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Toromont Announces Results for the Fourth Quarter and Full Year 2010

TORONTO, ONTARIO -- (MARKET WIRE) -- 02/24/11 -- Toromont Industries Ltd. (TSX: TIH) today reported financial results for the three and twelve-month periods ended December 31, 2010.




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                            Three months ended         Twelve months ended

                                   December 31                 December 31

                     -------------------------------------------------------

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 $970 million, revenues were 57% higher and net quarterly earnings, up 13%, exceeded the prior year for the first time since the first quarter of 2009.

The Equipment Group recovered to pre-recession income levels with a 25% increase in revenues, including record product support revenues, and a 77% increase in operating income for the quarter over the prior year. Bookings for the quarter increased 58% and closing backlogs were 133% higher reflecting significant orders for longer delivery mining equipment.

Compression Group bookings in the fourth quarter were up 119% with large orders coming from Australia and Canada. Revenues were up 93% in the quarter reflecting some market recovery and the consolidation of Enerflex Systems Income Fund (ESIF) acquired in the first quarter. Operating income in the fourth quarter of 2010 of $25.4 million approached last year's fourth quarter results of $26.3 million.

Toromont closed the year with cash on hand of $174 million after paying off $170 million of the $450 million acquisition loan during the year. Debt net of cash at the end of the year was $246 million.

"2010 was a transitional year for Toromont," said Robert M. Ogilvie, Chairman and Chief Executive Officer of Toromont Industries Ltd. "Having acquired ESIF for $700 million in the first quarter, we undertook the challenging task of combining two competitors with different cultures and targeting significant reductions in staff and facilities. Completed in the trough of the global market for compression and process equipment, the additional costs and early distractions associated with acquisition reduced earnings for the year. The integration process is now essentially complete. We have achieved significant synergies and asset reductions. The management team is now able to focus on business profitability and growth. Compression Group earnings have improved each quarter. The new Enerflex is now a global leader in the gas compression and process equipment industry."

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 on January 4, 2011 to shareholders of record on

    December 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 of Enerflex 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 Enerflex Ltd will open up exciting organic growth and expansion opportunities for Toromont and Enerflex."

Quarterly Conference Call and Webcast

Interested parties are invited to join the quarterly conference call with investment analysts, in listen-only mode, on Thursday, February 24, 2011 at 5:00 p.m. (ET). The call may be accessed by telephone at 1-877-240-9772 (toll free) or 416-340-8530 (Toronto area). A replay of the conference call will be available until Thursday, March 10, 2011 by calling 1-800-408-3053 or 416-694-9451 and quoting passcode 7782377.

Both the live webcast and the replay of the quarterly conference call can be accessed at www.toromont.com.

About Toromont

Toromont Industries Ltd. operates through two business segments: The Equipment Group and the Compression Group. The Equipment Group includes one of the larger Caterpillar dealerships by revenue and geographic territory in addition to industry leading rental operations. The Compression Group is a global leader specializing in the design, engineering, fabrication, and installation of compression systems for natural gas, coal-bed methane, fuel gas and carbon dioxide in addition to process systems and CIMCO industrial and recreational refrigeration systems. Both Groups offer comprehensive product support capabilities. This press release and more information about Toromont Industries can be found on the Web at www.toromont.com.

Management's Discussion and Analysis

This Management's Discussion and Analysis ("MD&A") comments on the operations, performance and financial condition of Toromont Industries Ltd. ("Toromont" or the "Company") as at and for the year ended December 31, 2010, compared to the preceding year. This MD&A should be read in conjunction with the attached unaudited consolidated financial statements and related notes for the year ended December 31, 2010.

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 February 23, 2011.

For periods prior to January 20, 2010, the consolidated financial statements reported herein do not include the financial position and results of operations for the natural gas compression and processing equipment business acquired by Toromont in connection with its acquisition of Enerflex Systems Income Fund ("ESIF"). For further details, see "Corporate Developments - Acquisition of Enerflex Systems Income Fund" and Note 3 of the Notes to the Consolidated Financial Statements.

The Board of Directors of Toromont has unanimously approved in principle a spinoff of Enerflex Ltd. ("Enerflex") to Toromont's shareholders as a separate, publicly traded company called "Enerflex Ltd." At the time of the spinoff, Enerflex would hold Toromont's natural gas production and processing equipment business, including the business acquired as part of Toromont's acquisition of ESIF. Completion of the spinoff is subject to the receipt of required court and shareholder approval and the satisfaction of certain other conditions. The information presented herein does not give effect to the proposed spinoff. For further details, see "Corporate Developments - Proposed Spinoff of Enerflex". If the proposed spinoff proceeds, there will be a significant and material effect on the operations and results of Toromont. Detailed information as to the proposed spinoff and its effects will be included in a management information circular to be filed in advance of the meeting of Toromont shareholders to vote on the spinoff.

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 December 31, 2010, Toromont employed approximately 5,700 people in more than 170 locations, predominantly in Canada and the United States. Toromont is listed on the Toronto Stock Exchange ( the "TSX") under the symbol TIH. The Company serves its customers through two business groups.

The Equipment Group sells, rents and services a broad range of specialized construction equipment and industrial engines. These activities generated 44% of the Company's revenues in 2010 (2009 - 48%). The Equipment Group is comprised of Toromont CAT, one of the world's larger Caterpillar dealerships by revenue and geographic territory, and Battlefield - The CAT Rental Store, an industry-leading rental operation. Performance in the Equipment Group is driven by activity in several industries: road building and other infrastructure-related activities; residential and commercial construction; mining; aggregates; waste management; steel; forestry; and agriculture. Other significant activities include sales and product support activities for Caterpillar engines used in a variety of applications including industrial, commercial, marine, on-highway trucks and power generation.

The Compression Group is a leading Global business specializing in the design, engineering, fabrication, installation and after-sale support of compression, process and refrigeration systems. These activities generated 56% of the Company's revenues in 2010 (2009 - 52%). The Compression Group is comprised of Enerflex Ltd., a leader in supplying and servicing compression and process systems used in natural gas, fuel gas and carbon dioxide applications and CIMCO Refrigeration, a leader in industrial and recreational markets. Results in the Compression Group are influenced by conditions in the primary market segments served: natural gas production and transportation; chemical, petrochemical, food and beverage processing; cold storage; food distribution; and ice rink construction.

CORPORATE DEVELOPMENTS

Acquisition of Enerflex Systems Income Fund

On January 20, 2010, Toromont completed its offer for ESIF. ESIF was a supplier of products and services to the global oil and gas production industry, and had operations in Canada, Australia, the Netherlands, the United States, Germany, Pakistan, the United Arab Emirates, Indonesia and Malaysia.

This important transaction brought together ESIF and Toromont Energy Systems, to create a stronger organization named Enerflex Ltd., better able to serve customers and compete in both North American and international markets. The new Enerflex benefits from more comprehensive global market coverage and a broader suite of products as well as a more robust capital structure. Attractive synergies and cost savings are already being realized through the elimination of excess fabrication capacity, overlapping service facilities, and duplicate general and administration expenses.

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 September 1, 2010. The financial results from Syntech, previously reported in the Compression Group, have been reflected as results from discontinued operations.

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 November 8, 2010, the Board of Directors of Toromont unanimously approved in principle all actions to prepare for and implement a spinoff of Enerflex, Toromont's natural gas compression and processing equipment business, to Toromont's shareholders as a separate, publicly traded company. This business comprises the majority of Toromont's operations within the Compression Group. The spinoff is designed to enhance long term value for the shareholders of Toromont by separating its businesses into two distinct public companies better able to pursue independent strategies and opportunities for growth.

If the transaction is completed, Toromont shareholders will exchange their current Toromont shares for new shares in both Toromont and in Enerflex Ltd.

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 Canada Revenue Agency (CRA).

