TORONTO, ONTARIO — (Marketwire) — 02/11/13 — Toromont Industries Ltd. (TSX: TIH) today reported record financial results from continuing operations for the three and twelve-month periods ended December 31, 2012.
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:
“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 .
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 and may also be found at . 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 .
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 and on the Company–s website at .
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
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
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.
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
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.
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.
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:
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:
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:
Significant sources and uses of cash in 2011 included:
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.
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.
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:
Over the same five-year period, revenue growth has been constrained at times by a number of factors including:
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
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
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
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.
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
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 pa