Toromont Announces 2015 Results and 6% Increase in Quarterly Dividend
(firmenpresse) - TORONTO, ONTARIO -- (Marketwired) -- 02/09/16 -- Toromont Industries Ltd. (TSX: TIH) today reported financial results for the three and twelve-month periods ended December 31, 2015.
"We were pleased with our 2015 results, which demonstrated consistent and resilient performance. Earnings increased 9%, in-line with total revenue growth as an increasing contribution from product support, offset margin pressures in today''s challenging markets. We are also pleased with performance in the fourth quarter against a very tough comparator last year," said Scott J. Medhurst, President and Chief Executive Officer of Toromont Industries Ltd. "The Equipment Group delivered good results on growth in product support and CIMCO had a strong year with increased penetration into the US market."
Considering the Company''s solid financial position, cash flows and balances, and positive long- term outlook, the Board of Directors today increased the quarterly dividend to 18 cents per share, representing a 6% increase. The next dividend is payable April 1, 2016 to shareholders of record at the close of business on March 10, 2016. The Company has paid dividends every year since going public in 1968 and this represents the 27th consecutive year of increases.
Highlights:
"In the Equipment Group, the potential for increased infrastructure spending bodes well for prospects while tight conditions in mining and weak agriculture markets are expected to continue. In the near-term, the weakened Canadian dollar may impact customers'' spending power, timing of purchasing decisions and otherwise exert pressures on equipment margins. At CIMCO, activity levels are encouraging in both the US and Canada," continued Mr. Medhurst. "Across all of our businesses, diversity, expanding product offering and capabilities and a disciplined operating culture remain our strengths, and position us well entering 2016."
Quarterly Conference Call and Webcast
Interested parties are invited to join the quarterly conference call with investment analysts, in listen-only mode, on Wednesday, February 10, 2016 at 8:00 a.m. (ET). The call may be accessed by telephone at 1-866-225-6564 (toll free) or 416-340-2220 (Toronto area). A replay of the conference call will be available until Wednesday, February 24, 2016 by calling 1-800- 408-3053 or 905-694-9451 and quoting passcode 3205449.
Both the live webcast and the replay of the quarterly conference call can be accessed at .
Advisory
Information in this press release that is not a historical fact is "forward-looking information". Words such as "plans", "intends", "outlook", "expects", "anticipates", "estimates", "believes", "likely", "should", "could", "will", "may" and similar expressions are intended to identify statements containing forward-looking information. Forward-looking information in this press release is based on current objectives, strategies, expectations and assumptions which management considers appropriate and reasonable at the time including, but not limited to, general economic and industry growth rates, commodity prices, currency exchange and interest rates, competitive intensity and shareholder and regulatory approvals.
By its nature, forward-looking information is subject to risks and uncertainties which may be beyond the ability of Toromont to control or predict. The actual results, performance or achievements of Toromont could differ materially from those expressed or implied by forward- looking information. Factors that could cause actual results, performance, achievements or events to differ from current expectations include, among others, risks and uncertainties related to: business cycles, including general economic conditions in the countries in which Toromont operates; commodity price changes, including changes in the price of precious and base metals; changes in foreign exchange rates, including the Cdn$/US$ exchange rate; the termination of distribution or original equipment manufacturer agreements; equipment product acceptance and availability of supply; increased competition; credit of third parties; additional costs associated with warranties and maintenance contracts; changes in interest rates; the availability of financing; and, environmental regulation.
Any of the above mentioned risks and uncertainties could cause or contribute to actual results that are materially different from those expressed or implied in the forward-looking information and statements included in this press release. For a further description of certain risks and uncertainties and other factors that could cause or contribute to actual results that are materially different, see the risks and uncertainties set out in the "Risks and Risk Management" and "Outlook" sections of Toromont''s most recent annual or interim Management Discussion and Analysis, as filed with Canadian securities regulators at and may also be found at . Other factors, risks and uncertainties not presently known to Toromont or that Toromont currently believes are not material could also cause actual results or events to differ materially from those expressed or implied by statements containing forward-looking information.
Readers are cautioned not to place undue reliance on statements containing forward-looking information that are included in this press release, which are made as of the date of this press release, and not to use such information for anything other than their intended purpose.
Toromont disclaims any obligation or intention to update or revise any forward-looking information, whether as a result of new information, future events or otherwise, except as required by applicable securities legislation.
About Toromont
Toromont Industries Ltd. operates through two business segments: The Equipment Group and CIMCO. The Equipment Group includes one of the larger Caterpillar dealerships by revenue and geographic territory, industry-leading rental operations and a growing agricultural dealership in Manitoba. CIMCO is a market leader in the design, engineering, fabrication and installation of industrial and recreational refrigeration systems. Both segments offer comprehensive product support capabilities. This press release and more information about Toromont Industries can be found at .
FOOTNOTES
Management''s Discussion and Analysis
This Management''s Discussion and Analysis ("MD&A") comments on the operations, performance and financial condition of Toromont Industries Ltd. ("Toromont" or the "Company") as at and for the three and twelve months ended December 31, 2015, compared to the preceding year. This MD&A should be read in conjunction with the attached unaudited consolidated financial statements and related notes for the twelve months ended December 31, 2015, the annual MD&A contained in the 2014 Annual Report and the audited annual consolidated financial statements for the year ended December 31, 2014.
The consolidated financial statements reported herein have been prepared in accordance with International Financial Reporting Standards ("IFRS") and are reported in Canadian dollars. The information in this MD&A is current to February 9, 2016.
Additional information is contained in the Company''s filings with Canadian securities regulators, including the Company''s 2014 Annual Report and 2015 Annual Information Form. These filings are available on SEDAR at and on the Company''s website at .
CORPORATE PROFILE AND BUSINESS SEGMENTATION
As at December 31, 2015, Toromont employed over 3,500 people in more than 100 locations across Canada and the United States. Toromont is listed on the Toronto Stock Exchange under the symbol TIH.
Toromont has two reportable operating segments: the Equipment Group and CIMCO.