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 Compression Group. Enerflex will not be considered a discontinued operation until all necessary approvals are received and the spinoff is completed.

PRIMARY OBJECTIVE AND MAJOR STRATEGIES

A primary objective of Toromont Industries Ltd. is to build shareholder value through sustainable and profitable growth, founded on a strong financial position. To guide its activities in pursuit of this objective, Toromont works toward specific, long-term financial goals (see section heading "Key Performance Measures" in this MD&A) and each of its operating groups consistently employs the following broad strategies:

Expand Markets

Toromont serves 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 ended December 31 ($

 thousands, except per share                                             %

 amounts)                                    2010            2009   change

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Revenues                            $   2,332,247   $   1,824,592       28%

Cost of goods sold                      1,843,540       1,415,476       30%

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Gross profit                              488,707         409,116       19%

Selling and administrative expenses       334,988         226,764       48%

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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

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Income before income taxes                148,541         179,892      (17%)

Income taxes                               48,393          59,376      (18%)

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Earnings from continuing operations       100,148         120,516      (17%)

Losses on discontinued operations          (1,498)              -      n/m

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Net earnings                        $      98,650   $     120,516      (18%)

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Earnings per share (basic)          $        1.30   $        1.86      (30%)

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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. Equipment Group revenues were up 16% on higher new and used equipment sales and product support activities. Compression Group revenues were up 39% as continued growth in Canadian recreational refrigeration, together with revenues from the acquired business more than offset declines in certain Canadian and international markets. Economic conditions generally and natural gas compression markets specifically, have shown improvement from the lows seen in 2009 and the early part of 2010.

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 $0.97 in 2010 compared to $0.88 in 2009, a 10% increase. Impacts of this trend include:




--  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 Compression Group, lower shop utilization contributed to reduced gross profit margins in the current year. Gross profit margins in the Equipment Group in 2010 were down slightly from 2009 on an unfavourable change in mix, with a higher proportion of equipment sales compared to product support revenues.

Selling and administrative expenses increased $108.2 million from 2009. Most of the increase was due to the recurring costs assumed with the acquisition. Selling and administrative expenses in 2010 also included costs related to the acquisition and integration of ESIF of $9.2 million. Amortization of identifiable intangible assets recorded on acquisition added $11.0 million in expense in 2010. Selling and administrative expenses as a percentage of revenues were 14.4% in 2010 versus 12.4% in 2009.

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 $18.3 million higher in 2010. The increase in expense resulted primarily from financing the acquisition of ESIF. Interest expense on debt related to the acquisition was $18.1 million.

Earnings in 2010 included a gain of $18.6 million ($16.3 million after tax and $0.21 per share) related to units of ESIF purchased by Toromont during 2009. These assets were previously designated as available for sale and unrealized gains were included in Other Comprehensive Income ("OCI") in 2009. The amount of the gain represents the difference in value between actual cash cost of the units and the fair market value of the units on the acquisition date of January 20, 2010. Under Canadian accounting standards, the gain in OCI is required to be reclassified out of OCI and into net earnings on acquisition of the related business.

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 $1.30 for the year, down 30% from 2009, reflecting lower earnings and a higher number of shares outstanding. The weighted average of shares outstanding in 2010 was 18% higher than 2009 reflecting the issuance of approximately 11.9 million shares in connection with the acquisition of ESIF.

Comprehensive income was $69.6 million, comprised of net earnings of $98.7 million and other comprehensive loss of $29.1 million. The other comprehensive loss arose from the reclassification to earnings of unrealized gains on available-for-sale financial assets in the period of $15.6 million and a loss on translation of self-sustaining foreign operations of $11.2 million.

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 January 1, 2010. Prior periods have not been restated as the impact is insignificant. Interest expense and interest and investment income are not allocated.

Equipment Group




Twelve months ended December 31 ($                                        %

 thousands)                                   2010            2009   change

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Equipment sales and rentals

 New                                 $     416,922   $     336,907       24%

 Used                                      144,296         118,273       22%

 Rental                                    143,398         137,536        4%

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Total equipment sales and rentals          704,616         592,716       19%

Power generation                            11,450           9,692       18%

Product support                            306,634         278,938       10%

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Total revenues                       $   1,022,700   $     881,346       16%

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Operating income                     $     106,748   $      85,441       25%

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Capital expenditures                 $      72,415   $      37,706       92%

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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 $307 million in 2010, 10% higher than 2009. On a constant dollar basis (adjusted for all pricing adjustments including those for foreign exchange), product support revenues were up 14%. Product support revenues in 2010 also benefited from a higher installed base of equipment in our territory coupled with higher utilization of equipment in 2010 compared to the prior year which was dampened by market conditions.

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 Equipment Group totalled $72.4 million in 2010. Expenditures related to replacement and expansion of the rental fleet accounted for $39.7 million of total expenditures in 2010. Expenditures of $25.9 million were made for new and/or expanded facilities to meet current and future growth requirements. Other capital expenditures included $1.9 on information technology and $3.4 million on service and delivery vehicles.




                                                                          %

(in $ millions)                                  2010           2009 change

----------------------------------------------------------------------------



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 $125 million received from Detour Gold Corporation for a fleet of mining trucks and support equipment, to be delivered in 2011 and 2012. Bookings also reflect increased activity in mining, power systems and construction.

Compression Group




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 $30 million on an annualized basis. This forward-looking information is based on salary and other historical cost data and reflects only actions taken to date. 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.

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 $33 million on translation of revenues derived at foreign operations. Sales of natural gas compression packages from US operations were down 23% on a US dollar basis due to lower market activity in the first half of 2010. US natural gas compression package sales strengthened in the second half of the year and exceeded 2009 levels during the fourth quarter of 2010. Sales from Canadian operations were significantly higher on revenues added by the acquisition, largely offsetting the declines in the legacy businesses.

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 Canada has seen good growth due to the Recreational Infrastructure Canada program, while the markets for industrial refrigeration in Canada and refrigeration generally in the US have remained challenged.

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 $40 million related to construction of a natural gas processing facility which was determined to be a sales-type lease.

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.

The Compression Group reported operating income of $47.0 million in 2010 compared to $97.0 million in 2009. The decrease reflects the higher fixed overheads and excess capacity in fabrication facilities which continued to be under absorbed on lower activity levels on a combined pro forma basis. Transaction related costs and restructuring activities resulted in $9.2 million expense in 2010. Amortization related to identifiable intangible assets recorded on acquisition totalled $11.0 million.

Capital expenditures totalled $57.7 million in 2010. Approximately $30 million of capital expenditures related to completion of a gas processing rental facility for an international customer under a Build-Own-Operate-Maintain agreement. Approximately $10 million in capital expenditures were related to new sales and service branch locations in the United States required in support of growth of the business.




                                                                          %

(in $ millions)                                  2010           2009 change

----------------------------------------------------------------------------



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 QGC PTY Ltd. totalling a record USD $193 million for natural gas compression and process equipment for use in Australia. Recreational refrigeration bookings were up 26% in 2010 with strong order activity in Canadian recreational markets due to the Recreational Infrastructure Canada program. Industrial refrigeration bookings were down 24% through the same time frame on weaker economic conditions.

CONSOLIDATED FINANCIAL CONDITION

The Company has maintained a strong financial position for many years. At December 31, 2010, the ratio of total debt net of cash to equity was 0.2:1. Total assets were $2.3 billion at December 31, 2010, compared with $1.4 billion at December 31, 2009. Total assets purchased in the acquisition of ESIF were approximately $1 billion.

Working Capital

The Company's investment in non-cash working capital increased 4% to $345.7 million at December 31, 2010. The major components, along with the changes from December 31, 2009, are identified in the following table. Generally, the increased December 31, 2010 balances reflect the acquisition of working capital of ESIF.




