Toromont Announces Results for the Fourth Quarter and Full Year 2010
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Three months ended Twelve months ended
December 31 December 31
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millions, except per % %
share amounts 2010 2009 change 2010 2009 change
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Revenues $ 709.7 $ 452.8 57% $2,332.2 $1,824.6 28%
Operating income $ 60.0 $ 45.8 31% $ 153.7 $ 182.4 (16%)
Net earnings $ 35.4 $ 31.4 13% $ 98.7 $ 120.5 (18%)
Earnings per share -
basic $ 0.47 $ 0.48 (2%) $ 1.30 $ 1.86 (30%)
Weighted average
shares outstanding 77.0 64.8 19% 76.2 64.7 18%
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Note - In the first quarter of 2010, Toromont completed the acquisition of
Enerflex Systems Income Fund and its results have been consolidated from
January 20, 2010 , the date of acquisition.
Toromont ended the year on a very strong note. Fourth quarter bookings were up 94%, backlogs increased year-over-year by 135% to
Toromont closed the year with cash on hand of
"2010 was a transitional year for Toromont," said
Highlights:
--Equipment Group revenues were up 25% in the quarter versus the similar period of 2009 on strong new and used machine sales and higher product support activities. Operating income increased 77% compared to last year on higher revenues and improved margins. For the year, revenues increased 16% and operating income increased 25% from 2009, reflecting increased market activity. --Equipment Group bookings increased 58% in the fourth quarter and 68% in the year-to-date versus 2009. Mining, power systems and road building have reported improved activity levels. Backlog was$256 million compared to$110 at this time last year. --Compression Group revenues were up 93% in the quarter compared to the same period last year due to the acquisition. Operating income was 3% lower than the fourth quarter of 2009 due primarily to higher combined capacity and overheads. For the year, revenues increased 39% while operating income decreased 52% due to weak market conditions and costs related to the acquisition, integration and transition. --Compression Group bookings for the quarter were 119% higher than those reported in the fourth quarter of 2009 and 150% higher on a year-to-date basis. Backlogs ended the year at$713 million compared to$301 million at this time last year. -- The integration of the Company's legacy natural gas compression and processing equipment business with the acquired ESIF business to create the new Enerflex was a key focus during the year and has substantially been completed. Actions taken through to the end of 2010 have reduced 310 employee positions and eliminated 320,000 sq. ft. of excess capacity. Cost savings achieved through these actions is estimated at$30 million on an annualized basis. Continued focus is being placed on facilities requirements, surplus real estate and excess inventory and these efforts are expected to reduce capital employed and lead to additional cost savings. -- Net earnings were$21.8 million or 18% lower compared to 2009. Net earnings in 2010 included (all on an after-tax basis)$2.2 million in acquisition related costs,$4.9 million in restructuring expenses and$8.2 million in amortization of intangible assets acquired as part of the acquisition. -- The Company maintained a strong financial position and ended the year with$174 million of cash. The company reduced its acquisition debt of$450 million by$170 million during the year. During the quarter, the Company renegotiated its term loan and bank credit facilities achieving a one-year extension and reducing interest costs. After completing the largest acquisition in the Company's history, total debt net of cash to shareholders' equity was 0.20:1, comfortably within stated capital targets. -- The Board of Directors declared the regular quarterly dividend of$0.16 per common share, paid onJanuary 4, 2011 to shareholders of record onDecember 13, 2010 . The Company has paid dividends every year since going public in 1968. -- The Company continued to complete the actions necessary to prepare for and implement the spinoff ofEnerflex Ltd. , its natural gas compression and processing equipment subsidiary, to existing shareholders by means of a tax-deferred divestiture for Canadian tax purposes, subject to a favourable ruling from CRA. Post-spinoff, Toromont's operations include Toromont CAT, Battlefield -The CAT Rental Store and CIMCO. The proposed corporate reorganization would be implemented through a court approved plan of arrangement, which is subject to court and shareholder approval. Completion of the spinoff will also be subject to approval of the TSX and fulfillment of certain other conditions.
"With large backlogs and significant momentum in our product support activities our consolidated outlook for 2011 is positive, even though the markets we serve are still in the early stages of recovery," continued Mr. Ogilvie. "We believe that the pending spinoff of our combined gas compression and process equipment group under the name of
Quarterly Conference Call and Webcast
Interested parties are invited to join the quarterly conference call with investment analysts, in listen-only mode, on
Both the live webcast and the replay of the quarterly conference call can be accessed at www.toromont.com.
About Toromont
Management's Discussion and Analysis
This Management's Discussion and Analysis ("MD&A") comments on the operations, performance and financial condition of
The consolidated financial statements reported herein have been prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP") and are reported in Canadian dollars. The information in this MD&A is current to
For periods prior to
The Board of Directors of Toromont has unanimously approved in principle a spinoff of
Additional information is contained in the Company's filings with Canadian securities regulators, including the Company's Annual Information Form. These filings are available on SEDAR at www.sedar.com and on the Company's website at www.toromont.com.
ADVISORY
Statements and information herein that are not historical facts are "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 forward-looking information and statements. With respect to the forward-looking information contained herein, we have made certain assumptions with respect to general economic and industry growth rates, commodity prices, currency exchange and interest rates, competitive intensity and shareholder and regulatory approvals.
Forward-looking statements are based on current expectations and are influenced by management's historical experience, perception of trends and current business conditions, expected future developments and other factors which management considers appropriate. By their nature, forward-looking information and statements are subject to risks and uncertainties which may be beyond Toromont's ability to control or predict. Actual results or events could differ materially from those expressed or implied by forward-looking information and statements. Factors that could cause actual results or events to differ from current expectations include, among others: business cycle risk, including general economic conditions in the countries in which Toromont operates; risk of commodity price changes including precious and base metals and natural gas; risk of changes in foreign exchange rates, including the Cdn $/US$ exchange rate; risk of the termination of distribution or original equipment manufacturer agreements; risk of equipment product acceptance and availability of supply; risk of increased competition; credit risk related to financial instruments; risk of additional costs associated with warranties and maintenance contracts; interest rate risk on financing arrangements; risk of availability of financing; risk of environmental regulation; and new or amended IFRS or interpretations that become effective prior to the inclusion of the Company's financial statement of position in its first annual audited IFRS financial statements. Forward-looking statements in respect of the spinoff of Enerflex as a separate, publicly traded company also entail various risks and uncertainties, including among others, the potential benefit of the spinoff, the potential for a lower combined trading price of common shares of Toromont and Enerflex after the spinoff, the lack of an established market for common shares of Enerflex, the possibility of a negative effect on trading prices if current shareholders of Toromont are unwilling or unable to hold common shares of Toromont or Enerflex after the spinoff, increased exposure to substantial tax liabilities if tax-deferred spinoff requirements are not met, delays or amendments to the spinoff if certain consents and approvals are not obtained on a timely basis, future factors that may arise making it inadvisable to proceed with, or advisable to delay, all or part of the spin-off, potentially significant indemnification obligations on Toromont and Enerflex following the spinoff and less diverse businesses of the separate companies resulting from the spinoff.
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 or incorporated into this MD&A. 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 the "Outlook" sections of this MD&A. A description of certain risks and uncertainties in respect of the spinoff of Enerflex as a separate, publicly traded company will be included in a management information circular to be filed in advance of the meeting of Toromont shareholders to vote on the spinoff. 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 forward-looking information and statements.
Forward-looking information and statements contained herein about prospective results of operations, financial position or cash flows that are based on assumptions about future economic conditions and courses of action are presented for the purpose of assisting Toromont's shareholders in understanding management's current view regarding those future outcomes and may not be appropriate for other purposes. Readers are cautioned not to place undue reliance on the forward-looking information and statements contained herein, which are given as of the date of this document, and not to use such information and statements for anything other than their intended purpose. Toromont disclaims any obligation or intention to update publicly or revise any forward-looking information or statement, whether as a result of new information, future events or otherwise, except as required by applicable securities legislation.
CORPORATE PROFILE AND BUSINESS SEGMENTATION
As at
CORPORATE DEVELOPMENTS
Acquisition of
On
This important transaction brought together ESIF and Toromont Energy Systems, to create a stronger organization named
For further information on the accounting for the acquisition, refer to Note 3 of the Notes to the Consolidated Financial Statements.
Sale of Syntech Enerflex
Syntech Enerflex was an electrical, instrumentation and controls business which was acquired as part of the acquisition of ESIF. This business was not considered to be core to the future growth of the Company and was sold effective
For further information on the accounting for the disposition, refer to Note 4 of the Notes to the Consolidated Financial Statements.
Proposed Spinoff of Enerflex
On
If the transaction is completed, Toromont shareholders will exchange their current Toromont shares for new shares in both Toromont and in
The spinoff is expected to provide a number of benefits to the existing shareholders of Toromont, including the following benefits.
-- Creates distinct market leaders with critical mass and momentum - The
spinoff will create two market leaders in their respective industries
with the scale and operational strength to compete effectively in their
distinct markets.
-- Sharper business and strategic focus - The proposed successor companies
have different business cycles, serve different markets, sell to
different customers, are subject to different competitive forces and
require different short term and long term strategies. Their separation
into two independent companies, each with its own board of directors,
will provide management of each company with a sharper business focus.
This will permit them to pursue independent business strategies best
suited to their business plans, and allow them to pursue opportunities
in their respective markets.
-- Independent growth opportunities - Each of the two businesses has
attractive opportunities for both organic expansion and external growth
through acquisitions, capital investments and geographic expansion.
Separating Toromont and Enerflex will enable each to pursue independent
growth strategies that may not be available to them as part of a
consolidated Toromont.
-- Enhanced access to growth capital - As separate companies, Toromont and
Enerflex will have separately traded shares and independent balance
sheets, which will provide them with enhanced access to the capital
necessary to finance their respective growth strategies.
-- Improved market understanding and valuation - By establishing two
separate public companies with independent public reporting and a
simplified corporate structure, investors and analysts will be able to
more easily evaluate each one on a stand-alone basis relative to
competitors, benchmarks and performance criteria specific to their
respective industries. This should improve alignment of the two
companies with their direct public company comparables and facilitate
sector-specific analyst coverage for each.
-- Better ability to attract, retain and motivate key employees - The
separation of Toromont into two independent public companies will also
enable each to provide business-specific incentives to key employees.
Compensation arrangements can more closely align the role of each
employee with the performance of the business that employs them,
enhancing each company's ability to better attract, retain and motivate
key people.
Toromont plans to structure the proposed transaction as a tax-deferred divestiture for Canadian tax purposes, subject to a favourable ruling from
The transaction will be implemented by way of a plan of arrangement, which is subject to court approval, prior approval of the TSX and fulfillment of certain other conditions.
The transaction also requires the approval of the Company's shareholders. In order to proceed with the arrangement it must be approved by two-thirds of the Toromont shares that are voted at the meeting to consider it. If the necessary conditions are met and required approvals are obtained, Toromont anticipates that the spinoff would be completed shortly after receipt of the final court approval. However, notwithstanding the receipt and satisfaction of such approvals and conditions, whether the spinoff is effected, and the timing for effecting the spinoff, will remain in the sole and absolute discretion of Toromont.
Further information on Enerflex and this proposed transaction will be provided in a management information circular to be filed in advance of the meeting of shareholders to vote on the spinoff.
The financial results from Enerflex are reported in the
PRIMARY OBJECTIVE AND MAJOR STRATEGIES
A primary objective of
Expand Markets
Toromont serves a diverse number of 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 future 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, 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 often 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. Incentive programs, a strong share ownership and highly principled culture 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 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
Years endedDecember 31 ($ thousands, except per share % amounts) 2010 2009 change ---------------------------------------------------------------------------- Revenues $ 2,332,247 $ 1,824,592 28% Cost of goods sold 1,843,540 1,415,476 30% ---------------------------------------------------------------------------- Gross profit 488,707 409,116 19% Selling and administrative expenses 334,988 226,764 48% ---------------------------------------------------------------------------- Operating income 153,719 182,352 (16%) Interest expense 27,076 8,815 207% Interest and investment income (2,803) (6,355) (56%) Gain on available-for-sale financial assets (18,627) - n/m Equity earnings from affiliates (468) - n/m ---------------------------------------------------------------------------- Income before income taxes 148,541 179,892 (17%) Income taxes 48,393 59,376 (18%) ---------------------------------------------------------------------------- Earnings from continuing operations 100,148 120,516 (17%) Losses on discontinued operations (1,498) - n/m ---------------------------------------------------------------------------- Net earnings $ 98,650 $ 120,516 (18%) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Earnings per share (basic) $ 1.30 $ 1.86 (30%) ---------------------------------------------------------------------------- Key ratios: Gross profit as a % of revenues 21.0% 22.4% Selling and administrative expenses as a % of revenues 14.4% 12.4% Operating income as a % of revenues 6.6% 10.0% Income taxes as a % of income before income taxes 32.6% 33.0% Note - 2009 amounts do not include the financial results of ESIF, which have been included in the consolidated financial statements from date of acquisition,January 20, 2010 .
Revenues increased 28% in 2010 compared to 2009 on higher revenues in both operating groups.
Significant volatility in the rate of exchange between the Canadian and U.S. dollar has also had a meaningful impact on revenue trends. The Canadian dollar averaged
-- The Canadian/U.S. dollar exchange rate impacts reported revenues on the
translation of the financial statements of foreign subsidiaries. Simple
translation of the U.S. dollar reduced reported revenues by $54 million
versus 2009. Net income was also reduced by $3.8 million due to
translation.
-- Nearly all of the equipment and parts sold in the Equipment Group are
sourced in U.S. dollars. The Canadian dollar sales prices generally
reflect changes in the rate of exchange. The impact on equipment
revenues 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 the Compression Group , revenues from foreign subsidiaries are
impacted by the translation of results, noted above. Sales in Canada are
largely impacted by the same factors as those impacting the Equipment
Group .
Gross profit margin was 21.0% in 2010 compared with 22.4% in 2009. Within the
Selling and administrative expenses increased
Operating income decreased 16% in 2010 compared to the prior year as higher expense levels and lower gross margins more than offset higher revenues.
Interest expense was
Earnings in 2010 included a gain of
The effective income tax rate in 2010 is 32.6% compared to 33% in 2009. The lower rate in 2010 reflects the favourable capital gains tax rate used for the unrealized gain on units reclassified out of OCI and into income on acquisition. Excluding this, the effective income tax rate would be 35.5% in 2010, due to a higher proportion of income coming from higher tax jurisdictions.
The losses on discontinued operations related to the aforementioned disposition of Syntech.