The Equipment Group is comprised of Toromont CAT, one of the world''s larger Caterpillar dealerships, Battlefield - The CAT Rental Store, an industry-leading rental operation, and AgWest, an agricultural equipment and solutions dealer representing AGCO, CLAAS and other manufacturers'' products. Performance in the Equipment Group is driven by activity in several industries: road building and other infrastructure-related activities; mining; residential and commercial construction; power generation; aggregates; waste management; steel; forestry; and agriculture. Significant activities include the sale, rental and service of mobile equipment for Caterpillar and other manufacturers; sale, rental and service of engines used in a variety of applications including industrial, commercial, marine, on-highway trucks and power generation; and sale of complementary and related products, parts and service. Territories include Ontario, Manitoba, Newfoundland and most of Labrador and Nunavut.
CIMCO is a market leader in the design, engineering, fabrication, installation and after-sale support of refrigeration systems in industrial and recreational markets. Results of CIMCO are influenced by conditions in the primary market segments served: beverage and food processing; cold storage; food distribution; mining; and recreational ice surfaces. CIMCO offers systems designed to optimize energy usage through proprietary products such as ECO CHILL®. CIMCO has manufacturing facilities in Canada and the United States and sells its solutions globally.
PRIMARY OBJECTIVE AND MAJOR STRATEGIES
The primary objective of the Company is to build shareholder value through sustainable and profitable growth, supported by a strong financial foundation. To guide its activities in pursuit of this objective, Toromont works toward specific, long-term financial goals (see section heading "Key Performance Measures" in this MD&A) and each of its operating groups consistently employs the following broad strategies:
Expand Markets
Toromont serves diverse markets that offer significant long-term potential for profitable expansion. Each operating group strives to achieve or maintain leading positions in markets served. Incremental revenues are derived from improved coverage, market share gains and geographic expansion. Expansion of the installed base of equipment provides the foundation for product support growth and leverages the fixed costs associated with the Company''s infrastructure.
Strengthen Product Support
Toromont''s parts and service business is a significant contributor to overall profitability and serves to stabilize results through economic downturns. Product support activities also represent opportunities to develop closer relationships with customers and differentiate the Company''s product and service offering. The ability to consistently meet or exceed customers'' expectations for service efficiency and quality is critical, as after-market support is an integral part of the customer''s decision-making process when purchasing equipment.
Broaden Product Offerings
Toromont delivers specialized capital equipment to a diverse range of customers and industries. Collectively, hundreds of thousands of different parts are offered through the Company''s distribution channels. The Company expands its customer base through selectively extending product lines and capabilities. In support of this strategy, Toromont represents product lines that are considered leading and generally best-in-class from suppliers and business partners who continually expand and develop their offerings. Strong relationships with suppliers and business partners are critical in achieving growth objectives.
Invest in Resources
The combined knowledge and experience of Toromont''s people is a key competitive advantage. Growth is dependent on attracting, retaining and developing employees with values that are consistent with Toromont''s. A highly principled culture, share ownership and profitability based incentive programs result in a close alignment of employee and shareholder interests. By investing in employee training and development, the capabilities and productivity of employees continually improve to better serve shareholders, customers and business partners.
Toromont''s information technology represents another competitive differentiator in the marketplace. The Company''s selective investments in technology, inclusive of e-commerce initiatives, strengthen customer service capabilities, generate new opportunities for growth, drive efficiency and increase returns to shareholders.
Maintain a Strong Financial Position
A strong, well-capitalized balance sheet creates stability and financial flexibility, and has contributed to the Company''s long-term track record of profitable growth. It is also fundamental to the Company''s future success.
Growth in both the Equipment Group (up 8%) and CIMCO (up 10%) contributed to the $141.8 million or 9% increase in revenues over last year. Strong product support growth in both Groups accounts for 69% of the total increase year-over-year. The Equipment Group continues to benefit from the increased installed base of equipment in the field and good activity levels. CIMCO benefitted from continued strong performance in Canada with contributions from growing US product support. Equipment Group equipment sales increased 5% while CIMCO package sales were up 7%.
Gross profit margin was slightly lower than last year, down 0.10 percentage point to 24.7%. A favorable sales mix of product support to total revenues partially offset generally lower gross margins. Market conditions continue to be challenged by the heightened competitive environment, global economic conditions and the weakened Canadian dollar.
Selling and administrative expenses increased at a lower rate than revenues. The increase was mainly attributable to higher compensation costs up ($6.8 million) on annual salary increases, additional personnel and increased incentive compensation on the higher income; increased costs associated with the expanded agricultural business (up $4.2 million); and an unfavorable foreign exchange impact on translation of US operations ($1.3 million). Certain other expense categories such as occupancy, insurance, customer allowances and information technology, and travel costs were higher, reflecting increased business levels.
Interest expense increased on higher average debt balances in support of higher working capital held throughout the year. Additionally, the recent $150.0 million debenture offering was completed in advance of the maturity of the $125.0 million maturing debenture, resulting in incremental interest in the fourth quarter while the debentures overlapped.
Interest income decreased, reflecting lower conversions of rental purchase options.
The effective income tax rate for 2015 was 26.9% compared to 26.3% in 2014.
Net earnings in 2015 were $145.7 million and basic earnings per share ("EPS") were $1.88 per share, up 9% from 2014, tracking the increased revenues.
Comprehensive income in 2015 was $147.6 million (2014 - $129.0 million), comprised of net earnings of $145.7 million (2014 - $133.2 million) and other comprehensive income of $1.9 million (2014 - $4.2 million loss). Other comprehensive income included actuarial gains on employee pension plans of $0.6 million (2014 - $5.1 million loss), net of tax.
BUSINESS SEGMENT ANNUAL 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, operating income relative to revenues and return on capital employed. Corporate expenses are allocated based on each segment''s revenue. Interest expense and interest and investment income are not allocated.
Equipment Group results improved on continued product support growth along with increased equipment sales and rental revenues.