                                                                Change

                                                          ------------------

                             December 31     December 31

$ thousands                         2010            2009           $      %

----------------------------------------------------------------------------



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%

----------------------------------------------------------------------------

Total non-cash working

 capital                   $     345,683   $     332,307   $  13,376      4%

----------------------------------------------------------------------------

----------------------------------------------------------------------------



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 December 31, 2010 reflect higher trailing activity levels. Revenues in both operating groups were higher in the fourth quarter of 2010 than in the fourth quarter of 2009. Higher revenues will generally result in higher accounts receivable balances.

Inventories increased $74.2 million or 20% from 2009. Equipment Group inventories are 8% higher to support higher sales volumes and the increased service business. Compression Group inventories are 33% higher. The ESIF acquisition completed in early 2010 included inventories of approximately $136 million. Reductions in inventories of parts and direct materials were realized as part of the integration of the two legacy businesses.

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 $3.4 million as at December 31, 2010. This is not expected to affect net income, as the unrealized losses will offset future gains on the related hedged items.

Accounts payable and accrued liabilities at December 31, 2010 were higher than at December 31, 2009 on higher activity levels, including purchases of inventories. Extended terms of payment have been offered by certain suppliers. Accruals for profit-sharing payments increased year-over-year on the expanded operations and special bonuses related to transition efforts.

Dividends payable were 26% higher at December 31, 2010 compared to last year reflecting the higher number of shares outstanding after the acquisition. Approximately 11.9 million shares were issued as partial consideration in the acquisition of ESIF, representing an increase in the number of shares outstanding from December 31, 2009 of 18%. The quarterly dividend rate was increased by the Board of Directors in 2010 to $0.16 per share, compared to $0.15 per share dividend in 2009, an increase of 7%.

Deferred revenues represent billings to customers in excess of revenue recognized. In the Compression Group, deferred revenues arise on progress billings in advance of revenue recognition which increased year-over-year on increased activity levels. In the Equipment Group, deferred revenues arise on sales of equipment with residual value guarantees, extended warranty and other customer support agreements as well as on progress billings on long-term construction contracts.

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 December 31, 2010.

Employee Share Ownership

The Company employs a variety of stock-based compensation plans to align employees' interests with corporate objectives.

The Company maintains an Executive Stock Option Plan for certain employees and directors. Stock options have a seven-year term, vest 20% cumulatively on each anniversary date of the grant and are exercisable at the designated common share price. At December 31, 2010, 2.1 million options to purchase common shares were outstanding, of which 0.8 million were exercisable.

The Company offers an Employee Share Ownership Plan whereby employees can purchase shares by way of payroll deductions. Under the terms of this plan, eligible employees may purchase common shares of the Company in the open market at the then current market price. The Company pays a portion of the purchase price, matching contributions at a rate of $1 for every $3 dollars contributed, to a maximum of $1,000 per annum per employee. Company contributions vest to the employee immediately. Company contributions amounting to $1.0 million in 2010 (2009 - $0.9 million) were charged to selling and administrative expense when paid. A third party administers the Plan.

The Company also offers a deferred share unit (DSU) plan for certain employees and non-employee directors, whereby they may elect, on an annual basis, to receive all or a portion of their 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 December 31, 2010, 87,969 DSUs were outstanding at a value of $2,747 (2009 - 68,723 units at a value of $1,882). During 2010, 864 DSUs were redeemed for $25 (2009 - 47,086 DSUs were redeemed for $1,098). The liability for DSUs is included in Accounts Payable and Accrued Liabilities.

Employee Future Benefits

The Company sponsors pension arrangements for substantially all of its employees, primarily through defined contribution plans in Canada and a 401(k) matched savings plan in the United States. Certain unionized employees do not participate in Company-sponsored plans, and contributions are made to these union-sponsored plans in accordance with respective collective bargaining agreements. In the case of the defined contribution plans, regular contributions are made to the employees' individual accounts, which are administered by a plan trustee, in accordance with the plan document. Future expense for these plans will vary based on future participation rates.

Approximately 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 $4.7 million or 10%. The funded status of the plans has declined from a deficit of $0.4 million to a deficit of $1.8 million. The unrecognized actuarial loss at December 31, 2010, was $15.3 million, compared to an unrecognized actuarial loss of $12.4 million at December 31, 2009. Pension plan accounting requires gains and losses to be effectively smoothed over future periods, beginning in the following period. The Company expects pension expense and cash pension contributions to be similar to 2010 levels, before consideration of the spinoff of Enerflex.

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 $19.8 million as at December 31, 2010. As there are only nominal plan assets, the impact of volatility in financial markets on pension expense and contributions for this plan are insignificant.

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 August 30, 2011. The actual number of shares purchased and the timing of any such purchases will be determined by Toromont. All shares purchased under the bid will be cancelled.

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 $0.9 million (average cost of $19.77 per share).

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 $0.62 per common share ($0.60 per common share in 2009).

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 $450 million term loan facility in January 2010 in connection with the acquisition of ESIF. In addition to two required quarterly repayments of $16.875 million, the Company made a voluntary repayment, without penalty, of $83.125 million during the third quarter of 2010.

Effective November 5, 2010, the Company completed a refinancing of its Canadian committed credit facility. The new committed credit facility, with a maturity date of June 30, 2012, provides $600 million in available financing and includes covenants, restrictions and events of default that are substantially the same as the corresponding provisions in Toromont's previous facilities. In conjunction with the new financing, the $333.125 million outstanding under the term loan facility was repaid in full and cancelled using proceeds of the new financing together with cash-on-hand. Debt incurred under the new facility is unsecured and ranks pari passu with debt outstanding under Toromont's existing debentures. Toromont intends to utilize this facility primarily through the issuance of bankers' acceptances with acceptance fees ranging from 150 to 275 basis points, determined based on Toromont's leverage ratio.

At December 31, 2010, $144 million or 34% of long-term debt carried interest at fixed rates. This debt matures at various dates through to 2019 with a current weighted average interest rate of 5.5%. The remaining $280 million or 66% of long-term debt carried interest at a variable rate of approximately 3.2% at December 31, 2010.

Combined unsecured credit facilities amounted to $620 million at year-end comprised of $600 million in Canada and US$20 million in the United States ($20 million Canadian equivalent). These credit facilities mature in 2012. At December 31, 2010, there were no drawings against the US credit facility and $280 million was drawn against the Canadian facility. Letters of credit in the amount of $64 million were issued against the credit facilities.

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

----------------------------------------------------------------------------

 Operating activities                            255,653            196,253

 Investing activities                           (340,909)           (73,904)

 Financing activities                             54,453            (51,014)

----------------------------------------------------------------------------

(Decrease) increase in cash in the

 period                                          (30,803)            71,335

Effect of foreign exchange on cash

 balances                                         (2,065)            (1,652)

----------------------------------------------------------------------------

Cash, end of period                     $        174,089   $        206,957

----------------------------------------------------------------------------

----------------------------------------------------------------------------



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 $255.7 million in the year compared to $196.3 million in 2009. Net earnings adjusted for items not requiring cash were down 14% on lower operating margins including expenses related to the acquisition of ESIF. Non-cash working capital and other provided $103.7 million in 2010 compared to $19.3 million in 2009. The components and changes in working capital are discussed in more detail in this MD&A under the heading "Consolidated Financial Condition."

Cash Flows from Investing Activities

Investing activities in 2010 used $340.9 million and comprised the following items:




--  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 the Equipment 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 ($36.2 million).

Investing activities in 2009 used $73.9 million and comprised the following items:




--  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 $54.5 million in 2010 and used $51.1 million in 2009.

