Toromont Industries Annual Report 2017

Plain-text annual report

STRONGER TOGETHER PLUS FORTS ENSEMBLE T o r o m o n t I n d u s t r i e s L t d . 2 0 1 7 A n n u a l R e p o r t Toromont Industries Ltd. Corporate Office 3131 Highway 7 West P.0. Box 5511 Concord ON L4K 1B7 Tel: 416 667 5511 www.toromont.com TOROMONT INDUSTRIES LTD. ANNUAL REPORT 2017 STRONGER TOGETHER PLUS FORTS ENSEMBLE is the mantra we have marched to since expanding our employee base and dealership territory through acquisition in October of 2017. While apropos for this business combination, the ability to maximize the collective capabilities of our employees, partners and business units (newly acquired and long-held) by working together has long been the key to value creation at Toromont; and it will be the way we achieve our ambitious goals for the future. How to Get in Touch With Us Tel: 416.667.5511 Fax: 416.667.5555 E-mail: investorrelations@toromont.com www.toromont.com How to Reach Our Transfer Agent and Registrar Investors are encouraged to contact AST Trust Company (Canada) for information regarding their security holdings. AST Trust Company (Canada) P.O. Box 700 Station B Montreal, Quebec H3B 3K3 Toll-Free North America: 1.800.387.0825 Local: 416.682.3860 E-mail: inquiries@astﬁnancial.com www.astﬁnancial.com/ca-en Common Shares Listed on the Toronto Stock Exchange Stock Symbol – TIH Contents 02 06 08 14 15 16 Letter to Shareholders Map of Operations Sustainability Report Corporate Governance Board of Directors Executive Operating Team 17 44 46 51 78 80 Management’s Discussion and Analysis Management’s and Independent Auditors’ Reports Consolidated Financial Statements Notes to the Consolidated Financial Statements Ten-Year Financial Review Corporate Information This annual report was printed in Canada on stock manufactured chlorine-free with 10% post-consumer ﬁbre. Design and Coordination: Ove Design & Communications www.ovedesign.com Editorial: Fundamental Creative Inc. TOGETHER, WE ARE TOROMONT Toromont Industries Ltd. (TSX: TIH) is a diversiﬁed growth company operating through two business segments: the Equipment Group and CIMCO. Both segments provide specialized equipment and comprehensive product support capabilities. More information can be found at toromont.com and in this annual report. TOROMONT CAT BATTLEFIELD – THE CAT RENTAL STORE CIMCO REFRIGERATION With 60 branches across seven provinces and one territory, Toromont is one of the largest Caterpillar dealers in the world. As such, it serves the specialized heavy equipment, power generation and product support needs of thousands of mining, construction, demolition, paving, aggregate, waste management, agriculture, forestry, trucking, shipping, transit, public infrastructure and data centre customers. From 72 stores in our Cat dealer territories, supported by a rapid delivery-to-site business system, Battleﬁeld addresses the rental and purchase needs of contractors, specialty trades and do-it-yourself customers through its line-up of more than 250 brand-name machines, tools and supplies. CIMCO is North America’s largest supplier of industrial and recreational compression equipment and product support services for food, dairy, cold storage, beverage, pharmaceutical, automotive, chemical, petrochemical, mining and ice-rink applications. AGWEST LTD. TOROMONT MATERIAL HANDLING JOBSITE EQUIPMENT SITECH MID-CANADA LTD. From six facilities, AgWest serves the year-round equipment and product support needs of Manitoba’s agriculture industry as the official dealer of ACGO and CLAAS, two trusted brands for crop and livestock applications. From 14 locations, Toromont Material Handling rents, sells and services leading brand- name lift trucks, container handlers, industrial batteries, chargers and racking systems that ports and terminals, paper producers, automotive parts manufacturers, beverage companies, hardware retailers and other customers rely on to safely move, protect and store critical inventories. Across seven Ontario locations, Jobsite meets the specialized tool crib rental equipment needs of contractors working in industrial plants of all kinds, from automotive to pulp and paper. SITECH specializes in providing machine control, site positioning, and asset management technologies as well as professional support services as a Trimble and Cat AccuGrade® dealer in Ontario, Manitoba, Newfoundland, Quebec and Atlantic Canada. TOROMONT 2017 ANNUAL REPORT 1 FELLOW SHAREHOLDERS, We will remember 2017 as the year Toromont signiﬁcantly increased the scale of its Caterpillar dealership, represented by Toromont Cat and Battleﬁeld – The Cat Rental Store, by acquiring ownership of the businesses and net operating assets of the Hewitt Group of companies and expanding our employee base and service territory to include Quebec, the Maritimes and western Labrador. Robert M. Ogilvie Chairman of the Board Scott J. Medhurst President and CEO This milestone acquisition, Toromont’s largest, enhanced the size and diversity of our customer base, connected our operations in contiguous markets throughout Eastern and Central Canada and into the Far North, added scale in the form of 45 locations, and opened our doors to the talents of 2,100 additional employees. We will also remember 2017 as a year of good ﬁnancial results. Toromont earned $2.20 per diluted share in 2017, 11% more than in 2016 despite $0.05 per share of incurred costs related to the Hewitt transaction. Strong customer activity levels across most markets produced revenue growth for Toromont’s specialized equipment and product support-fueled business. Revenue was $2.4 billion, 23% above last year (or 10% excluding acquired operations). On higher earnings, return on opening shareholders’ equity was 19.3%, in line with our long-term goal of an 18% after-tax return over a business cycle. We are pleased that Toromont performed while simultaneously completing a large and complex acquisition. The ability to do both was a direct reﬂection of deep management bench strength developed over many years through decentralized decision-making. We are grateful to our empowered business- unit leaders and employees for focusing unwaveringly on operational excellence. The aggressive deployment of the balance sheet for acquisition purposes was made possible by Toromont’s strong ﬁnancial CIMCO, Battleﬁeld