) (9,741) (34,920)
Currency translation
effects - 25 -
----------------------------------------------------------------------------
December 31, 2011 $ 37,992 $ 301,304 $ 262,468
Accumulated
depreciation
December 31, 2010 $ 18,783 $ 142,773 $ 115,239
December 31, 2010 -
Enerflex $ - - $ -
Reclassifications 0 0 0
Depreciation charge 1,485 13,751 30,482
Depreciation of
disposals (22) (7,158) (18,615)
Impairment Reversal - -
Currency translation
effects - 10 -
----------------------------------------------------------------------------
December 31, 2011 $ 20,246 $ 149,376 $ 127,106
----------------------------------------------------------------------------
Net book value -
December 31, 2011 $ 17,746 $ 151,928 $ 135,362
----------------------------------------------------------------------------
----------------------------------------------------------------------------
During 2012, depreciation expense of $47,255 have been charged in cost of goods
sold (2011 - $39,578) and $4,790 have been charged to selling and administrative
expenses (2011 - $4,655).
Operating income from rental operations for the year ended December 31, 2012 was
$26.8 million (2011 - $23.5 million).
6.OTHER ASSETS
December 31 December 31
2012 2011
----------------------------------------------------------------------------
Equipment sold with guaranteed residual values $ 11,456 $ 7,263
Other 1,158 932
----------------------------------------------------------------------------
$ 12,614 $ 8,195
----------------------------------------------------------------------------
----------------------------------------------------------------------------
7.GOODWILL AND INTANGIBLE ASSETS
2012 2011
----------------------------------------------------------------------------
Goodwill $ 13,450 $ 13,450
Intangible assets 13,669 -
----------------------------------------------------------------------------
$ 27,119 $ 13,450
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Toromont acquired from Caterpillar the assets associated with the former
coterminous Bucyrus distribution network. Under this agreement, Toromont paid US
$13.5 million ($13.7 million). This acquisition was accounted for as a purchase
of an identifiable intangible asset. Accordingly, the purchase price was
allocated to the intangible asset - distribution network.
The intangible asset - distribution network is considered to have an indefinite
useful life as the agreement does not have a termination date. Intangible assets
with an indefinite useful life are not amortized but are tested for impairment
annually, or when conditions suggest that there may be an impairment.
Goodwill and intangible assets have been allocated to two CGUs or groups of CGUs
for impairment testing as follows:
-- Toromont CAT, included within the Equipment Group
-- CIMCO, which is also an operating and reportable segment
Carrying amount of goodwill and intangible assets allocated to each of the CGUs
2012 2011
----------------------------------------------------------------------------
Toromont CAT - Goodwill $ 13,000 $ 13,000
CIMCO - Goodwill 450 450
----------------------------------------------------------------------------
Total Goodwill 13,450 13,450
Toromont CAT - Intangible assets 13,669 -
----------------------------------------------------------------------------
Total Goodwill and Intangible assets $ 27,119 $ 13,450
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The Company performed the annual impairment test of goodwill and intangible
assets allocated to Toromont CAT as at December 31, 2012. The recoverable amount
of Toromont CAT has been determined based on a value in use calculation using
cash flow projections from financial budgets approved by senior management
covering a three-year period. Cash flow beyond the three-year period was
extrapolated using a 2% growth rate which represents the expected growth in the
Canadian economy. The pre-tax discount rate applied to cash flow projects is
10.8%. As a result of the analysis, management did not identify impairment for
this CGU.
The Company performed the annual impairment test of goodwill allocated to CIMCO
as at December 31, 2012. The recoverable amount of CIMCO has been determined
based on a value in use calculation using cash flow projections from financial
budgets approved by senior management covering a three-year period. Cash flow
beyond the three-year period was extrapolated using a 2% growth rate which
represents the expected growth in the Canadian economy. The pre-tax discount
rate applied to cash flow projects is 12.7%. As a result of the analysis,
management did not identify impairment for this CGU.
Key Assumption Used in Value in Use Calculations
The calculation of value in use for Toromont CAT and CIMCO are most sensitive to
the following assumptions:
-- Discount rates
-- Growth rate to extrapolate cash flows beyond the budget period
Discount rates represent the current market assessment of the risks specific to
each CGU, taking into consideration the time value of money and individual risks
of the underlying assets that have not been incorporated in the cash flow
estimates. The discount rate is derived from the CGU's weighted-average cost of
capital, taking into account both debt and equity. The cost of equity is derived
from the expected return on investment by the Company's shareholders. The cost
of debt is based on the interest-bearing borrowings the Company is obliged to
service. Segment-specific risk is incorporated by applying different debt to
equity ratios.
Growth rate estimates are based on published data and were used as a
conservative estimate of future growth.
Sensitivity to Changes in Assumptions
Management believes that no reasonably possible change in any of the above key
assumptions would cause the carrying value of either unit to materially exceed
its recoverable amount.
8.PAYABLES, ACCRUALS AND PROVISIONS
2012 2011
----------------------------------------------------------------------------
Accounts payable and accrued liabilities $ 183,361 $ 263,544
Dividends payable 9,165 8,433
Provisions 10,942 8,758
----------------------------------------------------------------------------
$ 203,468 $ 280,735
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Activities related to provisions were as follows:
Warranty Other Total
----------------------------------------------------------------------------
Balance as at December 31, 2011 $ 5,132 $ 3,626 $ 8,758
New provisions 6,728 1,036 7,764
Charges/credits against provisions (5,283) (297) (5,580)
----------------------------------------------------------------------------
Balance as at December 31, 2012 $ 6,577 $ 4,365 $ 10,942
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Warranty Other Total
----------------------------------------------------------------------------
Balance as at December 31, 2010 $ 4,812 $ 2,012 $ 6,824
New provisions 5,286 1,927 7,213
Charges/credits against provisions (4,966) (313) (5,279)
----------------------------------------------------------------------------
Balance as at December 31, 2011 $ 5,132 $ 3,626 $ 8,758
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Warranty
A provision is recognized for expected warranty claims on products and services
during the last year, based on past experience and known issues. It is expected
that most of these costs will be incurred in the next financial year.