Net increase in long-term debt totalled $92.8 million in 2010. Borrowings of $450 million were drawn during the year in order to finance the acquisition of ESIF, including repayments on ESIF senior secured notes payable and bank facilities. Strong cash flow during 2010 and substantial cash on hand entering the year allowed the Company to make total net repayments on this and other long-term debt of $348 million. In 2009, total debt decreased by $15.4 million.

Dividends paid to common shareholders totalled $45.1 million and were 18% higher than that paid in the prior year. The number of shares outstanding increased 11.9 million (18% based on December 31, 2009 number of shares) as a result of common shares issued to acquire ESIF. The regular quarterly dividend rate was increased 7% from $0.15 per share to $0.16 per share effective with the October 2010 dividend payment.

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 $858 thousand.

Cash received on the exercise of share options totalled $6.7 million compared to $3.4 million in the prior year. The increase reflects a higher number of stock options exercised and a higher weighted average exercise price.

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 Equipment Group is experiencing improved bookings in many markets, including mining, road building and power systems. While the government stimulus spending for Canadian infrastructure is winding down, we believe that investment levels will continue to remain high in the infrastructure markets we serve, significantly road building. The parts and service business has seen a recent resumption of growth and provides a measure of stability, driven by the larger installed base of equipment in the field.

Our Compression Group has seen quarter-over-quarter increase in bookings. Toromont believes that the long term market fundamentals for natural gas in Canada and the U.S. are positive. Process and international markets also provide opportunity. Recreational refrigeration markets in Canada have been buoyed by governmental infrastructure spending programs which will carry over into 2011. Industrial markets remain weak.

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 in the United States;

--  Additional product offerings over the years from Caterpillar 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 the Equipment Group's rental

    operations.



Over the same five-year period, revenue growth has been constrained at times by a number of factors including:




--  General economic weakness, which has negatively impacted revenues since

    the latter part of 2008;

--  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 North America have increased substantially as a result of the acquisition of ESIF.

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 ended December 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 Canada which has driven by higher activity in the Equipment Group.

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 Compression Group, were decreases of $4 million and $0.4 million respectively.

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 Equipment Group on improved price realization. The Compression Group reported lower margins on lower shop efficiencies related to the expanded operations.

Selling and administrative expenses increased $40.5 million or 74% versus the comparable period of the prior year. Most of the increase was due to the recurring costs assumed with the acquisition including amortization of identifiable intangible assets. Selling and administrative expenses as a percentage of revenues were 13.4% compared to 12% in the comparable period last year.

Interest expense was $2.6 million higher in the quarter compared to the similar period last year on interest on financing for the acquisition of ESIF.

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 $35.4 million, up 13% from 2009. Basic earnings per share were $0.47, down just one cent from the fourth quarter of 2009, despite a 19% increase in the number of shares outstanding.

Comprehensive income was $24.7 million, comprised of net earnings of $35.4 million and other comprehensive loss of $10.7 million. Other comprehensive loss arose primarily on unrealized exchange loss on translation of the Company's foreign operations.

Fourth Quarter Results of Operations in the Equipment Group




Three months ended December 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 Compression Group




Three months ended December 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 Compression Group for the fourth quarter of 2010 were up 93% from the similar period last year, benefiting from increased revenues from the acquired operations. Revenues generated in the US were relatively strong in the quarter while international markets declined year-over-year.

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 Canada has seen good growth due to the Recreational Infrastructure Canada program, which has driven record results for the year for CIMCO. As the deadline for completion of projects under this program was extended in the fourth quarter, construction schedules have slowed somewhat leading to the year-over-year decline.

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.

The Equipment Group has historically had a distinct seasonal trend in activity levels. Lower revenues are recorded during the first quarter due to winter shutdowns in the construction industry. The fourth quarter has typically been the strongest quarter due in part to the timing of customers' capital investment decisions, delivery of equipment from suppliers for customer-specific orders and conversions of equipment on rent with a purchase option. This pattern has been altered somewhat in recent years given changes in economic conditions, product availability and other market specific factors. Management expects the seasonality trend to resume as market conditions improve.

The Compression Group also has historically had a distinct seasonal trend in activity levels due to well-site access and drilling patterns, which reflect weather conditions. Generally, higher revenues are reported in the fourth quarter of each year. This trend has not been evident in the last two years due to deteriorating natural gas markets, general economic conditions and the acquisition of ESIF. Geographic and product mix diversification has also served to mitigate this seasonality. Management expects the seasonality trend to resume as natural gas market fundamentals improve.

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 Equipment Group.

Net earnings declined 14% in 2009 on lower revenues. Net earnings in 2010 declined 18% on lower profitability within in the Compression Group due to the significant acquisition, transition and integration of ESIF.

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 $1 billion.

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

Equipment Group

The Equipment Group purchases most of its equipment inventories and parts from Caterpillar under a dealership agreement that dates back to 1993. As is customary in distribution arrangements of this type, the agreement with Caterpillar can be terminated by either party upon 90 days' notice. In the event Caterpillar terminates, it must repurchase substantially all inventories of new equipment and parts at cost. Toromont has maintained an excellent relationship with Caterpillar for 16 years and management expects this will continue going forward.

Toromont is dependent on the continued market acceptance of Caterpillar's products. It is believed that Caterpillar has a solid reputation as a high-quality manufacturer, with excellent brand recognition and customer support as well as leading market shares in many of the markets it serves. However, there can be no assurance that Caterpillar will be able to maintain its reputation and market position in the future. Any resulting decrease in the demand for Caterpillar products could have a material adverse impact on the Company's business, results of operations and future prospects.

Toromont is also dependent on Caterpillar for timely supply of equipment and parts. From time to time during periods of intense demand, Caterpillar may find it necessary to allocate its supply of particular products among its dealers. Such allocations of supply have not, in the past, proven to be a significant impediment in the conduct of business. However, there can be no assurance that Caterpillar will continue to supply its products in the quantities and timeframes required by customers.

Compression Group

Some of the components used in the products of the Compression Group are obtained from a single source or a limited group of suppliers. The Compression Group's reliance on these suppliers involves several risks, including price increases, inferior component quality and a potential inability to obtain an adequate supply of required components in a timely manner. The partial or complete loss of certain of these sources could have a negative impact on Toromont's results of operations and could damage its customer relationships Further, a significant increase in the price of one or more of these components could have a negative impact on Toromont's results of operations.

One of the Compression Group's strategic assets is its distribution and OEM agreements with leading manufacturers, notably the Waukesha Engine division of Dresser Inc. for engines, Finning (Caterpillar) for engines and parts, Ariel Corporation for compressors and parts, and The Frick Company (Johnson Controls Inc.) for compressors and parts. In the event that one or more of these agreements were to be terminated, Toromont would lose a competitive advantage.

Competition

The Company competes with a large number of international, national, regional and local suppliers in each of its markets. Although price competition can be strong, there are a number of factors that have enhanced the Company's ability to compete throughout its market areas including: the range and quality of products and services; ability to meet sophisticated customer requirements; distribution capabilities including number and proximity of locations; financing offered by Caterpillar Finance; e-commerce solutions; reputation and financial strength. Increased competitive pressures or the inability of the Company to maintain the factors that have enhanced its competitive position to date could adversely affect the Company's business, results of operations or financial condition.

The Compression Group requires skilled engineering and design professionals in order to maintain customer satisfaction and engage in product innovation. Toromont competes for these professionals, not only with other companies in the same industry, but also with oil and gas producers and other industries. In periods of high energy activity, demand for the skills and expertise of these professionals increases, making the hiring and retention of these individuals more difficult.

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 North America with a smaller percentage of accounts receivable held with international clients. Management does not believe that any single industry or geographic region represents significant credit risk.

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 the United States. Consequently, reported costs of inventory and the transaction prices charged to customers for equipment and parts are affected by the relative strength of the Canadian dollar. The Company mitigates exchange rate risk by entering into foreign currency contracts to fix the cost of imported inventory where appropriate.