and Toromont Cat teamed up to provide equipment to the Canada 150 ice rink. A Toromont technician inspects a Cat C-175 generator, which provides mission critical power for mining, data centre and hospital applications. Battleﬁeld’s hub and spoke distribution model, backed by technology, means quick delivery of equipment to customer sites. foundation. We ﬁnanced the $1.02 billion purchase price through cash on hand, the issuance of 2.25 million Toromont shares, a $500 million note offering, a $250 million bank term loan and our credit facilities, which were expanded and extended. Even with the balance sheet so deployed, we maintained ﬁnancial ﬂexibility and, during the year, continued to reinvest for growth and proﬁt. While paying dividends of $59 million, Toromont allocated $140 million to its rental ﬂeets, property and plants to improve competitiveness. cylinders, engines, transmissions, ﬁnal drives, torque converters and off-the-shelf exchange components. At Toromont Cat Power Systems, best-ever revenue performance reﬂected strong demand across prime and standby power markets. The addition of Gorman Rupp pumps to Toromont’s product portfolio several years ago also continued to broaden opportunities as multiple units were placed with customers. Business Unit Highlights For Toromont Cat, 2017 was a breakthrough year on several levels. A clear highlight came in August when Toromont was named to Caterpillar’s Circle of Excellence. Only 15 of Caterpillar’s 171 dealers globally are chosen for this honour, based on performance across key metrics as well as their alignment with Caterpillar, our key business partner. Our service team also achieved coveted Gold status with Caterpillar. Global benchmarking and competition of this nature make us a better business. For Battleﬁeld, which marked its 40th anniversary in 2017, a disciplined focus resulted in improved participation in customer opportunities. To address customer demand, after- hours shifts were added to improve rental product availability, while automated service processes eliminated wasted bench and administration time. Efficiency and technology advancements continue to be key elements of the growth model. On the latter, a smartphone mobile “app,” introduced in late 2016, was well received by customers who now use it to optimize rental asset management. In 2018, more Android- based ordering tools will be added. Annual results were also noteworthy as the dealership experienced good activity levels generally in mining and construction sectors leading to more equipment sales, improved heavy rental ﬂeet utilization, and strong product support revenues ﬂowing from our large installed base. The roving mobile specialized service technicians assigned to Toromont’s virtual “Store 90” provided the ﬂexibility and expertise needed to meet demand for product support in remote territories without sacriﬁcing capacity in Toromont Cat branches. Toromont’s remanufacturing operations remained busy on signiﬁcant demand for rebuilt hydraulic Jobsite kept busy in 2017 with several industrial projects. Jobsite’s investment in a larger facility in Burlington, Ontario and a new location in Trenton, Ontario position it for ongoing growth. SITECH increased its professional consulting services to ensure customers receive full product support, as the adoption rate for software and hardware has accelerated. AgWest completed the third year of its operational excellence journey by driving solid new machine sales as a dealer of AGCO and CLAAS equipment, and broadening its product offering to TOROMONT 2017 ANNUAL REPO RT 3 MESSAGE TO SHAREHOLDERS EARNINGS PER SHARE (BASIC) 2017 REVENUES $2.22 $1.99 $1.88 $1.73 $1.61 2013 2014 2015 2016 2017 2 1 0 37% 44% New & used equipment – 44% Refrigeration equipment – 8% Rental – 11% Product support – 37% 11% 8% include Trimble’s Vantage portfolio of precision agronomy and water management technologies. For CIMCO, 2017 was another year of innovation and growth across recreational and industrial markets for products and product support. CIMCO’s engineering team, in concert with ﬁve OEM partners, introduced Smart Rink Connect – a portfolio of intelligent systems to monitor and report on the performance of compressors, chillers, condensers and dehumidiﬁers in real-time. Another highlight of CIMCO’s year was supporting innovative customer projects, such as the 13,000 sq. ft. Bentway skating path under Toronto’s Gardiner Expressway. It features the ﬁrst CO2/glycol refrigeration system in Ontario. Proving that we are stronger together, CIMCO teamed up with two other Toromont businesses to assist the Ottawa Senators and Capital Sports Management in the design-build of the Canada 150 Ice Rink on Parliament Hill. CIMCO provided a solution comprised of rental chillers and a back-up generator from Toromont Cat, and a quick-ice takeout system from Battleﬁeld. The temporary rink was a main attraction in the nation’s capital this past winter and will be reused at a local community after the event. Refrigeration packages for the Buffalo Sabres, Detroit Red Wings and the Las Vegas Golden Knights demonstrated the value of our long-term partnership with the NHL. Safety We are accountable for the safety of employees, a responsibility we accept as our most important. As our current safety journey has evolved, we experienced a noticeable improvement in total recordable injury frequency rate – down 37% in the past ﬁve years. This is a mathematical computation that measures how many recordable incidents occur per hours worked. Despite this progress, a tragic event at a customer location took the lives of three individuals in 2017, including a Toromont employee. We mourn their losses and are dedicated to ensuring the safety of our employees and all stakeholders. Governance John McCallum and David Galloway will not stand for re-election at this year’s annual and special meeting of shareholders. While their retirements were well planned, we will certainly miss their experienced leadership and insightful counsel. Mr. McCallum joined our Board in 1985, served as Lead Director for several years and, until recently, chaired the Audit Committee. Mr. Galloway joined us in 2002 and, until recently, chaired the Nominating and Corporate Governance Committee. We sincerely thank John and David for helping to set the standard for governance