Other
Other provisions relate largely to open legal and insurance claims and onerous
contracts. No one claim is significant.
9.LONG-TERM DEBT
2012 2011
----------------------------------------------------------------------------
Bank credit facility $ 26,547 $ -
Senior debentures 135,883 137,163
Debt issuance costs, net of amortization (2,663) (3,068)
----------------------------------------------------------------------------
Total long-term debt 159,767 134,095
Less current portion 1,372 1,280
----------------------------------------------------------------------------
$ 158,395 $ 132,815
----------------------------------------------------------------------------
----------------------------------------------------------------------------
All debt is unsecured.
The Company maintains a $200 million committed credit facility. The facility
matures in September 2017. Debt incurred under the facility is unsecured and
ranks pari passu with debt outstanding under Toromont's existing debentures. The
facility was amended in September 2012 to extend the term at improved rates.
Interest is based on a floating rate, primarily bankers' acceptances and prime,
plus applicable margins and fees based on the terms of the credit facility. Debt
issuance costs of $369 were adjusted against the carrying value of the long-term
debt.
At December 31, 2012, standby letters of credit issued utilized $24.1 million of
the credit lines (December 31, 2011 - $24.8 million).
Terms of the senior debentures are:
-- $125,000, 4.92% senior debentures due October 13, 2015, interest payable
semi-annually, principal due on maturity; and
-- $10,883, 7.06% senior debentures due March 29, 2019, interest payable
semi-annually through September 29, 2009; thereafter, blended principal
and interest payments through to maturity.
These credit arrangements include covenants, restrictions and events of default
usually present in credit facilities of this nature, including requirements to
meet certain financial tests periodically and restrictions on additional
indebtedness and encumbrances.
Scheduled principal repayments and interest payments on long-term debt are as
follows:
Principal Interest
----------------------------------------------------------------------------
2013 $ 1,372 $ 7,619
2014 1,471 7,521
2015 126,576 6,067
2016 1,690 1,152
2017 28,358 849
2018 to 2019 2,963 1,480
----------------------------------------------------------------------------
$ 162,430 $ 24,688
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Interest expense includes interest on debt initially incurred for a term greater
than one year of $8,425 (2011 - $8,436).
10.SHARE CAPITAL
Authorized
The Company is authorized to issue an unlimited number of common shares (no par
value) and preferred shares. No preferred shares have been issued.
Issued
The changes in the common shares issued and outstanding during the year were as
follows:
2012 2011
Number of Common Number of Common
Common Share Common Share
Shares Capital Shares Capital
----------------------------------------------------------------------------
Balance, beginning of year 76,629,777 $ 265,436 77,149,626 $ 469,080
Exercise of stock options 443,920 7,794 200,155 4,141
Purchase of shares for
cancellation (666,039) (2,330) (720,004) (2,467)
Enerflex spinoff - - - (205,318)
----------------------------------------------------------------------------
Balance, end of year 76,407,658 $ 270,900 76,629,777 $ 265,436
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Shareholder Rights Plan
The Shareholder Rights Plan is designed to encourage the fair treatment of
shareholders in connection with any takeover offer for the Company. Rights
issued under the plan become exercisable when a person, and any related parties,
acquires or commences a take-over bid to acquire 20% or more of the Company's
outstanding common shares without complying with certain provisions set out in
the plan or without approval of the Company's Board of Directors. Should such an
acquisition occur, each rights holder, other than the acquiring person and
related parties, will have the right to purchase common shares of the Company at
a 50% discount to the market price at that time. The plan expires in April 2015.
Normal Course Issuer Bid ("NCIB")
Toromont renewed its NCIB program in 2012. The current issuer bid allows the
Company to purchase up to approximately 6.4 million of its common shares in the
12-month period ending August 30, 2013, representing 10% of common shares in the
public float, as estimated at the time of renewal. The actual number of shares
purchased and the timing of any such purchases will be determined by Toromont.
All shares purchased under the bid will be cancelled.
In the year ended December 31, 2012, the Company purchased and cancelled 666,039
common shares for $14,137 (average cost of $21.23 per share) under its NCIB
program. In the year ended December 31, 2011, the Company purchased and
cancelled 720,004 common shares for $12,213 (average cost of $16.96 per share)
under its NCIB program.
Dividends
The Company paid dividends of $36.0 million ($0.47 per share) for the year ended
December 31, 2012 and $40.9 million ($0.53 per share) for the year ended
December 31, 2011.
The dividend was adjusted to $0.10 per share for the post-spinoff dividend paid
on July 1, 2011 which, together with the $0.06 dividend subsequently declared by
the Enerflex Ltd. Board, kept shareholders whole with the pre-spinoff dividend
amount. On August 12, 2011, the Board of Directors increased the quarterly
dividend to $0.11 per share and on February 24, 2012, the quarterly dividend was
raised to $0.12 per share.