In addition, pricing to customers is customarily adjusted to reflect changes in the Canadian dollar landed cost of imported goods.

The Company 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 December 31, 2010 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.

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 $54 million and net income by approximately $3.8 million.

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 December 31, 2010, the Company's debt portfolio is comprised of 34% fixed rate and 66% floating rate debt. Fixed rate debt exposes the Company to future interest rate movements upon refinancing the debt at maturity. Floating rate debt exposes the Company to fluctuations in short-term interest rates by causing related interest payments and finance expense to vary.

The Company's fixed rate debt matures between 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 November 8, 2010, the Company announced a proposal to spinoff Enerflex, Toromont's natural gas compression and processing equipment business, to Toromont's shareholders as a separate, publicly traded company. This business comprises the majority of Toromont's operations within the Compression Group.

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 Enerflex Ltd. and this proposed transaction will be provided in the a management information circular to be filed in advance of the meeting of shareholders to vote on the spinoff. This document is expected to be filed in mid-March and will be available on SEDAR at www.sedar.com and on the Company's website at www.toromont.com.

Environmental Regulation

Toromont's customers, particularly in North America, Europe and Australia, are subject to significant and ever-increasing environmental legislation and regulation. This legislation can impact Toromont in two ways. First, it may increase the technical difficulty in meeting environmental requirements in product design, which could increase the cost of these businesses' products. Second, it may result in a reduction in activity by Toromont's customers in environmentally sensitive areas, in turn reducing the sales opportunities available to Toromont.

Toromont is also subject to a broad range of environmental laws and regulations. These may, in certain circumstances, impose strict liability for environmental contamination, which may render Toromont liable for remediation costs, natural resource damages and other damages as a result of conduct that was lawful at the time it occurred or the conduct of, or conditions caused by, prior owners, operators or other third parties. In addition, where contamination may be present, it is not uncommon for neighbouring land owners and other third parties to file claims for personal injury, property damage and recovery of response costs. Remediation costs and other damages arising as a result of environmental laws and regulations, and costs associated with new information, changes in existing environmental laws and regulations or the adoption of new environmental laws and regulations could be substantial and could negatively impact Toromont's business, results of operations or financial condition.

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 Equipment Group and Compression Group similarly and therefore are not discussed on a segmented basis.

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 January 1, 2010, the Company adopted the Canadian Institute of Chartered Accountants (CICA) Handbook Section 1582 Business Combinations, Section 1601 Consolidated Financial Statements, and Section 1602 Non-controlling Interests. Section 1582 specifies a number of changes, including an expanded definition of a business, a requirement to measure all business acquisitions at fair value, a requirement to measure non-controlling interests at fair value, and a requirement to recognize acquisition-related costs as expenses. Section 1601 establishes the standards for preparing consolidated financial statements. Section 1602 specifies that non-controlling interests be treated as a separate component of equity, not as a liability or other item outside of equity. These new standards are harmonized with International Financial Reporting Standards (IFRS). The new standards will become effective in 2011, however early adoption is permitted. The Company has early adopted Section 1582, Section 1601 and Section 1602 effective from January 1, 2010.

The Company had reported deferred transaction costs of $9,035 as at December 31, 2009. These costs were charged to opening retained earnings, net of tax of $1,129, as a result of the change in accounting policy.

FUTURE ACCOUNTING STANDARDS

Financial Instruments Recognition and Measurement

In June 2009, the CICA amended Handbook Section 3855 - Financial Instruments - Recognition and Measurement ("Section 3855") to clarify the application of the effective interest method after a debt instrument has been impaired and when an embedded prepayment option is separated from its host debt instrument at initial recognition for accounting purposes. The amendments are applicable for the Company's interim and annual financial statements for its fiscal year beginning January 1, 2011. Earlier adoption is permitted. At December 31, 2010, the Company had no debt instruments to which the Section 3855 amendments would be applicable.

Multiple Deliverable Revenue Arrangements

On December 24, 2009, the CICA issued EIC Abstract 175 - Multiple deliverable revenue arrangements ("EIC-175"). EIC-175 addresses the accounting by a vendor for arrangements under which it will perform multiple revenue generating activities and how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting. EIC-175 is applicable to revenue arrangements with multiple deliverables entered into or materially modified on or after January 1, 2011. Earlier adoption is permitted. The Company does not anticipate early adopting EIC-175. The Company plans to adopt revenue recognition principles in accordance with IFRS effective January 1, 2011 and does not anticipate that this adoption will have a material impact on the Company's consolidated financial statements.

INTERNATIONAL FINANCIAL REPORTING STANDARDS

International Financial Reporting Standards (IFRS) will be required in Canada for publicly accountable enterprises for fiscal years beginning on or after January 1, 2011. The first financial statements to be presented on an IFRS basis will be for the quarter ended March 31, 2011. At that time, current and comparative data will be presented on an IFRS basis, including an opening balance sheet as at January 1, 2010.

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.

----------------------------------------------------------------------------

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.

----------------------------------------------------------------------------

Training and Communication

----------------------------------------------------------------------------

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

----------------------------------------------------------------------------

Systems

----------------------------------------------------------------------------

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

----------------------------------------------------------------------------

Control Environment

----------------------------------------------------------------------------

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

----------------------------------------------------------------------------

Other Business Impacts

----------------------------------------------------------------------------

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.

----------------------------------------------------------------------------



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 January 1, 2010.

The following are the key transitional provisions which are expected to be adopted on January 1, 2010 and which will have an impact on the Company's financial position on transition. It is not an exhaustive list; certain other optional exemptions are allowed, however such exemptions will not be significant to the Company's adoption of IFRS.




----------------------------------------------------------------------------

Area of IFRS                           Summary of Exemption Available

----------------------------------------------------------------------------

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

----------------------------------------------------------------------------

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

----------------------------------------------------------------------------

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

----------------------------------------------------------------------------

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

----------------------------------------------------------------------------

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.

----------------------------------------------------------------------------

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.

----------------------------------------------------------------------------



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.




----------------------------------------------------------------------------

Accounting Area           Key Difference from GAAP  Status

----------------------------------------------------------------------------

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

----------------------------------------------------------------------------

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.

----------------------------------------------------------------------------

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.

----------------------------------------------------------------------------

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.

----------------------------------------------------------------------------

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.

----------------------------------------------------------------------------



The International Accounting Standards Board (IASB) work plan anticipates the completion of several projects in calendar years 2010 and 2011. The projects on financial instruments, post-employment benefits, financial statement presentation, revenue recognition and leases are most relevant to the Company's IFRS transition plans. Management will be monitoring any changes to these standards closely.

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 January 1, 2010, the data of transition, and as at December 31, 2010. The amounts presented were prepared using the above-noted transitional exemptions and accounting policy choices. The ultimate opening shareholders' equity impact as presented in the financial statements for the year ending December 31, 2011, may differ from the figures presented in the foregoing tables if there are any changes to the underlying IFRS.




                                                    Accumulated

                                                          Other

($                Share   Contributed   Retained  Comprehensive

thousands)      Capital       Surplus   Earnings         Income       Total

----------------------------------------------------------------------------



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           -

----------------------------------------------------------------------------

                      -             -    (27,128)        15,954     (11,174)

----------------------------------------------------------------------------



IFRS -

 January 1,

 2010         $ 132,261 $      10,012 $  677,385  $      15,326  $  834,984

----------------------------------------------------------------------------

----------------------------------------------------------------------------





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

----------------------------------------------------------------------------

                      -             -    (21,866)        12,067      (9,800)

----------------------------------------------------------------------------



IFRS -

 December 31,

 2010         $ 469,080 $      10,882 $  733,581  $     (17,650) $1,195,892

----------------------------------------------------------------------------

----------------------------------------------------------------------------



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 $6.7 million of asset impairment provision previously recorded in 2005.