The majority of new equipment and parts is sourced from the United States, which impacts the comparability of new equipment revenues year-over-year. A weaker Canadian dollar translates to increased unit prices and costs. While the value of the Canadian dollar was lower by 14% on average in 2015 versus a year ago, the specific impact is mitigated in the short-term by hedging practices and inventory on hand.
New equipment sales into construction markets were relatively flat versus a year ago, down $2.7 million or 1%. Sales of new agricultural equipment increased $4.7 million or 15%, benefitting from acquisitions last year, but limited by the very weak conditions seen in this market. New equipment sales to mining (up $6.0 million or 9%) and forestry customers (up $7.0 million or 74%) were up year-over-year.
Used equipment sales include used equipment purchased for resale, equipment received on trade-in, rent with purchase option ("RPO") returns and sales of Company-owned rental fleet units. Used equipment sales increased $6.1 million or 3% largely due to dispositions of agriculture equipment inventory and rental fleet, partially offset by lower sales into mining. Used equipment sales can vary substantially period-to-period on factors such as product availability (both new and used), customer demands and the general pricing environment.
Rental revenues increased $2.4 million or 1% on strong heavy equipment and power rentals. Heavy equipment rentals were up 7% on a larger fleet. Power rentals increased 13%, benefiting from good activity during the Toronto Pan-Am games and increased penetration of the entertainment market. Light equipment rentals were relatively unchanged year-over-year as a drop in activity related to renewable energy projects was offset by increased activity in other segments. The Company continues to invest in this very important and competitive light equipment rental market as evidenced by the opening of new rental branches in Goose Bay, NL (late 2014); and Brantford and North Bay, Ontario (2015). Revenue from equipment on rent with a purchase option ("RPO") was down 3% on lower mining activity.
Power generation revenues from Toromont-owned and managed plants decreased marginally over last year on lower electricity sales from the Waterloo Landfill site and Sudbury Downtown plant in addition to lower thermal revenue from the Sudbury Downtown and Sudbury Hospital plants.
Product support revenues increased $83.7 million or 18%, benefitting from the larger installed base of equipment in our territory and good activity levels for equipment in the field. Parts revenues increased 19% over 2014, benefitting in part from the weaker Canadian dollar. Parts revenues were up 7% on a constant dollar basis with substantial parts deliveries to mining (up 18%), construction (up 16%) and agriculture (up 118%) markets. Service revenues were up 15%, also with good increases from construction (up 10%), mining (up 11%) and agriculture (up 81%). Product support was further buoyed by increased rebuild activity in mining.
Equipment margins were 0.30 percentage points lower reflecting competitive market conditions together with planned dispositions of aged agricultural equipment at auctions. Rental margins were down 0.40 percentage points, reflecting the cost of the larger rental fleet that was not fully utilized during the year. A favorable sales mix of product support revenues to total improved gross margins by 0.50 percentage points. Product support revenues as a percentage of total revenues were 34.9% in 2015 compared to 32.0% in 2014.
Selling and administrative expenses increased $8.9 million or 5% compared to last year. The expanded agricultural business accounted for approximately $4.2 million or 47% of the increase. Compensation costs were higher (up $4.9 million) on annual increases, additional headcount to support growth and higher profit sharing accrual on the higher earnings. Bad debt expenses were $1.4 million lower mainly due to specific exposures identified in 2014 not repeated. Certain other expense categories increased relative to the higher sales activity. As a percentage of revenues, expenses were 0.40 percentage points lower than 2014 (12.8% vs. 13.2%).
Operating income increased 10% versus a year ago reflecting the higher revenues and lower relative expense levels, partially offset by the lower margins.
Capital expenditures in the Equipment Group were $42.7 million (40%) higher year-over-year, mainly on continued investment in rental assets. Replacement and expansion of the rental fleet accounted for $119.7 million of total investment in 2015. Expenditures of $11.5 million related to new and expanded facilities to meet current and future growth requirements. Other capital expenditures included $11.0 million for service and delivery vehicles, $3.9 million for machinery and equipment and $2.9 million for upgrades and enhancements to the information technology infrastructure.
Higher agriculture bookings account for approximately 65% of the increase year-over-year, benefitting from the acquisitions. Increased mining (up 13%) and relatively unchanged construction bookings (against a tough comparator) were partially offset by lower power systems activity (down 5%).
Backlogs decreased 10% from 2014 across all industries except agriculture (up 30%) and mining (up 5%). At December 31, 2015, the majority of the backlog related to construction (39%), power systems (30%), mining (20%) and agriculture (11%). Most of the backlog is expected to be delivered in 2016. Shortened delivery windows due to process improvements and increased capacity at Caterpillar, together with available equipment for construction orders from inventory, have contributed to reduced backlogs.
CIMCO reported record revenues for the year. Package sales increased after a slower year in 2014 and product support revenues continued to demonstrate solid growth in both Canada and the US. The Canadian dollar was weaker in 2015, accounting for approximately $6.0 million of the increase in revenues on the translation of the US operations split fairly evenly between package sales and product support revenues.
Package revenues reflect work performed using the percentage-of-completion method, which reflects timing of projects and construction schedules largely under our customers'' control. In Canada, package revenues were $3.9 million or 4% higher than last year. Recreational activity was good, up $3.0 million or 11%, however, still somewhat below historical averages. Industrial activity was up $0.9 million or 1% over last year. In the US, package revenues increased $3.5 million or 17% ($0.3 million or 1% in US$) compared to 2014.
Product support revenues increased $13.7 million or 14% versus 2014. In Canada, revenues were up $5.3 million or 7% with good growth across all regions. In the US, revenues were up $8.4 million or 41% ($4.0 million or 22% in US$). Focus remains on continued expansion into US markets.
Gross margins improved 1.20 percentage points on higher package margins (up 1.60 percentage points) and a favorable sales mix of product support revenues to total (up 0.20 percentage points), partially offset by lower product support margins (down 0.60 percentage points). Package margins were up on improved execution, higher value added content of projects and lower warranty costs. Lower product support margins reflect the tight pricing environment in Canada and the US. Product support revenues were 48.6% as a percentage of total revenues in 2015 compared to 47.0% in 2014.