excellence that we follow today and for playing formative roles in Toromont’s success. The Way Forward Toromont is now a much larger business where it counts: in customer relationships across mining, construction and energy; geographic coverage; expanded product lines; product support; employee talent; and ﬁnancial resources. In an industry that has shown a trend toward consolidation in recent years, our expanded scope and scale will become an increasingly important competitive advantage. With a substantial growth platform now in place, it is our job to leverage the collective strengths of our business so that we can transform this potential into continuing growth. We began the integration program knowing the acquired and existing businesses were complementary, that we both shared 4 TOROMON T 2017 ANN UAL R EPO RT Marie-Josée Pagé, Engineering Supervisor and Jonathan Royal, Equipment Supervisor collaborate on a customer project at Toromont’s operations in Pointe-Claire, Quebec. Toromont supports infrastructure projects, including road paving, with specialized equipment, technology and service. Cat dealer processes and that best-practice exchange across all operations could lead to improvements. To set the stage, we started with leadership appointments and embarked on the collaborative development of detailed strategic and business plans for 2018. Rebranding acquired operations under the Toromont Cat and Battleﬁeld logos underscored our intention to provide a consistent customer experience across all territories. Critical to the achievement of our objectives is embedding Toromont’s decentralized management approach in acquired operations. Decentralization means granting management authority to our business unit leaders, matched by accountability for performance and alignment with Toromont’s business model and ﬁve core strategies: expand markets, strengthen product support, broaden product offerings, invest in resources and maintain a strong ﬁnancial foundation. company with deep roots in both cities anchoring our North American presence. In 2018, Toromont will celebrate its 50th anniversary as a public company and we are proud of our track record of proven, steady growth. However, we know that success is never guaranteed; it is the product of hard work and good decisions made by a focused team. At Toromont, we are exceedingly fortunate to have such a team; from our 6,000 employees who expertly represent our brands to our experienced Board of Directors, corporate officers and business unit leaders who set the tone. Together, we are out to prove once again that we are stronger for our customers, shareholders and business partners to whom we offer our utmost thanks for participating in a most memorable year. We are pleased and encouraged by the positive and enthusiastic response the business combination has received to date from all quarters of the Company and beyond. We are particularly grateful to Caterpillar for endorsing this transaction. Yours sincerely, Looking ahead, our agenda is action-oriented and focuses on continuous improvement. Coming Full Circle The name Toromont was conceived in 1961 by private investors in Toronto and Montreal who came together to form a business that would leverage the opportunities resident in what, at that time, were Canada’s two main centres of commerce. While much has changed over the past 57 years as Canada and Toromont have grown, we are proud to remain a Canadian Scott J. Medhurst President and CEO Robert M. Ogilvie Chairman of the Board TOROMONT 2017 ANNUAL REPORT 5 TOGETHER, WE COVER MORE GROUND The recent expansion of our Toromont Cat and Battleﬁeld territories created a contiguous market to address, stretching from western Manitoba to the eastern tip of Newfoundland and north to Ellesmere Island. Home to 72% of Canada’s population, 68% of its economic output and a large share of its natural resources, it’s an enormously diverse area. It’s also a region Toromont is ideally situated to serve. By working together using our extensive branch network, ﬂeets of service vehicles, and proven logistics and technology capabilities, we will cover more ground for customers and shareholders than ever before. HEWITT ACQUISITION LOCATIONS EQUIPMENT GROUP LOCATIONS CIMCO LOCATIONS 6 TOROMON T 2017 AN NUAL R EP O RT 2,100 45 Additional employees Additional locations 146 Locations 6,000 Employees $176m Net income Toromont earned $2.20 per diluted share in 2017, 11% more than in 2016 despite $0.05 per share of incurred costs related to the Hewitt transaction. TOROMONT 2017 ANNUAL REPORT 7 SUSTAINABILITY REPORT Consistent earnings performance is only one part of Toromont’s responsibility as a company. To succeed, we must grow safely and with integrity, and we must lead in ways that support the development of employees, the progress of customers and business partners and the sustainability of the communities in which we work. 8 TOROM ON T 2017 AN NUAL REP O RT Safety The safety of our 6,000 employees and all stakeholders who enter Toromont’s 146 places of business is our most important obligation. As a result, we long ago established the appropriate structure and processes to ensure that all aspects of safety stewardship, including training and compliance, are prioritized across our operations and that all team members are given the tools and encouragement they need to keep themselves and their colleagues safe. In 2017, employees participated in over 10,250 hours of formal, job-speciﬁc safety training needed to recognize, avoid and mitigate the risks inherent in their occupations and workspaces. While training provides important technical knowledge, and reinforces the safety culture at Toromont, it is not enough. Awareness, diligence and accountability form the most effective lines of defense against injury. For many years, and again in 2017, we brought attention to safety through company-wide Safety Talks. These are short, informative daily reminders of how to avoid injury. Everyone at Toromont is more aware because of this initiative. To enhance participation, the corporate health and safety team shared ownership for Safety Talk content with Toromont Cat branches in 2017. Branch-led discussions brought focus to operations-speciﬁc hazards, while corporate Safety Talks provided an opportunity to spread awareness of policy changes. Consistent