Net earnings were down 18% in 2010 compared to 2009. Basic earnings per share ("EPS") were
Comprehensive income was
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. Previously, corporate overheads were allocated to the business segments based on operating income. The change in allocation method has been applied prospectively from
Twelve months ended December 31 ($ % thousands) 2010 2009 change ---------------------------------------------------------------------------- Equipment sales and rentals New $ 416,922 $ 336,907 24% Used 144,296 118,273 22% Rental 143,398 137,536 4% ---------------------------------------------------------------------------- Total equipment sales and rentals 704,616 592,716 19% Power generation 11,450 9,692 18% Product support 306,634 278,938 10% ---------------------------------------------------------------------------- Total revenues $ 1,022,700 $ 881,346 16% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Operating income $ 106,748 $ 85,441 25% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Capital expenditures $ 72,415 $ 37,706 92% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Key ratios: Product support revenues as a % of total revenues 30.0% 31.6% Group total revenues as a % of consolidated revenues 43.9% 48.3% Operating income as a % of revenues 10.4% 9.7%
An extended period of weaker market conditions dampened results through 2009 and into the first quarter of 2010. Market conditions began to improve in the second quarter of 2010 and the positive trend continued through the end of 2010, resulting in a strong finish to the year.
New and used equipment sales were 24% and 22% higher in 2010 respectively. Sales increases resulted largely from higher unit sales. Many market segments, notably heavy construction, mining and industrial, were higher.
Rental revenues were 4% higher than 2009. Rental rates were consistently lower in 2010 due to very competitive market conditions; however equipment utilization improved through the latter part of 2010 leading to the increased rental revenues.
Power generation revenues from Toromont-owned plants increased 18% compared to the similar periods of the prior year, reflecting increased operating hours and higher average prices for electricity.
Product support revenues were a record
Operating income was up 25% in 2010 compared to 2009 reflecting the 16% increase in revenues. Expense ratios were improved from 2009.
Capital expenditures in the
%
(in $ millions) 2010 2009 change
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Bookings - twelve months ended
December 31 $ 708 $ 421 68%
Backlogs - as at December 31 $ 256 $ 110 133%
Equipment bookings and backlog benefited from a significant order of
Twelve months ended December 31 ($ % thousands) 2010 2009 change ---------------------------------------------------------------------------- Package sales and rentals Natural gas compression $ 503,418 $ 526,412 (4%) Process and fuel gas compression 263,506 128,553 105% Refrigeration systems 106,890 91,776 16% Compression rentals 32,443 15,238 113% Other 45,603 - n/m ---------------------------------------------------------------------------- Total package sales and rentals 951,860 761,979 25% Product support 357,687 181,267 97% ---------------------------------------------------------------------------- Total revenues $ 1,309,547 $ 943,246 39% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Operating income $ 46,971 $ 96,911 (52%) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Capital expenditures $ 57,709 $ 23,335 147% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Key ratios: Product support revenues as a % of total revenues 27.3% 19.2% Group total revenues as a % of consolidated revenues 56.1% 51.7% Operating income as a % of revenues 3.6% 10.3% Note - 2009 amounts do not include the financial results of ESIF, which have been included in the consolidated financial statements from date of acquisition,January 20, 2010 .
The integration of the Company's legacy natural gas compression and processing equipment business with the acquired ESIF business to create the new Enerflex was a key focus during the year and has substantially been completed. Significant efforts were focused on integrating the Canadian operations including sales, engineering, fabrication, product support and administration functions. Operations in the U.S. and international locations were largely unaffected.
Actions taken through to the end of 2010 have reduced 310 employee positions and eliminated 320,000 sq. ft. of excess capacity. Cost savings achieved through these actions is estimated at
Other actions taken during the year include the sale of Syntech Enerflex, an electrical, instrumentation and controls business which was acquired as part of the acquisition of Enerflex. This business was not considered to be core to the future growth of the Company and was sold. See Note 4 of the consolidated financial statements.
Due to the integration of the Canadian operations, it is not possible to clearly associate trends to either of the two predecessor organizations. Generally, weak fundamentals in the global natural gas compression and related markets have translated to reduced revenues in 2010 on a pro forma basis. Reductions in revenues in each of the predecessors to Enerflex have been more than offset in total by the increased revenues derived from the acquired business.
Natural gas package revenues were down 4% in 2010 from the prior year. The stronger Canadian dollar resulted in a decrease of
Process and fuel gas compression systems revenues were up 105% 2010 on revenues added by the acquisition.
Refrigeration systems revenues were up 16% in 2010 compared to 2009. Recreational refrigeration in
Rental revenues increased in 2010 due to the addition of the rental operation of the acquired ESIF business.
Other revenues include revenues from businesses acquired in the acquisition of ESIF, including combined heat and power and project engineering. Revenues in 2010 include
Product support revenues increased 97% in 2010 compared to 2009 as the acquisition of ESIF resulted in significantly expanded operations. Refrigeration product support revenues were relatively unchanged from the prior year.
Capital expenditures totalled
%
(in $ millions) 2010 2009 change
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Bookings - twelve months ended
December 31 $ 1,147 $ 459 150%
Backlogs - as at December 31 $ 713 $ 301 137%
Note - 2009 amounts do not include the financial results of ESIF, which
have been included in the consolidated financial statements from date of
acquisition, January 20, 2010 .
Compression bookings were up significantly year-over-year, reflecting the larger integrated Enerflex business and success in certain key markets. Notable successes include orders from
CONSOLIDATED FINANCIAL CONDITION
The Company has maintained a strong financial position for many years. At
Working Capital
The Company's investment in non-cash working capital increased 4% to
Change
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December 31 December 31
$ thousands 2010 2009 $ %
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Accounts receivable $ 451,858 $ 244,759 $ 207,099 85%
Inventories 447,271 373,110 74,161 20%
Income taxes, net (4,962) 16,967 (21,929) -129%
Future income tax assets 41,483 34,326 7,157 21%
Derivative financial
instruments (3,379) (874) (2,505) 287%
Other current assets 25,356 6,037 19,319 320%
Accounts payable and
accrued liabilities (397,362) (228,436) (168,926) 74%
Dividends payable (12,305) (9,728) (2,577) 26%
Deferred revenue (195,388) (89,810) (105,578) 118%
Current portion of long-
term debt (6,889) (14,044) 7,155 -51%
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Total non-cash working
capital $ 345,683 $ 332,307 $ 13,376 4%
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Note - 2009 amounts do not include the financial results of ESIF, which have
been included in the consolidated financial statements from date of
acquisition, January 20, 2010 .
Accounts receivable as at
Inventories increased
Income taxes (payable) receivable reflect amounts owing for current corporate income taxes less installments made to date as well as refunds to be received for prior taxation years' corporate income tax.
Future income tax assets reflect differences between income tax and accounting.
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
Accounts payable and accrued liabilities at
Dividends payable were 26% higher at
Deferred revenues represent billings to customers in excess of revenue recognized. In the
The current portion of long-term debt reflects scheduled principal repayments due in 2011. This amount is lower as a result of the maturity of certain senior debentures in 2010.
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
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
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
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 management incentive award 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 termination of employment or resignation from the Board, as the case may be. DSUs have dividend equivalent rights, which are expensed as earned. The Company records the cost of the DSU Plan as compensation expense.
As at
Employee Future Benefits
The Company sponsors pension arrangements for substantially all of its employees, primarily through defined contribution plans in
Approximately 150 employees participate in one of two defined benefit plans:
-- Powell Plan - Consists of personnel of Powell Equipment (acquired by
Toromont in 2001); and
-- Other plan assets and obligations - Provides for certain retirees and
terminated vested employees of businesses previously acquired by the
Company as well as for retired participants of the defined contribution
plan who, in accordance with the plan provisions, have elected to
receive a pension directly from the plan.
Financial markets continued to be volatile in 2010. This resulted in a gain on plan assets of
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
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. The standard 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 2010. This issuer bid allows the Company to purchase up to approximately 5.6 million of its common shares, representing 10% of common shares in the public float, in the year ending
No shares were purchased under the NCIB in 2010 and in light of the proposed spinoff, the Company has suspended the repurchase of its common shares pursuant to its NCIB. In 2009, the Company purchased and cancelled 43,400 shares for
Outstanding Share Data
As at the date of this MD&A, the Company had 77,158,736 common shares and 2,121,750 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. It is intended that the initial dividends paid by Toromont and Enerflex to their respective shareholders after the spinoff will, in the aggregate, equal the dividend that Toromont would have otherwise paid had the spinoff not occurred. After this initial dividend, the boards of directors of each of Toromont and Enerflex will re-examine whether this dividend policy is appropriate for their respective companies in future periods.
During 2010, the Company declared dividends of
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.
Toromont arranged a
Effective
At
Combined unsecured credit facilities amounted to
The Company expects that continued cash flows from operations in 2011, 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.
It is expected that subsequent to the spinoff, Enerflex will repay outstanding intercompany debt owed to Toromont. Toromont will apply the funds it receives to repay amounts outstanding under Toromont's credit facilities and expects to amend the credit agreement governing these credit facilities to reduce the available amount.
Principal Components of Cash Flow
Cash from operating, investing and financing activities, as reflected in the Consolidated Statements of Cash Flows, are summarized in the following table:
Twelve months ended December 31
$ thousands 2010 2009
----------------------------------------------------------------------------
Cash, beginning of period $ 206,957 $ 137,274
Cash, provided by (used in):
Operations 151,917 176,945
Change in non-cash working capital
and other 103,736 19,308
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Operating activities 255,653 196,253
Investing activities (340,909) (73,904)
Financing activities 54,453 (51,014)
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(Decrease) increase in cash in the
period (30,803) 71,335
Effect of foreign exchange on cash
balances (2,065) (1,652)
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Cash, end of period $ 174,089 $ 206,957
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----------------------------------------------------------------------------
Note - 2009 amounts do not include the financial results of ESIF, which have
been included in the consolidated financial statements from date of
acquisition, January 20, 2010 .
Cash Flows from Operating Activities
Operating activities provided
Cash Flows from Investing Activities
Investing activities in 2010 used
-- Cash purchase price for the acquisition of ESIF was$292.5 million ; -- Proceeds on sale of discontinued operations, Syntech, of$3.5 million cash and$3.5 million note receivable; -- Rental fleet additions included$38.4 million for a natural gas processing plant which was accounted for as a sales type lease, -- The balance of rental fleet additions of$31.3 million was directed largely at theEquipment Group ; and -- Additions to property, plant and equipment of$60.4 million .
Investments in property, plant and equipment in 2010 were related largely to additional land and buildings acquired for new branch locations (
Investing activities in 2009 used
-- Cash used for purchase of units of ESIF;
-- Net additions to the rental fleet (additions less proceeds on disposal)
of $9.6 million ;
-- Gross investment in property, plant and equipment was $21.3 million .
Cash Flows from Financing Activities
Financing activities provided
Net increase in long-term debt totalled
Dividends paid to common shareholders totalled
There were no shares purchased under the normal course issuer bid (NCIB) during 2010 and, in light of the proposed spinoff, the Company has suspended the repurchase of its common shares pursuant to its NCIB. During 2009, 43,400 shares were purchased and cancelled under the Company's NCIB at a cost of
Cash received on the exercise of share options totalled
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 progressive, profitable improvement. Toromont is well positioned in each of its diverse markets and both business segments have good growth prospects over the longer term.
The new Enerflex is a well capitalized global leader in the compression market, built on the complementary strengths of its predecessor organizations, with a strong leadership team in place. Toromont believes that the prospects for this business are excellent.
The global economy appears to be recovering from the recent recession. We entered 2011 with significantly stronger backlog than we had entering 2010.
Our
Our
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.
We believe that the proposed spinoff of Enerflex will increase long-term value for shareholders.
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.
Payments due by
Period 2011 2012 2013 2014
----------------------------------------------------------------------------
Long-term Debt
- principal $ 6,889 $ 281,280 $ 1,372 $ 1,471
- interest 16,226 11,466 6,895 6,796
Operating Leases 17,136 13,626 10,395 7,430
----------------------------------------------------------------------------
$ 40,251 $ 306,372 $ 18,662 $ 15,697
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Payments due by
Period 2015 Thereafter Total
--------------------------------------------------------------
Long-term Debt
- principal $ 126,576 $ 6,463 $ 424,051
- interest 5,342 944 47,669
Operating Leases 4,931 14,182 67,700
--------------------------------------------------------------
$ 136,849 $ 21,589 $ 539,420
--------------------------------------------------------------
--------------------------------------------------------------
It is expected that concurrent with the spinoff, Enerflex will repay all outstanding intercompany debt owed to Toromont. Toromont will apply the funds it receives to repay amounts outstanding under Toromont's credit facilities and expects to amend the credit agreement governing these credit facilities to reduce the available credit.
KEY PERFORMANCE MEASURES
Management reviews and monitors its activities and the performance indicators it believes are critical to measuring success. Some of the key financial performance measures are summarized in the following table. Others include, but are not limited to, measures such as market share, fleet utilization, customer and employee satisfaction and employee health and safety.
Years ended December 31, 2010 2009 2008 2007 2006 ---------------------------------------------------------------------------- Expanding Markets and Broadening Product Offerings Revenue growth 27.8% -14.0% 12.4% 8.1% 10.2% Revenue generated outside North America (millions) $ 312.1 $ 87.9 $ 69.0 $ 75.6 $ 80.8 Strengthening Product Support Product support revenue growth 44.4% -7.7% 5.5% 6.3% 9.2% Investing in Our Resources Revenue per employee (thousands) $ 421 $ 422 $ 463 $ 431 $ 407 Investment in information technology (millions) $ 19.4 $ 15.3 $ 14.9 $ 13.6 $ 12.7 Return on capital employed 10.3% 21.1% 26.4% 24.7% 22.7% Strong Financial Position Working capital (millions) $ 520 $ 539 $ 509 $ 467 $ 470 Total debt, net of cash to equity ratio .20:1 n/m .05:1 .19:1 .36:1 Book value (shareholders' equity) per share $ 15.63 $ 13.17 $ 12.06 $ 10.08 $ 8.79 Build Shareholder Value Basic earnings per share growth -30.1% -13.9% 14.3% 21.2% 24.8% Dividends per share growth 3.3% 7.1% 16.7% 20.0% 25.0% Return on equity 8.5% 15.5% 21.5% 21.6% 20.6% n/m - not meaningful
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 2006, revenues increased at an average annual rate of 8.9%. Product support revenue growth has averaged 11.5% annually. Revenue growth in continuing operations has been a result of:
-- Acquisition of ESIF in 2010; -- Significant expansion of compression operations inthe United States ; -- Additional product offerings over the years fromCaterpillar and other suppliers; -- Organic growth through increased fleet size and additional branches; -- Increased customer demand for formal product support agreements; and -- Other acquisitions, primarily within theEquipment Group's rental operations.
