TORONTO, ONTARIO — (Marketwire) — 02/23/12 — Toromont Industries Ltd. (TSX: TIH) today reported excellent financial results for the three and twelve-month periods ended December 31, 2011.
Toromont reported strong results in the fourth quarter with net earnings from continuing operations increasing 22%, reflecting higher revenues and better margins. For the year, net earnings increased 34% on the same factors.
“We are pleased with our results for the quarter and year. Revenues from equipment sales, product support and rentals were at or near record levels for a fourth quarter and full year,” said Robert M. Ogilvie, Chairman and CEO of Toromont Industries Ltd.
Highlights:
“Toromont is well positioned to achieve continuing success, with a healthy backlog, leading market positions and growing product support activities,” continued Mr. Ogilvie. “We have significant organic expansion opportunities and continue to search for strategic acquisitions. 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 Thursday, February 23, 2012 at 5:00 p.m. (ET). The call may be accessed by telephone at 1-800-952-6845 (toll free) or 416-695-6616 (Toronto area). A replay of the conference call will be available until Thursday, March 8, 2012 by calling 1-800-408-3053 or 416-694-9451 and quoting passcode 3184026.
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, 2011, 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, 2011, the annual MD&A contained in the 2010 Annual Report and the audited annual consolidated financial statements for the year ended December 31, 2010.
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 23, 2012.
Additional information is contained in the Company–s filings with Canadian securities regulators, including the Company–s 2010 Annual Report and 2011 Annual Information Form. These filings are available on SEDAR at and on the Company–s website at .
SPINOFF OF ENERFLEX
On June 1, 2011, Toromont completed the spinoff of its natural gas compression business, Enerflex Ltd. (“Enerflex”). The transaction was implemented by way of a plan of arrangement. Toromont shareholders received one share of Enerflex for each common share of Toromont. Enerflex shares began trading on a “when issued” basis on the Toronto Stock Exchange on June 3, 2011 under the symbol EFX.
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.
CORPORATE PROFILE AND BUSINESS SEGMENTATION
As at December 31, 2011, Toromont employed approximately 3,000 people in almost 100 locations across Canada and the United States. Toromont is listed on the Toronto Stock Exchange (the “TSX”) 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.
Prior to 2011, the Company reported two operating segments, the Equipment Group and the Compression Group. Enerflex was previously included in the Compression Group. With the completion of the spinoff, operating results have been restated to reflect Enerflex as a discontinued operation. The Compression Group has been renamed CIMCO.
PRIMARY OBJECTIVE AND MAJOR STRATEGIES
A primary objective of the Company is to build shareholder value through sustainable and profitable growth, founded on a strong financial position. 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.
CONSOLIDATED RESULTS OF OPERATIONS
Revenues increased 14% in 2011 compared to 2010 on higher revenues in both operating groups. Equipment Group revenues were up 17% on higher new equipment sales, rental and product support activities. CIMCO revenues were up 1% on higher product support activities, largely offset by a decline in package sales following a very strong year in 2010.
Gross profit margin was 25.3% in 2011 compared with 24.3% in 2010. Gross profit margins in the Equipment Group in 2011 were up from 2010 on higher volumes. CIMCO gross profit margins were up from 2010 on improved project execution.
Selling and administrative expenses increased $20.0 million, 11%, from 2010. Selling and administrative expense increases are largely tracking the increase in revenues. Compensation was $10.6 million (10%) higher in 2011 compared to 2010 on increased headcount, annual salary increases and higher annual performance incentives expense. Increased warranty and freight costs in both periods reflect increased business levels. Information technology costs increased 14% due to development projects on current systems and infrastructure upgrades. Selling and administrative expenses as a percentage of revenues for 2011 were 14.6% in 2011 versus 15.0% in 2010.
In 2010, revised pricing under certain electricity supply contracts triggered an assessment of the recoverable amount of certain power generation assets held in the Equipment Group. This assessment led to a gain of $6,683 ($4,812 after tax) resulting from the reversal of an asset impairment provision recorded in 2005.