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 December 31, 2009, using the internal control integrated framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, they have concluded that the design and operation of the Company's disclosure controls and procedures were adequate and effective as at December 31, 2010, to provide reasonable assurance that a) material information relating to the Company and its consolidated subsidiaries would have been known to them and by others within those entities, and b) information required to be disclosed is recorded, processed, summarized and reported within required time periods. They have also concluded that the design and operation of internal controls over financial reporting were adequate and effective as at December 31, 2010, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial reporting in accordance with GAAP.

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 December 31, 2010 and have concluded that these controls and procedures are being maintained as designed, they expect that the disclosure controls and procedures and internal controls over financial reporting may not prevent all errors and fraud. A control system, no matter how well conceived or operated, can only provide reasonable, not absolute, assurance that the objectives of the control system are met.

NON-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 Non-Cash Working Capital

Working capital is defined as current assets less current liabilities. Non-cash working capital is defined as working capital less cash and equivalents.




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 notes





TOROMONT INDUSTRIES LTD.

CONSOLIDATED STATEMENTS OF EARNINGS



(unaudited)

Years ended December 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 notes





TOROMONT 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 notes





TOROMONT 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 notes





TOROMONT 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

Toromont Industries Ltd. and its subsidiaries (the "Company") operate through two business segments: the Equipment Group and the Compression Group. The Equipment Group includes one of the world's larger Caterpillar dealerships by revenue and geographic territory in addition to industry leading rental operations. The Compression Group is a global leader specializing in the design, engineering, fabrication, and installation of natural gas compression units and hydrocarbon and petrochemical process systems and industrial and recreational refrigeration systems. Both groups offer comprehensive product support capabilities. Toromont is listed on the Toronto Stock Exchange (the "TSX")under the symbol TIH.

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 January 1, 2010, the Company adopted the Canadian Institute of Chartered Accountants (CICA) Handbook Section 1582 Business Combinations, Section 1601 Consolidated Financial Statements, and Section 1602 Non-controlling Interests. Section 1582 specifies a number of changes, including an expanded definition of a business, a requirement to measure all business acquisitions at fair value, a requirement to measure non-controlling interests at fair value, and a requirement to recognize acquisition-related costs as expenses. Section 1601 establishes the standards for preparing consolidated financial statements. Section 1602 specifies that non-controlling interests be treated as a separate component of equity, not as a liability or other item outside of equity. These new standards are harmonized with International Financial Reporting Standards (IFRS). The new standards will become effective in 2011, however early adoption is permitted. The Company has early adopted these standards effective from January 1, 2010. These standards shall be applied prospectively to business combinations whose acquisition date is on or after the date of adoption.

The Company had deferred transaction costs of $9,035 as at December 31, 2009. These costs were charged to opening retained earnings in 2010, net of tax of $1,129, as a result of the change in accounting policy.

Future Accounting Changes

Financial Instruments - Recognition and Measurement

In June 2009, the CICA amended Handbook Section 3855 Financial Instruments - Recognition and Measurement to clarify the application of the effective interest method after a debt instrument has been impaired and when an embedded prepayment option is separated from its host debt instrument at initial recognition for accounting purposes. The amendments are applicable for the Company's interim and annual financial statements for its fiscal year beginning January 1, 2011. Earlier adoption is permitted. At December 31, 2010, the Company had no debt instruments to which the Section 3855 amendments would be applicable.

Multiple Deliverable Revenue Arrangements

On December 24, 2009, the CICA issued EIC Abstract 175 - Multiple Deliverable Revenue Arrangements. EIC-175 addresses the accounting by a vendor for arrangements under which it will perform multiple revenue generating activities and how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting. EIC-175 is applicable to revenue arrangements with multiple deliverables entered into or materially modified on or after January 1, 2011. Earlier adoption is permitted. The Company did not early adopt EIC-175. The Company does not anticipate that this adoption will have a material impact on the Company's consolidated financial statements.

International Financial Reporting Standards

Canadian GAAP will be converged with IFRS effective January 1, 2011. The transition from Canadian GAAP to IFRS will be applicable for the Company for the first quarter of 2011 when the Company will prepare both the current and comparative financial information using IFRS.

3. BUSINESS ACQUISITIONS

On January 20, 2010, the Company completed its offer for the units of Enerflex Systems Income Fund ("ESIF"). ESIF was a supplier of products and services to the global oil and gas production industry, and had operations in Canada, Australia, the Netherlands, the United States, Germany, Pakistan, the United Arab Emirates, Indonesia and Malaysia. ESIF has been integrated with the Company's existing natural gas and process compression business, Toromont Energy Systems, and is continuing under the name Enerflex Ltd. ("Enerflex"). This acquisition creates a stronger organization, better able to serve customers and compete globally. The financial results of Enerflex are included in the Compression Group.

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 Enerflex Holdings Limited Partnership ("Enerflex LP"),

Pursuant to the Offer, Toromont acquired 39,583,074 Trust Units and 2,640,692 Exchangeable LP Units on January 20, 2010. Toromont acquired an additional 1,907,500 Trust Units in the Tax Efficient Subsequent Acquisition on February 26, 2010. In both the Offer and the Tax Efficient Subsequent Acquisition (collectively referred to as the "Acquisition"), Toromont offered the holders of Units the opportunity to elect to receive as consideration either $14.25 in cash or 0.5382 of a common share of Toromont plus $0.05 in cash per Unit, in each case subject to pro ration.

In total, Toromont paid approximately $315.5 million in cash and issued approximately 11.9 million Toromont common shares for the Units acquired in the Acquisition. The cost to Toromont to purchase all of the Units of ESIF is noted below. For accounting purposes, the cost of Toromont's common shares issued in the Acquisition was calculated based on the average share price traded on the TSX on the respective dates of acquisition.

Prior to the Acquisition, Toromont owned 3,902,100 Trust Units which were purchased with a cash cost of $37.8 million ($9.69 per unit). Prior to the date of acquisition, Toromont designated its investment in ESIF as available-for-sale and as a result the units were measured at fair value with the changes in fair value recorded in Other Comprehensive Income ("OCI"). On acquisition, the cumulative gain on this investment was reclassified out of OCI and into the statement of earnings. The fair value of this investment was included in the cost of purchase outlined below. The fair value of these units at January 20, 2010 was $56.4 million.




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, January 20, 2010. Given the advanced stage of integration of the operations it is impracticable to determine the amount of revenue and net income of the acquired company since 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 $109 million, representing gross contractual amounts receivable of $115 million less management's best estimate of the contractual cash flows not expected to be collected of $6 million.

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 Australia, Europe and the Middle East; and the combined strategic value to the Company's growth plan. The amount assigned to goodwill is not expected to be deductible for tax purposes.

Acquisition-related costs, primarily for advisory services, were incurred during the year ended December 31, 2009 and 2010. Costs totaling $9,035 ($7,906 net of tax) were incurred and deferred at December 31, 2009 and have been charged to opening retained earnings on adoption of CICA Section 1582 (see note 2). Costs totaling $2,559 have been incurred during the year ended December 31, 2010 and were included in selling and administrative expenses.

The consolidated revenues and pre-tax earnings for the year ended December 31, 2010 as though the acquisition date had been January 1, 2010, excluding purchase accounting adjustments and one-time costs related to change of control, are estimated at $2,323 million and $145 million respectively. These are unaudited pro forma figures and are not necessarily indicative of the combined results that would have been attained had the acquisition taken place at January 1, 2010, nor is it necessarily indicative of future results.

4. DISCONTINUED OPERATIONS

Effective September 1, 2010, the Company sold certain assets and the operations of Syntech Enerflex, an electrical, instrumentation and controls business. Syntech was a component of the January 20, 2010 acquisition of ESIF; however it was considered not to be core to the future growth of the Company.