Over the same five-year period, revenue growth has been constrained at times by a number of factors including:
-- General economic weakness, which has negatively impacted revenues since
the latter part of 2008;
-- Declines in underlying market conditions such as depressed natural gas
prices in Canada ;
-- Inability to source equipment from suppliers to meet customer demand or
delivery schedules; and
-- Lack of skilled workers such as mechanics and journeymen resulting in
service revenue and efficiency impacts.
Changes in the Canadian/U.S. exchange rate impacts reported revenues in two ways. First the exchange rate impacts on the translation of results from foreign subsidiaries. Second the exchange rate impacts on the purchase price of equipment that in turn is reflected in selling prices.
Revenues generated outside
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. In 2010, book value (shareholders' equity) per share increased 19% over the prior year on the ESIF acquisition and strong earnings. Leverage, as represented by the ratio of total debt, net of cash, to shareholders' equity, is 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 acquisition, with higher overheads and expenses during the transition year. EPS in 2010 was also negatively impacted by shares issued for the acquisition of ESIF.
Toromont has paid dividends consistently since 1968, and has increased the dividend in each of the last 21 years.
CONSOLIDATED RESULTS OF OPERATIONS FOR THE FOURTH QUARTER 2010
Three months endedDecember 31 ($ thousands, except per share amounts) 2010 2009 % change ---------------------------------------------------------------------------- Revenues $ 709,710 $ 452,838 57% Cost of goods sold 554,662 352,485 57% ---------------------------------------------------------------------------- Gross profit 155,048 100,353 55% Selling and administrative expenses 95,071 54,532 74% ---------------------------------------------------------------------------- Operating income 59,977 45,821 31% Interest expense 5,076 2,450 107% Interest and investment income (1,210) (2,913) (58%) Equity earnings from affiliates (138) - n/m ---------------------------------------------------------------------------- Income before income taxes 56,249 46,284 22% Income taxes 20,895 14,934 40% ---------------------------------------------------------------------------- Earnings from continuing operations 35,354 31,350 13% Losses on discontinued operations - - n/m ---------------------------------------------------------------------------- Net earnings $ 35,354 $ 31,350 13% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Earnings per share (basic) $ 0.47 $ 0.48 (2%) ---------------------------------------------------------------------------- Key ratios: Gross profit as a % of revenues 21.8% 22.2% Selling and administrative expenses as a % of revenues 13.4% 12.0% Operating income as a % of revenues 8.5% 10.1% Income taxes as a % of income before income taxes 37.1% 32.3% Note - 2009 amounts do not include the financial results of ESIF, which have been included in the consolidated financial statements from date of acquisition,January 20, 2010 .
Results in the fourth quarter were good and represented the first year-over-year increase in operating income and net income since early 2008. The improved results in the quarter largely reflect improved economic conditions in
The Canadian dollar was 4% stronger on average for the fourth quarter of 2010 compared to the similar period last year. The impact on revenues and net income on translation of foreign subsidiaries, all reported in the
Revenues were 57% higher in the fourth quarter of 2010 compared to the same period last year. Increases were reported in both Compression and Equipment.
Gross profit increased 55% in the fourth quarter over last year on the higher sales volumes. Gross profit margin was 21.8% in 2010 compared to 22.2% in 2009. Higher margins were reported in the
Selling and administrative expenses increased
Interest expense was
Interest income in the fourth quarter of 2009 included distributions received on investment in ESIF trust units held prior to the acquisition of the entire business.
The effective income tax rate was 37.1% compared to 32.3% in the fourth quarter of 2009. The tax rate has been skewed higher due to profits generated in higher tax jurisdictions while losses were generated in certain lower tax international markets.
Net earnings in the quarter were
Comprehensive income was
Fourth Quarter Results of Operations in the
Three months endedDecember 31 ($ thousands) 2010 2009 % change ---------------------------------------------------------------------------- Equipment sales and rentals New $ 130,633 $ 99,632 31% Used 38,584 32,492 19% Rental 43,553 38,065 14% ---------------------------------------------------------------------------- Total equipment sales and rentals 212,770 170,189 25% Power generation 3,758 2,482 51% Product support 81,410 66,338 23% ---------------------------------------------------------------------------- Total revenues $ 297,938 $ 239,009 25% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Operating income $ 34,534 $ 19,558 77% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Bookings ($ millions) $ 207 $ 131 58% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Key ratios: Product support revenues as a % of total revenues 27.3% 27.8% Group total revenues as a % of consolidated revenues 42.0% 52.8% Operating income as a % of revenues 11.6% 8.2%
New and used equipment sales increased 31% and 19% respectively compared to the fourth quarter of 2009. Market conditions were much stronger in the fourth quarter of 2010 versus the generally weaker economy seen in 2009.
Rental revenues were up 14% in the quarter compared to the prior year on higher fleet utilization. Rental rates have been consistently lower this year due to very competitive market conditions.
Power generation revenues from Toromont-owned plants increased 51% in the quarter. Higher revenues reflect certain 'catch up' payments with respect to revised operating contracts with certain customers which were recently finalized. Excluding these remedial payments, revenues would have still increased 3%.
Product support revenues were up 23% compared to the prior year and represented a new record level for any quarter. Improved market conditions and a growing installed base of equipment in territory have driven higher activity levels.
Operating income was up 77% over last year on higher revenues and improved gross margins. Selling and administrative expenses increased 19% on the higher volumes. Profit sharing accruals were higher in 2010 on the higher operating income.. Operating income as a percentage of revenues was 11.6% compared to 8.2% in the fourth quarter of 2009.
Fourth Quarter Results of Operations in the
Three months endedDecember 31 ($ thousands) 2010 2009 % change ---------------------------------------------------------------------------- Package sales and rentals Natural gas compression $ 150,549 $ 123,554 22% Process and fuel gas compression 111,527 16,172 590% Refrigeration systems 25,976 26,474 (2%) Compression rentals 8,441 3,322 154% Other 10,275 - n/m ---------------------------------------------------------------------------- Total package sales and rentals 306,768 169,522 81% Product support 105,004 44,307 137% ---------------------------------------------------------------------------- Total revenues $ 411,771 $ 213,829 93% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Operating income $ 25,443 $ 26,263 (3%) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Bookings ($ millions) $ 397 $ 181 119% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Key ratios: Product support revenues as a % of total revenues 25.5% 20.7% Group total revenues as a % of consolidated revenues 58.0% 47.2% Operating income as a % of revenues 6.2% 12.3% Note - 2009 amounts do not include the financial results of ESIF, which have been included in the consolidated financial statements from date of acquisition,January 20, 2010 .
Revenues in the
Natural gas package revenues were up 22% in the quarter, benefiting from increased revenues from the acquired operations.
Process compression systems were significantly higher in the quarter. Process system sales depend on timing of customer orders and requirements.
Refrigeration revenues for the quarter were 2% lower on timing of construction work. Recreational refrigeration in
Product support revenues increased 137% in the quarter as the acquisition of ESIF significantly expanded operations. Canadian refrigeration product support revenues were 6% lower than the prior year as customers focused on new construction, while US product support revenues were significantly higher.
Operating income was 3% lower in the fourth quarter of 2009 compared to the similar period last year on lower margins, partially offset by higher volumes. Gross margins were lower in 2010 compared to 2009 on lower shop utilization from the expanded operations. Selling and administrative expenses were up significantly from the prior year due to the acquisition, integration costs and amortization of intangibles.
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 2009 annual audited consolidated financial statements.
$ thousands, except per share
amounts Q1 2010 Q2 2010 Q3 2010 Q4 2010
--------------------------------------------
Revenues
Equipment Group $ 176,635 $ 264,538 $ 283,588 $ 297,938
Compression Group 249,838 312,086 335,852 411,772
--------------------------------------------
Total revenues $ 426,473 $ 576,624 $ 619,440 $ 709,710
--------------------------------------------
--------------------------------------------
Net earnings - continuing
operations $ 16,227 $ 22,369 $ 26,198 $ 35,354
Net earnings $ 15,365 $ 21,832 $ 26,099 $ 35,354
Per share information:
Earnings per share - continuing
operations
Basic $ 0.22 $ 0.29 $ 0.34 $ 0.47
Diluted $ 0.22 $ 0.29 $ 0.34 $ 0.46
Earnings per share
Basic $ 0.21 $ 0.28 $ 0.34 $ 0.47
Diluted $ 0.21 $ 0.28 $ 0.34 $ 0.46
Dividends per share $ 0.15 $ 0.15 $ 0.16 $ 0.16
Weighted average common shares
outstanding - Basic (in
thousands) 73,866 76,881 76,896 76,962
$ thousands, except per share
amounts Q1 2009 Q2 2009 Q3 2009 Q4 2009
--------------------------------------------
Revenues
Equipment Group $ 191,693 $ 217,015 $ 233,629 $ 239,009
Compression Group 265,966 267,158 196,293 213,829
--------------------------------------------
Total revenues $ 457,659 $ 484,173 $ 429,922 $ 452,838
--------------------------------------------
--------------------------------------------
Net earnings $ 23,718 $ 33,525 $ 31,923 $ 31,350
Per share information:
Basic earnings per share $ 0.37 $ 0.51 $ 0.50 $ 0.48
Diluted earnings per share $ 0.37 $ 0.51 $ 0.50 $ 0.48
Dividends per share $ 0.15 $ 0.15 $ 0.15 $ 0.15
Weighted average common shares
outstanding - Basic (in
thousands) 64,678 64,698 64,718 64,771
Note - 2009 amounts do not include the financial
results of ESIF, which have been included in the
consolidated financial statements from date of
acquisition, January 20, 2010 .
Interim period revenues and earnings historically reflect some seasonality.
As a result of the historical seasonal sales trends, inventories increase through the year in order to meet the expected demand for delivery in the fourth quarter of the fiscal year, while accounts receivable are highest at year end.
SELECTED ANNUAL INFORMATION
(in thousands, except per share amounts) 2010 2009 2008 ---------------------------------------------------------------------------- Revenues $ 2,332,247 $ 1,824,592 $ 2,121,209 Net earnings - continuing operations $ 100,148 $ 120,516 $ 140,853 Net earnings $ 98,650 $ 120,516 $ 140,524 Earnings per share - continuing operations - Basic $ 1.32 $ 1.86 $ 2.17 - Diluted $ 1.31 $ 1.86 $ 2.16 Earnings per share - Basic $ 1.30 $ 1.86 $ 2.16 - Diluted $ 1.29 $ 1.86 $ 2.15 Dividends declared per share $ 0.62 $ 0.60 $ 0.56 Total assets $ 2,269,238 $ 1,364,667 $ 1,533,450 Total long-term debt $ 419,929 $ 158,095 $ 173,475 Weighted average common shares outstanding, basic (millions) 76.2 64.7 65.0 Note - 2009 and previous amounts do not include the financial results of ESIF, which have been included in the consolidated financial statements from date of acquisition,January 20, 2010 .
The global economic crisis of late 2008 and 2009 served to reduce revenues in 2009 as activity levels in end markets slowed. Revenues grew 28% in 2010 on the acquisition of ESIF and improved market conditions within the
Net earnings declined 14% in 2009 on lower revenues. Net earnings in 2010 declined 18% on lower profitability within in the
Earnings per share have generally followed earnings. This was impacted in 2010 as the number of common shares outstanding increased 19% due to shares issued in connection with the acquisition of ESIF.
Dividends have generally increased in proportion to trailing earnings growth.
Total assets increased in 2010 on the acquisition of ESIF. Total assets acquired were approximately
Long-term debt increased in 2010 and represented 20% of total shareholders' equity (net of cash) at year end, within the Company's 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 either or both 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 both operating segments. Commodity price movements in the natural gas and 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 and compression packages.
Toromont's business is diversified across a wide range of industry market segments and geographic territories, 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. Across both operating segments, 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
Toromont is dependent on the continued market acceptance of
Toromont is also dependent on
Some of the components used in the products of the
One of the
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.
Toromont also relies on the skills and availability of trained and experienced tradesmen and technicians in both the Equipment and Compression Groups 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 could 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. No asset-backed commercial paper products were held. 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, industry or geographic area. The Company has accounts receivable from customers engaged in various industries including oil and gas production construction, mining, food and beverage, and governmental agencies. These customers are based across
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 with provisions for inflationary 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 Company transacts business in multiple currencies, the most significant of which are the Canadian dollar, the U.S. dollar, the Euro and the Australian dollar. As a result, the Company has foreign currency exposure with respect to items denominated in foreign currencies. The types of foreign exchange risk can be categorized as follows:
Transaction Exposure
The Company sources the majority of its products and major components from
In addition, pricing to customers is customarily adjusted to reflect changes in the Canadian dollar landed cost of imported goods.
The Company also sells compression packages in foreign currencies, primarily the U.S. dollar, the Euro and the Australian dollar, and enters into foreign currency contracts to reduce these exchange rate risks. 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.
Translation Exposure
At
Foreign currency-based earnings are translated into Canadian dollars each period. As a result, fluctuations in the value of the Canadian dollar relative to these other currencies will impact reported net income. Such exchange rate fluctuations have historically not been material year-over-year relative to the overall earnings or financial position of the Company. The impact in 2010 was to reduce revenues by
Exchange rate fluctuations may be more significant in future periods as a result of expected growth in Enerflex's Australian operations.
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
The Company's fixed rate debt matures between 2011 and 2019, with 87% maturing in 2015.
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.
Spinoff Transaction Risk
On
The proposed spinoff of Enerflex as a separate, publicly traded company entails various risks and uncertainties, including the following:
-- The combined trading prices of common shares of Toromont and Enerflex
after the spinoff may be less than the trading price of Toromont's
common shares immediately prior to the spinoff.
-- There is currently no established market for the common shares of
Enerflex to be issued as part of the spinoff and even if a market does
develop current shareholders of Toromont may be unwilling or unable to
hold common shares of Toromont and/or Enerflex after the spinoff, which
could have a negative effect on their trading prices.
-- Toromont and Enerflex could be exposed to substantial tax liabilities if
the tax-deferred spinoff requirements are not met.
-- Toromont may delay or amend the implementation of all or part of the
spinoff or may proceed with the spinoff even if certain consents and
approvals are not obtained on a timely basis.
-- Toromont and Enerflex will have indemnification obligations to each
other following the spinoff that could be significant.
-- As separate companies, the respective businesses of Toromont and
Enerflex will be less diversified.