Operating income increased 24% in 2011 compared to the prior year, 32% higher excluding the asset impairment reversal in the prior year. The increase is a result of higher revenues and gross margins and improved expense levels. Operating income as a percentage of revenues was 10.7% for 2011 compared to 9.9% in 2010 (9.3% in 2010 excluding asset impairment reversal).
Interest expense was $9.0 million in 2011 compared to $11.6 million in 2010. Interest expense was lower on lower debt balances.
The effective income tax rate for 2011 was 27.9% compared to 30.5% in 2010. The reduction in rates reflects lower statutory rates.
Net earnings from continuing operations in 2011 were $102.7 million, 34% higher than 2010. Basic earnings per share (“EPS”) from continuing operations were $1.33, 33% higher than the 2010, reflecting the higher earnings and a 1% increase in the weighted-average number of common shares outstanding.
Earnings from discontinued operations in 2011 included results from the Enerflex operations for the five months ended May 31, 2011, net of transaction related expenses. In addition, a net gain of $133.2 million, $1.73 per share basic, was recorded in the second quarter of 2011 on the spinoff of Enerflex. Earnings from discontinued operations in 2010 included results from Enerflex for the full year.
Net earnings in 2011 were $246.5 million, or $3.20 basic EPS.
Comprehensive income in 2011 was $253.9 million, comprised of net earnings of $246.5 million and other comprehensive income of $7.4 million. Other comprehensive income included $18.0 million for cumulative translation losses of Enerflex foreign operations which were transferred to income on spinoff. The actuarial loss on employee pension plans charged to other comprehensive income in 2011 was $7.2 million net of 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 global economic uncertainly in 2010 and 2011, demand for the Company–s products and services were strong.
New and used equipment sales were 24% and 6% higher in 2011 respectively. Sales increases resulted largely from higher unit sales. Many market segments, notably mining, heavy construction and agriculture, were higher.
Rental revenues were 15% higher than 2010. Equipment utilization improved through 2011 leading to the increased rental revenues. Rental rates were fairly consistent in both years with continuing competitive market conditions. One new store in Bradford, Ontario opened in January 2011 which also contributed to the year-over-year increase.
Power generation revenues from Toromont-owned plants increased 6% compared to the similar period of the prior year, reflecting increased operating hours and higher average prices for electricity.
Product support revenues were a record $351 million in 2011, 14% higher than the previous record set in 2010. On a constant dollar basis (adjusted for all pricing adjustments including those for foreign exchange), product support revenues were up 16%. Product support revenues in 2011 benefited from a growing installed base of equipment in our territory coupled with higher utilization of equipment in 2011 compared to the prior year which was dampened by general market conditions.
Operating income in 2010 included $6,683 representing a reversal of an asset impairment originally taken in 2005. This reversal, required under IFRS, was generated due to a new, improved contract for the supply of electricity from Toromont-owned power plants. Excluding this in the prior year, operating income was up 32% in 2011 compared to 2010 in part reflecting the 17% increase in revenues. Gross margin as a percentage of revenues increased 70 basis points compared to 2010 on higher activity levels. Selling and administrative expenses increased 12% on the 17% increase in revenues. Higher costs were reported across a number of areas including compensation, warranty, freight and information technology. Operating income as a percentage of revenues was 11.2% in 2011, compared to 10.6% in 2010 (9.9% in 2010 excluding the asset impairment reversal).
Capital expenditures in the Equipment Group totalled $82.3 million in 2011. Expenditures related to replacement and expansion of the rental fleet accounted for $57.9 million of total expenditures in 2011. Expenditures of $9.4 million related to new and expanded facilities to meet current and future growth requirements. Other capital expenditures included $2.2 million on information technology and $7.7 million on service and delivery vehicles.
Equipment bookings and backlog in 2010 benefited from a significant order of $125 million received from Detour Gold Corporation for a fleet of mining trucks and support equipment. Deliveries of this equipment began in the fourth quarter of 2011 and are expected to be completed in 2012. Approximately 60% of backlog at December 31, 2011 represents mining orders with deliveries scheduled over the next four quarters. The remaining 40% largely represents orders for equipment to be delivered from inventory, the majority of which will be delivered within the following quarter. Excluding the Detour order in 2010, bookings were up 9% in 2011 reflecting increased activity in mining, power systems and construction.
