Toromont Announces 2016 Results and 6% Increase in Quarterly Dividend
(firmenpresse) - TORONTO, ONTARIO -- (Marketwired) -- 02/06/17 -- Toromont Industries Ltd. (TSX: TIH) today reported financial results for the three and twelve-month periods ended December 31, 2016.
"We are pleased with our overall 2016 results which reflect the realization of opportunities in generally challenging markets. Revenues grew 4% over last year with solid earnings growth of 7%, a reflection of the team''s focus and commitment to operating disciplines," said Scott J. Medhurst, President and Chief Executive Officer of Toromont Industries Ltd. "CIMCO delivered outstanding results while performance in the Equipment Group reflects softness in certain of its business sectors. Product support activity continues to provide a strong foundation for growth in both Groups. The Company''s strong balance sheet and free-cash flows position it well for future initiatives."
Considering the Company''s solid financial position and positive long-term outlook, the Board of Directors today increased the quarterly dividend by 6% to 19 cents per share. The next dividend is payable April 3, 2017 to shareholders of record at the close of business on March 10, 2017. Toromont has paid dividends every year since going public in 1968 and this represents the 28th consecutive year of increases.
"We are encouraged by the long-term outlook for infrastructure spending and expect to have better visibility into future spending initiatives following 2017 budget announcements from the Federal and provincial governments. Equipment Group customers have been restrained with their capital spending pending clarity on government investment levels, and this has contributed to the softness experienced in many of the markets served. Performance at CIMCO was exceptional and has led to strong package sales and product support growth," continued Mr. Medhurst. "Across our organization, strong product support growth, together with diverse products and markets, provides a sound financial position, operational stability and opportunities for continued success."
Quarterly Conference Call and Webcast
Interested parties are invited to join the quarterly conference call with investment analysts, in listen-only mode, on Tuesday, February 7, 2017 at 8:00 a.m. (ET). The call may be accessed by telephone at 1-866-223-7781 (toll free) or 416-340-2218 (Toronto area). A replay of the conference call will be available until Tuesday, February 14, 2017 by calling 1-800-408-3053 or 905-694-9451 and quoting passcode 1169295.
Both the live webcast and the replay of the quarterly conference call can be accessed at .
Advisory
Information in this press release that is not a historical fact is "forward-looking information". Words such as "plans", "intends", "outlook", "expects", "anticipates", "estimates", "believes", "likely", "should", "could", "will", "may" and similar expressions are intended to identify statements containing forward-looking information. Forward-looking information in this press release is based on current objectives, strategies, expectations and assumptions which management considers appropriate and reasonable at the time including, but not limited to, general economic and industry growth rates, commodity prices, currency exchange and interest rates, competitive intensity and shareholder and regulatory approvals.
By its nature, forward-looking information is subject to risks and uncertainties which may be beyond the ability of Toromont to control or predict. The actual results, performance or achievements of Toromont could differ materially from those expressed or implied by forward-looking information. Factors that could cause actual results, performance, achievements or events to differ from current expectations include, among others, risks and uncertainties related to: business cycles, including general economic conditions in the countries in which Toromont operates; commodity price changes, including changes in the price of precious and base metals; changes in foreign exchange rates, including the Cdn$/US$ exchange rate; the termination of distribution or original equipment manufacturer agreements; equipment product acceptance and availability of supply; increased competition; credit of third parties; additional costs associated with warranties and maintenance contracts; changes in interest rates; the availability of financing; and, environmental regulation.
Any of the above mentioned risks and uncertainties could cause or contribute to actual results that are materially different from those expressed or implied in the forward-looking information and statements included in this press release. For a further description of certain risks and uncertainties and other factors that could cause or contribute to actual results that are materially different, see the risks and uncertainties set out in the "Risks and Risk Management" and "Outlook" sections of Toromont''s most recent annual or interim Management Discussion and Analysis, as filed with Canadian securities regulators at and may also be found at . Other factors, risks and uncertainties not presently known to Toromont or that Toromont currently believes are not material could also cause actual results or events to differ materially from those expressed or implied by statements containing forward-looking information.
Readers are cautioned not to place undue reliance on statements containing forward-looking information that are included in this press release, which are made as of the date of this press release, and not to use such information for anything other than their intended purpose. Toromont disclaims any obligation or intention to update or revise any forward-looking information, whether as a result of new information, future events or otherwise, except as required by applicable securities legislation.