11. CONTRIBUTED SURPLUS
Contributed surplus consists of accumulated stock option expense less the fair
value of the options at the grant date that have been exercised and reclassified
to share capital. Changes in contributed surplus were as follows:
2012 2011
----------------------------------------------------------------------------
Contributed surplus, beginning of year $ 5,890 $ 10,882
Stock-based compensation, net of forfeitures 1,659 1,001
Value of compensation cost associated with
exercised options (1,592) (912)
Enerflex spinoff - (5,081)
----------------------------------------------------------------------------
Contributed surplus, end of year $ 5,957 $ 5,890
----------------------------------------------------------------------------
----------------------------------------------------------------------------
12. FINANCIAL INSTRUMENTS
Financial Assets and Liabilities - Classification and Measurement
Financial assets and financial liabilities are measured on an ongoing basis at
cost, fair value or amortized cost, depending on the classification. The
following table highlights the carrying amounts and classifications of financial
assets and liabilities:
Cash, loans Derivatives Other
As at December 31, and used for financial
2012 receivables hedging liabilities Total
----------------------------------------------------------------------------
Cash and cash
equivalents $ 2,383 $ - $ - $ 2,383
Accounts receivable 231,518 - - 231,518
Accounts payable and
accrued liabilities - - (203,468) (203,468)
Current portion of
long-term debt - - (1,372) (1,372)
Derivative financial
instruments - (346) - (346)
Long term debt - - (158,395) (158,395)
----------------------------------------------------------------------------
Total $ 233,901 $ (346) $ (363,235) $ (129,680)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash, loans Derivatives Other
As at December 31, and used for financial
2011 receivables hedging liabilities Total
----------------------------------------------------------------------------
Cash and cash
equivalents $ 75,319 $ - $ - $ 75,319
Accounts receivable 209,243 - - 209,243
Accounts payable and
accrued liabilities - - (280,735) (280,735)
Current portion of
long-term debt - - (1,280) (1,280)
Derivative financial
instruments - (210) - (210)
Long term debt - - (132,815) (132,815)
----------------------------------------------------------------------------
Total $ 284,562 $ (210) $ (414,830) $ (130,478)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Fair Value of Financial Instruments
The estimated fair values of cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities and borrowings under the bank term
facility approximate their respective carrying values given their short-term
maturities.
The fair value of derivative financial instruments is measured using the
discounted value of the difference between the contract's value at maturity
based on the contracted foreign exchange rate and the contract's value at
maturity based on the comparable foreign exchange rate at period end under the
same conditions. The financial institution's credit risk is also taken into
consideration in determining fair value. The valuation is determined using Level
2 inputs which are observable inputs or inputs which can be corroborated by
observable market data for substantially the full term of the asset or
liability.
The fair value of senior debentures as at December 31, 2012 was $144,078
(carrying value of $135,883). The fair value was determined using the discounted
cash flow method, a generally accepted valuation technique. The discounted
factor is based on market rates for debt with similar terms and remaining
maturities and based on Toromont's credit risk. The Company has no plans to
prepay these instruments prior to maturity. The valuation is determined using
Level 2 inputs which are observable inputs or inputs which can be corroborated
by observable market data for substantially the full term of the asset or
liability.
During the year ended December 31, 2012, there were no transfers between Level 1
and Level 2 fair value measurements.
Derivative Financial Instruments and Hedge Accounting
Foreign exchange contracts and options are transacted with financial
institutions to hedge foreign currency denominated obligations related to
purchases of inventory and sales of products.
The following table summarizes the Company's commitments to buy and sell foreign
currencies as at December 31, 2012.
Average
Notional Exchange
Amount Rate (i) Maturity
----------------------------------------------------------------------------
Purchase contracts USD 138,973 $ 1.0000 January 2013 to January 2014
Sell contracts GBP 440 $ 1.5935 June 2013 to March 2014
(i) CDN $ required to purchase one denominated unit
Management estimates that a loss of $349 would be realized if the contracts were
terminated on December 31, 2012. Certain of these forward contracts are
designated as cash flow hedges, and accordingly, an unrealized loss of $260 has
been included in OCI. These losses are not expected to affect net earnings as
the losses will be reclassified to net earnings within the next 12 months and
will offset gains recorded on the underlying hedged items, namely foreign
denominated accounts payable. A loss of $89 on forward contracts not designated
as hedges is included in net earnings which offsets a gain recorded on the
foreign-denominated items, namely accounts payable.
All hedging relationships are formally documented, including the risk management
objective and strategy. On an ongoing basis, an assessment is made as to whether
the designated derivative financial instruments continue to be effective in
offsetting changes in cash flows of the hedged transactions.
13.FINANCIAL INSTRUMENTS - RISK MANAGEMENT
In the normal course of business, Toromont is exposed to financial risks that
may potentially impact its operating results in one or all of its operating
segments. The Company employs risk management strategies with a view to
mitigating these risks on a cost-effective basis. Derivative financial
agreements are used to manage exposure to fluctuations in exchange rates. The
Company does not enter into derivative financial agreements for speculative
purposes.
Currency Risk
The Canadian operations of the Company source the majority of its products and
major components from the United States. Consequently, reported costs of
inventory and the transaction prices charged to customers for equipment and
parts are affected by the relative strength of the Canadian dollar. The Company
mitigates exchange rate risk by entering into foreign currency contracts to fix
the cost of imported inventory where appropriate. In addition, pricing to
customers is customarily adjusted to reflect changes in the Canadian dollar
landed cost of imported goods.
The Company maintains a conservative hedging policy whereby all significant
transactional currency risks are identified and hedged.
Sensitivity Analysis
The following sensitivity analysis is intended to illustrate the sensitivity to
changes in foreign exchange rates on the Company's financial instruments and
show the impact on net earnings and comprehensive income. Financial instruments
affected by currency risk include cash and cash equivalents, accounts
receivable, accounts payable and derivative financial instruments. This
sensitivity analysis relates to the position as at December 31, 2012 and for the
year then ended. The following table shows Toromont's sensitivity to a 5%
weakening of the Canadian dollar against the US dollar and the British Pound. A
5% strengthening of the Canadian dollar would have an equal and opposite effect.
This sensitivity analysis is provided as reasonably possible change in currency
in a volatile environment.