CIMCO
CIMCO reported record results for the year despite the windup of the federal Recreational Infrastructure Canada program.
Package revenues were down 3% in 2011 compared to 2010. Recreational revenues in Canada were healthy, although down 10% year-over-year as the federal Recreational Infrastructure Canada program was wound up in 2011. Offsetting this decline was a strengthening in US activity, in both recreational and industrial, with revenues up 37% in the year.
Product support revenues increased 5% in 2011 compared to the prior year on increased activity in Canada, most notably Ontario.
CIMCO reported operating income of $13.9 million in 2011, up 26% from $11.0 million reported in 2010. The increase reflects higher margins, up 200 basis points, on improved execution and a higher proportion of product support revenues to total. Selling and administrative expenses increased 4% year-over-year.
Capital expenditures totalled $0.6 million in 2011. Capital investment was directed largely at information technology assets and branch updates.
Bookings were down 17% compared to 2010. Canadian recreational bookings were down 62% as expected as the stimulus spending program drove significant bookings in 2010. Somewhat offsetting this decrease was a strengthening in Canadian industrial bookings, which were up 46% in the year. US bookings were also improved, with double-digit increases in both industrial and recreational projects.
Backlog ended the year at $51 million, down from that reported at this time last year. Backlog at December 31, 2010 benefited from significant projects carried forward under the federal stimulus program.
CONSOLIDATED FINANCIAL CONDITION
The Company has maintained a strong financial position for many years. At December 31, 2011, the ratio of total debt net of cash to total capitalization was 13%. Total assets were $913 million at December 31, 2011, compared with $907 million at December 31, 2010, excluding assets at discontinued operations.
Working Capital
The Company–s investment in non-cash working capital was $175.8 million at December 31, 2011. The major components, along with the changes from December 31, 2010, are identified in the following table.
Accounts receivable were $209 million as at December 31, 2011, unchanged from the same time last year reflecting higher sales offset by improved collections. Revenues for the fourth quarter of 2011 in the Equipment Group were 25% higher than in the fourth quarter of 2010. Higher revenues will generally result in higher accounts receivable balances.
Inventories at December 31, 2011 were $302 million, $77.5 million or 35% higher compared to the same time last year. Equipment Group inventories were 39% higher to support higher sales volumes and the increased service business. CIMCO inventories were down 28% on lower work in process.
Income taxes (payable) receivable reflect amounts owing for current corporate income taxes less instalments made to date as well as refunds to be received for prior taxation years– corporate income tax.
Derivative financial instruments represent the fair value of foreign exchange contracts. Fluctuations in the value of the Canadian dollar have led to a cumulative net loss of $0.6 million as at December 31, 2011. This is not expected to affect net income, as the unrealized losses will offset future gains on the related hedged items.
Accounts payable and accrued liabilities at December 31, 2011 were higher than at December 31, 2010 on higher activity levels, including purchases of inventories. Extended terms of payment have been offered by certain suppliers. Accruals for performance incentive bonuses increased year-over-year on improved earnings. The liability for deferred share units (DSU–s) increased on the higher market value of Toromont shares.
Lower dividends payable year-over-year reflect the apportionment of the previous $0.16 dividend between continuing Toromont ($0.10 per share) and Enerflex ($0.06 per share). Toromont–s dividend rate was subsequently increased by the Board of Directors to $0.11 per share, effective with the dividend paid on October 3, 2011.
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 customer support agreements as well as on progress billings on long-term construction contracts. In CIMCO, deferred revenues arise on progress billings in advance of revenue recognition.
The current portion of long-term debt reflects scheduled principal repayments due in 2012. This amount is lower as a result of the maturity of certain senior debentures in 2011.
Goodwill
The Company performs impairment tests on its goodwill balances 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, 2011.