About Toromont
Toromont Industries Ltd. operates through two business segments: the Equipment Group and CIMCO. The Equipment Group includes one of the larger Caterpillar dealerships by revenue and geographic territory in addition to industry leading rental operations and an expanding agricultural equipment business. 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 Ltd. 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, 2016, 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, 2016, the annual MD&A contained in the 2015 Annual Report and the audited annual consolidated financial statements for the year ended December 31, 2015.
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 6, 2017.
Additional information is contained in the Company''s filings with Canadian securities regulators, including the Company''s 2015 Annual Report and 2016 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, 2016, Toromont employed over 3,600 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 includes 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 rinks. 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.
CONSOLIDATED ANNUAL OPERATING RESULTS
Revenues increased 4% to $1.9 billion. CIMCO accounted for the majority of the increase in revenues on record package sales and product support revenues. The Equipment Group reported a 1% increase in revenues on higher product support and used equipment revenues partially offset by lower new equipment sales and rentals.
Gross profit margin was slightly higher than last year, up 30 basis points ("bps") to 25.0% largely due to a favorable sales mix of product support to total revenues. Challenging market conditions have continued to exert downward pressures on margins for each category of sales across most of the business.
Selling and administrative expenses increased $14.9 million or 6% and were up 30 bps as a percentage of revenues versus last year. The majority of the increase related to higher compensation costs up ($9.3 million) and higher mark-to-market adjustments on Deferred Share Units ("DSUs") ($3.1 million) due to the increased share price. Bad debt expenses were down $0.7 million on an improved aging profile of receivables.
In the third quarter of 2016, Toromont sold its licences related to internally-developed software modules, designed to work with dealer-based systems (DBS). The pre-tax gain on this sale was $4.9 million. Annual royalty revenue from the previous royalty arrangements averaged $0.6 million over the preceding three years.
Interest expense decreased on lower average debt balances and lower effective interest rates realized in a late-2015 refinancing.
Interest income increased on higher conversions of equipment on rent with a purchase option ("RPO") and increased investment income on higher average cash balances.
The effective income tax rate for 2016 was 27.0% compared to 26.9% in 2015.
Net earnings in 2016 were $155.7 million and basic earnings per share ("EPS") were $1.99, up 7% from 2015.
Comprehensive income in 2016 was $154.2 million (2015 - $147.6 million). Other comprehensive loss in 2016 was $1.6 million, including an actuarial loss on defined benefit pension plans of $1.1 million which resulted from a decrease in the discount rate.
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
The Equipment Group has faced challenging market conditions this year. The weakened Canadian dollar has resulted in higher new equipment prices versus recent years and delays in the roll-out of the announced Federal infrastructure investment has resulted in customers being more cautious with their capital expenditures. Consequently, customers have been seeking alternatives such as used, rebuilds and to a certain extent, rental purchase options. Additionally, weakness in other geographic markets has resulted in a migration of rental fleets, inventory and contractors into the relatively more active Ontario market. This led to increasing competitive conditions across all segments. In total, equipment sales were down $29.6 million or 4%.
New equipment sales were down $76.6 million or 13% versus last year, tracking industry declines based on Company estimates, with decreases reported across most industries served. Toromont''s new equipment sales into construction markets declined $40.0 million or 11%, while sales into mining markets were down $34.2 million or 45%. Power Systems revenues were off $10.9 million or 14%, due to delayed timing for certain project completions together with softness in most sectors. Deliveries into certain other market segments increased, including waste and landfill (up $8.6 million or 104%) and forestry (up $1.1 million or 7%). Agriculture revenues were relatively unchanged from last year despite very soft markets.
Offsetting the decline in new, used equipment sales increased to a new record of $239.4 million led by strong mining deliveries and increases across most other market segments. 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.
Rental revenues decreased $1.6 million or 1% as lower rental rates across all segments more than offset increased time utilization in the larger rental asset categories. Light equipment rentals were up 3% on larger fleets (up 12%) and two additional locations. Heavy equipment rentals were down 5% on lower time utilization exacerbated by changes in the competitive landscape which adversely affected demand. Power rentals decreased 17% against a tough prior year comparator, which included good activity surrounding the Toronto Pan-Am games, increased penetration of the entertainment market and the conversion of a large rental package. Rental revenues from RPO were down 8% largely due to rental rate pressures as the average RPO fleet investment increased 3% year-over-year. The ending RPO fleet at December 31st, 2016, was $61.0 million versus $49.8 million at the end of 2015.