Cdn dollar weakens by 5% USD GBP
----------------------------------------------------------------------------
Financial instruments held in foreign operations:
Other comprehensive Income $ 191 $ -
Financial instruments held in Canadian operations:
Net earnings $ 390 $ 5
Other comprehensive Income $ 3,592 $ (26)
The movement in OCI in foreign operations reflects the change in the fair value
of financial instruments. Gains or losses on translation of foreign subsidiaries
are deferred in OCI. Accumulated currency translation adjustments are recognized
in income when there is a reduction in the net investment in the foreign
operation.
The movement in net earnings in Canadian operations is a result of a change in
the fair values of financial instruments. The majority of these financial
instruments are hedged.
The movement in OCI in Canadian operations reflects the change in the fair value
of derivative financial instruments that are designated as cash flow hedges. The
gains or losses on these instruments are not expected to affect net earnings as
the gains or losses will offset losses or gains on the underlying hedged items.
Credit Risk
Financial instruments that potentially subject the Company to credit risk
consist of cash equivalents, accounts receivable and derivative financial
instruments. The carrying amount of assets included on the consolidated
statement of financial position represents the maximum credit exposure.
Cash equivalents consist mainly of short-term investments, such as money market
deposits. The Company has deposited the cash equivalents with reputable
financial institutions, from which management believes the risk of loss to be
remote.
The Company has accounts receivable from customers engaged in various industries
including mining, construction, food and beverage, and governmental agencies.
These specific industries may be affected by economic factors that may impact
accounts receivable. Management does not believe that any single industry
represents significant credit risk. Credit risk concentration with respect to
trade receivables is mitigated by the Company's large customer base.
The credit risk associated with derivative financial instruments arises from the
possibility that the counterparties may default on their obligations. In order
to minimize this risk, the Company enters into derivative transactions only with
highly rated financial institutions.
Interest Rate Risk
The Company minimizes its interest rate risk by managing its portfolio of
floating and fixed rate debt, as well as managing the term to maturity. The
Company may use derivative instruments such as interest rate swap agreements to
manage its current and anticipated exposure to interest rates. There were no
interest rate swap agreements outstanding as at December 31, 2012 or December
31, 2011.
The Company had a floating rate debt of $26.5 million as at December 31, 2012.
Liquidity Risk
Liquidity risk is the risk that the Company may encounter difficulties in
meeting obligations associated with financial liabilities. As at December 31,
2012, the Company had unutilized lines of credit of $149.4 million.
Accounts payable are primarily due within 90 days and will be satisfied from
current working capital.
The Company expects that continued cash flows from operations in 2012, together
with currently available credit facilities, will be more than sufficient to fund
its requirements for investments in working capital, capital assets and dividend
payments through the next 12 months, and that the Company's credit ratings
provide reasonable access to capital markets to facilitate future debt issuance.
14.INTEREST INCOME AND EXPENSE
The components of interest expense are as follows:
2012 2011
----------------------------------------------------------------------------
Term loan facility $ 2,807 $ 1,941
Senior debentures 6,907 7,071
----------------------------------------------------------------------------
$ 9,714 $ 9,012
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The components of interest and investment income are as follows:
2012 2011
----------------------------------------------------------------------------
Interest income on rental conversions $ 3,529 $ 2,981
Other 445 233
----------------------------------------------------------------------------
$ 3,974 $ 3,214
----------------------------------------------------------------------------
----------------------------------------------------------------------------
15.INCOME TAXES
Significant components of the provision for income tax expense were as follows:
2012 2011
----------------------------------------------------------------------------
Current income tax expense $ 43,212 $ 41,159
Deferred income tax expense (recovery) 773 (1,450)
----------------------------------------------------------------------------
Total income tax expense $ 43,985 $ 39,709
----------------------------------------------------------------------------
----------------------------------------------------------------------------
A reconciliation of income taxes at Canadian statutory rates with the reported
income taxes was as follows:
2012 2011
----------------------------------------------------------------------------
Statutory Canadian federal and provincial
income tax rates 26.50% 28.25%
----------------------------------------------------------------------------
Expected taxes on income $ 43,603 $ 40,224
Increase (decrease) in income taxes resulting
from:
Higher (lower) effective tax rates in other
jurisdictions 110 (383)
Manufacturing and processing rate reduction (218) (198)
Expenses not deductible (income not taxable)
for tax purposes 902 (919)
Non-taxable gains (83) (61)
Effect of future income tax rate reductions (320) (28)
Other (9) 1,074
----------------------------------------------------------------------------
Provision for income taxes $ 43,985 $ 39,709
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Effective income tax rate 26.7% 27.9%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The statutory income tax rate represents the combined Canadian federal and
Ontario provincial income tax rates which are the relevant tax jurisdictions for
the Company. The decrease is largely due to the reduction of the Federal income
tax rate in 2011 from 18% to 16.5%.
The source of deferred income taxes was as follows:
2012 2011
----------------------------------------------------------------------------
Accrued liabilities $ 9,681 $ 8,964
Deferred revenue 1,193 1,021
Accounts receivable 1,273 1,231
Inventories 2,866 2,927
Capital assets (9,147) (8,454)
Pension 7,144 6,705
Other 620 503
Cash flow hedges in other comprehensive income 67 (148)
----------------------------------------------------------------------------
Deferred tax assets $ 13,697 $ 12,749
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The movement in net deferred tax assets was as follows:
2012 2011
----------------------------------------------------------------------------
Balance, January 1 $ 12,749 $ 10,435
Tax (expense) recovery recognized in income (773) 1,450
Tax recovery recognized in other comprehensive income 1,721 864
----------------------------------------------------------------------------
Balance, December 31 $ 13,697 $ 12,749
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The aggregate amount of temporary differences associated with investments in
subsidiaries for which deferred tax assets have not been recognized as at
December 31, 2012 was $39,512 (December 31, 2011 - $31,270).