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, 2011, 2.4 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 $1.1 million in 2011 (2010 – $1.0 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, 193,728 DSUs were outstanding at a value of $4,093 (2010 – 87,968 units at a value of $2,747). 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 140 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 $21.0 million as at December 31, 2011. 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 2011. The return on plan assets was $1,650 or 3.2%. Long-term interest rates declined in 2011, driving an increase in the present value of pension obligation, up $7,209. As a result, the funded status of the plans has declined from a deficit of $19,851 at December 31, 2010 to a deficit of $26,161 at December 31, 2011. These deficits included $18,090 and $19,561 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 2012 to be similar to 2011 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. IFRS requires that 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 2011. This issuer bid allows the Company to purchase up to approximately 5.7 million of its common shares, representing 10% of common shares in the public float, in the year ending August 30, 2012. 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 2011, the Company purchased and cancelled 720,004 shares for $12.2 million (average cost of $16.96 per share). No shares were purchased under the NCIB in 2010.
Outstanding Share Data
As at the date of this MD&A, the Company had 76,809,332 common shares and 2,239,505 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 2011, the Company declared dividends of $0.48 per common share ($0.62 per common share in 2010), reflecting the lower dividend rate subsequent to 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 from Enerflex 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 of Enerflex with no penalty.
As at December 31, 2011, there were no drawings on the Canadian facility. Letters of credit utilized $24.8 million of the facility.
Cash and cash equivalents at December 31, 2011 was $75.3 million, compared to $174.1 million at December 31, 2010. Excess cash was held by the Company during 2010 in light of the acquisition/spinoff of Enerflex and the uncertain economic environment. Cash balances were drawn down in 2011 on a number of factors, most notably the repayment of acquisition related financing, net of amounts received from Enerflex on spinoff and investments in working capital, primarily inventories in light of specific orders, generally higher volumes and tightened supply.
The Company expects that continued cash flows from operations in 2012, cash and cash equivalents on hand 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 from continuing operations provided $96.8 million in 2011 compared to $157.3 million in 2010. Net earnings adjusted for items not requiring cash were 25% higher than that reported last year on higher revenues and improved operating margins. Non-cash working capital and other used $39.7 million compared to generating $48.4 million in 2010. In 2011, the Equipment Group invested $82 million in inventory in light of stronger market conditions and specific customer orders. Discontinued operations provided $57.4 million in cash flow in 2011 compared to $98.5 million in the similar period last year. Results for discontinued operations in 2011 include operations to May 31, 2011, while results for 2010 include a full year.
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 $55.9 million in 2011 compared to $48.1 million in 2010.
Net rental fleet additions (purchases less proceeds of disposition) totalled $34.8 million in 2011 compared to $17.7 million in 2010. Additional investments in the rental fleet were made in the current year in light of stronger demand on improved market conditions.
Investments in property, plant and equipment in 2011 totalled $25.0 million compared to $32.6 million in 2010. Additions in 2011 were largely made within the Equipment Group and included $10.4 million for land and buildings for new and expanded branches, $7.8 million for service vehicles, and $2.8 million for information technology assets. Additions in 2010 included $26.1 million for land and buildings acquired for new branch locations.
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.
Investing activities at discontinued operations in 2010 included cash used for acquisition of Enerflex Systems Income Fund of $292.5 million.
Cash Flows from Financing Activities
Financing activities used $337.3 million in 2011 and provided $54.5 million in 2010.
During 2011, payments on long-term debt totalled $286.9 million. The acquisition financing from the purchase of Enerflex Systems Income Fund 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. The net increase in long-term debt in 2010 was $101.1 million.
Dividends paid to common shareholders in 2011 totalled $40.9 million compared to $45.1 million paid in the prior year. The quarterly dividend rate prior to spinoff was $0.16 per share. The rate was adjusted to $0.10 per share for the post-spinoff dividend which, together with the $0.06 dividend subsequently declared by the Enerflex 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, effective with the dividend paid October 3, 2011.
In 2011, the Company purchased and cancelled 720,004 shares for $12.2 million (average cost of $16.96 per share). No shares were purchased under the NCIB in 2010.
Cash received on the exercise of share options totalled $3.2 million compared to $6.7 million in the prior year. The decrease reflects a lower number of stock options exercised.