Selling and administrative expenses increased $4.6 million or 13% compared to last year mainly on the foreign exchange impact on translation of US operations (up $1.3 million), higher bad debt expenses (up $1.1 million), compensation costs (up $0.9 million), professional fees and insurance (up $0.6 million) and insurance proceeds received in 2014 ($0.7 million). As a percentage of revenues, expenses were 0.20 percentage points higher than 2014 (17.5% vs. 17.3%).
Operating income increased 23% compared to 2014, reflecting the higher revenues and improved margins, partially offset by the higher relative expense levels.
Capital expenditures decreased 29% to $1.0 million with the majority of expenditures in 2015 related to information technology infrastructure enhancements and upgrades ($0.3 million), buildings and leasehold improvements ($0.2 million) machinery and equipment ($0.2 million) and additional service vehicles ($0.2 million).
Bookings increased 22%. Recreational bookings were strong in both Canada (up 44%) and the US (up 223% in Cdn$, 179% in US$). Industrial bookings were down 5% as increases in Canada (up 5%) were more than offset by weaker activity in the US (down 58% in Cdn$, 63% in US$).
Backlogs increased 31%. Recreational backlogs were up 107% with increases in the US (up 239% in Cdn$, 193% in US$) and Canada (up 45%). Industrial backlogs were up 2% with increases in Canada (up 13%) partially offset by decreases in the US (down 46% in Cdn$, 53% in US$). Most of the backlog is expected to revenue in 2016.
CONSOLIDATED FINANCIAL CONDITION
The Company has maintained a strong financial position for many years. At December 31, 2015, the ratio of total debt, net of cash, to total capitalization was 10%.
Working Capital
The Company''s investment in non-cash working capital was $421.3 million at December 31, 2015. The major components, along with the changes from December 31, 2014, are identified in the following table.
Accounts receivable increased $22.8 million or 9% compared to 2014 on the 1% increase in revenues in the fourth quarter and slower collections. Equipment Group accounts receivable increased $21.6 million or 11% while CIMCO accounts receivable increased $1.2 million or 3%. Days sales outstanding (DSO) was 45 at December 31, 2015 compared to 42 at the same time last year on increases in both the Equipment Group (up 3 days) and CIMCO (up 1 day).
Inventories increased $96.0 million (26%) to $463.2 million versus a year ago.
Accounts payable and accrued liabilities at December 31, 2015 increased $13.0 million or 6% from this time last year. The increase was primarily due to the timing of payments related to inventory purchases and related payments for other supplies, the impact of the weaker Canadian dollar on accounts payable to US based vendors as well as higher accruals for annual performance incentive bonuses on the higher net earnings.
Income taxes payable represents amounts owing for current corporate income taxes less installments made to date.
Higher dividends payable year over year reflect the higher dividend rate. In 2015, the quarterly dividend rate was increased from $0.15 per share to $0.17 per share, a 13% increase.
Deferred revenues represent billings to customers in excess of revenue recognized. In the Equipment Group, deferred revenues arise on sales of equipment with residual value guarantees, extended warranty contracts and other long-term customer support agreements as well as on progress billings on long-term construction contracts. Equipment Group deferred revenues were 43% higher in 2015 than in 2014. In CIMCO, deferred revenues arise on progress billings in advance of revenue recognition. CIMCO deferred revenues were 113% higher in 2015 than in 2014.
Goodwill and Intangibles
The Company performs impairment tests on its goodwill and intangibles with indefinite lives on an annual basis or as warranted by events or circumstances. The assessment entails estimating the fair value of operations to which the goodwill and intangibles relate, using the present value of expected discounted future cash flows. This assessment affirmed goodwill and intangibles values as at December 31, 2015.
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 its senior employees. Effective 2013, non-employee directors no longer receive grants under this plan. Stock options 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. Effective 2013, stock options granted have a ten year term while those granted prior to 2013 have a seven year term. At December 31, 2015, 2.5 million options to purchase common shares were outstanding, of which 1.0 million were exercisable.
The Company offers an Employee Share Ownership Plan whereby employees can purchase shares by way of payroll deductions. Under the terms of this plan, eligible employees may purchase common shares of the Company in the open market at the then current market price. The Company pays a portion of the purchase price, matching contributions at a rate of $1 dollar for every $3 dollars contributed, to a maximum of $1,000 per employee, per year. Effective January 1, 2016, the maximum contribution will increase to the greater of 2.5% of an employee''s base salary or $1,000 per annum. Company contributions vest to the employee immediately. Company contributions amounting to $1.1 million in 2015 (2014 - $1.0 million) were charged to selling and administrative expense when paid. Approximately 48% (2014 - 48%) of employees participate in this plan. The Plan is administered by an independent third party.
The Company also offers a deferred share unit (DSU) plan for certain executives and non- employee directors, whereby they may elect, on an annual basis, to receive all or a portion of their performance incentive bonus or fees, respectively, in DSUs. Non-employee directors also receive DSUs as part of their compensation, aligning at-risk and cash compensation components. A DSU is a notional unit that reflects the market value of a single Toromont common share and generally vests immediately. DSUs will be redeemed on cessation of employment or directorship. DSUs have dividend equivalent rights, which are expensed as earned. The Company records the cost of the DSU Plan as compensation expense in selling and administrative expenses.
As at December 31, 2015, 377,311 DSUs were outstanding with a total value of $12.0 million (2014 - 334,709 units at a value of $9.5 million). The liability for DSUs is included in accounts payable, accrued liabilities and provisions on the consolidated statement of financial position.
Employee Future Benefits
Defined Contribution Plans
The Company sponsors pension arrangements for substantially all of its employees, primarily through defined contribution plans in Canada and a 401(k) matched savings plan in the United States. Certain unionized employees do not participate in Company-sponsored plans, and contributions are made to these retirement programs in accordance with the respective collective bargaining agreements. In the case of defined contribution plans, regular contributions are made to the individual employee accounts, which are administered by a plan trustee in accordance with the plan documents.