Further information on
Environmental Regulation
Toromont's customers, particularly in
Toromont is also subject to a broad range of environmental laws and regulations. These may, in certain circumstances, impose strict liability for environmental contamination, which may render Toromont liable for remediation costs, natural resource damages and other damages as a result of conduct that was lawful at the time it occurred or the conduct of, or conditions caused by, prior owners, operators or other third parties. In addition, where contamination may be present, it is not uncommon for neighbouring land owners and other third parties to file claims for personal injury, property damage and recovery of response costs. Remediation costs and other damages arising as a result of environmental laws and regulations, and costs associated with new information, changes in existing environmental laws and regulations or the adoption of new environmental laws and regulations could be substantial and could negatively impact Toromont's business, results of operations or financial condition.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's significant accounting policies are described in Note 1 to the unaudited consolidated financial statements. The preparation of financial statements in conformity with Canadian GAAP requires estimates and assumptions that affect the results of operations and financial position. By their nature, these judgments are subject to an inherent degree of uncertainty and are based upon historical experience, trends in the industry and information available from outside sources. Management reviews its estimates on an ongoing basis. Different accounting policies, or changes to estimates or assumptions could potentially have a material impact, positive or negative, on Toromont's financial position and results of operations. The critical accounting policies and estimates described below affect both the
Revenue Recognition
The Company reflects revenues generated from the assembly and manufacture of projects using the percentage-of-completion approach of accounting for performance of production-type contracts. This approach to revenue recognition requires management to make a number of estimates and assumptions surrounding the expected profitability of the contract, the estimated degree of completion based on cost progression and other detailed factors. Although these factors are routinely reviewed as part of the project management process, changes in these estimates or assumptions could lead to changes in the revenues recognized in a given period. However, there are many of these projects in process at any given point, the majority of which are in actual construction for a period of three months or less.
Property, Plant and Equipment
Fixed assets are stated at cost less accumulated depreciation, including asset impairment losses. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets.
The estimated useful lives of fixed assets are reviewed on a regular basis. Assessing the reasonableness of the estimated useful lives of fixed assets requires judgment and is based on currently available information.
Fixed assets are also reviewed for potential impairment on a regular basis or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. In cases where the undiscounted expected future cash flows are less than the carrying amount, an impairment loss is recognized. Impairment losses on long-lived assets are measured as the amount by which the carrying value of an asset or asset group exceeds its fair value, as determined by the discounted future cash flows of the asset or asset group. In estimating future cash flows, the Company uses its best estimates based on internal plans that incorporate management's judgments as to the remaining service potential of the fixed assets. Changes in circumstances, such as technological advances and changes to business strategy can result in actual useful lives and future cash flows differing significantly from estimates. The assumptions used, including rates and methodologies, are reviewed on an ongoing basis to ensure they continue to be appropriate. Revisions to the estimated useful lives of fixed assets or future cash flows constitute a change in accounting estimate and are applied prospectively.
Income Taxes
The liability method of accounting for income taxes is used. Future income tax assets and liabilities, measured at substantively enacted tax rates, are recognized for all temporary differences caused when the tax bases of assets and liabilities differ from those reported in the audited consolidated financial statements.
Income tax rules and regulations in the countries in which the Company operates and income tax treaties between these countries are subject to interpretation and require estimates and assumptions in determining the Company's consolidated income tax provision that may be challenged by the taxation authorities.
Changes or differences in these estimates or assumptions may result in changes to the current or future income tax balances on the consolidated balance sheet, a charge or credit to income tax expense in the consolidated statement of earnings and may result in cash payments or receipts. Additional information on income taxes is provided in Note 18 to the accompanying unaudited consolidated financial statements.
CHANGES IN ACCOUNTING POLICIES
Business Combinations
Effective
The Company had reported deferred transaction costs of
FUTURE ACCOUNTING STANDARDS
Financial Instruments Recognition and Measurement
In
Multiple Deliverable Revenue Arrangements
On
INTERNATIONAL FINANCIAL REPORTING STANDARDS
International Financial Reporting Standards (IFRS) will be required in
Project Management
The Company's conversion project commenced in 2008 and consisted of four phases:
1. Diagnostic - Prepare an in-depth identification and analysis of
differences between Canadian GAAP and IFRS.
2. Design and planning - Prepare an implementation plan including
identifying process, system and financial reporting controls changes
required for the conversion to IFRS.
3. Solution development - Address identified GAAP differences to confirm
nature and impact of differences and to select accounting policies and
transition choices.
4. Implementation - Develop process for dual reporting in 2010 and full
convergence in 2011, including consideration of information systems,
internal controls over financial reporting and disclosure controls and
procedures.
Investments in training and resources have been made throughout the transition period to facilitate a timely conversion.
The Company's IFRS transition project is on schedule and largely complete. Quarterly updates are provided to the Audit Committee. The following table indicates the key elements of the Company's plan for transitioning to IFRS and the progress made against each activity.
----------------------------------------------------------------------------
Key Activity Status
----------------------------------------------------------------------------
Accounting Policies and Procedures
----------------------------------------------------------------------------
Identify differences between IFRS and Completed
the Company's existing policies and
procedures
----------------------------------------------------------------------------
Analyze and determine which IFRS 1 Transitional exemptions analyzed and
exemptions will be taken on decisions preliminarily approved by
transition to IFRSs senior management and the Audit
Committee.
----------------------------------------------------------------------------
Analyze and select ongoing policies Initial accounting policy selections
where alternatives are permitted preliminarily approved by senior
management and the Audit Committee.
----------------------------------------------------------------------------
Revise accounting policy and Revisions to accounting manuals are
procedures manuals in process.
----------------------------------------------------------------------------
Financial Statement Preparation
----------------------------------------------------------------------------
Preparation of Opening Balance Sheet Management has completed the opening
on transition to IFRS as at January balance sheet and the Company's
1, 2010 including required external auditors have substantially
reconciliations completed their procedures.
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Prepare 2010 comparative interim Preparation of 2010 comparative
financial statements and note financials is well underway.
disclosures in compliance with IFRSs External auditor review procedures
have commenced on 2010 comparative
financials. Management anticipates
that the 2010 quarterly comparative
preparation and review process will
be finalized in early 2011.
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Training and Communication
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Design and implement IFRS training Key employees involved with
to affected personnel and to our implementation have completed in-
external stakeholders depth training and attend update
courses each year. High level
'overview' training provided to
financial personnel in all business
units.
Communication to external
stakeholders has been ongoing through
our MD&A disclosures. Further
refinement of expected impacts of the
IFRSs conversion will occur in each
period up to adoption of IFRSs
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Systems
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Identify changes required to IT Required changes to IT systems have
systems for dual reporting and been identified and implemented.
additional data gathering, and Testing is ongoing.
implement solutions Additional data required for IFRS has
been implemented within the Company's
financial information system and will
continue to be tested and refined
through to early 2011
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Control Environment
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For all changes to policies and Relevant controls are being assessed
procedures identified, assess as each work stream progresses.
effectiveness of internal controls
over financial reporting and
disclosure controls and procedures
and implement any necessary changes
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Other Business Impacts
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Identify other potential impacts of Identification of impacts of
conversion to IFRS transition to IFRS is on-going.
Adoption of IFRS is not expected to
have any material impact on the
company's contracts.
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Transitional Impacts
IFRS 1 - First-Time Adoption of International Financial Reporting Standards provides entities adopting IFRS for the first time with a number of optional exemptions and mandatory exceptions, in certain areas, to the general requirement for full retrospective application of IFRS. Most adjustments required on transition to IFRS will be made retrospectively against opening retained earnings as of the date of the first comparative balance sheet presented which will be
The following are the key transitional provisions which are expected to be adopted on
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Area of IFRS Summary of Exemption Available
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Business Combinations Choices: The Company may elect on
transition to IFRS to either restate
all past business combinations in
accordance with IFRS 3 "Business
Combinations" or to apply an elective
exemption from applying IFRS to past
business combinations.
Policy selection: The Company will
elect, on transition to IFRS, to
apply the elective exemption such
that transactions entered into prior
to the transition date will not be
restated. In addition, the Company
adopted Canadian Handbook Section
1582, 1601 and 1602 effective January
1, 2010 . These new standards are
considered to be IFRS compliant.
Expected transition impact: None
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Property, Plant and Equipment Choices: The Company may elect to
report items of property, plant and
equipment in its opening balance
sheet on the transition date at a
deemed cost instead of the actual
cost that would be determined under
IFRS. The deemed cost of an item may
be either its fair value at the date
of transition to IFRS or an amount
determined by a previous revaluation
under Canadian GAAP (as long as that
amount was close to either its fair
value, cost or adjusted cost). The
exemption can be applied on an asset-
by-asset basis.
Policy selection: The Company will
not elect to report any items of
property, plant and equipment in its
opening balance sheet on the
transition date, at a deemed cost
instead of the actual cost that would
be determined under IFRSs. The
Company will instead report the items
at cost.
Expected transition impact: None
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Share-Based Payments Choices: The Company may elect not to
apply IFRS 2 "Share-Based Payments"
to equity instruments granted on or
before November 7, 2002 or which
vested before the Company's date of
transition to IFRS.
Policy selection: The Company will
elect to apply IFRS 2 to equity
instruments granted on or before
November 7, 2002 or which vested
before the Company's date of
transition to IFRS.
Expected transition impact: Not
significant
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Employee Benefits Choices: The Company may elect to
recognize all cumulative gains and
losses through opening retained
earnings at the date of transition to
IFRS. Actuarial gains and losses
would have to be recalculated under
IFRS from the inception of the
defined benefit plan if the exemption
is not taken.
Policy selection: The Company will
elect to recognize all cumulative
actuarial gains and losses at the
date of transition.
Expected transition impact: Increase
total liabilities, increase future
income tax assets and decrease
retained earnings
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Foreign Exchange Choices: On transition, cumulative
translation gains or losses in
accumulated other comprehensive
income (OCI) can be reclassified to
retained earnings. If not elected,
all cumulative translation
differences must be recalculated
under IFRS from inception.
Policy selection: The Company will
elect to reclassify all cumulative
translation gains and losses at the
date of transition to retained
earnings.
Expected transition impact:
Reclassification of all cumulative
translation gains and losses in OCI
results in a charge to retained
earnings of $16 million .
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Borrowing Costs Choices: On transition, the Company
must select a commencement date for
capitalization of borrowing costs
related to all qualifying assets
which is on or before January 1,
2010 .
Policy selection: The Company will
elect to capitalize borrowing costs
on all qualifying assets commencing
on January 1, 2010 .
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Accounting Policy Changes
In addition to the one time transitional impacts described above, there are several accounting policy differences which may impact the Company on a go-forward basis. The significant accounting policy differences are presented below. This is not an exhaustive list.
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Accounting Area Key Difference from GAAP Status
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Employee Benefits Under Canadian GAAP, the The Company has elected
Company applies the to record actuarial
'corridor' method of gains and losses arising
accounting, whereby from its defined benefit
actuarial gains and pension plans in OCI.
losses are deferred and This will impact the
amortized over time. Company's income
Under IFRS, a Company statement expense
may elect to recognize associated with the
actuarial gains and defined benefit pension
losses: plans as actuarial
In full, as they arise, gains/losses are no
in the income statement longer amortized.
Over a longer period, Variability in OCI will
using the 'corridor' increase as actuarial
method, or gains/losses are
In full as they arise, recorded.
outside profit or loss,
in OCI
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Stock Based Compensation The valuation of stock The impact of these
options under IFRS changes is not
requires individual significant.
'tranche based'
valuations for those
option plans with graded
vesting, whilst Canadian
GAAP allows a single
valuation for all
tranches.
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Impairment of Assets IFRS requires impairment The Company has
testing to be done at identified more cash
the smallest generating units than
identifiable group of the reporting units
assets that generate currently used to assess
cash inflows that are for impairment under
largely independent of Canadian GAAP.
cash inflows from other Whether the Company will
groups of assets ('cash be materially impacted
generating unit'), by this change will
rather than the depend upon the facts at
reporting unit level the time of each
considered by Canadian impairment test.
GAAP. Impairment reversal
IFRS requires the calculations have been
assessment of asset prepared and the
impairment to be based Company's external
on discounted future auditors have
cash-flows. substantially completed
IFRS allows the reversal their procedures.
of impairment losses,
other than for goodwill
and indefinite life
intangible assets, while
GAAP does not.
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Borrowing Costs Under IFRS, borrowing The impact of this
costs will be policy change will be
capitalized to assets dependent on the
which take a substantial magnitude of capital
time to develop or spend on qualifying
construct using a assets in the future.
capitalization rate Generally, this will
based on all of the reduce finance costs and
company's outstanding increase property, plant
third-party debt. and equipment balances
and associated
depreciation for those
assets.
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Financial Statement IFRS requires Financial statement
Presentation and significantly more formats have been
Disclosure disclosure than GAAP for drafted for both interim
certain standards. and annual reporting
purposes. Formats and
disclosures will be
revised through to early
2011.
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Impact of Adoption - Reconciliation from Canadian GAAP to IFRS
The following table provides a summary of the Canadian GAAP to IFRS transitional impact to opening shareholders' equity as at
Accumulated
Other
($ Share Contributed Retained Comprehensive
thousands) Capital Surplus Earnings Income Total
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Canadian GAAP
- January 1,
2010 $ 132,261 $ 10,012 $ 704,512 $ (628) $ 846,157
IFRS
adjustments
a) Employee
future
benefits (11,174) (11,174)
b) Currency
translation
account (15,954) 15,954 -
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- - (27,128) 15,954 (11,174)
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IFRS -
January 1,
2010 $ 132,261 $ 10,012 $ 677,385 $ 15,326 $ 834,984
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Canadian GAAP
- December
31, 2010 $ 469,080 $ 10,882 $ 755,447 $ (29,717) $1,205,692
IFRS
adjustments
a) Employee
future
benefits (10,724) (3,887) (14,612)
b) Currency
translation
account (15,954) 15,954 -
c) Reversal
of asset
impairment 4,812 4,812
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- - (21,866) 12,067 (9,800)
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IFRS -
December 31,
2010 $ 469,080 $ 10,882 $ 733,581 $ (17,650) $1,195,892
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a) Employee Future Benefits
- Unfunded Pension Obligation - Under Canadian GAAP, accrued pension
benefit obligation in excess of plan assets for defined benefit
pension plans was only required to be disclosed in the notes to the
consolidated financial statements. Under IFRS, the obligation in
excess of plan assets is required to be recorded as a liability on the
balance sheet.
- Actuarial Gains and Losses - Under Canadian GAAP, actuarial gains and
losses were recognized on a systematic and consistent basis, subject
to a minimum required amortization based on a "corridor" approach.
Unrecognized actuarial gains and losses below the corridor were
deferred. Under IFRS, in accordance with the Company's IFRS I
election, any deferred actuarial gains and losses are immediately
recognized in shareholders' equity. Post adoption, the Company elected
to immediately recognize all actuarial gains and losses in
shareholders' equity.
b) Cumulative Translation Account
- Upon transition to IFRS, the Company elected to reset all cumulative
translation differences to zero.
c) Reversal of Asset Impairment
- Under Canadian GAAP, asset impairments are not reversed. Under IFRS,
asset impairments are required to be reversed when there has been a
change in estimates used to determine the recoverable amount.