16. EARNINGS PER SHARE
Basic earnings per share ("EPS") are calculated by dividing net earnings for the
year by the weighted average number of common shares outstanding during the
year.
Diluted EPS is calculated by dividing net earnings by the weighted average
number of common shares outstanding during the year plus the weighted average
number of common shares that would be issued on conversion of all dilutive stock
options to common shares.
EPS amounts for continuing and discontinued operations is calculated by dividing
net earnings from continuing and discontinued operations respectively by the
weighted average number of common shares for both basic and diluted amounts.
2012 2011
----------------------------------------------------------------------------
Net earnings available to common shareholders $ 120,553 $ 246,459
Net earnings from discontinued operations - 143,781
----------------------------------------------------------------------------
Net earnings from continuing operations $ 120,553 $ 102,678
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted average common shares outstanding 76,549,792 77,013,509
Dilutive effect of stock option conversion 537,137 379,744
----------------------------------------------------------------------------
Diluted weighted average common shares
outstanding 77,086,929 77,393,253
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Basic earnings per share
Continuing operations $ 1.57 $ 1.33
Discontinued operations - 1.87
----------------------------------------------------------------------------
$ 1.57 $ 3.20
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Diluted earnings per share
Continuing operations $ 1.56 $ 1.32
Discontinued operations - 1.86
----------------------------------------------------------------------------
$ 1.56 $ 3.18
----------------------------------------------------------------------------
----------------------------------------------------------------------------
There were no anti-dilutive options for the year ended December 31, 2012 and 2011.
17. EMPLOYEE BENEFITS EXPENSE
2012 2011
----------------------------------------------------------------------------
Wages and salaries $ 264,360 $ 251,693
Other employment benefit expenses 43,013 38,945
Share options granted to directors and employees 1,659 1,001
Pension costs 9,627 8,768
----------------------------------------------------------------------------
$ 318,659 $ 300,407
----------------------------------------------------------------------------
18. STOCK-BASED COMPENSATION
The Company maintains a stock option program for certain employees. Under the
plan, up to 6,096,000 options may be granted for subsequent exercise in exchange
for common shares. It is the Company's policy that no more than 1% of
outstanding shares or 766,298 share options may be granted in any one year.
Stock options have a seven-year term, vest 20% per year on each anniversary date
of the grant and are exercisable at the designated common share price, which is
fixed at prevailing market prices of the common shares at the date the option is
granted. Toromont accrues compensation cost over the vesting period based on
fair value.
A reconciliation of the outstanding options for the year ended December 31, 2012
was as follows:
Weighted
Average
Number of Exercise
Options Price
----------------------------------------------------------------------------
Options outstanding, beginning of year 2,419,060 $ 15.41
Granted 610,100 20.76
Exercised (1) (443,920) 13.97
Forfeited (20,885) 16.61
----------------------------------------------------------------------------
Options outstanding, end of year 2,564,355 $ 16.92
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Options exercisable, end of year 972,990 $ 15.24
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) The weighted average share price at date of exercise was $21.95
A reconciliation of the outstanding options for the year ended December 31, 2011
was as follows:
Weighted
Average
Number of Exercise
Options Price
----------------------------------------------------------------------------
Options outstanding, beginning of year 2,144,860 $ 26.04
Exercised prior to spinoff (1) (62,770) 22.99
Forfeited prior to spinoff (52,060) 27.11
----------------------------------------------------------------------------
Options outstanding at spinoff 2,030,030 $ 26.10
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Options outstanding post spinoff 2,030,030 $ 14.72
Granted subsequent to spinoff 601,975 17.10
Exercised subsequent to spinoff (2) (137,385) 12.80
Forfeited subsequent to spinoff (75,560) 15.12
----------------------------------------------------------------------------
Options outstanding, end of year 2,419,060 $ 15.41
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Options exercisable, end of year 972,605 $ 14.43
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) The weighted average share price at date of exercise was $31.45
(2) The weighted average share price at date of exercise was $20.05
Stock options outstanding at the time of the Enerflex spinoff were split. For
each Toromont stock option previously held, option holders received one option
in each of Toromont and Enerflex, with the exercise price determined by applying
the "butterfly proportion" to the previous exercise price. All other conditions
related to these options, including term and vesting periods, remained the same
and there was no acceleration of options vesting. The butterfly proportion was
determined to be 56.4% to 43.6% for Toromont and Enerflex respectively.
The number of options outstanding at June 1, 2011 was 2,030,030 and the weighted
average exercise price was $26.10. Based on the butterfly proportion, the
adjusted weighted average exercise price of Toromont options was $14.72. The
adjusted weighted average exercise price of Enerflex options was $11.39.
The following table summarizes stock options outstanding and exercisable as at
December 31, 2012.
Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Life Exercise Number Exercise
Prices Outstanding (years) Price Outstanding Price
----------------------------------------------------------------------------
$12.42 - $14.19 401,730 2.5 $ 12.72 250,810 $ 12.90
$14.20 - $16.93 985,800 3.0 $ 16.18 612,160 $ 15.86
$16.94 - $20.76 1,176,825 6.1 $ 18.98 110,020 $ 17.10
----------------------------------------------------------------------------
Total 2,564,355 4.3 $ 16.92 972,990 $ 15.24
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The fair value of the stock options granted during 2012 and 2011 were determined
at the time of grant using the Black-Scholes option pricing model with the
following assumptions:
2012 2011
----------------------------------------------------------------------------
Weighted average fair value price per option $ 3.91 $ 3.19
Expected life of options (years) 5.81 5.81
Expected stock price volatility 25.0% 25.0%
Expected dividend yield 2.31% 2.57%
Risk-free interest rate 1.34% 1.67%
----------------------------------------------------------------------------
Deferred Share Unit Plan
The Company offers a deferred share unit ("DSU") plan for executives and
non-employee directors, whereby they may elect on an annual basis to receive all
or a portion of their performance incentive bonus or fees, respectively, in
DSUs. In addition, the Board may grant discretionary DSUs.