Total consideration received was $7.0 million comprised of $3.5 million in cash and $3.5 million in a note receivable due in twelve equal monthly installments, plus interest, commencing January 2011. Net assets disposed, including transactions costs, also totalled $7.0 million, comprised of $6.0 million of non-cash working capital and $1.0 million of capital assets. Revenues and loss before income taxes from discontinued operations in 2010 were $41,887 and $2,003 respectively.

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 $987 million (2009: $705 million). The cost of goods sold includes inventory write-down pertaining to obsolescence and aging together with recoveries of past write-down upon disposition. A reversal write-down of $3.7 million was recorded in 2010. The amount charged to the income statement and included in cost of goods sold for the write-down of inventory for valuation issues during 2009 was $10.5 million.

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 December 31, 2010 was $29,148 (2009 - $22,668).

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 December 31, 2010 was $41,167 (2009 - $35,497). Operating income from rental operations for the year ended December 31, 2010 was $27.0 million (2009 - $17.2 million).

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 Total Production Services Inc.

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 $0.3 million (2009 - nil) based on a 9% interest rate implicit in the lease.

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 December 31, 2010 was $10,973 (2009 - $Nil).

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 November 5, 2010, the Company completed a refinancing of its Canadian committed credit facility. The new committed credit facility, with a maturity date of June 30, 2012, provides $600 million in available financing. Debt incurred under the new facility is unsecured and ranks pari passu with debt outstanding under Toromont's existing debentures. Outstanding loans under the facility bear interest at a rate equal to the Canadian prime rate plus a specified margin ranging from 50 to 175 basis points. Toromont intends to utilize this facility primarily through the issuance of bankers' acceptances with acceptance fees ranging from 150 to 275 basis points. The applicable margin or acceptance fee will, in each case, be determined based on Toromont's leverage ratio.

The Company also maintains a US $20 million committed credit facility in the United States which matures in 2012. The facility bears interest at prime which was 3.25% at December 31, 2010.

Standby letters of credit issued utilized $64,221 of the credit facilities at December 31, 2010 (2009 - $33,248).

(b) Terms of the senior debentures are:




--  $5,694, 6.80% senior debentures due March 29, 2011, interest payable

    semi-annually through March 29, 2007; thereafter, blended principal and

    interest payments through to maturity;

--  $125,000, 4.92% senior debentures due October 13, 2015, interest payable

    semi-annually, principal due on maturity; and

--  $13,357, 7.06% senior debentures due March 29, 2019, interest payable

    semi-annually through September 29, 2009; thereafter, blended principal

    and interest payments through to maturity.



These credit arrangements include covenants, restrictions and events of default usually present in credit facilities of this nature, including requirements to meet certain financial tests periodically and restrictions on additional indebtedness and encumbrances.

In January 2010, Toromont established a term loan facility in connection with the acquisition of ESIF. Borrowings of $450 million were drawn down under this facility, with principal repayments of $16.875 million due quarterly beginning June 30, 2010, and a lump sum final repayment due in July 2011 (eighteen month term). Debt issuance costs of $6.9 million were adjusted against the carrying value of the debt. In conjunction with the refinancing of the Canadian credit facility noted above, amounts outstanding under the term loan facility were repaid in full on November 5, 2010.

Senior secured notes payable assumed in the acquisition of ESIF in the amount of $100.6 million were required to be repaid under the terms of the term loan facility. These notes were repaid subsequent to completing the acquisition. A premium of $11.3 million was paid in connection with the repayment of these notes, and was included in the fair value of liabilities assumed for purposes of the purchase price allocation. Borrowings under ESIF's bank facility were also repaid following completion of the acquisition.

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 $25,968 (2009 - $8,636).

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 April 2012.

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 August 30, 2011, representing 10% of common shares in the public float, as estimated at the time of renewal. The actual number of shares purchased and the timing of any such purchases will be determined by Toromont. All shares purchased under the bid will be cancelled.

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 $858 (average cost of $19.77 per share),

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 December 31, accumulated other comprehensive income was comprised of the following amounts:




                                                    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 $2,544 will be reclassified to net income within the next twelve months. These losses will offset gains recorded on the underlying hedged items, namely foreign denominated accounts payable and accounts receivable. Management intends to hold these foreign currency contracts to maturity.

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 December 31, 2010 and indicates the fair value hierarchy of the valuation techniques used to determine such fair value.




                                                  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 December 31, 2010 under the same conditions. The financial institution's credit risk is also taken into consideration in determining fair value. Fair value measurement of derivative financial instruments is classified as Level 2 in the hierarchy of fair value measurements.

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 December 31, 2010.




                                      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 $5,218 would be realized if the contracts were terminated on December 31, 2010. Certain of these forward contracts are designated as cash flow hedges, and accordingly, a loss of $3,922 has been included in other comprehensive income. These losses are not expected to affect net income as the losses will be reclassified to net income and will offset gains recorded on the underlying hedged items, namely foreign denominated accounts payable and accounts receivable. A loss of $1,296 on forward contracts not designated as hedges is included in net income which offsets gains recorded on the foreign-denominated items, namely accounts payable and accounts receivable.

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 December 31, 2009 with the acquisition of ESIF. Enerflex has significant international exposure through export from its Canadian operations as well as a number of foreign subsidiaries, the most significant of which are located in Australia, the Netherlands and the United Arab Emirates.

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 United States. Consequently, reported costs of inventory and the transaction prices charged to customers for equipment and parts are affected by the relative strength of the Canadian dollar. The Company mitigates exchange rate risk by entering into foreign currency contracts to fix the cost of imported inventory where appropriate. In addition, pricing to customers is customarily adjusted to reflect changes in the Canadian dollar landed cost of imported goods.

The Company 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 December 31, 2010 of a 5% weakening of the Canadian dollar against the US dollar, Euro and Australian dollar, everything else being equal. A 5% strengthening of the Canadian dollar would have an equal and opposite effect. This sensitivity analysis is provided as reasonably possible change in currency in a volatile environment.




Cdn dollar weakens by 5%                      USD        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 December 31, 2010 and for the year then ended. The following table shows Toromont's sensitivity to a 5% weakening of the Canadian dollar against the US dollar, Euro and Australian dollar. A 5% strengthening of the Canadian dollar would have an equal and opposite effect. This sensitivity analysis is provided as reasonably possible change in currency in a volatile environment.




Cdn dollar weakens by 5%           USD        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 December 31, 2010, $29.5 million or 6.4% of accounts receivable were outstanding for more than 90 days (2009 - $14.3 million or 5.7%). The movement in the Company's allowance for doubtful accounts was as follows:




                                                    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 December 31, 2010, $280 million or 66% of the Company's total debt portfolio was subject to movements in floating interest rates. A 1.0% increase in interest rates, all things being equal, would reduce income before taxes by $2.8 million on an annualized basis. A 1.0% decrease in interest rates, all things being equal, would have an equal but opposite effect. This sensitivity analysis is provided as reasonably possible change in interest rates.

The Company minimizes its interest rate risk by managing its portfolio of floating and fixed rate debt, as well as managing the term to maturity. The Company may use derivative instruments such as interest rate swap agreements to manage its current and anticipated exposure to interest rates. There were no interest rate swap agreements outstanding as at December 31, 2010.

Liquidity risk

Liquidity risk is the risk that the Company may encounter difficulties in meeting obligations associated with financial liabilities. As at December 31, 2010, the Company was holding cash and cash equivalents of $174 million and had unutilized lines of credit of $276 million.

Accounts payable are primarily due within 90 days and will be satisfied from current working capital.