with our decentralized approach, safety strategies continued to be customized and championed in all divisions. In 2017, two-day Leadership Safety Summits were introduced at selected Toromont Cat branches that enlisted the participation of branch leaders and supervisors with a focus on how to improve effectiveness. Branch employees, without the presence of their supervisors, were asked to offer their advice on how to enhance our safety-ﬁrst culture. A visibility campaign with rotating posters promoting key safety messages placed in high-traffic areas was also introduced. Some divisions build awareness through recognition programs. At Battleﬁeld, where a core competency is the delivery of equipment to customer job sites, a quarterly and annual awards program for safe driving and clean inspections was introduced. At Toromont Cat, the annual Safety Bucket Award is given annually to the branch that best demonstrates the proper behaviours, which in 2017 was Timmins, Ontario. Safety is also a consideration in equipment purchases. In 2017, Toromont Cat adopted a new metal-on-metal policy mandating the use of soft steel sledge hammers, which are safer and lighter. Ergonomically correct sit/stand desks were purchased in a pilot test to help employees avoid back and neck strains. We encourage diligence through the mandated use of standardized pre-job-hazard assessments, which require technicians in all Toromont businesses to identify the speciﬁc risks inherent in every project (equipment installation and repair) and document the steps to be taken to mitigate those risks. In 2017, Battleﬁeld’s pre-job hazard assessment forms were digitized, making it easier and faster for service and road technicians to complete. Accountability is engendered in several ways. Our Board of Directors is actively involved in safety stewardship. By reviewing safety results and practices at all regularly scheduled Board meetings, and demanding accountability for performance, the A Growing Toromont Tribute to Canada 150 To celebrate Canada’s 150th anniversary and show our support for environmental sustainability, Toromont employees set a goal to plant 150 maple trees at our facilities and in local parks. The idea blossomed and, at ﬁnal count, over 350 trees were added from Manitoba through Newfoundland. SUSTAINABILITY REPORT Directors establish the right tone from the top. At the management level, we tie variable compensation to safe operating performance and to management involvement in promoting safe behaviours. Managers and supervisors demonstrate their commitment by being visible and active. We achieve the best results when all employees are accountable for their own safety and the safety of their colleagues. This is where Toromont’s Five Cardinal Safety Rules policy plays its part. This policy reﬂects our serious commitment to the ﬁve behaviours that we deem of utmost importance: be ﬁt for duty; assess all hazards prior to starting the job; control all hazardous energy; wear the right personal protective equipment; and, report all incidents. Failure to comply leads to disciplinary action up to employment termination. As a result of employees’ collective dedication to safety, Toromont’s total recordable injury frequency rate has been cut by 37% over the past ﬁve years. Despite the extensive efforts of our team at all levels, we were devastated by a tragic accident, which claimed the lives of three individuals in 2017, including a Toromont employee. This has deepened our commitment to ensuring the safety of our employees and all stakeholders. Toromont is deeply engaged in safety, not simply because it is the right thing to do but because it is essential. Only when employees go home safely after their workdays does Toromont succeed as an employer, a supplier and as a responsible partner in communities throughout North America. empowered workforce where employees have opportunities to develop their skills, embrace new challenges and share in the rewards of superior ﬁnancial performance. One of the ways we achieve our workforce goals is through a decentralized approach to management. We believe that assigning authority and accountability deep into the organization creates a more meaningful work environment, strengthens talent development and ultimately leads to better decisions in support of our customer relationships. To set the right foundation for empowerment, we invest 70% more in training per employee than the average company in North America based on benchmark data published by American Talent Development. We use these funds for programs that are custom-tailored to meet the speciﬁc needs of employees serving in our business units. All Toromont Cat employees participate in setting personal annual training and development goals. We support goal attainment by documenting the key competencies that are necessary for each individual’s success based on their role and making online and classroom training available to develop those competencies. Educational resources, catalogued in a Development Playbook, are bolstered by dozens of courses available through Caterpillar’s dealer performance centre and from online educational service providers. In aggregate, Toromont Cat employees completed over 85,000 hours of technical training, over 2,500 hours of leadership and professional skills coaching and received over 2,700 hours of customer experience training in 2017 to elevate their capabilities and hone their skills. Employee Development We recognize that employees who are committed to their work and to the Company are more customer focused, more productive, and more likely to build a long-term career at Toromont. For these reasons, we strive to create an Beyond core programs, we add specialized training. In 2017, as part of our collective commitment to better serving the natural resources industry, Toromont hosted a week-long, Caterpillar- delivered Mining Equipment Management workshop for Canadian Cat dealers. It improved our knowledge of machine Toromont Cat Recognized as One of Canada’s Best Employers In February 2018, Forbes named Toromont Cat one of Canada’s Best Employers using the ﬁndings of an independent survey of more than 8,000 Canadian workers. With a guarantee of anonymity, participants were asked to rate their willingness to recommend their own employers to friends and family and were prompted to evaluate other employers in their respective industries. Three hundred companies receive this distinction, including leaders such as Google Canada and Microsoft Canada. 