The following table summarizes information related to DSU activity:
2012 2011
----------------------------------------------------------------------------
Number of Number of
DSUs Value DSUs Value
----------------------------------------------------------------------------
Outstanding, beginning of year 193,728 $ 4,093 87,969 $ 2,747
Units taken in lieu of performance
incentive awards, director fees
and dividends 33,671 778 25,900 690
Redemptions (15,527) (314) - -
Adjustment to reflect spinoff - - 58,888 -
DSUs granted - - 20,971 362
Fair market value adjustment - (260) - 294
----------------------------------------------------------------------------
Outstanding, end of year 211,872 $ 4,297 193,728 $ 4,093
----------------------------------------------------------------------------
----------------------------------------------------------------------------
DSUs outstanding as at June 1, 2011 were adjusted to reflect the difference in
the fair market value as a result of the spinoff of Enerflex. The adjustment was
determined based on the volume-weighted average trading prices for the five
trading days prior to and subsequent to the effective date of the spinoff.
The liability for DSUs is recorded in accounts payable and accrued liabilities.
Employee Share Ownership Plan
The Company offers an Employee Share Ownership Plan (the "Plan") whereby
employees who meet the eligibility criteria can purchase shares by way of
payroll deductions. There is a Company match of up to $1,000 per employee per
annum based on contributions by the Company of $1 for every $3 contributed by
the employee. Company contributions vest to the employee immediately. Company
contributions amounting to $0.9 million in 2012 (2011 - $1.1 million) were
charged to selling and administrative expenses when paid. The Plan is
administered by a third party.
19.EMPLOYEE FUTURE BENEFITS
The Company sponsors pension arrangements for substantially all of its
employees, primarily through defined contribution plans in Canada and a 401(k)
matched savings plan in the United States. Certain unionized employees do not
participate in Company-sponsored plans, and contributions are made to these
retirement programs in accordance with the respective collective bargaining
agreements. In the case of defined contribution plans, regular contributions are
made to the individual employee accounts, which are administered by a plan
trustee in accordance with the plan document.
Approximately 130 employees are included in defined benefit plans.
a) Powell Plan - This is a legacy plan whose members were employees of Powell
Equipment when it was acquired by Toromont in 2001. The plan is a contributory
plan that provides pension benefits based on length of service and career
average earnings. The last actuarial valuation of the plan was completed as at
December 31, 2011. The next valuation is scheduled as at December 31, 2012.
b) Executive Plan - This is a non-contributory pension arrangement for certain
senior executives that provides for a supplementary retirement payout in excess
of amounts provided for under the registered plan. The most recent actuarial
valuation of the plan was completed as at December 31, 2012. The next valuation
is scheduled as at December 31, 2013.
c) Other plan assets and obligations - This provides for certain retirees and
terminated vested employees of businesses previously acquired by the Company as
well as for retired participants of the defined contribution plan that, in
accordance with the plan provisions, have elected to receive a pension directly
from the plan. The most recent actuarial valuation of the plan was completed as
at January 1, 2011. The next valuation is scheduled as at January 1, 2014.
The changes in the fair value of assets and the pension obligations and the
funded status of the defined benefit plans were as follows:
2012 2011
----------------------------------------------------------------------------
Accrued benefit obligations:
Balance, beginning of year $ 79,373 $ 72,164
Service cost 1,209 998
Interest cost 3,392 3,614
Net actuarial loss 6,309 7,666
Benefits paid (6,983) (5,502)
Voluntary contributions 433 433
----------------------------------------------------------------------------
Balance, end of year 83,733 79,373
----------------------------------------------------------------------------
Plan assets:
Fair value, beginning of year 53,212 52,313
Expected return on plan assets 3,742 3,640
Net actuarial gain (loss) 516 (1,990)
Company contributions 5,961 4,306
Participant contributions 433 433
Benefits paid (6,983) (5,502)
Other adjustments 12 12
----------------------------------------------------------------------------
Fair value, end of year 56,893 53,212
----------------------------------------------------------------------------
Accrued pension liability $ 26,840 $ 26,161
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The funded status of the Company's defined benefit pension plans at year end was
as follows:
2012
Accrued Accrued
benefit pension asset
obligation Plan assets (liability)
----------------------------------------------------------------------------
Powell Plan $ 53,844 $ 46,634 $ (7,210)
Executive Plan 21,843 1,527 (20,316)
Other plan assets and obligations 8,046 8,732 686
----------------------------------------------------------------------------
Accrued pension asset (liability) $ 83,733 $ 56,893 $ (26,840)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2011
Accrued Accrued
benefit pension asset
obligation Plan assets (liability)
----------------------------------------------------------------------------
Powell Plan $ 49,228 $ 42,018 $ (7,210)
Executive Plan 21,791 2,230 (19,561)
Other plan assets and obligations 8,354 8,964 610
----------------------------------------------------------------------------
Accrued pension asset (liability) $ 79,373 $ 53,212 $ (26,161)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The Executive Plan is a supplemental pension plan and is solely the obligation
of the Company. The Company is not obligated to fund this plan but is obligated
to pay benefits under the terms of the plan as they come due. The Company has
posted letters of credit in the amount of $20.2 million to secure the
obligations under this plan.