Power generation revenues from Toromont-owned and managed plants increased $1.1 million or 10% over last year on higher electricity sales from the Waterloo Landfill site and Sudbury Hospital plant in addition to higher thermal revenue from the Sudbury Downtown and Hospital plants.
Product support revenues increased $47.5 million or 9%, benefitting from the larger installed base of equipment in our territory and good activity levels for equipment in the field. Parts revenues increased 11% over 2015, led by substantial parts deliveries into mining (up 22%), construction (up 2%) and agriculture (up 25%) markets. Higher parts sales also reflect changes in pricing as a consequence of the weakened Canadian dollar. We estimate that on a constant dollar basis, parts sales increased 5%. Service revenues were up 2% largely due to good construction activity levels. Product support was also lifted by increased rebuild activity in mining.
Gross margins improved 60 bps on a favorable sales mix of product support revenues to total revenues (37.5% compared to 34.9% in 2015). Competitive market conditions were experienced across most lines of business during the year. Lower depreciation charges on the rental fleets as a result of updated estimates of estimated useful lives and residual values served to offset the impact of lower financial utilization of the rental fleets. The net impact of these changes reduced depreciation by $4.1 million for the year versus applying the previous estimates.
Selling and administrative expenses increased $12.6 million or 6% compared to last year. Compensation costs (up $6.0 million), customer allowances (up $2.0 million) and information technology expenses (up $1.4 million) accounted for the majority of the increase. As a percentage of revenues, expenses were 60 bps higher than 2015 (13.4% vs. 12.8%).
The $4.9 million pre-tax gain on the sale of internally-developed software is included in the Equipment Group results. Excluding this gain, operating income increased $1.6 million versus last year but was down 10 bps to 12.0% as a percentage of revenues.
Capital expenditures in the Equipment Group were $27.5 million (18%) lower year-over-year. Replacement and expansion of the rental fleet accounted for $98.7 million of total investment in 2016. Other capital expenditures include $11.2 million for service and delivery vehicles, $6.1 million for new and expanded facilities to meet current and future growth requirements, $2.7 million for machinery and equipment and $1.5 million for upgrades and enhancements to the information technology infrastructure.
Bookings and Backlogs
Bookings increased 4% to $814.0 million with increases in mining (29%), agriculture (18%) and power systems (7%) orders partially offset by lower construction (1%) orders.
Backlogs of $147.0 million were up 60% from this time last year with increases across most market segments. At December 31st, 2016, the backlog related to mining (32%), construction (28%), power systems (26%) and agriculture (14%). Most of the backlog is expected to be delivered in 2017. Backlogs can vary significantly from period to period on large project activities, especially in mining and power systems, the timing of orders and deliveries and the availability of equipment from either equipment or suppliers.
CIMCO
CIMCO reported record results for the year on continued growth in both Canada and the US. Translation of US operations did not have a significant impact on results.
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 $25.2 million or 26% higher than last year with terrific growth in Ontario, Quebec and Atlantic Canada partially offset by a decline in Western Canada. Industrial markets were up $30.4 million or 47% while recreational markets were down $5.2 million or 17%. In the US, package revenues increased $16.9 million or 71% versus last year with recreational activity more than doubling (up 120%) and industrial activity increasing 12%. Increased sales coverage in the US has yielded positive results and remains an area with significant growth potential.
Product support revenues increased $5.6 million or 5% versus last year largely due to higher activity levels in Canada (up 6%) while US revenues were relatively in line with last year. Focus remains on continued expansion into US markets with traction expected over the longer term as the installed based increases.
Gross margins were down 130 bps on lower average package margins and an increased proportion of package sales versus higher margin product support sales, partially offset by improved product support margins. Lower package margins reflect the tight pricing environment and higher warranty costs partially offset by improved execution and a favorable foreign exchange impact. Higher product support margins reflect execution experience despite increasingly competitive market conditions. Product support revenues were 42.4% as a percentage of total revenues in 2016 compared to 48.6% in 2015.