Defined Benefit Plans
The Company sponsors three defined benefit plans (Powell Plan, Executive Plan and Toromont Plan) for approximately 97 qualifying employees. The Powell and Toromont Plans are administered by a separate Fund that is legally separated from the Company and are described fully in note 18 to the consolidated financial statements.
The funded status of these plans changed by $0.3 million (an increase in the accrued pension liability) as at December 31, 2015.
The Executive Plan is a supplemental plan and is solely the obligation of the Company. All members of the plan are retired. The Company is not obligated to fund the 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 $18.0 million as at December 31, 2015. As there are no plan assets, there is no impact on pension expense and contributions.
The Company expects pension expense and cash pension contributions for 2016 to be similar to 2015 levels.
A key assumption in pension accounting is the discount rate. This rate is set with regard to the yield on high-quality corporate bonds of similar average duration to the cash flow liabilities of the Plans. Yields are volatile and can deviate significantly from period to period.
Off-Balance Sheet Arrangements
Other than the Company''s operating leases, 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 2015. This issuer bid allows the Company to purchase up to approximately 5.9 million of its common shares, representing 10% of common shares in the public float, in the year ending August 30, 2016. 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.
During the year ended December 31, 2015, the Company purchased and cancelled 74,500 common shares for $2.2 million (average cost of $29.95, including transaction costs). No shares were purchased during the year ended December 31, 2014.
Outstanding Share Data
As at the date of this MD&A, the Company had 77,922,571 common shares and 2,490,420 share options outstanding.
Dividends
Toromont pays a quarterly dividend on its outstanding common shares and has historically targeted a dividend rate that approximates 30 - 40% of trailing earnings from continuing operations.
During 2015, the Company declared dividends of $0.68 per common share, $0.17 per quarter (2014 - $0.60 per common share or $0.15 per quarter).
Considering the Company''s solid financial position, cash flows and balances, and positive long- term outlook, the Board of Directors announced it is increasing the quarterly dividend to 18 cents per share effective with the dividend payable on April 1, 2016. This represents a 6% increase in Toromont''s regular quarterly cash dividend. The Company has paid dividends every year since going public in 1968 and this represents the 27th consecutive year it has announced an increase.
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.
Effective September 18, 2015, the Company amended and increased its existing $200.0 million committed credit facility to $250.0 million and extended the term of the agreement to September 7, 2020. Debt under the facility is unsecured and ranks pari passu with debt outstanding under Toromont''s existing debentures. The facility includes covenants, restrictions and events of default typical for credit facilities of this nature.
As at December 31, 2015 and 2014, no amounts were drawn on the facility. Letters of credit utilized $21.9 million of the facility (2014 - $22.6 million).
On September 30, 2015, the Company issued senior unsecured debentures in an aggregate principal amount of $150.0 million (the "Debentures"). The Debentures mature in 2025 and bear interest at a rate of 3.71% per annum, payable semi-annually. The Debentures are unsecured, unsubordinated and rank pari passu with other unsecured, unsubordinated debt. Toromont used the net proceeds to pay the principal and interest owing on the outstanding $125.0 million senior debentures which matured on October 13, 2015, and for general corporate purposes.
Cash at December 31, 2015 was $66.7 million, compared to $86.0 million at December 31, 2014.
The Company expects that continued cash flows from operations in 2016 and currently available credit facilities will be more than sufficient to fund requirements for investments in working capital and capital assets.
Principal Components of Cash Flow
Cash from operating, investing and financing activities, as reflected in the Consolidated Statements of Cash Flows, are summarized in the following table:
Cash Flows from Operating Activities
Operating activities provided $113.9 million in 2015 compared to $143.5 million in 2014. Net earnings adjusted for items not requiring cash were 10% higher than last year on higher revenues. Non-cash working capital and other used $91.3 million compared to $42.6 million in 2014.
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 used $113.9 million in 2015 compared to $85.8 million in 2014.
Net rental fleet additions (purchases less proceeds of disposition) totalled $86.1 million in 2015 compared to $52.1 million in 2014. Investments in the rental fleet continued in light of stronger demand on improved market conditions, the existing fleet age profile and the continued expansion of our heavy and light equipment rental operations.
Investments in property, plant and equipment in 2015 totalled $30.4 million compared to $26.5 million in 2014. Additions in 2015 and 2014 were largely made within the Equipment Group and included $11.8 million for new and expanded branches (2014 - $10.7 million), $11.3 million for service vehicles (2014 - $8.3 million), $4.0 million for machinery and equipment (2014 - $3.7 million) and $3.2 million for IT equipment (2014 - $3.0 million).
No businesses were acquired during the year ended December 31, 2015. In 2014, $8.6 million was used for business acquisitions. Refer to note 24 to the Notes to the Unaudited Consolidated Financial Statements for further information.
Cash Flows from Financing Activities
Financing activities used $19.6 million in 2015 compared to $42.7 million in 2014.
Significant sources and uses of cash in 2015 included:
Significant sources and uses of cash in 2014 included:
OUTLOOK
In the Equipment Group, the parts and service business has experienced significant growth driven by the larger installed base of equipment in the field, which provides a measure of stability. Service shops remain busy and the Company continues to hire technicians to address the increased demand. Broader product lines, investment in rental, the expanded agricultural businesses and developing product support technologies supporting remote diagnostics and telemetrics will also contribute to future growth.
The Federal government''s commitment to significantly increase infrastructure spending bodes well for long-term prospects. Heightened competitive conditions, a tight pricing environment, stagnant economic growth and the weaker Canadian dollar are expected to continue to weigh on prospects in 2016. The Company continued to invest in growing its rental fleets and in increasing utilization rates.
While market conditions in mining remain challenging, mine production continues and opportunities for sales in support of new mine development, mine expansion and equipment replacement exist. With the substantially increased base of installed equipment, product support activity should continue to grow so long as mines remain active.