In 2010, revised pricing under certain electricity supply contracts triggered an assessment of the recoverable amount of certain power generation assets. The value in use was based on cash flow forecast in real terms and discounted at a pre-tax rate of 3.3 per cent. This led to a reversal of
RESPONSIBILITY OF MANAGEMENT AND THE BOARD OF DIRECTORS
Management is responsible for the information disclosed in this MD&A and the accompanying consolidated financial statements, and has in place appropriate information systems, procedures and controls to ensure that information used internally by management and disclosed externally is materially complete and reliable. In addition, the Company's Audit Committee, on behalf of the Board of Directors, provides an oversight role with respect to all public financial disclosures made by the Company, and has reviewed and approved this MD&A and the accompanying consolidated financial statements. The Audit Committee is also responsible for determining that management fulfills its responsibilities in the financial control of operations, including disclosure controls and procedures and internal control over financial reporting.
DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROL OVER FINANCIAL REPORTING
The Chairman & Chief Executive Officer and the Chief Financial Officer, together with other members of management, have evaluated the effectiveness of the Company's disclosure controls and procedures and internal controls over financial reporting as at
There have been no changes in the design of the Company's internal controls over financial reporting during the fourth quarter of 2010 that would materially affect, or is reasonably likely to materially affect, the Company's internal controls over financial reporting.
While the Officers of the Company have evaluated the effectiveness of disclosure controls and procedures and internal control over financial reporting as at
NON-GAAP FINANCIAL MEASURES
The success of the Company and business unit strategies is measured using a number of key performance indicators, which are outlined below. These measures are also used by management in its assessment of relative investments in operations. These key performance indicators are not measurements in accordance with Canadian GAAP. It is possible that these measures will not be comparable to similar measures prescribed by other companies. They should not be considered as an alternative to net income or any other measure of performance under Canadian GAAP.
Operating Income and Operating Margin
Each business segment assumes responsibility for its operating results as measured by, amongst other factors, operating income, which is defined as income before income taxes, interest income and interest expense. Financing and related interest charges cannot be attrib-uted to business segments on a meaningful basis that is comparable to other companies. Business segments and income tax jurisdic-tions are not synonymous, and it is believed that the allocation of income taxes distorts the historical comparability of the performance of the business segments. Consolidated and segmented operating income is reconciled to net earnings in tables where used in this MD&A.
Operating income margin is calculated by dividing operating income by total revenue.
Return on Equity (ROE) and Return on Capital Employed (ROCE)
Return on equity is monitored to assess the profitability of the consolidated Company. ROE is calculated by dividing net earnings by opening shareholders' equity.
ROCE is a key performance indicator that is utilized to assess both current operating performance and prospective investments. The numerator used for the calculation is income before income taxes, interest expense and interest income (excluding interest on rental conversions). The denominator in the calculation is the monthly average capital employed, which is defined as net debt plus shareholders' equity.
Working Capital and
Working capital is defined as current assets less current liabilities. Non-cash working capital is defined as working capital less cash and equivalents.
TOROMONT INDUSTRIES LTD. CONSOLIDATED BALANCE SHEETS (unaudited) as at December 31 ($ thousands) 2010 2009 ---------------------------------------------------------------------------- Assets Current assets Cash and cash equivalents (note 22) $ 174,089 $ 206,957 Accounts receivable 451,858 244,759 Inventories (note 5) 447,271 373,110 Income taxes receivable 2,656 16,967 Future income taxes (note 18) 41,483 34,326 Derivative financial instruments 1,272 - Other current assets 25,356 6,037 ---------------------------------------------------------------------------- Total current assets 1,143,985 882,156 Property, plant and equipment (note 6) 314,201 186,491 Rental equipment (note 7) 236,106 183,175 Future income taxes 22,895 - Other assets (note 8) 22,818 78,045 Intangible assets (note 9) 33,127 - Goodwill 496,106 34,800 ---------------------------------------------------------------------------- Total assets $ 2,269,238 $ 1,364,667 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Liabilities Current liabilities Accounts payable and accrued liabilities (note 10) $ 409,667 $ 238,164 Deferred revenues 195,388 89,810 Current portion of long-term debt (note 11) 6,889 14,044 Income taxes payable 7,618 - Derivative financial instruments 4,651 874 ---------------------------------------------------------------------------- Total current liabilities 624,213 342,892 Deferred revenues 14,137 13,386 Derivative financial instruments 1,839 - Long-term debt (note 11) 413,040 144,051 Accrued pension liability (note 17) 358 2,351 Future income taxes (note 18) 9,014 7,924 Shareholders' equity Share capital (note 12) 469,080 132,261 Contributed surplus (note 13) 10,882 10,012 Retained earnings 755,447 712,418 Accumulated other comprehensive loss (note 14) (29,717) (628) ---------------------------------------------------------------------------- Total shareholders' equity 1,205,692 854,063 ---------------------------------------------------------------------------- Non-controlling interest 945 - ---------------------------------------------------------------------------- Shareholders' equity 1,206,637 854,063 ---------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 2,269,238 $ 1,364,667 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- See accompanying notesTOROMONT INDUSTRIES LTD. CONSOLIDATED STATEMENTS OF EARNINGS (unaudited) Years endedDecember 31 ($ thousands, except share amounts) 2010 2009 ---------------------------------------------------------------------------- Revenues $ 2,332,247 $ 1,824,592 Cost of goods sold 1,843,540 1,415,476 ---------------------------------------------------------------------------- Gross profit 488,707 409,116 Selling and administrative expenses 334,988 226,764 ---------------------------------------------------------------------------- Operating income 153,719 182,352 Interest expense 27,076 8,815 Interest and investment income (2,803) (6,355) Gain on available-for-sale financial assets on business acquisition (18,627) - Equity earnings from affiliates (468) - ---------------------------------------------------------------------------- Income before income taxes 148,541 179,892 Income taxes 48,393 59,376 ---------------------------------------------------------------------------- Earnings from continuing operations 100,148 120,516 Losses from discontinued operations (note 4) (1,498) - ---------------------------------------------------------------------------- Net earnings $ 98,650 $ 120,516 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Net earnings attributable to non- controlling interests $ 462 $ - ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Basic earnings per share (note 19) Continuing operations $ 1.32 $ 1.86 Discontinued operations (0.02) - ---------------------------------------------------------------------------- $ 1.30 $ 1.86 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Diluted earnings per share (note 19) Continuing operations $ 1.31 $ 1.86 Discontinued operations (0.02) - ---------------------------------------------------------------------------- $ 1.29 $ 1.86 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Weighted average number of shares outstanding Basic 76,170,972 64,716,775 Diluted 76,361,949 64,830,866 See accompanying notesTOROMONT INDUSTRIES LTD. CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (unaudited) Years ended December 31 ($ thousands) 2010 2009 ---------------------------------------------------------------------------- Retained earnings, beginning of year $ 712,418 $ 631,522 Change in accounting policy (note 2) (7,906) - ---------------------------------------------------------------------------- $ 704,512 $ 631,522 Net earnings 98,650 120,516 Dividends (47,715) (38,848) Shares purchased for cancellation (note 12) - (772) ---------------------------------------------------------------------------- Retained earnings, end of year $ 755,447 $ 712,418 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- See accompanying notesTOROMONT INDUSTRIES LTD. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited) Years ended December 31 ($ thousands) 2010 2009 ---------------------------------------------------------------------------- Net earnings $ 98,650 $ 120,516 Other comprehensive income (loss): Unrealized loss on translation of financial statements of self- sustaining foreign operations (11,220) (23,308) Change in fair value of derivatives designated as cash flow hedges, net of income tax recovery (2010 - $1,848; 2009 - $2,181) (3,380) (4,063) Loss on derivatives designated as cash flow hedges transferred to net income in the current period, net of income tax (2010 - $621; 2009 - $122) 1,126 229 Unrealized gain on financial assets designated as available-for-sale, net of income taxes of $3,090 - 15,615 Reclassification to net income of gain on available-for-sale financial assets as a result of business acquisition, net of income taxes of $3,090 (15,615) - ---------------------------------------------------------------------------- Other comprehensive loss (29,089) (11,527) ---------------------------------------------------------------------------- Comprehensive income $ 69,561 $ 108,989 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Comprehensive income attributable to non-controlling interests $ 462 $ - ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- See accompanying notesTOROMONT INDUSTRIES LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Years ended December 31 ($ thousands) 2010 2009 ---------------------------------------------------------------------------- Operating activities Net earnings $ 98,650 $ 120,516 Items not requiring cash and cash equivalents Depreciation and amortization 85,496 58,165 Equity earnings from affiliates (468) - Stock-based compensation 3,005 2,289 Accrued pension liability (1,993) 29 Future income taxes (8,022) 3,093 Gain on sale of rental equipment, property, plant, and equipment (6,124) (7,147) Gain on available-for-sale financial instruments on business acquisition (18,627) - ---------------------------------------------------------------------------- 151,917 176,945 Net change in non-cash working capital and other (note 22) 103,736 19,308 ---------------------------------------------------------------------------- Cash provided by operating activities 255,653 196,253 ---------------------------------------------------------------------------- Investing activities Additions to: Rental equipment (69,690) (39,712) Property, plant and equipment (60,434) (21,329) Investments - (37,797) Proceeds on disposal of: Rental equipment 79,238 30,078 Property, plant and equipment 5,290 5,128 Disposal of discontinued operations (note 4) 3,500 - Decrease (increase) in other assets (6,280) (10,272) Business acquisitions (note 3) (292,533) - ---------------------------------------------------------------------------- Cash used in investing activities (340,909) (73,904) ---------------------------------------------------------------------------- Financing activities Increase in term credit facility debt 280,000 - Increase in term loan facility 450,000 - Repayment of term loan facility (450,000) - Repayment of long-term debt (178,854) (15,380) Financing costs (8,330) - Dividends (45,099) (38,165) Shares purchased for cancellation - (858) Cash received on exercise of options 6,736 3,389 ---------------------------------------------------------------------------- Cash provided by (used in) financing activities 54,453 (51,014) ---------------------------------------------------------------------------- Effect of exchange rate changes on cash denominated in foreign currency (2,065) (1,652) (Decrease) increase in cash and cash equivalents (32,868) 69,683 Cash and cash equivalents at beginning of year 206,957 137,274 ---------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 174,089 $ 206,957 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Supplemental cash flow information (note 22) See accompanying notes NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited) December 31, 2010 ($ thousands except where otherwise indicated)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements have been prepared by management in accordance with Canadian Generally Accepted Accounting Principles ("GAAP").
Basis of Consolidation
The consolidated financial statements include the accounts of the Company, wholly owned subsidiaries, majority owned subsidiaries and the proportionate share of the accounts of joint ventures. Non-controlling interests exist in less than wholly-owned subsidiaries of the Company and represent the outside interest's share of the carrying value for the subsidiaries. All significant inter-company accounts and transactions have been eliminated.
Equity Investments
Investments in entities where the Company exercises significant influence, generally defined as greater than 20% interest, are accounted for using the equity method. These investments are recorded at cost plus the Company's share of income or loss to date less dividends received.
Use of Estimates
The preparation of the consolidated financial statements in conformity with Canadian GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year. Actual results could differ from those estimates. Estimates are used in accounting for items and matters such as long-term contracts, allowance for uncollectible accounts receivable, allowance for inventory obsolescence, product warranty, estimated useful lives of assets for depreciation, asset and goodwill impairment assessments, employee benefits and income taxes.
Revenue Recognition
Revenue is recognized when persuasive evidence of an arrangement exists, the price is fixed or determinable, performance requirements are achieved and ultimate collection is reasonably assured. In addition to this general policy, the following describes the specific revenue recognition policies for each major category of revenue.
a. Revenues from the sale of equipment are recorded when goods are shipped
to the customer, at which time title to the equipment and significant
risks of ownership have passed.
b. Revenues from the supply of equipment systems involving design,
manufacture, installation and start-up are determined using the
percentage-of-completion method, based on total costs incurred as a
proportion of expected total costs of the project. Revenues and costs
begin to be recognized when progress reaches a stage of completion
sufficient to reasonably determine the probable results. Any foreseeable
losses on such projects are charged to operations when determined.
c. Revenues from equipment rentals are recognized in accordance with the
terms of the relevant agreement with the customer, generally on a
straight-line basis over the term of the agreement.
d. Product support services include sales of parts and servicing of
equipment. For the sale of parts, revenues are recognized when the part
is shipped to the customer. For servicing of equipment, revenues are
recognized as the service work is completed and billed.
e. Revenues on extended warranty and long-term maintenance contracts are
recognized either on a percentage-of-completion basis proportionate to
the service work that has been performed based on the parts and labour
service provided, or on a straight-line basis over the life of the
warranty. At the completion of the contract, any remaining profit on the
contract is recognized as revenue. Any losses estimated during the term
of the contract are recognized when identified.
f. Revenues on equipment sold directly to customers or to third-party
lessors for which the Company has provided a guarantee to repurchase the
equipment at predetermined residual values and dates are accounted for
as operating leases wherein revenue is recognized over the period
extending to the date of the residual guarantee.
If an arrangement involves the provision of multiple elements, the total arrangement value is allocated to each element as a separate unit of accounting based on their fair values if:
1. The delivered item has value to the client on a stand-alone basis;
2. There is objective and reliable evidence of the fair value of the
undelivered item; and,
3. The arrangement includes a general right of return relative to the
delivered item and delivery or performance of the undelivered item is
considered probable and substantially in the control of the Company.
Translation of Foreign Currencies
Transactions denominated in foreign currencies are translated into Canadian dollars at the rate of exchange in effect at the time of the transaction. Monetary assets and liabilities are translated into Canadian dollars at the year-end exchange rate. Non-monetary items are translated at historical rates. All exchange gains and losses are included in earnings.
The assets and liabilities of foreign subsidiaries which are considered to be financially and operationally self-sustaining are translated into Canadian funds at the exchange rate in effect at the balance sheet dates. Revenue and expense items are translated using the average exchange rates for the year. The foreign exchange impact of these translations is included in accumulated other comprehensive income in shareholders' equity.
The monetary assets and liabilities of foreign subsidiaries which are not considered to be financially and operationally self-sustaining are translated into Canadian funds at the exchange rate in effect at the balance sheet dates. Non-monetary assets and liabilities are translated into Canadian dollars using the exchange rates at the date of the transactions. Revenue and expense items are translated using the average exchange rates for the year. The foreign exchange impact of these translations is included in net income of the period.
Financial Instruments
Financial instruments are measured at fair value on initial recognition. After initial recognition, financial instruments are measured at their fair values, except for loans and receivables and other financial liabilities, which are measured at cost or amortized cost using the effective interest rate method.