OUTLOOK
Toromont has a history of performance at a high level for all stakeholders, resulting from consistent application of long-term strategies, a proven business model and a focus on asset management and constant improvement. Toromont is well positioned in each of its markets and both business segments have good growth prospects over the longer term.
Our Equipment Group is experiencing improved activity in many markets, including mining, road building and power systems. We believe that investment levels will continue to remain high in the infrastructure markets we serve. The parts and service business has seen a resumption of growth and provides a measure of stability, driven by the larger installed base of equipment in the field.
Toromont expects to benefit from Caterpillar–s expanding product line-up. In 2011, Caterpillar completed the acquisition of Bucyrus, a leading manufacturer of mining equipment for the surface and underground mining industries. Toromont has entered into discussions with Caterpillar for distribution rights to these products; however the impact of this is not determinable at this time. Also in 2011, Caterpillar completed the acquisition of MWM, a leading global supplier of natural gas and alternative-fuel engines. This initiative has expanded Toromont–s Power Systems product offering.
CIMCO has seen a reduction in recreational activity in Canada subsequent to the end of the governmental infrastructure spending programs. Industrial markets in Canada and US markets have shown some recent strengthening; however it is too early to determine if this will continue.
Our management teams have been successful in adjusting to changing market conditions. Our focus on staffing, asset management, discretionary spending and capital investment have left us in good position to capitalize on opportunities going forward.
CONTRACTUAL OBLIGATIONS
Contractual obligations are set out in the following table. Management believes that these obligations will be met comfortably through cash on hand, cash generated from operations and existing short- and 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 2007, revenues increased at an average annual rate of 4.7%. Product support revenue growth has averaged 5.0% 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 13%, 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.
Toromont has paid dividends consistently since 1968, and has increased the dividend in each of the last 22 years. 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 2011
Results from continuing operations in the fourth quarter of 2011 were strong, with double-digit increases in revenue and earnings.
Revenues were 19% higher in the fourth quarter of 2011 compared to the same period last year on higher revenues at the Equipment Group.
Gross profit increased 21% in the fourth quarter over last year on the higher sales volumes. Gross profit margin was 25.4% in 2011 compared to 25.0% in 2010. Higher margins were reported in CIMCO on sales mix. Equipment Group margins were also slightly higher than the same period last year.
In the fourth quarter of 2010, revised pricing under certain electricity supply contracts triggered an assessment of the recoverable amount of certain power generation assets held in the Equipment Group. This assessment led to a gain of $6,683 ($4,812 after tax) resulting from the reversal of an asset impairment provision recorded in 2005.
Selling and administrative expenses increased $5.3 million or 11% versus the comparable period of the prior year. Approximately 30% of the increase is related to increased compensation on annual compensation increases and higher staffing levels. Selling and administrative expenses as a percentage of revenues were 13.6% compared to 14.6% in the comparable period last year.
Interest expense was $2.1 million in the fourth quarter of 2011, down 7% from the similar period last year on lower debt balances.
The effective income tax rate was 27.9% in the fourth quarter of 2011 compared to 32.3% in the same period last year. The lower tax rate reflects lower statutory rates.
Net earnings from continuing operations in the quarter were $34.2 million, up 22% from 2010. Basic earnings per share were $0.44, up 22% from the fourth quarter of 2010.
Earnings from discontinued operations in the fourth quarter of 2010 were $12.4 million.
Net earnings in the fourth quarter of 2011 were $34.2 million, for basic EPS of $0.44, compared to $40.3 million, basic EPS of $0.52 in the prior year. The decrease results from discontinued operations.
Comprehensive income in the quarter was $19.7 million, comprised of net earnings of $34.2 million and other comprehensive loss of $14.5 million. Other comprehensive loss reflects actuarial losses on employee pension plans ($7.2 million) and net losses on derivatives designated as fair value hedges ($7.3 million). The losses on derivatives are not expected to impact net income in the future as the losses will be offset by gains on the underlying items.
Fourth Quarter Results of Operations in the Equipment Group
New and used equipment sales increased 44% and 21% respectively compared to the fourth quarter of 2010. Significant deliveries were made to mining customers in the quarter.