The newly formed AgWest business unit expands our reach into the important agricultural equipment market. Business integration efforts are largely complete. Sales coverage and operational processes will continue to be a focus in order to generate target returns over the longer-term. End markets are currently weak and are expected to dampen results in the near-term.
Activity at CIMCO reflects general economic activity, governmental investment levels and focus, as well as specific customer decisions and construction schedules. Recent booking activity and current backlog bodes well for future prospects. The product support business remains a focus for development and continued growth in this area is encouraging. CIMCO has a wide product offering using natural refrigerants including innovative CO2 solutions, which are expected to contribute to growth in the future replacement of CFC, HCFC and HFC refrigerants in both recreational and industrial applications. In addition, CIMCO is focused on its growth strategy in the US, which is a significant market opportunity.
The diversity of the businesses, expanding product offering and services, financial strength and disciplined operating culture positions the Company for continued growth in the long-term.
CONTRACTUAL OBLIGATIONS
Contractual obligations are set out in the following table. Management believes that these obligations will be met comfortably through cash generated from operations and existing long- term financing facilities.
KEY PERFORMANCE MEASURES
Management reviews and monitors its activities and the performance indicators it believes are critical to measuring success. Some of the key financial performance measures are summarized in the following table. Others include, but are not limited to, measures such as market share, fleet utilization, customer and employee satisfaction and employee health and safety.
Measuring Toromont''s results against these strategies over the past five years illustrates that the Company has and continues to make significant progress.
Since 2011, revenues increased at an average annual rate of 8.4%. Product support revenue growth has averaged 11.6% annually. Revenue growth has been a result of:
Over the same five-year period, revenue growth has been constrained at times by a number of factors including:
Changes in the Canadian/U.S. exchange rate also affects reported revenues as the exchange rate impacts the purchase price of equipment that in turn is reflected in selling prices. Since 2011 there has been fluctuations in the average yearly exchange rate of Canadian dollar against the US dollar - 2011 - US$1.01, 2012 - on par, 2013 - US$0.97, 2014 - US$0.91 and 2015 - US$0.78.
Toromont has generated a significant competitive advantage over the past years by investing in its resources, in part to increase productivity levels, and we will continue this into the future as it is a crucial element to our success in the marketplace.
Toromont continues to maintain a strong balance sheet. Leverage, as represented by the ratio of total debt, net of cash, to total capitalization (net debt plus shareholders'' equity), was 10%, well within targeted levels.
Toromont has paid dividends consistently since 1968 and has increased the dividend in each of the last 27 years. The regular quarterly dividend rate was increased 13% from $0.15 to $0.17 per share in 2015 and a further 6% to $0.18 per share in 2016, evidencing our commitment to delivering exceptional shareholder value.
Despite continuing challenges in the broader economy, revenues were higher in the fourth quarter of 2015 compared to the same period last year. Both the Equipment Group and CIMCO benefitted from strong product support growth.
Gross profit decreased 3% in the quarter versus last year on lower margins in the Equipment Group. Competitive markets and the weakened Canadian dollar continued to dampen margins, exacerbated by underutilized rental fleet additions. CIMCO margins were relatively unchanged as higher package margins and a favorable sales mix of product support revenues to total were offset by lower product support margins. At CIMCO, the product support business continued its strong growth, increasing to 49.8% as a percentage of revenues compared to last year, up 5.10 percentage points.
Selling and administrative expenses decreased $3.5 million or 6% on the 1% increase in revenues. Expenses were $3.5 million lower than last year and 0.90 percentage points lower as a percentage of revenues (12.7% versus 13.6%). Bad debt expenses (down $1.7 million) professional fees (down $1.5 million) and lower mark-to-market adjustments on DSUs (down $0.9 million) contributed to this expense reduction, partially offset by higher compensation costs (up $0.3 million) and additional costs related to the expanded agricultural business (up $0.4 million). Certain other expense categories increased on the higher sales activity.
Interest expense was higher than in the similar period last year on higher debt balances resulting from the issuance of senior debentures during the fourth quarter.
Interest income was down from last year on reduced conversions of rental equipment with purchase options.
The effective income tax rate for 2015 was 26.7% compared to 26.2% in the same period last year and largely reflects the mix of income by tax jurisdiction.
Net earnings in the quarter were $44.4 million and basic EPS were $0.57 per share, compared to net earnings of $45.7 million and basic EPS of $0.59 in 2014, a decrease of 3%.
BUSINESS SEGMENT FOURTH QUARTER OPERATING RESULTS
Equipment Group results were lower in the fourth quarter versus last year. Revenues were relatively unchanged from last year on growing product support activity, offset by lower equipment sales and rentals.
New equipment sales increased $3.2 million or 2% in the quarter compared to 2014. Lower construction (down $1.9 million or 2%) and mining deliveries (down $3.1 million or 20%) were more than offset by higher sales into forestry markets (up $3.2 million or 143%) and increased Power Systems revenues (up $5.2 million or 19%) on growth in prime and backup power projects.
Used equipment sales decreased in the quarter compared to the record fourth quarter last year. Mining (down $11.0 million or 69%) and forestry deliveries (down $2.2 million or 86%) led the drop. Agriculture used equipment sales were also lower (down $1.4 million or 34%) in light of the weaker end markets facing that sector. Growth in other markets compensated somewhat.
Rental revenues were $1.7 million or 3% lower compared to last year on lower light equipment rentals (down $1.5 million or 4%). Heavy equipment and power rentals were relatively unchanged despite the larger fleet. Rental rates were fairly consistent in both years with continuing competitive market conditions.
Product support revenues were up $12.3 million or 10% over 2014 with increases in both parts (up $10.7 million or 11%) and service (up $1.6 million or 5%). Activity was good across most markets.