Selling and administrative expenses increased $2.2 million or 6% compared to last year on higher compensation costs (up $3.2 million) partially offset by lower bad debt expenses (down $0.6 million). Certain other expense categories were lower including professional fees, insurance and depreciation. As a percentage of revenues, expenses were 220 bps lower than last year (15.3% vs. 17.5%).
Operating income increased 37% to $20.4 million on the higher revenues and lower relative expense levels, partially offset by lower margins. Operating income margin increased 90 bps to 7.3%.
Capital expenditures were up 82% to $1.9 million with the majority of expenditures in 2016 related to additional service vehicles ($1.0 million), machinery and equipment ($0.4 million) and information technology infrastructure enhancements and upgrades ($0.3 million).
Bookings and Backlogs
Bookings increased 28% to a new high of $178.0 million with increases in both Canada and the US. Industrial bookings were up 45% with strong growth in both Canada (up 33%) and the US (up 211%). Recreational bookings were up 6% with increases in the US (up 20%) partially offset by a decrease in Canada (down 4%).
Backlogs increased 13% to $99.0 million also with increases in both Canada and the US and represented the second highest level for this time of year. Recreational backlogs were up 24% with increases in Canada (up 29%) and the US (up 19%). Industrial backlogs were up 4% as strong US activity levels (up 85%) were partially offset by softer Canadian levels (down 5%). Substantially all of the backlog is expected to be realized as revenue in 2017.
CONSOLIDATED FINANCIAL CONDITION
The Company has maintained a strong financial position for many years. At December 31, 2016, the ratio of net debt to total capitalization was -4% (cash exceeded total debt).
Non-Cash Working Capital
The Company''s investment in non-cash working capital was $388.5 million at December 31, 2016. The major components, along with the changes from December 31, 2015, are identified in the following table.
Accounts receivable increased $14.5 million or 6% compared to 2015 mainly due to the 2% increase in revenues in the fourth quarter. Equipment Group accounts receivable increased $9.3 million or 4% while CIMCO accounts receivable increased $5.2 million or 11%. Days sales outstanding (DSO) was relatively in line with last year at 45 days with the Equipment Group holding constant and CIMCO down 2 days.
Inventories decreased $27.5 million (6%) to $435.8 million versus a year ago.
Accounts payable and accrued liabilities at December 31, 2016 increased $24.0 million or 10% 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 in addition to the impact of the weaker Canadian dollar on accounts payable to US based vendors.
Income taxes payable reflects the difference between tax installments and current tax expense.
Higher dividends payable year over year reflect the higher dividend rate. In 2016, the quarterly dividend rate was increased from $0.17 per share to $0.18 per share, a 6% 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 12% lower in 2016 than in 2015 on Customer Service Agreements ("CSAs"). In CIMCO, deferred revenues arise on progress billings in advance of revenue recognition. CIMCO deferred revenues were 10% higher in 2016 than in 2015.
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, 2016. See Note 7 to the unaudited consolidated financial statements.
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. Non-employee directors have not received grants under this plan since 2013. 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 at the date the option is granted. Stock options granted in 2013 and after have a ten-year term while those granted prior to 2013 have a seven-year term. At December 31, 2016, 2.4 million options to purchase common shares were outstanding, of which 0.9 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 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 $1.8 million in 2016 (2015 - $1.1 million) were charged to selling and administrative expense when paid. Approximately 50% (2015 - 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, 2016, 407,731 DSUs were outstanding with a total value of $17.3 million (2015 - 377,311 units at a value of $12.0 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 their 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 91 qualifying employees. The Powell and Toromont Plans are administered by a separate Fund that is legally separated from the Company and as described fully in Note 18 to the unaudited consolidated financial statements.
The funded status of these plans changed by $1.5 million (an increase in the accrued pension liability) as at December 31, 2016.
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 $17.2 million as at December 31, 2016. 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 2017 to be similar to 2016 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 2016. This issuer bid allows the Company to purchase up to approximately 6.7 million of its common shares, representing 10% of common shares in the public float, in the year ending August 30, 2017. 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, 2016, the Company purchased and cancelled 89,244 common shares for $2.6 million (average cost of $28.84 per share, including transaction costs) under its NCIB program (2015 - 74,500 common shares for $2.2 million at an average cost of $29.95 per share, including transaction costs).