10 TOROMON T 2017 AN NUAL RE PO RT applications, maintenance strategies, and customer needs. A Great Sales Leadership workshop was also held to elevate the capability of our sales leaders through the effective use of planning, coaching and communications strategies. “To set the right foundation for empowerment, we invest 70% more in training per employee than the average company in North America” In 2017, we created the Leaders@Work learning portal for release in 2018. The curriculum sets out a learning path for all new Toromont Cat leaders. As the name suggests, participants can continue to lead while learning because courses are available on demand and online. The majority of Toromont’s new leaders are promoted from within, making this type of training essential. Toromont Cat’s two-year Management Trainee Program continued to provide an opportunity for skills development for high-potential future leaders recruited from Canadian universities. This program has proven to be instrumental in expanding the pool of emerging management talent over many years. In 2018, we intend to double the number of management trainees in the program to augment our leadership pipeline in support of future growth. The long-running Toromont Cat apprenticeship program continues to feed a steady supply of technicians. At year end, 123 apprentices were moving toward completion of the technical training and hours of experience required to achieve journeyperson status. One of the ways we identify and attract future technicians and other talented people is through partnerships with 10 academic institutions that offer specialized skills training. To bolster recruitment in an area of its business that is facing skills shortages, CIMCO developed, for 2018 launch, an apprenticeship program for product support technicians. During the year, CIMCO engineers were trained in newly acquired Revit software, which enables users to design a building’s refrigeration and mechanical structures in three dimensions. This investment shortens design time. Additionally, CIMCO reorganized its sales force and placed more emphasis on sales coaching with the goal of improving customer loyalty and growing revenue. As part of the reward for all that they do, employees are given the option of participating in Toromont’s Employee Share Purchase plan as a complement to their regular compensation and beneﬁts. A large percentage of our workforce participates in this plan, and as owners, our employees have an alignment of interest with our public shareholders. These and other ongoing employee-development efforts have made Toromont a career destination of choice, with one of the lowest turnover rates in our industry. Stronger Together Through Human Resources Best-Practice Exchange The dealership acquisition in October 2017 provides an opportunity to strengthen the human resources strategies and practices of our larger corporation through a best- practice exchange. To capitalize on this opportunity, we are benchmarking safety, employee development, diversity and charitable-giving programs across the organization. We are pleased to note that the two predecessor organizations had shared values, including a belief in the pre-eminence of employee safety, training and awareness. Management Trainee Program Among Best-in-Class Separately, Toromont’s Management Trainee Program received special recognition in the “Best First Time Manager Development Program” and “Best Executive Coaching Program” categories at the 2018 LEAD (Leadership Excellence And Development) Awards in Salt Lake City, Utah. LEAD brings together human resources professionals globally for its annual conference and selects the top 15 companies in each judging category. Other top names included Rogers Communications and Cisco Systems. TOROMONT 2017 ANNUAL REPORT 11 SUSTAINABILITY REPORT Diversity and Inclusion Toromont continuously explores new and innovative ways to enhance diversity hiring and maintain a workplace that is welcoming to all people who share our enthusiasm for hard work, uncompromising integrity and stakeholder value creation. By embracing diversity, we gain a richer range of experience that helps to make Toromont a better business. Policy, training and recruitment are used to reinforce the development of an inclusive culture where leaders value and nurture differences and set the tone for respectful workplaces. To formalize our approach, Toromont Cat created a Diversity Council. It includes employees from under-represented groups who work together to spearhead speciﬁc action plans that will help shape our culture. In recent years, we’ve developed partnerships with inﬂuential third parties that connect us to members of their communities for the purposes of hiring and promoting careers in our industry. This includes valued partnerships with the Moose Cree, the Cree people of Attawapiskat, Ontario and the Inuit and Innu of Canada’s North. We also engaged with COSTI Immigrant Services and the Toronto District School Board. As a result of involvement with the Board’s Enhanced Language Training Program, Toromont hosted a six-week placement in its EM Solutions Group for an internationally trained professional to gain relevant Canadian experience with the possibility of full-time employment. As part of our Power of People recruitment program, we created Women@Toromont and Diversity in Action videos (available on Toromont’s YouTube channel), the former featured as part of International Women’s Day celebrations. We participated in Ryerson University’s diversity networking event that allowed us to gain students’ perspectives on inclusion. Ten Toromont women also participated in the Women in Construction dinner that is held annually to create awareness of exciting career opportunities available in our industry. We also walk the walk: 30% of our 2017 management trainees were women from mining and construction engineering ﬁelds. Encouraging young people to enter the skilled trades is also important, and we do so, in part, through our long-running THINK BIG scholarship program. It continued in 2017 with an award to a Centennial College student who is now completing a level 1 