The Company primarily applies the market approach for recurring fair value measurements. Three levels of inputs may be used to measure fair value:
-- Level 1 - unadjusted quoted prices in active markets for identical
assets or liabilities
-- Level 2 - observable inputs other than Level 1 prices that are
observable or can be corroborated by observable market data for
substantially the full term of asset or liability
-- Level 3 - unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the assets or
liabilities
The Company has made the following classifications:
-- Cash and cash equivalents are classified as assets held for trading and
are measured at fair value. Gains and losses resulting from the periodic
revaluation are recorded in net income.
-- Accounts receivable and net investment in sales-type leases are
classified as loans and receivables and are recorded at amortized cost
using the effective interest rate method.
-- Investments are classified as available for sale and are recorded at
fair value based on quoted market prices. Gains and losses resulting
from the periodic revaluation are recorded in other comprehensive
income. No investments were held at December 31, 2010 .
-- Accounts payable and accrued liabilities and long-term debt are
classified as other financial liabilities. Subsequent measurements are
recorded at amortized cost using the effective interest rate method.
Transaction costs are expensed as incurred for financial instruments classified or designated as held for trading. Transaction costs for financial assets classified as available for sale are added to the value of the instrument at acquisition. Transaction costs related to other financial liabilities are added to the value of the instrument at acquisition and taken into net income using the effective interest rate method.
Derivative Financial Instruments and Hedge Accounting
Derivative financial agreements are used to manage exposure to fluctuations in exchange rates. The Company does not enter into derivative financial agreements for speculative purposes.
Derivative financial instruments are measured at their fair value upon initial recognition and on each subsequent reporting date. The fair value of quoted derivatives is equal to their positive or negative market value. If a market value is not available, the fair value is calculated using standard financial valuation models, such as discounted cash flow or option pricing models. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative.
The Company elected to apply hedge accounting for foreign exchange forward contracts for firm commitments and anticipated transactions. These are also designated as cash flow hedges. For cash flow hedges, fair value changes of the effective portion of the hedging instrument are recognized in accumulated other comprehensive income, net of taxes. The ineffective portion of the fair value changes is recognized in net income. Amounts charged to accumulated other comprehensive income are reclassified to the income statement when the hedged transaction affects the income statement.
All hedging relationships are formally documented, including the risk management objective and strategy. On an ongoing basis, an assessment is made as to whether the designated derivative financial instruments continue to be effective in offsetting changes in cash flows of the hedged transactions.
Income Taxes
The liability method of accounting for income taxes is used. Future income tax assets and liabilities are recognized for the future income tax consequences attributable to differences between the financial statement carrying values of existing assets and liabilities and their respective income tax bases. Future income tax assets and liabilities are measured using enacted or substantively enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on future income tax assets and liabilities of a change in income tax rates is recognized in net earnings in the period that includes the date of substantive enactment.
Stock-Based Compensation
The fair value method of accounting for stock options is used. The fair value of option grants are calculated using the Black-Scholes option pricing model and is recognized as compensation expense over the vesting period of those grants with a corresponding adjustment to contributed surplus. On the exercise of stock options, the consideration paid by the employee and the related amounts in contributed surplus are credited to common share capital.
Employee Future Benefits
For defined contribution plans, the pension expense recorded in earnings is the amount of the contributions the Company is required to pay in accordance with the terms of the plan.
For defined benefit plans, the Company accrues its obligations and the related costs, net of plan assets. The Company has adopted the following policies for its defined benefit plans:
-- The cost of pensions earned by employees is actuarially determined using
the projected unit credit method pro-rated on length of service and
management's best estimate assumptions to value its pensions using a
measurement date of December 31 ;
-- For the purpose of calculating the expected return on plan assets, those
assets are valued at fair value;
-- Past service costs from plan amendments are amortized on a straight-line
basis over the average remaining service period of employees active at
the date of amendments;
-- The excess of the net actuarial gain (loss) over 10% of the greater of
the benefit obligation and the fair value of plan assets is amortized on
a straight-line basis over the average remaining service period of the
active employees or on the average remaining lifetime in the case of
retirees.
Earnings per Share ("EPS")
Basic EPS is calculated by dividing the net earnings available to common shareholders by the weighted average number of common shares outstanding during the year. Diluted EPS is calculated using the treasury stock method, which assumes that all outstanding stock option grants are exercised, if dilutive, and the assumed proceeds are used to purchase the Company's common shares at the average market price during the year.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, bank balances, and money market instruments including bankers acceptances and term deposits with an original term of three months or less at date of purchase. Cash and equivalents are recorded at cost, which approximates market value.
Allowance for Doubtful Accounts
Trade receivables carried at amortized cost are subject to periodic impairment review and are classified as impaired when, in the opinion of management, there is a reasonable doubt that credit-related losses are expected to be incurred taking into consideration all circumstances known at the date of review. When the recovery of any recognized impairment is considered unlikely, the amount of the impairment is removed from the consolidated balance sheet, without prejudice to any actions that the Company may initiate to seek collection of the amount receivable.
Inventories
Inventories are valued at the lower of cost and net realizable value.
Cost of equipment, repair and distribution parts and direct materials include purchase cost and costs incurred in bringing each product to its present location and condition. Serialized inventory is determined on a specific item basis. Non-serialized inventory is determined based on a weighted average actual cost.
Cost of work-in-process includes cost of direct materials, labour and an allocation of manufacturing overheads, excluding borrowing costs, based on normal operating capacity.
Cost of inventories include the transfer from accumulated other comprehensive income (loss) of gains and losses on qualifying cash flow hedges in respect of the purchase of inventory.
Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale.
Inventories are written down to net realizable value when the cost of inventories is estimated to be unrecoverable due to obsolescence, damage or declining selling prices. When circumstances that previously caused inventories to be written down below cost no longer exist or when there is clear evidence of an increase in selling prices, the amount of the write-down previously recorded is reversed.
Rental Equipment
Rental equipment is recorded at cost. Rental equipment is depreciated over its estimated useful life on a straight-line basis. Estimated useful lives range from 1 to 15 years.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is recognized principally on a straight-line basis to depreciate the cost of these assets over their estimated useful lives. Estimated useful lives range from 20 to 30 years for buildings, 3 to 10 years for equipment and 20 years for power generation assets.
Leasehold improvements and lease inducements are amortized on a straight-line basis over the term of the lease.
Lease receivables
Equipment under terms which transfer substantially all of the benefits and risks of ownership to customers are accounted for as sales-type leases and the amounts due to these leases are presented in Other Assets. The receivable will be accreted to the nominal amount over the remaining term of the lease.
Intangible Assets
Intangible assets represent the fair value of assets assigned to contractual or other legal rights at the date of acquisition, including customer relationships, long-term contracts, distribution agreements and order backlog. Intangible assets are amortized on a straight line basis over their estimated economic lives, ranging from 1 to 5 years.
Impairment of Long-lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. In cases where the undiscounted expected future cash flows are less than the carrying amount, an impairment loss is recognized. Impairment losses on long-lived assets are measured as the amount by which the carrying value of an asset group exceeds its fair value, as determined by the discounted future cash flows of the asset group.
Goodwill
Goodwill represents the cost of acquired businesses in excess of the fair value of net identifiable assets acquired. Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate a potential impairment. In the fourth quarter of 2009 and 2010, annual goodwill assessments were performed establishing that there were no impairments in either year.
Discontinued Operations
The results of discontinued operations are presented net of tax on a one-line basis in the consolidated statements of earnings. Direct corporate overheads and income taxes are allocated to discontinued operations. Interest expense (income) and general corporate overheads are not allocated to discontinued operations.
Comparative Amounts
Certain comparative figures have been restated to conform with the current year's presentation.
2. CHANGES IN ACCOUNTING POLICIES
Business Combinations
Effective
The Company had deferred transaction costs of
Future Accounting Changes
Financial Instruments - Recognition and Measurement
In
Multiple Deliverable Revenue Arrangements
On
International Financial Reporting Standards
Canadian GAAP will be converged with IFRS effective
3. BUSINESS ACQUISITIONS
On
Toromont purchased ESIF pursuant to a take-over bid (the "Offer") to acquire all of the outstanding trust units (the "Trust Units") of ESIF and all of the issued and outstanding class B limited partnership units (the "Exchangeable LP Units" and, together with the Trust Units, the "Units") of
Pursuant to the Offer, Toromont acquired 39,583,074 Trust Units and 2,640,692 Exchangeable LP Units on
In total, Toromont paid approximately
Prior to the Acquisition, Toromont owned 3,902,100 Trust Units which were purchased with a cash cost of
Purchase price ------------------------------------------------------------- Units owned by Toromont prior to Offer $ 56,424 Cash consideration 315,539 Issuance of Toromont common shares 328,105 ---------------------------------------------------------------------------- Total $ 700,068 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
The Acquisition is accounted for as a business combination with Toromont as the acquirer of ESIF. The Acquisition has been accounted for using the purchase method of accounting. Results from ESIF have been consolidated from the acquisition date,
Cash used in the investment is determined as follows:
Cash consideration $ 315,539
less cash acquired (23,006)
----------------------------------------------------------------------------
$ 292,533
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The purchase cost was allocated to the underlying assets acquired and liabilities assumed based upon their fair value at the date of acquisition. The Company determined the fair values based on discounted cash flows, market information, independent valuations and management's estimates.
The final allocation of the purchase price is as follows:
Purchase price allocation
------------------------------------------------------------
Cash $ 23,006
Non-cash working capital 125,742
Property, plant and equipment 135,400
Rental equipment 67,587
Other long term assets 24,315
Intangible assets with a finite life
Customer relationships 38,400
Other 5,700
Long term liabilities (181,388)
----------------------------------------------------------------------------
Net identifable assets 238,762
Residual purchase price allocated to goodwill 461,306
----------------------------------------------------------------------------
$ 700,068
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Non-cash working capital includes accounts receivable of
Factors that contributed to a purchase price that resulted in the recognition of goodwill include: the existing ESIF business; the acquired workforce; time-to-market benefits of acquiring an established manufacturing and service organization in key international markets such as
Acquisition-related costs, primarily for advisory services, were incurred during the year ended
The consolidated revenues and pre-tax earnings for the year ended
4. DISCONTINUED OPERATIONS
Effective
Total consideration received was
5. INVENTORIES
2010 2009
----------------------------------------------------------------------------
Equipment $ 173,988 $ 164,744
Repair and distribution parts 101,142 74,809
Direct materials 56,294 75,740
Work-in-process 115,847 57,817
----------------------------------------------------------------------------
$ 447,271 $ 373,110
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The amount of inventory recognized as an expense and included in cost of goods sold accounted for other than by the percentage-of-completion method during 2010 was
6. PROPERTY, PLANT AND EQUIPMENT
2010
Accumulated Net Book
Cost Depreciation Value
----------------------------------------------------------------------------
Land $ 93,651 $ - $ 93,651
Buildings 209,997 64,087 145,910
Equipment 151,789 105,029 46,760
Power generation 37,737 25,468 12,269
Assets under construction 15,611 - 15,611
----------------------------------------------------------------------------
$ 508,785 $ 194,584 $ 314,201
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2009
Accumulated Net Book
Cost Depreciation Value
----------------------------------------------------------------------------
Land $ 41,269 $ - $ 41,269
Buildings 157,830 58,679 99,151
Equipment 129,987 97,774 32,213
Power generation 37,714 24,353 13,361
Assets under construction 497 - 497
----------------------------------------------------------------------------
$ 367,297 $ 180,806 $ 186,491
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Depreciation expense for the year ended
7. RENTAL EQUIPMENT
2010 2009
----------------------------------------------------------------------------
Cost $ 367,885 $ 301,489
Less: Accumulated depreciation 131,779 118,314
----------------------------------------------------------------------------
$ 236,106 $ 183,175
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Depreciation expense for the year ended
8. OTHER ASSETS
2010 2009
----------------------------------------------------------------------------
Equipment sold with guaranteed residual
values $ 8,451 $ 10,940
Investment in affiliate 3,146 -
Net investment in sales-type lease 10,651
Investment in Enerflex units - 56,502
Deferred transaction costs - 10,160
Other 570 443
----------------------------------------------------------------------------
$ 22,818 $ 78,045
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The Company owns a 40% interest in
The Company entered into a contract to build, own, maintain and operate a natural gas compression facility. This contract contained multiple deliverables, one of which was considered a sales-type lease for accounting purposes. The contract terminates in 2013.
The value of the net investment is comprised of the following:
Net investment in sales-type lease
----------------------------------------------------------------------------
Minimum future lease payments $ 23,202
Unearned finance income (1,900)
----------------------------------------------------------------------------
21,302
less current portion (10,651)
----------------------------------------------------------------------------
$ 10,651
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Finance lease income included in interest income in 2010 was
9. INTANGIBLE ASSETS
as at December 31, Accumulated
2010 Acquired Value Amortization Net Book Value
----------------------------------------------------------------------------
Customer relationships $ 38,400 $ 7,657 $ 30,743
Other 5,700 3,315 2,385
----------------------------------------------------------------------------
$ 44,100 $ 10,973 $ 33,127
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Amortization expense for the year ended
10. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
2010 2009
----------------------------------------------------------------------------
Accounts payable and accrued liabilities $ 397,325 $ 228,436
Dividends payable 12,342 9,728
----------------------------------------------------------------------------
Total accounts payable and accrued
liabilities $ 409,667 $ 238,164
----------------------------------------------------------------------------
----------------------------------------------------------------------------
11. LONG-TERM DEBT
2010 2009
----------------------------------------------------------------------------
Bank Credit Facility (a) $ 280,000 $ -
Senior debentures (b) 144,051 155,999
Notes payable - 2,096
Debt issuance costs, net of amortization (4,122) -
----------------------------------------------------------------------------
Total long-term debt 419,929 158,095
Less current portion 6,889 14,044
----------------------------------------------------------------------------
$ 413,040 $ 144,051
----------------------------------------------------------------------------
----------------------------------------------------------------------------
All debt is unsecured.
(a) Effective
The Company also maintains a US
Standby letters of credit issued utilized
(b) Terms of the senior debentures are:
--$5,694 , 6.80% senior debentures dueMarch 29, 2011 , interest payable semi-annually throughMarch 29, 2007 ; thereafter, blended principal and interest payments through to maturity; --$125,000 , 4.92% senior debentures dueOctober 13, 2015 , interest payable semi-annually, principal due on maturity; and --$13,357 , 7.06% senior debentures dueMarch 29, 2019 , interest payable semi-annually throughSeptember 29, 2009 ; thereafter, blended principal and interest payments through to maturity.
These credit arrangements include covenants, restrictions and events of default usually present in credit facilities of this nature, including requirements to meet certain financial tests periodically and restrictions on additional indebtedness and encumbrances.