Gross profit margins decreased 1.40 percentage points in the quarter. A favorable sales mix of product support revenues to total (up 0.80 percentage points) was partially offset by lower margins. Rental margins were 1.00 percentage points lower on lower market activity and underutilized new fleet additions. Equipment margins were 0.90 percentage points lower and have remained under pressure throughout the year on very competitive market conditions, exacerbated by the weakened Canadian dollar. Product support revenues as a percentage of total revenues were 33.9% in the fourth quarter compared to 31.0% in 2014.
Selling and administrative expenses were $4.4 million or 8% lower than the comparable quarter last year mainly due to lower bad debt expenses (down $1.4 million), warranty (down $0.6 million) and freight (down $0.6 million). The expanded agricultural business increased expenses by $0.4 million versus last year while certain other expense categories such as compensation costs, profit sharing, information technology expenses and occupancy costs were higher, reflective of the increase in revenues. As a percentage of revenues, expenses were 1.10 percentage points lower than 2014 (12.0% vs. 13.1%).
Operating income decreased 2% compared to last year on the lower margins partially offset by a lower expense ratio. Operating income as a percentage of revenues was 13.9% compared to 14.2% in the fourth quarter of 2014.
Bookings in the fourth quarter of 2015 were $165.0 million, down 18% from the similar period last year with decreases across all segments except agriculture (up 12%), benefitting from the broader product of the expanded business.
CIMCO reported record results for the fourth quarter on growth in the US. The weaker Canadian dollar accounted for approximately $2.0 million of the increase in revenues on the translation of the US operations split fairly evenly between package sales and product support revenues.
Package revenues were down 1% as higher activity in the US was more than offset by lower levels in Canada. US package revenues increased in both recreational (up 181% in Cdn$, 150% in US$) and industrial markets (up 23% in Cdn$, 4% in US$). Lower Canadian industrial revenues (down 30%) were partially offset by higher recreational revenues (up 18%). Strong industrial activity in Western Canadian industrial markets were more than offset by softer conditions in Eastern Canada.
Product support revenues increased in both the US and Canada. US product support, a focus for expansion, generated a 71% revenue increase (47% in US$).
Gross margins were relatively unchanged from last year as improved package margins (up 2.00 percentage points) and a favorable sales mix of product support revenues to total (up 0.40 percentage points) were offset by lower product support margins (down 2.40 percentage points). Product support revenues as a percentage of total revenues were 49.8% compared to 44.7% in the fourth quarter of 2014.
Selling and administrative expenses increased $0.8 million or 8%, mainly due to an unfavorable foreign exchange impact ($0.4 million), higher professional fees and insurance ($0.3 million), compensation costs ($0.3 million) and safety and training (up $0.3 million), partially offset by lower bad debt expenses (down $0.3 million). As a percentage of revenues, expenses were 0.10 percentage points lower than 2014 (16.9% vs. 17.0%).
Operating income increased 16% on the higher revenues and was 8.1% as a percentage of revenues compared to 7.6% in 2014.
Bookings in the quarter totalled $36.0 million, up 20% from the comparable period last year. US bookings were up 119% (72% in US$) while Canadian bookings were relatively unchanged.
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 2015 annual unaudited consolidated financial statements.
Interim period revenues and earnings historically reflect significant variability from quarter to quarter.
The Equipment Group has historically had a distinct seasonal trend in activity levels. Lower revenues are recorded during the first quarter due to winter shutdowns in the construction industry. The fourth quarter had typically been the strongest due in part to the timing of customers'' capital investment decisions, delivery of equipment from suppliers for customer- specific orders and conversions of equipment on rent with a purchase option. This pattern has been interrupted by the timing of significant sales to mining and other customers, which can be variable due to the timing of mine site development and access, and construction project schedules. We expect this historical seasonal trend to continue for non-mining related business.
CIMCO has also had a distinct seasonal trend in results historically, due to timing of construction activity. Lower revenues are recorded during the first quarter on slower construction schedules due to the weather. Revenues increase in subsequent quarters as construction schedules ramp up. This trend can and has been interrupted somewhat by significant governmental funding initiatives and significant industrial projects.
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.
Revenues grew 9% in 2015, despite competitive market conditions and an uncertain economic environment, with strong performance in the Equipment Group and CIMCO. In 2014, revenues grew 4% through strong performance in the Equipment Group and continued product support growth at CIMCO.
Net earnings improved 9% in 2015 on higher revenues and a lower selling and administrative expense ratio partially offset by slightly lower margins. In 2014, net earnings improved 8% on higher revenues, generally improving margins and a relatively flat selling and administrative expenses ratio.
Earnings per share ("EPS") have generally followed earnings with basic EPS increasing 9% in 2015 and 8% in 2014.
Dividends have generally increased in proportion to trailing earnings growth. The quarterly dividend rate was increased in 2013 by 8% to $0.13 per share, in 2014 by 15% to $0.15 per share, in 2015 by 13% to $0.17 per share and 6% to $0.18 per share in 2016. The Company has announced dividend increases every year since 1968.
Total assets increased in 2015 by 15% and by 7% in 2014. The increase reflects growth in the Company''s operations and supports the higher revenues and earnings. Inventories have increased significantly as described in the "Working Capital" section of this MD&A. Continued investment in the rental fleet reflects strong demand and improved market conditions.
Long-term debt increased in 2015. The Company issued $150.0 million in long-term senior debentures during the year to replace $125.0 million of maturing debentures. The increases amount of debentures issued provides added flexibility for future investments in rental fleet, operational assets and business acquisitions. Total debt, net of cash, to total capitalization was 10% at December 31, 2015, well within targeted levels.
RISKS AND RISK MANAGEMENT
In the normal course of business, Toromont is exposed to risks that may potentially impact its financial results in any or all of its business segments. The Company and each operating segment employ risk management strategies with a view to mitigating these risks on a cost- effective basis.
Business Cycle
Expenditures on capital goods have historically been cyclical, reflecting a variety of factors including interest rates, foreign exchange rates, consumer and business confidence, commodity prices, corporate profits, credit conditions and the availability of capital to finance purchases. Toromont''s customers are typically affected, to varying degrees, by these factors and trends in the general business cycle within their respective markets. As a result, Toromont''s financial performance is affected by the impact of such business cycles on the Company''s customer base.