Outstanding Share Data
As at the date of this MD&A, the Company had 78,417,956 common shares and 2,411,371 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 2016, the Company declared dividends of $0.72 per common share, $0.18 per quarter (2015 - $0.68 per common share or $0.17 per quarter).
Considering the Company''s solid financial position and positive long-term outlook, the Board of Directors announced it is increasing the quarterly dividend to 19 cents per share effective with the dividend payable on April 3rd, 2017. 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 28th 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.
The Company has a committed credit facility of $250.0 million with a maturity of 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, 2016 and 2015, no amounts were drawn on the facility. Letters of credit utilized $21.7 million of the facility (2015 - $21.9 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.
Cash at December 31st, 2016 was $188.7 million, compared to $66.7 million at December 31, 2015.
The Company expects that continued cash flows from operations in 2017 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 significantly higher cash flow in 2016 compared to 2015. Net earnings adjusted for items not requiring cash were up 5% over last year. Non-cash working capital provided significant cash inflow due to lower inventories and higher accounts payable, accrued liabilities and provisions, partially offset by higher accounts receivables. Net rental fleet additions (purchases less proceeds of dispositions) were lower as investment levels were ramped up in 2015 in response to market demand and in light of the existing fleet age profile at that time.
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 $18.6 million in 2016 compared to $27.7 million in 2015.
Investments in property, plant and equipment accounted for the majority of the cash use and included the following additions:
The Company also recorded proceeds on the disposal of internally-developed software of $4.9 million during 2016 (2015 - $nil).
Cash Flows from Financing Activities
Financing activities used $48.1 million in 2016 compared to $19.6 million in 2015.
In 2015, the Company issued $150.0 million in long-term senior debentures and repaid the $125.0 million long-term senior debentures which matured. Financing costs of $1.7 million were incurred related to the issuance and amendments to the credit facility in 2015.
The Company paid dividends of $55.4 million or $0.71 per share in 2016 (2015 - $51.2 million or $0.66 per share).
The Company received $11.6 million on the exercise of stock in 2016 (2015 - $12.1 million).
In 2016, the Company purchased and cancelled 89,244 common shares for $2.6 million (average cost of $28.84, including transaction costs) under its NCIB program (2015 - 74,500 common shares for $2.2 million (average cost of $29.95, including transaction costs)).
OUTLOOK
The Equipment Group''s parts and service business has provided momentum driven by the larger installed base of equipment working in the field, providing a measure of stability in a variable business environment. There was also a shift to used equipment and rebuild activity during the past year. The Company continues to hire technicians in anticipation of an increase in demand, including the opportunity for increased equipment rebuilds and readying used iron. Broader product lines, investment in rental equipment, expanding the agricultural business and developing product support technologies supporting remote diagnostics and telematics are expected to contribute to longer-term growth. In the near-term, national and global economic conditions are leading national and international players to allocate additional resources to Toromont''s local markets, creating challenging conditions.
We are encouraged by the long-term outlook for infrastructure spending and expect to get better visibility into future spending initiatives following the 2017 Budget announcements from the Federal and various provincial governments.
The mining industry has been capital constrained and focused on cost reduction initiatives for a number of years now, although increased enquiries point to the potential for a somewhat increased opportunity to come. In the meantime, mine production continues generating product support opportunities and incremental equipment to support the operations and expansion of these existing mines. With the substantially increased base of installed equipment, product support activity should continue to grow so long as mines remain active.
AgWest expands our footprint in the important agricultural equipment market. Sales coverage and operational processes will continue to be a focus in order to generate longer term financial returns. Weak end markets together with increased industry inventory levels are expected to continue to dampen results in the near term.
CIMCO''s growth in performance in recent years represents the nascent realization of focused strategies. Recent booking activity and current backlogs bode well for future prospects. Increasing product support levels is also a positive signal for future trends. CIMCO has a wide product offering using natural refrigerants including innovative CO2 solutions, which are expected to contribute to growth. In addition, CIMCO is focused on its growth strategy in the US, which represents a significant market opportunity.
The diversity of the businesses, expanding product offering and services, financial strength and disciplined operating culture position 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 on hand, 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 2012, revenues increased at an average annual rate of 6.2%. Product support revenue growth has averaged 10.7% 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 affect reported revenues as the exchange rate impacts the purchase price of equipment that in turn is reflected in selling prices. Since 2012 there has been fluctuations in the average yearly exchange rate of Canadian dollar against the US dollar - 2012 - on par, 2013 - US$0.97, 2014 - US$0.91, 2015 - US$0.78 and 2016 - US$0.75.