In
Senior secured notes payable assumed in the acquisition of ESIF in the amount of
Scheduled principal repayments and interest payments on long-term debt are as follows:
Principal Interest
----------------------------------------------------------------------------
2011 $ 6,889 $ 16,226
2012 281,280 11,466
2013 1,372 6,895
2014 1,471 6,796
2015 126,576 5,342
2016 to 2019 6,463 944
----------------------------------------------------------------------------
$ 424,051 $ 47,669
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Interest expense included interest on debt initially incurred for a term greater than one year of
12. SHARE CAPITAL
Authorized
The Company is authorized to issue an unlimited number of common shares and preferred shares. No preferred shares have been issued.
Issued
The changes in the common shares issued and outstanding during the year were as follows:
2010 2009
Number of Common Number of Common
Common Share Common Share
Shares Capital Shares Capital
----------------------------------------------------------------------------
Balance, beginning of
year 64,867,467 $ 132,261 64,620,677 $ 127,704
Exercise of stock
options 406,909 8,872 290,190 4,643
Shares issued for
Enerflex acquisition 11,875,250 327,947 - -
Purchase of shares for
cancellation - - (43,400) (86)
----------------------------------------------------------------------------
Balance, end of year 77,149,626 $ 469,080 64,867,467 $ 132,261
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Shareholder Rights Plan
The Shareholder Rights Plan is designed to encourage the fair treatment of shareholders in connection with any takeover offer for the Company. Rights issued under the plan become exercisable when a person, and any related parties, acquires or commences a take-over bid to acquire 20% or more of the Company's outstanding common shares without complying with certain provisions set out in the plan or without approval of the Company's Board of Directors. Should such an acquisition occur, each rights holder, other than the acquiring person and related parties, will have the right to purchase common shares of the Company at a 50% discount to the market price at that time. The Shareholder Rights Plan was continued and amended in 2009. Amendments were largely administrative in nature. The plan expires in
Normal Course Issuer Bid (NCIB)
Toromont renewed its NCIB program in 2010. The current issuer bid allows the Company to purchase up to approximately 5.6 million of its common shares in the 12 month period ending
The Company did not purchase any shares under the normal course issuer bid in 2010. In 2009, the Company purchased and cancelled 43,400 shares under its NCIB program for
13. CONTRIBUTED SURPLUS
Contributed surplus consists of accumulated stock option expense less the fair value of the options at the grant date that have been exercised and reclassified to share capital. Changes in contributed surplus were as follows:
2010 2009
----------------------------------------------------------------------------
Balance, beginning of year $ 10,012 $ 8,978
Stock-based compensation expense, net
of forfeitures 3,005 2,289
Value of compensation cost associated
with exercised options (2,135) (1,255)
----------------------------------------------------------------------------
Balance, end of year $ 10,882 $ 10,012
----------------------------------------------------------------------------
----------------------------------------------------------------------------
14. ACCUMULATED OTHER COMPREHENSIVE INCOME
The changes in accumulated other comprehensive income were as follows:
2010 2009
----------------------------------------------------------------------------
Balance, beginning of year $ (628) $ 10,899
Other comprehensive loss (29,089) (11,527)
----------------------------------------------------------------------------
Balance, end of year $ (29,717) $ (628)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
As at
2010 2009
----------------------------------------------------------------------------
Unrealized losses on translation of
financial statements of self-
sustaining foreign operations $ (27,173) $ (15,954)
Losses on foreign exchange derivatives
designated as cash flow hedges, net of
income taxes (2010 - $1,378 ; 2009 -
$150) (2,544) (289)
Unrealized gain on financial assets
designated as available-for-sale
(income taxes - $3,090) - 15,615
----------------------------------------------------------------------------
Balance, end of year $ (29,717) $ (628)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The gains and losses on derivative contracts are intended to offset the transaction losses and gains. The losses of
15. FINANCIAL INSTRUMENTS
Categories of financial assets and liabilities
The carrying values of the Company's financial instruments are classified into the following categories:
2010 2009
----------------------------------------------------------------------------
Held for trading (1) $ 174,089 $ 206,957
Loans and receivables (2) $ 473,160 $ 244,759
Available for sale assets (3) $ - $ 56,502
Other financial liabilities (4) $ 829,596 $ 396,259
Derivatives designated as effective hedges (5) $ (3,922) $ (440)
Derivatives designated as held for trading (6) $ (1,296) $ (434)
(1) Comprised of cash and cash equivalents. All held for trading assets
were designated as such upon initial recognition.
(2) Comprised of accounts receivable and net investment in sales-type lease.
(3) Comprised of investment in marketable securities which are reported in
other assets.
(4) Comprised of accounts payable and accrued liabilities and long-term
debt.
(5) Comprised of the Company's foreign exchange forward contracts designated
as hedges.
(6) Comprised of the Company's foreign exchange forward contracts that are
not designated as hedges for accounting purposes.
Fair Value Measurements
The following table presents information about the Company's assets and liabilities measured at fair value on a recurring basis as at
Fair Value
------------------------------------------
Carrying
Value Level 1 Level 2 Level 3 Total
------------------------------------------------------
Liabilities
Derivative financial
instruments $ 5,218 - $ 5,218 - $ 5,218
Senior debentures $ 144,051 - $ 151,181 - $ 151,181
The estimated fair values of cash equivalents, accounts receivable, notes receivable, accounts payable and accrued liabilities, borrowings under the bank term facility and notes payable approximate their respective carrying values given their short term maturities.
The estimated fair value of net investment in sales-type lease is measured using the discounted value of the minimum future lease payments discounted at the rate implicit in the lease. There has been no change since recognition of the net investment and as such the fair value approximates the carrying value.
The fair value of derivative financial instruments is measured using the discounted value of the difference between the contract's value at maturity based on the contracted foreign exchange rate and the contract's value at maturity based on the comparable foreign exchange rate at
The fair value of senior debentures is measured using the discounted cash flow method, a generally accepted valuation technique. The discount factor is based on market rates for debt with similar terms and remaining maturities and that has been adjusted for our credit quality. The Company has no plans to prepay these instruments prior to maturity. Fair value measurement of the senior debentures is classified as Level 2 in the hierarchy of fair value measurements.
Derivative financial instruments and hedge accounting
Foreign exchange contracts and options are transacted with financial institutions to hedge foreign currency denominated obligations related to purchases of inventory and sales of products.
The following table summarizes the Company's commitments to buy and sell foreign currencies as at
Average
Notional Exchange
Amount Rate Maturity
----------------------------------------------------------------------------
Canadian dollar
denominated
contracts
Purchase contracts USD 214,813 $ 1.0288 January 2011 to October 2012
EUR 11,191 $ 1.3318 January 2011 to January 2012
Sales contracts USD (13,822) $ (3.2728) January 2011 to November 2011
EUR 1,568 $ 1.3910 January 2011 to May 2011
Australian dollar
denominated
contracts
Purchase contracts USD 3,461 $ 1.1303 January 2011 to December 2011
CDN 2,000 $ 0.9980 January 2011
Management estimates that a loss of
All hedging relationships are formally documented, including the risk management objective and strategy. On an ongoing basis, an assessment is made as to whether the designated derivative financial instruments continue to be effective in offsetting changes in cash flows of the hedged transactions.
Risks arising from financial instruments and risk management
In the normal course of business, Toromont is exposed to financial risks that may potentially impact its operating results in either or both of its business segments. The Company employs risk management strategies with a view to mitigating these risks on a cost-effective basis. Derivative financial agreements are used to manage exposure to fluctuations in exchange rates and interest rates. The Company does not enter into derivative financial agreements for speculative purposes.
Currency risk
The Company's currency exposure has increased from
The types of foreign exchange risk and the Company's related risk management strategies are as follows:
Transaction exposure
The Canadian operations of the Company source the majority of its products and major components from
The Company also sells compression packages in foreign currencies, primarily the U.S. dollar, and enters into foreign currency contracts to reduce these exchange rate risks.
The Company maintains a conservative hedging policy whereby all significant transactional currency risks are identified and hedged.
Translation exposure
The Company's earnings from and net investment in, self-sustaining foreign subsidiaries are exposed to fluctuations in exchange rates. The currencies with the most significant impact are the US dollar, Australian dollar and the Euro.
All of the Company's foreign operations are considered self-sustaining. Accordingly, assets and liabilities are translated into Canadian dollars using the exchange rates in effect at the balance sheet dates. Unrealized translation gains and losses are deferred and included in accumulated other comprehensive income. The cumulative currency translation adjustments are recognized in income when there has been a reduction in the net investment in the foreign operations.
Earnings at foreign operations are translated into Canadian dollars each period at current exchange rates for the period. As a result, fluctuations in the value of the Canadian dollar relative to these other currencies will impact reported net income. Such exchange rate fluctuations have historically not been material year-over-year relative to the overall earnings or financial position of the Company. The following table shows the effect on net income before tax for the year ended
Cdn dollar weakens by 5% USD Euro AUD ---------------------------------------------------------------------------- Net income before tax $ 2,788 $ (95) $ (551)
Sensitivity analysis
The following sensitivity analysis is intended to illustrate the sensitivity to changes in foreign exchange rates on the Company's financial instruments and show the impact on net earnings and comprehensive income. Financial instruments affected by currency risk include cash and cash equivalents, accounts receivable, accounts payable and derivative financial instruments. This sensitivity analysis relates to the position as at
Cdn dollar weakens by 5% USD Euro AUD Total ---------------------------------------------------------------------------- Financial instruments held in foreign operations: Other comprehensive Income $ 3,312 $ 678 $ 1,660 $ 5,650 Financial instruments held in Canadian operations: Net earnings $ 1,942 $ 21 $ 1 $ 1,964 Other comprehensive Income $ 4,512 $ 441 $ (69) $ 4,884
The movement in other comprehensive income in foreign operations reflects the change in the fair value of financial instruments. Gains or losses on translation of self-sustaining subsidiaries are deferred in other comprehensive income. Accumulated currency translation adjustments are recognized in income when there is a reduction in the net investment in the foreign operation.
The movement in net earnings in Canadian operations is a result of a change in the fair values of financial instruments. The majority of these financial instruments are hedged.
The movement in other comprehensive income in Canadian operations reflects the change in the fair value of derivative financial instruments that are designated as cash flow hedges. The gains or losses on these instruments are not expected to affect net income as the gains or losses will offset losses or gains on the underlying hedged items.
Credit risk
Financial instruments that potentially subject the Company to credit risk consist of cash equivalents, accounts receivable, net investment in sales-type lease 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 has deposited the cash equivalents with reputable financial institutions, from which management believes the risk of loss to be remote.
The Company has accounts receivable from customers engaged in various industries including mining, construction, natural gas production and transportation, chemical and petrochemicals, food and beverage, and governmental agencies that are not concentrated in any specific geographic area. These specific industries may be affected by economic factors that may impact accounts receivable. Management does not believe that any single industry or particular geographic region represents significant credit risk. Credit risk concentration with respect to trade receivables is mitigated by the Company's large customer base.
As at
2010 2009
----------------------------------------------------------------------------
Balance, beginning of year $ 7,096 $ 9,774
Change in foreign exchange rates (69) (437)
Provisions and revisions, net 4,285 (2,241)
----------------------------------------------------------------------------
Balance, end of year $ 11,312 $ 7,096
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The credit risk associated with net investment in sales-type lease arises from the possibility that the counterparty may default on their obligations. In order to minimize this risk, the Company enters into sales-type lease transactions only in select circumstances. Close contact is maintained with the customer over the duration of the lease to ensure visibility to issues as and if they arise.
The credit risk associated with derivative financial instruments arises from the possibility that the counterparties may default on their obligations. In order to minimize this risk, the Company enters into derivative transactions only with highly-rated financial institutions.
Interest rate risk
In relation to its debt financing, the Company is exposed to changes in interest rates, which may impact on the Company's borrowing costs. Floating rate debt exposes the Company to fluctuations in short-term interest rates. As at
The Company minimizes its interest rate risk by managing its portfolio of floating and fixed rate debt, as well as managing the term to maturity. The Company may use derivative instruments such as interest rate swap agreements to manage its current and anticipated exposure to interest rates. There were no interest rate swap agreements outstanding as at
Liquidity risk
Liquidity risk is the risk that the Company may encounter difficulties in meeting obligations associated with financial liabilities. As at
Accounts payable are primarily due within 90 days and will be satisfied from current working capital.
The Company expects that continued cash flows from operations in 2011, together with cash and cash equivalents on hand and currently available credit facilities, will be more than sufficient to fund its requirements for investments in working capital, capital assets and dividend payments through the next twelve months, and that the Company's credit ratings provide reasonable access to capital markets to facilitate future debt issuance.
16. STOCK-BASED COMPENSATION
The Company maintains a stock option program for certain employees. Under the plan, up to 6,096,000 options may be granted for subsequent exercise in exchange for common shares. It is Company policy that no more than 1% of outstanding shares or approximately 770,000 share options may be granted in any one year. Stock options have a seven-year term, vest 20% per year on each anniversary date of the grant and are exercisable at the designated common share price, which is fixed at prevailing market prices of the common shares at the date the option is granted. Each stock option is exercisable into one common share of the Company at the price specified in the terms of the option.