The Company expects that continued cash flows from operations in 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 December 31, 2010:




                         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 December 31, 2010, 87,969 units were outstanding at a value of $2,747 (2009 - 68,723 units at a value of $1,882). The Company records the cost of the DSU Plan as compensation expense. During 2010, 864 units (2009 - 47,086 units) were redeemed for $25 (2009 - $1,098).

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 $1,000 per employee per annum based on contributions by the Company of $1 for every $3 dollars contributed by the employee. Company contributions vest to the employee immediately. Company contributions amounting to $1.0 million in 2010 (2009 - $0.9 million), were charged to selling and administrative expense when paid. The Plan is administered by a third party.

17. EMPLOYEE FUTURE BENEFITS

The Company sponsors pension arrangements for substantially all of its employees, primarily through defined contribution plans in Canada and a 401(k) matched savings plan in the United States. Certain unionized employees do not participate in company-sponsored plans, and contributions are made to these retirement programs in accordance with respective collective bargaining agreements. In the case of defined contribution plans, regular contributions are made to the individual employee accounts, which are administered by a plan trustee in accordance with the plan document. The cost of pension benefits for defined contribution plans are expensed as the contributions are paid.

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 December 31, 2009. The next valuation is scheduled as at December 31, 2010.

b) Executive Plan - This is a non-contributory pension arrangement for certain senior executives that provides for a supplementary retirement payout in excess of amounts provided for under the registered plan. The most recent actuarial valuation of the plan was completed as at December 31, 2010. The next valuation is scheduled as at December 31, 2011.

c) Other plan assets and obligations - This provides for certain retirees and terminated vested employees of businesses previously acquired by the Company as well as for retired participants of the defined contribution plan that, in accordance with the plan provisions, have elected to receive a pension directly from the plan. The most recent actuarial valuation of the plan was completed as at January 1, 2009. The next valuation is scheduled as at January 1, 2012.

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 $19.8 million to secure the obligations under this plan.

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 December 31 included the following components:




                                                    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)

----------------------------------------------------------------------------

                                                   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

----------------------------------------------------------------------------

----------------------------------------------------------------------------



The total cash amount paid or payable for employee future benefits in 2010, including defined benefit and defined contribution plans, was $19,066 (2009 - $12,116).

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

----------------------------------------------------------------------------

Total income tax expense                 $         48,393   $         59,376

----------------------------------------------------------------------------

----------------------------------------------------------------------------



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)

----------------------------------------------------------------------------

Provision for income taxes              $         48,393   $         59,376

----------------------------------------------------------------------------

----------------------------------------------------------------------------



Effective income tax rate                           32.6%              33.0%

----------------------------------------------------------------------------

----------------------------------------------------------------------------



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

----------------------------------------------------------------------------

                                        $         41,483   $         34,326

----------------------------------------------------------------------------

----------------------------------------------------------------------------



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

----------------------------------------------------------------------------

                                        $         22,895   $              -

----------------------------------------------------------------------------

----------------------------------------------------------------------------



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 December 31, 2010, the Company had the following income tax losses available to reduce future year's income for income tax purposes, noted by tax jurisdiction and year of expiry:




Year of Expiry

(in $millions)                                Canada          US     Foreign

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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

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Net earnings available to common

 shareholders                            $         98,650   $        120,516

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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

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Basic earnings per share

 Continuing operations                   $           1.32   $           1.86

 Discontinued operations                            (0.02)                 -

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                                         $           1.30   $           1.86

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Diluted earnings per share

 Continuing operations                   $           1.31   $           1.86

 Discontinued operations                            (0.02)                 -

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                                         $           1.29   $           1.86

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In 2010, 936,920 outstanding stock options with an exercise price range of $28.84 to $29.71 were excluded from the calculation of diluted earnings per share as these options were anti-dilutive. In 2009, 884,240 outstanding stock options were excluded from the calculation.

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. CAPITAL MANAGEMENT

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

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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)

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Capital under management                $      1,481,249   $        805,829

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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

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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

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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 December 31, 2010. The Company purchased the joint venture as part of the acquisition of ESIF (see note 3).




As at December 31, 2010

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Current assets                                                  $     2,477

Long-term assets                                                        518

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Total assets                                                    $     2,995

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Current liabilities                                             $       894

Long-term liabilities and equity                                      2,101

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Total liabilites and equity                                     $     2,995

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Year ended December 31, 2010

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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. The Equipment Group includes one of the world's largest Caterpillar dealerships by revenue and geographic territory in addition to industry leading rental operations. The Compression group of segments, collectively, is a global leader specializing in the design, engineering, fabrication, and installation of compression systems for natural gas, coal bed methane, fuel gas and carbon dioxide in addition to process systems and industrial and recreational refrigeration systems. Both groups offer comprehensive product support capabilities. The corporate office provides finance, treasury, legal, human resources and other administrative support to the business segments.

Corporate overheads are allocated to the business segments based on revenue. Previously, corporate overheads were allocated to the business segments based on operating income. Due to the operating loss reported by the Compression Group in the first quarter of 2010, management determined that it would be appropriate to reconsider this allocation approach. The change in allocation method has been applied prospectively from January 1, 2010. Prior periods have not been restated as the impact is insignificant.

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

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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

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Operating

 Income      $  106,748 $ 85,441 $   46,971 $ 96,911 $  153,719  $  182,352

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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

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Net earnings

 from

 continuing

 operations                                          $  100,148  $  120,516

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Selected Balance Sheet information





                Equipment Group    Compression Group       Consolidated

                    2010     2009       2010     2009       2010        2009

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Identifiable

 assets       $  655,338 $599,358 $1,461,658 $459,572 $2,116,996 $ 1,058,930

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Corporate

 assets                                                  152,242 $   305,737

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Total assets                                          $2,269,238 $ 1,364,667

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Capital

 expenditures $   72,415 $ 37,706 $   57,709 $ 23,335 $  130,124 $    61,041

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Depreciation  $   41,345 $ 43,104 $   28,970 $ 15,061 $   70,315 $    58,165

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Amortization

 of

 Intangible

 assets       $        - $      - $   10,973 $      - $   10,973 $         -

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Goodwill      $   13,000 $ 13,000 $  483,106 $ 21,800 $  496,106 $    34,800

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Operations are based primarily in Canada and the United States. The following summarizes the final destination of revenues to customers and the assets held in each geographic segment.




                                                      2010              2009

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Revenues

 Canada                                   $      1,550,922  $      1,127,929

 United States                                     469,272           608,798

 International                                     312,053            87,865

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                                          $      2,332,247  $      1,824,592

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Capital Assets and Goodwill

 Canada                                   $        749,315  $        350,596

 United States                                     106,272            53,870

 International                                     190,826                 -

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                                          $      1,046,413  $        404,466

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25. ECONOMIC RELATIONSHIP

The Company, through its Equipment Group, sells and services heavy equipment and related parts. Distribution agreements are maintained with several equipment manufacturers, of which the most significant are with subsidiaries of Caterpillar Inc. The distribution and servicing of Caterpillar products account for the major portion of the Equipment Group's operations. Toromont has had a strong relationship with Caterpillar since 1993.

26. ENERFLEX SPINOFF

On November 8, 2010, Toromont announced its intention to spin off Enerflex Ltd., its natural gas compression and processing equipment supply subsidiary, to existing shareholders by means of a tax-deferred divestiture for Canadian tax purposes. After the spinoff, Toromont's remaining operations will include the business of 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 prior approval of the TSX and fulfillment of certain other conditions. If the necessary conditions are met and required approvals are obtained, the Company 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 the Company. It is not practicable to estimate the impact of this transaction at this time.

Contacts:

Toromont Industries Ltd.

Robert M. Ogilvie

Chairman and Chief Executive Officer

(416) 667-5554



Toromont Industries Ltd.

Paul R. Jewer

Vice President Finance and Chief Financial Officer

(416) 667-5638

www.toromont.com



Source: Toromont Industries Ltd.

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