The significant annual actuarial assumptions adopted in measuring the accrued
benefit obligations were as follows:
2012 2011
----------------------------------------------------------------------------
Discount rate 3.90% 4.25%
Expected long-term rate of return on plan assets 7.00% 7.00%
Rate of compensation increase 4.00% 4.00%
The allocations of plan assets were as follows:
2012 2011
----------------------------------------------------------------------------
Equity securities 44.6% 39.5%
Debt securities 37.8% 44.2%
Real estate 16.8% 15.2%
Cash and cash equivalents 0.8% 1.1%
No plan assets were directly invested in the Company's securities.
The net pension expense for the years ended December 31 included the following
components:
2012 2011
----------------------------------------------------------------------------
Defined benefit plans
Service cost $ 1,209 $ 998
Interest cost 3,392 3,614
Expected return on plan assets (3,742) (3,640)
----------------------------------------------------------------------------
859 972
Defined contribution plans 8,648 7,692
401(k) matched savings plan 120 104
----------------------------------------------------------------------------
Net pension expense $ 9,627 $ 8,768
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The total cash amount paid or payable for employee future benefits in 2012,
including defined benefit and defined contribution plans, was $14,269 (2011 -
$11,929).
The Company expects to contribute up to $5.6 million to its defined benefit
pension plans in 2013. These contributions may be reduced to the extent the
Company provides a letter of credit.
The cumulative actuarial losses recognized in OCI as at December 31, 2012 was
$20,610 (2011 - $14,840).
20.CAPITAL MANAGEMENT
The Company defines capital as the aggregate of shareholders' equity and
long-term debt less cash and cash equivalents.
The Company's capital management framework is designed to maintain a flexible
capital structure that allows for optimization of the cost of capital at
acceptable risk while balancing the interests of both equity and debt holders.
The Company generally targets a net debt to total capitalization ratio of 33%,
although there is a degree of variability associated with the timing of cash
flows. Also, if appropriate opportunities are identified, the Company is
prepared to significantly increase this ratio depending upon the opportunity.
The Company's capital management criteria can be illustrated as follows:
December 31 December 31
2012 2011
----------------------------------------------------------------------------
Shareholders' equity $ 476,575 $ 403,861
Long-term debt 159,767 134,095
Less cash and cash equivalents (2,383) (75,319)
----------------------------------------------------------------------------
Total capitalization $ 633,959 $ 462,637
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net debt as a % of total capitalization 25% 13%
Net debt to equity ratio 0.33:1 0.15:1
The Company is subject to minimum capital requirements relating to bank credit
facilities and senior debentures. The Company has comfortably met these minimum
requirements during the year.
There were no changes in the Company's approach to capital management during the
year.
21.SUPPLEMENTAL CASH FLOW INFORMATION
2012 2011
----------------------------------------------------------------------------
Net change in non-cash working capital and other
Accounts receivable $ (22,275) $ (623)
Inventories (25,848) (77,521)
Accounts payable, accrued liabilities and
provisions (73,486) 35,490
Deferred revenues 6,514 4,031
Other (9,380) (1,108)
----------------------------------------------------------------------------
$ (124,475) $ (39,731)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash paid during the year for:
Interest $ 9,097 $ 8,788
Income taxes $ 47,578 $ 31,412
Cash received during the year for:
Interest $ 3,776 $ 3,214
Income taxes $ 308 $ 740
22.COMMITMENTS
The Company has entered into leases on buildings, vehicles and office equipment.
The vehicle and office equipment leases generally have an average life between
three and five years with no renewal options. The building leases have a maximum
lease term of 20 years including renewal options. Some of the contracts include
a lease escalation clause, which is usually based on the Consumer Price Index.
Future minimum lease payments under non-cancellable operating leases as at
December 31, 2012 were as follows:
2013 $ 2,606
2014 2,017
2015 1,482
2016 1,329
2017 227
2018 and thereafter 1,726
----------------------------------------------------------------------------
$ 9,387
----------------------------------------------------------------------------
----------------------------------------------------------------------------
23.SEGMENTED INFORMATION
The Company has two reportable operating segments, each supported by the
corporate office. The business segments are strategic business units that offer
different products and services, and each is managed separately. The corporate
office provides finance, treasury, legal, human resources and other
administrative support to the business segments. Corporate overheads are
allocated to the business segments based on revenue.
The Equipment Group includes one of the world's larger Caterpillar dealerships
by revenue and geographic territory in addition to industry-leading rental
operations. CIMCO is an industry leader specializing in the design, engineering,
fabrication, and installation of industrial and recreational refrigeration
systems. Both groups offer comprehensive product support services.
The accounting policies of the reportable operating segments are the same as
those described in Note 1 - Significant Accounting Policies. Each reportable
operating segment's performance is measured based on operating income. No
reportable operating segment is reliant on any single external customer.
Segmented information excludes results from discontinued operations.