A reconciliation of the outstanding options is as follows:
Twelve Months ended December 31
2010 2009
----------------------------------------------------------------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Options Price Options Price
----------------------------------------------------------------------------
Options outstanding,
beginning of year 1,961,809 $ 22.91 1,917,599 $ 21.62
Granted 610,050 29.71 508,000 22.05
Exercised (406,909) 16.37 (290,190) 11.53
Forfeited (20,090) 21.25 (173,600) 25.14
----------------------------------------------------------------------------
Options outstanding, end
of year 2,144,860 $ 26.04 1,961,809 $ 22.91
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Options exercisable, end
of year 811,824 $ 24.51 900,607 $ 20.85
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following table summarizes stock options outstanding and exercisable at
Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Life Exercise Number Exercise
Prices Outstanding (years) Price Outstanding Price
----------------------------------------------------------------------------
$16.59 - $23.34 672,140 3.8 21.97 312,620 21.87
$24.58 - $29.71 1,472,720 4.4 27.90 499,204 26.16
----------------------------------------------------------------------------
Total 2,144,860 4.2 $ 26.04 811,824 $ 24.51
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The fair value of each stock option granted is estimated on the date of grant. The fair value of the stock options was determined using the Black-Scholes option pricing model with the following assumptions:
Twelve Months ended December 31
2010 2009
----------------------------------------------------------------------------
Weighted average fair value price per
option $ 6.59 $ 4.13
Expected life of options (years) 5.84 5.80
Expected stock price volatility 25.0% 25.0%
Expected dividend yield 2.0% 2.7%
Risk-free interest rate 2.6% 2.0%
----------------------------------------------------------------------------
Deferred Share Unit Plan
The Company offers a deferred share unit (DSU) plan for executives and non-employee directors, whereby they may elect on an annual basis to receive all or a portion of their management incentive award or fees, respectively in deferred share units. In addition, the Board may grant discretionary DSUs to executives. A DSU is a notional unit that reflects the market value of a single common share of Toromont and generally vests immediately. The DSUs will be redeemed on termination of employment or resignation from the board, as the case may be. The redemption amount will be based upon the average of the high and low trading prices of the common shares on the TSX for the five trading days preceding the redemption date. As at
Employee Share Ownership Plan
The Company offers an Employee Share Ownership Plan whereby employees who meet the eligibility criteria can purchase shares by way of payroll deductions. There is a Company match of up to
17. EMPLOYEE FUTURE BENEFITS
The Company sponsors pension arrangements for substantially all of its employees, primarily through defined contribution plans in
Approximately 150 employees are included in defined benefit plans.
a) Powell Plan - This is a legacy plan whose members were employees of Powell Equipment when it was acquired by Toromont in 2001. The plan is a contributory plan that provides pension benefits based on length of service and career average earnings. The last actuarial valuation of the plan was completed as at
b) Executive Plan - This is a non-contributory pension arrangement for certain senior executives that provides for a supplementary retirement payout in excess of amounts provided for under the registered plan. The most recent actuarial valuation of the plan was completed as at
c) Other plan assets and obligations - This provides for certain retirees and terminated vested employees of businesses previously acquired by the Company as well as for retired participants of the defined contribution plan that, in accordance with the plan provisions, have elected to receive a pension directly from the plan. The most recent actuarial valuation of the plan was completed as at
The changes in the fair value of assets and the pension obligations and the funded status of the defined benefit plans were as follows:
2010 2009
----------------------------------------------------------------------------
Accrued benefit obligations:
Balance, beginning of year $ 65,649 $ 61,517
Transfers - -
Service cost 1,262 1,412
Interest cost 3,732 3,685
Actuarial (gain) loss 6,658 4,538
Benefits paid (5,137) (5,503)
----------------------------------------------------------------------------
Balance, end of year $ 72,164 $ 65,649
----------------------------------------------------------------------------
Plan assets:
Fair value, beginning of year $ 48,400 $ 45,364
Transfers 4 15
Actual return on plan assets 4,865 5,867
Company contributions 3,771 2,235
Participant contributions 408 422
Benefits paid (5,135) (5,503)
----------------------------------------------------------------------------
Fair value, end of year $ 52,313 $ 48,400
----------------------------------------------------------------------------
Funded status of the plans $ (19,851) $ (17,249)
Unrecognized actuarial loss 20,084 15,785
Unrecognized past service benefit (591) (887)
----------------------------------------------------------------------------
Accrued pension liability $ (358) $ (2,351)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The funded status of the Company's defined benefit pension plans at year-end are as follows:
2010
Accrued Funded status
benefit - surplus
obligation Plan assets (deficit)
----------------------------------------------------------------------------
Powell Plan $ 43,525 $ 40,364 $ (3,161)
Executive Plan 20,342 2,252 (18,090)
Other plan assets and
obligations 8,297 9,697 1,400
----------------------------------------------------------------------------
Funded status of the plans $ 72,164 $ 52,313 $ (19,851)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2009
Accrued Funded status
benefit - surplus
obligation Plan assets (deficit)
----------------------------------------------------------------------------
Powell Plan $ 38,392 $ 36,583 $ (1,809)
Executive Plan 18,923 2,071 (16,852)
Other plan assets and
obligations 8,334 9,746 1,412
----------------------------------------------------------------------------
Funded status of the plans $ 65,649 $ 48,400 $ (17,249)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The Executive Plan is a supplemental pension plan and is solely the obligation of the Company. The Company is not obligated to fund this plan but is obligated to pay benefits under the terms of the plan as they come due. The Company has posted letters of credit in the amount of
The significant annual actuarial assumptions adopted in measuring the accrued benefit obligations were as follows:
2010 2009
----------------------------------------------------------------------------
Discount rate 5.00% 5.75%
Expected long-term rate of return on plan assets 7.00% 7.00%
Rate of compensation increase 4.00% 4.00%
The allocations of plan assets are as follows:
2010 2009
----------------------------------------------------------------------------
Equity securities 45.3% 44.2%
Debt securities 43.1% 43.9%
Real estate 11.5% 11.9%
Cash and cash equivalents 0.1% 0.0%
No plan assets are directly invested in the Company's securities.
The net pension expense for the years ended
2010 2009
----------------------------------------------------------------------------
Defined Benefit Plans
Service cost $ 854 $ 990
Interest cost 3,732 3,685
Actual return on plan assets (4,865) (5,867)
Actuarial loss (gain) 6,658 4,538
Difference between actual and expected
return on assets 1,468 2,877
Difference between actual and
recognized actuarial loss (5,773) (3,663)
Difference between actual and
recognized past service benefits (296) (296)
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1,778 2,264
Defined Contribution Plans 14,580 8,788
401(k) matched savings plan 690 787
----------------------------------------------------------------------------
Net pension expense $ 17,048 $ 11,839
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The total cash amount paid or payable for employee future benefits in 2010, including defined benefit and defined contribution plans, was
Defined contribution pension expense increased in 2010 due to an increase in the number of employees resulting from the acquisition of ESIF (see note 2).
18. INCOME TAXES
Significant components of the provision for income tax expense were as follows:
2010 2009
----------------------------------------------------------------------------
Current income tax expense $ 50,281 $ 56,283
Future income tax expense (recovery) (1,888) 3,093
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Total income tax expense $ 48,393 $ 59,376
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----------------------------------------------------------------------------
A reconciliation of income taxes at Canadian statutory rates with the reported income taxes was as follows:
2010 2009
----------------------------------------------------------------------------
Statutory Canadian federal and
provincial income tax rates 31.0% 33.0%
----------------------------------------------------------------------------
Expected taxes on income $ 46,048 $ 59,364
Increase (decrease) in income taxes
resulting from:
Higher (lower) effective tax rates in
other jurisdictions 1,702 (102)
Manufacturing and processing rate
reduction (198) (147)
(Income) expenses not (taxable)
deductible for tax purposes (1,769) 1,138
Non-taxable gains (2,552) (93)
Effect of future income tax rate
reductions 2,471 814
Other 2,691 (1,598)
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Provision for income taxes $ 48,393 $ 59,376
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Effective income tax rate 32.6% 33.0%
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----------------------------------------------------------------------------
The income tax effects of temporary differences that gave rise to significant portions of the future income tax assets and future income tax liabilities were as follows:
2010 2009
----------------------------------------------------------------------------
CURRENT FUTURE INCOME TAX ASSETS
Accrued liabilities $ 15,462 $ 12,761
Deferred revenue 2,753 2,358
Accounts receivable 3,844 2,490
Inventories 14,480 16,554
Other 4,188 -
Cash flow hedges in other comprehensive
income 756 163
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$ 41,483 $ 34,326
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NON-CURRENT FUTURE INCOME TAX ASSETS
Loss carryforwards $ 33,343 $ -
Capital assets (14,571)
Other 3,394 -
Cash flow hedges in other comprehensive
income 729
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$ 22,895 $ -
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NON-CURRENT FUTURE INCOME TAX
LIABILITIES
Capital assets $ 10,325 $ 9,047
Other (1,311) (4,213)
Available for sale financial assets in
other comprehensive income - 3,090
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$ 9,014 $ 7,924
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As at
Year of Expiry (in $millions) Canada US Foreign ---------------------------------------------------------------------------- 2015 $ 1.6 $ 1.9 2017 $ 5.1 2018 $ 6.5 2019 $ 5.8 2023 $ 1.6 2024 $ 10.0 $ 2.8 2025 $ 48.5 2026 $ 41.4 $ 0.8 2027 $ 3.4 indefinite $ 21.9
19. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share.
2010 2009
----------------------------------------------------------------------------
Net earnings available to common
shareholders $ 98,650 $ 120,516
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted average common shares
outstanding 76,170,972 64,716,775
Dilutive effect of stock option
conversion 190,977 114,091
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Diluted weighted average common shares
outstanding 76,361,949 64,830,866
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Basic earnings per share
Continuing operations $ 1.32 $ 1.86
Discontinued operations (0.02) -
----------------------------------------------------------------------------
$ 1.30 $ 1.86
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Diluted earnings per share
Continuing operations $ 1.31 $ 1.86
Discontinued operations (0.02) -
----------------------------------------------------------------------------
$ 1.29 $ 1.86
----------------------------------------------------------------------------
----------------------------------------------------------------------------
In 2010, 936,920 outstanding stock options with an exercise price range of
20. COMMITMENTS
Certain land, buildings and equipment are leased under several non-cancellable operating leases that require minimum annual payments as follows:
2011 $ 17,136
2012 13,626
2013 10,395
2014 7,430
2015 4,931
2016 and thereafter 14,182
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$ 67,700
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21.
The Company defines capital as the aggregate of shareholders' equity (excluding accumulated other comprehensive income) and long-term debt less cash and cash equivalents.
The Company's capital management framework is designed to maintain a flexible capital structure that allows for optimization of the cost of capital at acceptable risk while balancing the interests of both equity and debt holders.
The Company generally targets a net debt to equity ratio of 0.5:1, although there is a degree of variability associated with the timing of cash flows. Also, if appropriate opportunities are identified, the Company is prepared to significantly increase this ratio depending upon the opportunity.
The above capital management criteria can be illustrated as follows:
December 31 December 31
2010 2009
----------------------------------------------------------------------------
Shareholder's equity excluding
accumulated OCI $ 1,235,409 $ 854,691
Long-term debt 419,929 158,095
Cash and cash equivalents (174,089) (206,957)
----------------------------------------------------------------------------
Capital under management $ 1,481,249 $ 805,829
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net debt as a % of capital under
management 17% n/m
Net debt to equity ratio 0.20:1 n/m
n/m - not meaningful, cash exceeds long-term debt at December 31, 2009 The Company is subject to minimum capital requirements relating to bank credit facilities and senior debentures. The Company has comfortably met these minimum requirements during the year.
There were no changes in the Company's approach to capital management during the year.
22. SUPPLEMENTAL CASH FLOW INFORMATION
2010 2009
----------------------------------------------------------------------------
Net change in non-cash working capital
and other
Accounts receivable $ (97,875) $ 130,300
Inventories 57,006 126,250
Accounts payable and accrued
liabilities 77,941 (101,028)
Deferred revenues 53,320 (104,451)
Other 13,344 (31,763)
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$ 103,736 $ 19,308
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash paid during the year for:
Interest $ 23,208 $ 9,818
Income taxes $ 23,462 $ 77,204
Non-cash transactions:
Capital asset additions included in
accounts payable and accrued
liabilities $ 2,657 $ 467
Cash $ 174,089 $ 90,357
Cash equivalents - 116,600
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Cash and cash equivalents $ 174,089 $ 206,957
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23. INTEREST IN JOINT VENTURE
The following summarized the Company's share of assets, liabilities, revenues and expenses of its joint venture as at and for the year ended
As atDecember 31, 2010 ---------------------------------------------------------------------------- Current assets $ 2,477 Long-term assets 518 ---------------------------------------------------------------------------- Total assets $ 2,995 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Current liabilities $ 894 Long-term liabilities and equity 2,101 ---------------------------------------------------------------------------- Total liabilites and equity $ 2,995 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Year endedDecember 31, 2010 ---------------------------------------------------------------------------- Revenue $ 2,192 Expenses $ 2,938 Net loss $ (747) Cash flow from operating activities $ (1,738) Cash flow from investing activities $ (501) Cash flow from financing activities $ (12)
24. SEGMENTED INFORMATION
The Company has two reportable operating segments, each supported by the corporate office.
Corporate overheads are allocated to the business segments based on revenue. Previously, corporate overheads were allocated to the business segments based on operating income. Due to the operating loss reported by the
The accounting policies of the reportable operating segments are the same as those described in the summary of significant accounting policies. Each reportable operating segment's performance is measured based on operating income. No reportable operating segment is reliant on any single external customer.
Segmented information excludes results from discontinued operations.
Equipment Group Compression Group Consolidated
2010 2009 2010 2009 2010 2009
----------------------------------------------------------------------------
Equipment/
package
sales $ 561,218 $455,180 $ 873,814 $746,741 $1,435,032 $1,201,921
Rentals 143,398 137,536 32,443 15,238 175,841 152,774
Product
support 306,634 278,938 357,687 181,267 664,321 460,205
Power
generation 11,450 9,692 - - 11,450 9,692
Other - - 45,603 - 45,603 -
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Total
revenues $1,022,700 $881,346 $1,309,547 $943,246 $2,332,247 $1,824,592
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operating
Income $ 106,748 $ 85,441 $ 46,971 $ 96,911 $ 153,719 $ 182,352
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Interest
expense 27,076 8,815
Interest and
investment
income (2,803) (6,355)
Gain on
available-
for-sale
financial
assets on
business
acquisition (18,627)
Equity
earnings
from
affiliates (468)
Income taxes 48,393 59,376
----------------------------------------------------------------------------
Net earnings
from
continuing
operations $ 100,148 $ 120,516
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Selected Balance Sheet information
Equipment Group Compression Group Consolidated
2010 2009 2010 2009 2010 2009
----------------------------------------------------------------------------
Identifiable
assets $ 655,338 $599,358 $1,461,658 $459,572 $2,116,996 $ 1,058,930
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Corporate
assets 152,242 $ 305,737
----------------------------------------------------------------------------
Total assets $2,269,238 $ 1,364,667
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Capital
expenditures $ 72,415 $ 37,706 $ 57,709 $ 23,335 $ 130,124 $ 61,041
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Depreciation $ 41,345 $ 43,104 $ 28,970 $ 15,061 $ 70,315 $ 58,165
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Amortization
of
Intangible
assets $ - $ - $ 10,973 $ - $ 10,973 $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Goodwill $ 13,000 $ 13,000 $ 483,106 $ 21,800 $ 496,106 $ 34,800
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----------------------------------------------------------------------------
Operations are based primarily in
2010 2009
----------------------------------------------------------------------------
Revenues
Canada $ 1,550,922 $ 1,127,929
United States 469,272 608,798
International 312,053 87,865
----------------------------------------------------------------------------
$ 2,332,247 $ 1,824,592
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Capital Assets and Goodwill
Canada $ 749,315 $ 350,596
United States 106,272 53,870
International 190,826 -
----------------------------------------------------------------------------
$ 1,046,413 $ 404,466
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25. ECONOMIC RELATIONSHIP
The Company, through its
26. ENERFLEX SPINOFF
On
Contacts:Toromont Industries Ltd. Robert M. Ogilvie Chairman and Chief Executive Officer (416) 667-5554Toromont Industries Ltd. Paul R. Jewer Vice President Finance and Chief Financial Officer (416) 667-5638 www.toromont.com
Source:
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