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 net debt to total capitalization, was -4% (cash exceed total debt), well within targeted levels.
Toromont has paid dividends consistently since 1968 and has increased the dividend in each of the last 28 years. The regular quarterly dividend rate was increased 6% from $0.17 to $0.18 per share in 2016 and a further 6% to $0.19 per share in 2017, evidencing our commitment to delivering exceptional shareholder value.
CONSOLIDATED FOURTH QUARTER OPERATING RESULTS
Revenues were 2% higher in the fourth quarter of 2016 largely due to higher revenues at CIMCO as the Equipment Group revenues were relatively unchanged from last year.
Gross profit margin increased 110 bps to 26.6% in the quarter versus last year mainly on improved margins in the Equipment Group partially offset by decreased margins at CIMCO.
Selling and administrative expenses were up $6.4 million or 11% and were 110 bps higher as a percentage of revenues. Accounting for the majority of the increase was higher mark-to-market adjustments on DSUs (up $1.8 million), compensation costs (up $0.9 million) and bad debt expenses (up $0.9 million). Certain other expense categories increased on the higher sales activity.
Interest expense was lower than in the similar period last year on lower average debt balances.
Interest income was up from last year on increased investment income resulting from higher average cash balances.
The effective income tax rate for the fourth quarter of 2016 was 27.1% compared to 26.7% in the same period last year and largely reflects the mix of income by tax jurisdiction.
Net earnings in the quarter were up 3% to $45.5 million while basic EPS was up 2% to $0.58.
BUSINESS SEGMENT FOURTH QUARTER OPERATING RESULTS
Equipment Group
Equipment Group results were slightly higher than last year. Revenues were relatively unchanged from last year as higher product support and rental revenues were offset by lower total equipment sales.
On a combined basis, given the interplay between new and used equipment sales described earlier, total equipment sales were down 3% versus last year. Deliveries into construction (down 11%) and power systems (down 28%) markets were lower while sales into mining (up 63%) and other market segments were higher.
Rental revenues were up 5% compared to last year with increases in light equipment (up 5%), heavy equipment (up 2%) and equipment on rent with a purchase option (up 8%). Power rentals were down 6% mainly due to a large power project last year which boosted revenues.
Product support revenues were up $4.1 million or 3% over 2015 with increases in both parts (up $2.4 million or 2%) and service (up $1.7 million or 5%). Activity was good across most markets.
Gross profit margins increased 150 bps in the quarter versus last year. Improved equipment margins and a favorable sales mix of product support revenues to total were partially offset by lower product support and rental margins. Rental margins decreased on lower financial utilization, partially offset by lower depreciation charges as a result of the changes in estimates described earlier. The net impact of the changes reduced depreciation by $1.0 million in the fourth quarter versus applying the previous estimates.
Selling and administrative expenses increased by $6.3 million or 13% versus last year mainly due to higher customer allowances (up $1.4 million), compensation costs (up $0.3 million) and bad debt expenses (up $0.9 million). Certain other expense categories such as professional fees, information technology expenses and warranty were higher. As a percentage of revenues, expenses increased 150 bps over 2015 levels (13.6% vs. 12.1%).
Operating income margin was relatively unchanged from last year at 13.9%.
Bookings in the fourth quarter of 2016 were $224.0 million, up 36% from the similar period last year with increases across most market segments.
CIMCO
CIMCO reported terrific results for the fourth quarter largely due to good momentum in Canada. Translation of US operations did not have a significant impact on results.
Package revenues increased 30% as higher activity in Canada (up 51%) was partially offset by a decrease in the US (down 21%). In Canada, higher industrial (up 96%) were partially offset by recreational (down 32%) sales. In the US, both market segments were lower where strong booking activity levels did not translate into revenues as a result of delays in customers'' construction schedules.
Product support revenues decreased 8% versus last year. Both Canadian and US activity levels were lower due to timing of job completions and invoicing.
Gross margins decreased 90 bps on lower package margins and an unfavorable sales mix partially offset by improved product support margins. Product support revenues as a percentage of total revenues were 41.2% compared to 49.8% in the fourth quarter of 2015.