apprenticeship in our Concord branch. Outreach to secondary-school students is another key tactic. In 2017, our Jobsite division contributed specialized tooling and Toromont Cat provided personal protective equipment to a 40-member high-school robotics team competing in the annual FIRST Robotics Canada showcase. We were delighted to note that young women made up almost half of the Wybern school team. These and other initiatives are slowly but surely making Toromont a more diverse business and planting the seeds for a bigger and more diverse pool of future recruits. Stronger Together for Our Communities Toromont’s official charity is the United Way, chosen 15 years ago because it serves those in need in communities throughout North America where we do business and offers employees the chance to collaborate as volunteers to raise funds and awareness. This alignment was reinforced with our dealership acquisition, as the acquired organization also aligned their primary charitable giving with United Way/Centraide. In 2017, Toromont employees contributed $465,000 to this important cause through grassroots events. Contributions to individual charities, such as Toronto’s SickKids hospital rounded out our activities in support of building healthier communities. Environment Toromont has a relatively small environmental footprint, notwithstanding our broader scope of operations. This does not negate our responsibility to care for the environment. We Toromont Atlantic Shows Caring Community Spirit Fifteen Toromont Cat Atlantic and Battleﬁeld employees marked the 100th anniversary of the Halifax Explosion by teaming up in a United Way-led Day of Action in December in support of YWCA Halifax, North Woodside Community Centre, and Excalibur ADHD Association, providing another example of how we are stronger together for our communities. 12 TOROMONT 2017 ANN UAL REP O RT demonstrate our duty by committing to meet all regulations, maintaining environmental management processes that control and minimize our impact and seeking to continuously improve performance through regular assessments and ongoing investments. By remanufacturing and rebuilding customers’ used machines and components, Toromont also contributes to the aptly named circular economy. Every year, remanufacturing operations extend the life of heavy equipment and, in the process, divert tonnes of end-of-life material from landﬁll. Our ﬂeet of vehicles is the single largest contributor to greenhouse gas (GHG) emissions in our business. Accordingly, we maintain anti-idling policies and employ GPS monitoring of our service vehicles to track and seek to eliminate excessive idling. Fuel efficiency is also a key factor in the selection of service vehicles. Our network of facilities is the second largest source of GHG. Some branches are older and when they are renewed, we add energy-saving elements, such as insulated and sealed doors and fresh-air intake systems, which result in lower energy consumption. Continued replacement of old compressed-air units with high-efficiency systems leads to incremental improvement. Our other main source of GHG is engine testing. To reduce this impact, we operate a Power Systems’ testing facility in Brampton, Ontario, that incorporates a selective catalytic reduction emission abatement system. It minimizes the release of nitrogen oxide and sulfur oxide during generator testing by up to 95%. Toromont uses water in its operations. To reduce consumption, we invest in waste-water treatment and water recycling for equipment cleaning. In 2017, Battleﬁeld added wash-water treatment systems to stores in London, Ontario and St. John’s, Newfoundland. Toromont Cat added similar systems in Hamilton, Timmins and Concord branches in Ontario. These additions expand the network of stores and branches that have made these important investments. Since 2012, Toromont Cat has reduced waste by recycling absorbent cloths used in cleaning and repairing machines. Since then, 48,170 kilograms of waste were diverted from landﬁll and 33,257 litres of liquid including oil were recovered. In addition to in-house conservation, Toromont and its business partners produce products that help customers achieve their sustainability objectives. At CIMCO, ECO CHILL® technologies, which collect and recycle energy used in the refrigeration process, have cumulatively offset 740,000 CO2-equivalent tonnes (the same amount produced by 164,000 cars) compared to traditional refrigeration and saved 13 billion cubic feet of natural gas since they were introduced to the market. In 2017, CIMCO introduced Adiabatic coolers. Designed for rural rinks that rely on well water, these systems reduce water consumption by up to 80% compared to conventional evaporative condensers without compromising energy efficiency and without the use of chemical treatments or pumps. To remain an industry leader, Toromont works to be a better company for employees, customers, shareholders and the communities where we do business. While we are pleased with the efforts and progress made in 2017, there is always room to improve when it comes to sustainability in all its forms. CORPORATE GOVERNANCE A strong and effective corporate governance program continues to be a principal priority for Toromont. The Nominating and Corporate Governance Committee, on behalf of the Board, establishes and monitors the governance program and its effectiveness. The Company’s corporate governance structure and procedures are founded on our Code of Business Conduct that applies to all Directors, officers and employees. Our governance program includes the activities of the Board of Directors, who are elected by and are accountable to the shareholders, and the activities of management, who are appointed by the Board and are charged with the day-to-day management of the Company. Toromont regularly reviews and enhances its governance practices in response to evolving regulatory developments and other applicable legislation. The Company’s corporate governance program is in compliance with National Policy 58-201 – Corporate Governance Guidelines and Multilateral Instrument 52-110 – Audit Committees. Board of Directors The role of the Board of Directors, its activities and responsibilities are documented and are assessed at least annually, as are the terms of reference for each of the committees