Rental revenues were up 4% in the quarter compared to the prior year on higher fleet utilization. Rental rates have been largely consistent with the prior year, with continuing competitive market conditions.
Power generation revenues from Toromont-owned plants decreased 28% in the quarter. Revenues in the fourth quarter of 2010 included certain –catch up– payments with respect to revised operating contracts with certain customers. Excluding these remedial payments in the prior year, revenues would have increased 2%.
Product support revenues were up 9% compared to the prior year. Improved market conditions and a larger installed base of equipment in territory have driven higher activity levels.
Operating income was up 17% over last year on the higher revenues, 41% higher excluding the asset impairment reversal recorded in the comparable period of the prior year. Gross margins were up slightly in the quarter. Selling and administrative expenses increased 13% on the higher volumes, higher staffing levels and annual compensation increases. Operating income as a percentage of revenues was 12.6% compared to 13.4% in the fourth quarter of 2010 (11.1% in 2010 excluding the asset impairment reversal).
Bookings in the fourth quarter of 2011 were $157 million, down 24% from the similar period last year. Bookings in the fourth quarter of 2010 benefited from increased activity coming out of a prolonged period of purchasing restraint driven by uncertain economic conditions.
Fourth Quarter Results of Operations in CIMCO
Package revenues were down 30% in the quarter compared to 2010. Recreational revenues in Canada were very strong in 2010 as a result of the federal Recreational Infrastructure Canada (“RinC”) program. As this program was wound down in early 2011, recreational revenues have dropped 64%. Offsetting this decline is a strengthening in industrial revenues, in both Canada and the US, with revenues up 85% and 64% respectively. US recreational revenues were also strong in the fourth quarter of 2011.
Product support revenues increased 1% in the fourth quarter of 2011 compared to the prior year on increased activity in the US.
CIMCO reported operating income of $1.5 million in the quarter compared with $2.4 million reported in 2010. The decrease reflects the decline in revenues. Gross margins were up 170 basis points on a higher proportion of product support revenues to total. Selling and administrative expenses decreased 2% year-over-year.
Bookings in the quarter totalled $27 million, up 39% from the similar quarter last year. Industrial bookings were more than double those recorded last year on stronger market conditions in both Canada and the US. Recreational bookings were 30% lower on the windup of the federal stimulus program.
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 2011 annual unaudited consolidated financial statements.
Interim period revenues and earnings historically reflect some seasonality.
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 quarter 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, the increase 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. Generally, lower revenues are reported in the first quarter of each year as weather and other factors reduce construction activity. This trend was significantly put aside in 2011 as early quarters reflected increased activities associated with RInC projects. Completion of these projects in October 2011 meant a substantial reduction in activity in the fourth quarter.
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
The global economic crisis of late 2008 and 2009 served to reduce revenues in 2009 as activity levels in end markets slowed. Revenues grew 14% in 2011 and 15% in 2010 on improved market conditions within the Equipment Group.
Net earnings from continuing operations improved 30% in 2010 and 34% in 2011 on the higher revenues, generally improving margins and relatively slower growth in selling and administrative expenses.
Net earnings include results from discontinued operations, Enerflex. Toromont completed the acquisition of Enerflex Systems Income Fund (“ESIF”) in 2010. Results at the combined Enerflex operations in 2010 were dampened by weak natural gas markets as well as expenses related to the acquisition and subsequent integration efforts. 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. Earnings per share were impacted in 2010 as the number of common shares outstanding increased 18% due to shares issued in connection with the acquisition of ESIF.
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 Company has announced dividend increases in each of the past 22 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 13% at December 31, 2011, 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 18 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.
Cash equivalents consist mainly of short-term investments, 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
Volatility in the rate of exchange between the Canadian and U.S. dollar has an impact on revenue trends. The Canadian dollar averaged US $0.98 in the fourth quarter of 2011 compared to US $0.99 in 2010, a 1.0% decrease, however for the year the Canadian dollar was 4.2% stronger in 2011 versus 2010. 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, 2011, the Company–s debt portfolio is comprised of 100% 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