Selling and administrative expenses were relatively unchanged from last year but were 150 bps lower as a percentage of revenues (14.9% versus 16.4% last year).
Operating income increased 16% mainly on the higher revenues and was 8.5% as a percentage of revenues compared to 8.1% in 2015.
Bookings in the quarter totalled $41.0 million, up 14% from the comparable period last year. Higher US bookings (up 35%) accounted for approximately 71% of the increase.
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 2016 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 is impacted by the timing of significant sales to mining and other customers, resulting from the timing of mine site development and access, and construction project schedules.
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 winter weather. Revenues increase in subsequent quarters as construction schedules ramp up. This trend can be, and has been, impacted somewhat by significant governmental funding initiatives and significant industrial projects.
Historically, inventories have increased through the year to meet the expected demand for higher deliveries in the third and fourth quarters of the fiscal year. This seasonal sales trend also leads accounts receivable to be at their highest level at year-end.
SELECTED ANNUAL INFORMATION
Revenues grew 4% in 2016 mainly through strong performance at CIMCO as the Equipment Group continued to face competitive market conditions which led to a modest increase on continued product support growth. In 2015, revenues grew 9% through strong performance in both the Equipment Group and CIMCO.
Net earnings increased 7% in 2016 on the higher revenues and slightly improved gross margins partially offset by a higher selling and administrative expense ratio. In 2015, net earnings improved 9% on higher revenues and a lower selling and administrative expense ratio, partially offset by slightly lower margins.
Earnings per share have generally followed earnings with basic EPS increasing 6% in 2016 and 9% in 2015.
Dividends have generally increased in proportion to trailing earnings growth. The quarterly dividend rate was increased in 2014 by 15% to $0.15 per share, in 2015 by 13% to $0.17 per share, in 2016 by 6% to $0.18 per share and 6% to $0.19 per share in 2017. The Company has paid dividends every year since 1968.
Total assets increased in 2016 by 11% and by 15% in 2015. The increase reflects growth in the Company''s operations and supports the higher revenues and earnings.
Long-term debt decreased in 2016 mainly due to principal repayments on the senior debenture due in March 2019, net of the amortization of debt issuance costs. In 2015, the Company issued $150.0 million in long-term senior debentures to replace $125.0 million of maturing debentures. The increased amount of debentures issued provides added flexibility for future investments in rental fleet, operational assets and business acquisitions. Net debt to total capitalization at December 31, 2016 was -4% (cash exceed total debt), 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 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 24 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 has deposited cash with reputable financial institutions, from which management believes the risk of loss to be remote.
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 customer 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$0.75 in 2016 compared to US$0.78 in 2015, a 4% 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-volume goods such as spare parts. The Company does not enter into foreign exchange forward contracts for speculative purposes. The gains and losses on the foreign exchange forward contracts designated as cash flow hedges are intended to offset the translation losses and gains on the hedged foreign currency transactions when they occur. As a result, the foreign exchange impact on earnings with respect to transactional activity is not significant.
Interest Rate
The Company minimizes its interest rate risk by managing its portfolio of floating and fixed-rate debt, as well as managing the term to maturity.
At December 31, 2016, the Company''s debt portfolio included $154.8 million in fixed-rate debt (38%) and a $250.0 million floating-rate credit facility (62%).
Fixed-rate debt amortizes or matures between 2017 and 2025. Fixed-rate debt exposes the Company to future interest rate movements upon refinancing the debt at maturity. 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.
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 does not intend to settle or refinance any existing debt before maturity.
Financing Arrangements
The Company requires capital to finance its growth and to refinance its outstanding debt obligations as they come due for repayment. If the cash generated from the Company''s business, together with the credit available under existing bank facilities, is not sufficient to fund future capital requirements, the Company will require additional debt or equity financing in the capital markets. The Company''s ability to access capital markets, on terms that are acceptable, will be dependent upon prevailing market conditions, as well as the Company''s future financial condition. Further, the Company''s ability to increase its debt financing may be limited by its financial covenants or its credit rating objectives. The Company maintains a conservative leverage structure and although it does not anticipate difficulties, there can be no assurance that capital will be available on suitable terms and conditions, or that borrowing costs and credit ratings will not be adversely affected.
Environmental Regulation
Toromont''s customers are subject to sig
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