of the Board, the Chairs of the committees, the Lead Director and the Chairman, inclusive of scope and limits of authority of management. The Board acts in a supervisory role and any responsibilities not delegated to management remain with the Board. The Board’s supervisory role includes such matters as strategic planning, identiﬁcation and management of risks, succession planning, communication policy, internal controls and governance. The Lead Director is an independent Director, appointed annually by the independent Directors of the Board to facilitate the Board’s functioning autonomously from management. The Lead Director serves as a non-partisan contact for other Directors on matters not deemed appropriate to be discussed initially with the Chairman or in situations where the Chairman is not available. The Lead Director is available to counsel the Chairman on matters appropriate for review in advance of discussion with the full Board of Directors. For more information on the Board of Directors, please refer to the Management Information Circular dated February 28, 2018, prepared in connection with the Corporation’s 2018 Annual and Special Meeting of Shareholders available on our website at toromont.com. 14 TOROMONT 2017 ANN UAL R EPO RT Committee Structure and Mandates Committees of the Board are an integral part of the Company’s governance structure. Three committees have been established with a view toward allocating expertise and resources to particular areas, and to enhance the quality of discussion at Board meetings. The committees facilitate Board decision-making by providing recommendations to the Board on matters within their respective responsibilities. All committees are comprised solely of Directors who are independent of management. A summary of the responsibilities of the committees follows. The Audit Committee Principal duties include oversight responsibility for ﬁnancial statements and related disclosures, reports to shareholders and other related communications, establishment of appropriate ﬁnancial policies, the integrity of accounting systems and internal controls, legal compliance on ethics programs established by management, the approval of all audit and non-audit services provided by the independent auditors and consultation with the auditors independent of management, and overseeing the work of the auditors and the Internal Audit department. The Nominating and Corporate Governance Committee Principal responsibilities are reviewing and making recommendations as to all matters relating to effective corporate governance. The committee is responsible for assessing effectiveness of the Board, its size and composition, its committees, Director compensation, the Board’s relationship to management, and individual performance and contribution of its Directors. The committee is responsible for identiﬁcation and recruitment of new Directors and new Director orientation. The Human Resources and Compensation Committee Principal responsibilities are compensation of executive officers and other senior management, short- and long- term incentive programs, pension and other beneﬁt plans, executive officer appointments, evaluation of performance of the Chief Executive Officer, succession planning and executive development. The committee also oversees compliance with the Company’s Code of Business Conduct and the health, safety and environment program. Board of Directors L to R: James W. Gill, Robert M. Franklin, Scott J. Medhurst, John S. McCallum, Robert M. Ogilvie, Cathryn E. Cranston, Jeffrey S. Chisholm, David A. Galloway, Katherine A. Rethy, Wayne S. Hill TOROMONT 2017 ANNUAL REPORT 15 EXECUTIVE OPERATING TEAM L to R: David C. Wetherald, Paul R. Jewer, David A. Malinauskas, Michael P. Cuddy, Jennifer J. Cochrane, Scott J. Medhurst, Randall B. Casson Labrador and holds the ICD.D designation as a member of the 2004 and became President and CEO of Toromont Institute of Corporate Directors. Industries Ltd. in 2012. Mr. Mr. Jewer is also Past Chair Medhurst is a graduate of and a Director of the Board Toromont’s Management of The Country Day School, Trainee Program. He is an independent school in currently an active member King City, Ontario. David A. Malinauskas President, CIMCO Refrigeration Mr. Malinauskas was appointed President of CIMCO on January 1, 2015, following a successful 16-year career with the business. He has held various positions of increasing responsibility, including most recently, of the World Presidents’ Organization and Caterpillar Global Mining Council. David C. Wetherald Vice President, Human Resources and Legal Mr. Wetherald joined Toromont in 2004 as General Counsel and Corporate Secretary and became Vice President, Human Resources and Legal in 2008. He was previously employed with Torstar Corporation for 11 years as General Counsel & Secretary with corporate development responsibilities, and prior to that for ﬁve years with Davies. Michael P. Cuddy Vice President and Chief Information Officer Mr. Cuddy joined Toromont as General Manager, Information Technology and Chief Information Officer in 1995 and became Vice President and Chief Information Officer in 2004. He held various positions previously with Ontario Hydro, Imperial Oil and Bell Mobility, and holds a BSc and an MBA, both from the University of Toronto. Paul R. Jewer Executive Vice President and Chief Financial Officer Randall B. Casson President, Toromont Construction Division / Battleﬁeld – The Cat Rental Store Mr. Casson joined Toromont in 1977. He was appointed Vice President and General Manager, Northern Region in 1997 and became President of Battleﬁeld in 2001. He is a graduate of Toromont’s Management Trainee Program. He was appointed to his current position in 2012. Jennifer J. Cochrane Vice President, Finance Ms. Cochrane joined Toromont in 2003 and has held increasingly senior management positions within the ﬁnance area. She is a CPA, CA. Ms. Cochrane was appointed to her current position in 2013. 