Equipment Group CIMCO
2012 2011 2012 2011
----------------------------------------------------------------------------
Equipment/package sales $ 708,802 $ 668,372 $ 113,586 $ 103,925
Rentals 183,777 164,953 - -
Product support 405,880 350,977 83,693 81,662
Power generation 11,435 12,085 - -
----------------------------------------------------------------------------
Total revenues $ 1,309,894 $ 1,196,387 $ 197,279 $ 185,587
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operating Income $ 156,021 $ 134,314 $ 14,257 $ 13,871
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Interest expense
Interest and investment
income
Income taxes
----------------------------------------------------------------------------
Net earnings from continuing
operations
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Consolidated
2012 2011
----------------------------------------------------------------------------
Equipment/package sales $ 822,388 $ 772,297
Rentals 183,777 164,953
Product support 489,573 432,639
Power generation 11,435 12,085
----------------------------------------------------------------------------
Total revenues $ 1,507,173 $ 1,381,974
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operating Income $ 170,278 $ 148,185
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Interest expense 9,714 9,012
Interest and investment
income (3,974) (3,214)
Income taxes 43,985 39,709
----------------------------------------------------------------------------
Net earnings from continuing
operations $ 120,553 $ 102,678
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Selected balance sheet information:
Equipment
As at December 31, 2012 Group CIMCO Consolidated
----------------------------------------------------------------------------
Identifiable assets $ 835,649 $ 65,530 $ 901,179
Corporate assets 34,991
----------------------------------------------------------------------------
Total assets $ 936,170
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Identifiable liabilities $ 214,239 $ 38,845 $ 253,084
Corporate liabilities 206,511
----------------------------------------------------------------------------
Total liabilities $ 459,595
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Capital expenditures $ 99,871 $ 1,440 $ 101,311
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Depreciation $ 51,247 $ 798 $ 52,045
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Goodwill $ 13,000 $ 450 $ 13,450
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Equipment
As at December 31, 2011 Group CIMCO Consolidated
----------------------------------------------------------------------------
Identifiable assets $ 780,926 $ 43,651 $ 824,577
Corporate assets 88,754
----------------------------------------------------------------------------
Total assets $ 913,331
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Identifiable liabilities $ 295,994 $ 27,600 $ 323,594
Corporate liabilities 185,876
----------------------------------------------------------------------------
Total liabilities $ 509,470
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Capital expenditures $ 82,287 $ 590 $ 82,877
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Depreciation $ 43,642 $ 591 $ 44,233
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Goodwill $ 13,000 $ 450 $ 13,450
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operations are based primarily in Canada and the United States. The following
summarizes the final destination of revenues to customers and the capital assets
held in each geographic segment
2012 2011
----------------------------------------------------------------------------
Revenues
Canada $ 1,470,686 $ 1,337,230
United States 31,375 39,638
International 5,112 5,106
----------------------------------------------------------------------------
$ 1,507,173 $ 1,381,974
----------------------------------------------------------------------------
----------------------------------------------------------------------------
December 31 December 31
2012 2011
----------------------------------------------------------------------------
Capital Assets and Goodwill
Canada $ 329,346 $ 299,669
United States 1,029 1,071
----------------------------------------------------------------------------
$ 330,375 $ 300,740
----------------------------------------------------------------------------
----------------------------------------------------------------------------
24. RELATED PARTY DISCLOSURES
Key management personnel and director compensation from continuing operations
comprised:
2012 2011
----------------------------------------------------------------------------
Salaries $ 3,128 $ 2,759
Option based awards 1,337 798
Annual non-equity incentive based plan compensation 3,665 2,865
Pension 451 205
All other compensation 195 141
----------------------------------------------------------------------------
$ 8,776 $ 6,768
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The remuneration of directors and key management is determined by the Human
Resources Committee having regard to the performance of the individual and
Company and market trends.
Compensation to key management personnel increased as a result of succession
planning activities undertaken in 2012.
25.DISCONTINUED OPERATIONS
On June 1, 2011, Toromont completed the spinoff of its natural gas compression
business, Enerflex Ltd. ("Enerflex") implemented by way of a plan of
arrangement. Toromont shareholders received one share of Enerflex for each
common share of Toromont.
The book value of Toromont's outstanding common shares immediately prior to the
arrangement was attributed to continuing Toromont common shares and the new
Enerflex common shares in proportion to the relative fair value at the time of
the arrangement (the "butterfly proportion"), which was determined to be 56.4%
Toromont and 43.6% Enerflex.
The Toromont consolidated balance sheet reflects the transfer of various assets,
liabilities and equity accounts to Enerflex as part of the arrangement. The
underlying net assets representing the distribution of shares were as follows:
Assets
Cash $ 44,452
Accounts receivable 222,737
Inventories 201,019
Property, plant and equipment 164,818
Rental equipment 114,180
Deferred tax assets 46,753
Intangible assets 29,208
Goodwill 482,656
Other current and non-current assets 31,329
----------------------------------------------------------------------------
Total assets 1,337,152
----------------------------------------------------------------------------
Liabilities
Accounts payable, accrued liabilities and provisions 130,254
Deferred revenues 174,027
Other current and non-current liabilities 4,523
Notes payable to Toromont 173,300
----------------------------------------------------------------------------
482,104
----------------------------------------------------------------------------
Net assets transferred $ 855,048
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Results from discontinued operations for 2011 were as follows:
2011
----------------------------------------------------------------------------
Revenues $ 492,937
Net earnings before tax $ 20,783
Income taxes $ 10,166
Net earnings after tax $ 10,617
Earnings (losses) attributable to :
Common shareholders $ 11,240
Non-controlling interests $ (623)
The Company followed IFRIC 17 - Distributions of Non-cash Assets to Owners in
accounting for this transaction. In accordance with this guidance, a dividend of
$1,006.2 million was recorded at the time of spinoff, based on the fair value of
the distribution. The difference between the fair value of the dividend and the
carrying value of the assets and liabilities of Enerflex ($151,179) was
recognized as a gain in the consolidated income statement for the year ended
December 31, 2011, less $18,015 related to historical currency translations of
Enerflex's foreign operations.
26.ECONOMIC RELATIONSHIP
The Company, through its Equipment Group, sells and services heavy equipment and
related parts. Distribution agreements are maintained with several equipment
manufacturers, of which the most significant are with subsidiaries of
Caterpillar Inc. The distribution and servicing of Caterpillar products account
for the major portion of the Equipment Group's operations. Toromont has had a
strong relationship with Caterpillar since 1993.
FOR FURTHER INFORMATION PLEASE CONTACT:
Toromont Industries Ltd.
Scott J. Medhurst
President and Chief Executive Officer
(416) 667-5623
Toromont Industries Ltd.
Paul R. Jewer
Executive Vice President and Chief Financial Officer
(416) 667-5638
www.toromont.com
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