Commodities prices, and, in particular, changes in the view on long-term trends, affect demand for the Company''s products and services in the Equipment Group. Commodity price movements in base and precious metals sectors in particular can have an impact on customers'' demands for equipment and customer service. With lower commodity prices, demand is reduced as development of new projects is often stopped and existing projects can be curtailed, both leading to less demand for heavy equipment.
The business of the Company is diversified across a wide range of industry market segments, serving to temper the effects of business cycles on consolidated results. Continued diversification strategies such as expanding the Company''s customer base, broadening product offerings and geographic diversification are designed to moderate business cycle impacts. The Company has focused on the sale of specialized equipment and ongoing support through parts distribution and skilled service. Product support growth has been, and will continue to be, fundamental to the mitigation of downturns in the business cycle. The product support business contributes significantly higher profit margins and is typically subject to less volatility than equipment supply activities.
Product and Supply
The Equipment Group purchases most of its equipment inventories and parts from Caterpillar under a dealership agreement that dates back to 1993. As is customary in distribution arrangements of this type, the agreement with Caterpillar can be terminated by either party upon 90 days'' notice. In the event Caterpillar terminates, it must repurchase substantially all inventories of new equipment and parts at cost. Toromont has maintained an excellent relationship with Caterpillar for 23 years and management expects this will continue going forward.
Toromont is dependent on the continued market acceptance of Caterpillar''s products. It is believed that Caterpillar has a solid reputation as a high-quality manufacturer, with excellent brand recognition and customer support as well as leading market shares in many of the markets it serves. However, there can be no assurance that Caterpillar will be able to maintain its reputation and market position in the future. Any resulting decrease in the demand for Caterpillar products could have a material adverse impact on the Company''s business, results of operations and future prospects.
Toromont is also dependent on Caterpillar for timely supply of equipment and parts. From time to time during periods of intense demand, Caterpillar may find it necessary to allocate its supply of particular products among its dealers. Such allocations of supply have not, in the past, proven to be a significant impediment in the conduct of business. However, there can be no assurance that Caterpillar will continue to supply its products in the quantities and timeframes required by customers.
Competition
The Company competes with a large number of international, national, regional and local suppliers in each of its markets. Although price competition can be strong, there are a number of factors that have enhanced the Company''s ability to compete throughout its market areas including: the range and quality of products and services; ability to meet sophisticated customer requirements; distribution capabilities including number and proximity of locations; financing offered by Caterpillar Finance; e-commerce solutions; reputation and financial strength.
Increased competitive pressures or the inability of the Company to maintain the factors that have enhanced its competitive position to date could adversely affect the Company''s business, results of operations or financial condition.
The Company relies on the skills and availability of trained and experienced tradesmen and technicians in order to provide efficient and appropriate services to customers. Hiring and retaining such individuals is critical to the success of these businesses. Demographic trends are reducing the number of individuals entering the trades, making access to skilled individuals more difficult. The Company has several remote locations which make attracting and retaining skilled individuals more difficult.
Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash equivalents, accounts receivable and derivative financial instruments. The carrying amount of assets included on the balance sheet represents the maximum credit exposure.
When the Company has cash on hand it may be invested in short-term instruments, such as money market deposits. The Company manages its credit exposure associated with cash equivalents by ensuring there is no significant concentration of credit risk with a single counterparty, and by dealing only with highly rated financial institutions as counterparties.
The Company has accounts receivable from a large diversified customer base, and is not dependent on any single customer or industry. The Company has accounts receivable from customers engaged in various industries including construction, mining, food and beverage, and governmental agencies. Management does not believe that any single industry represents significant credit risk. These customers are based predominately in Canada.
The credit risk associated with derivative financial instruments arises from the possibility that the counterparties may default on their obligations. In order to minimize this risk, the Company enters into derivative transactions only with highly rated financial institutions.
Warranties and Maintenance Contracts
Warranties are provided for most of the equipment sold, typically for a one-year period following sale. The warranty claim risk is generally shared jointly with the equipment manufacturer.
Accordingly, liability is generally limited to the service component of the warranty claim, while the manufacturer is responsible for providing the required parts.
The Company also enters into long-term maintenance and repair contracts, whereby it is obligated to maintain equipment for its customers. The length of these contracts varies generally from two to five years. The contracts are typically fixed price on either machine hours or cost per hour, with provisions for inflationary and exchange adjustments. Due to the long-term nature of these contracts, there is a risk that maintenance costs may exceed the estimate, thereby resulting in a loss on the contract. These contracts are closely monitored for early warning signs of cost overruns. In addition, the manufacturer may, in certain circumstances, share in the cost overruns if profitability falls below a certain threshold.
Foreign Exchange
The Company transacts business in multiple currencies, the most significant of which are the Canadian dollar and the U.S. dollar. As a result, the Company has foreign currency exposure with respect to items denominated in foreign currencies.
The rate of exchange between the Canadian and U.S. dollar has an impact on revenue trends. The Canadian dollar averaged US$0.78 in 2015 compared to US$0.91 in 2014, a 14% decrease. As substantially all of the equipment and parts sold in the Equipment Group are sourced in U.S. dollars, and Canadian dollar sales prices generally reflect changes in the rate of exchange, a stronger Canadian dollar can adversely affect revenues. The impact is not readily estimable as it is largely dependent on when customers order the equipment versus when it was sold. Bookings in a given period would more closely follow period-over-period changes in exchange rates. Sales of parts come from inventories maintained to service customer requirements. As a result, constant parts replenishment means that there is a lagging impact of changes in exchange rates. In CIMCO, sales are largely affected by the same factors. In addition, revenues from CIMCO''s US subsidiary reflect changes in exchange rates on the translation of results, although this is not significant.
Foreign exchange contracts reduce volatility by fixing landed costs related to specific customer orders and establishing a level of price stability for high-vol
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