16 TOROMONT 2017 AN NUAL REP O RT Mr. Jewer joined Toromont Director of Engineering. He in 2005 as Chief Financial is a Professional Engineer Officer. Prior to joining Toromont, he served for ﬁve years as Chief Financial Officer for another Canadian publicly listed company. He is a Fellow of CPA Ontario (FCPA, FCA), a member of CPA Newfoundland and and received his MBA in 2001. Scott J. Medhurst President and Chief Executive Officer Mr. Medhurst joined Toromont in 1988. He was appointed President of Toromont Cat in MANAGEMENT’S DISCUSSION & ANALYSIS Management’s Discussion and Analysis This Management’s Discussion and Analysis (“MD&A”) comments on the operations, performance and ﬁnancial condition of Toromont Industries Ltd. (“Toromont” or the “Company”) as at and for the year ended December 31, 2017, compared to the preceding year. This MD&A should be read in conjunction with the attached audited consolidated ﬁnancial statements and related notes for the year ended December 31, 2017. 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 22, 2018. Additional information is contained in the Company’s ﬁlings with Canadian securities regulators, including the Company’s 2017 Annual Report and 2018 Annual Information Form. These ﬁlings are available on SEDAR at sedar.com and on the Company’s website at toromont.com. Advisory equipment manufacturer agreements; risks related to integration of Hewitt Information in this MD&A that is not a equipment product acceptance and operations with those of Toromont historical fact is “forward-looking availability of supply; increased including cost of integration and ability to information”. Words such as “plans”, competition; credit of third parties; achieve the expected beneﬁts. Readers are “intends”, “outlook”, “expects”, additional costs associated with warranties cautioned that the foregoing list of factors “anticipates”, “estimates”, “believes”, and maintenance contracts; changes in is not exhaustive. “likely”, “should”, “could”, “will”, “may” and interest rates; the availability of ﬁnancing; Any of the above mentioned risks and similar expressions are intended to identify potential environmental liabilities of the uncertainties could cause or contribute to statements containing forward-looking acquired businesses and changes to actual results that are materially different information. Forward-looking information environmental regulation; failure to attract from those expressed or implied in the in this MD&A reﬂect current estimates, and retain key employees; damage to the forward-looking information and beliefs, and assumptions, which are based reputation of Caterpillar, product quality statements included in this MD&A. For a on Toromont’s perception of historical and product safety risks which could further description of certain risks and trends, current conditions and expected expose Toromont to product liability claims uncertainties and other factors that could future developments, as well as other and negative publicity; new, or changes to cause or contribute to actual results that factors management believes are current, federal and provincial laws, rules are materially different, see the risks and appropriate in the circumstances. and regulations including changes in uncertainties set out in the “Risks and Risk Toromont’s estimates, beliefs and infrastructure spending; and any Management” and “Outlook” sections assumptions are inherently subject to requirement of Toromont to make herein. Other factors, risks and signiﬁcant business, economic, contributions to the registered funded uncertainties not presently known to competitive and other uncertainties and deﬁned beneﬁt pension plans, post- Toromont or that Toromont currently contingencies regarding future events and employment beneﬁts plan or the multi- believes are not material could also cause as such, are subject to change. Toromont employer pension plan obligations in which actual results or events to differ materially can give no assurance that such estimates, it participates in and acquired from Hewitt from those expressed or implied by beliefs and assumptions will prove to be thereunder in excess of those currently statements containing forward-looking correct. This MD&A also contains forward- contemplated. Risks and uncertainties information. looking statements about the recently related to the acquisition of the Hewitt Readers are cautioned not to place acquired businesses of Hewitt. operations could also cause the actual undue reliance on statements containing Numerous risks and uncertainties could results to differ materially from the forward-looking information, which reﬂect cause the actual results to differ materially estimates beliefs and assumptions Toromont’s expectations only as of the from the estimates, beliefs and expressed or implied in the forward-looking date of this MD&A, and not to use such assumptions expressed or implied in the statements, including but not limited to: information for anything other than their forward-looking statements, including, but changes in consumer and business intended purpose. Toromont disclaims any not limited to: business cycles, including conﬁdence as a result of the change in obligation to update or revise any forward- general economic conditions in the ownership; the potential for liabilities looking information, whether as a result of countries in which Toromont operates; assumed in the acquisition to exceed our new information, future events or commodity price changes, including estimates or for material undiscovered otherwise, except as required by law. changes in the price of precious and base liabilities in the Hewitt business; the metals; changes in foreign exchange rates, potential for third parties to terminate or including the Cdn$/US$ exchange rate; alter their agreements or relationships with the termination of distribution or original Toromont as a result of the acquisition; and 18 TOROMONT 2017 AN N UAL RE PO RT Corporate Development Acquisition of the Hewitt Group of Companies (“Hewitt”) On October 27, 2017, Toromont completed engine dealer for Québec, the Maritimes operations in the mining, construction, the acquisition of the businesses and net and the Eastern seaboard of the United power systems, product support and operating assets of Hewitt. States, from Maine to Virginia. Additional expanded product lines. Hewitt was the authorized Caterpillar distribution rights were also acquired in For further information on the dealer for the province of Québec, Western this transaction. accounting for the acquisition, refer to Labrador and the Maritimes, as well as the This important transaction delivers note 3 of the notes to the consolidated Caterpillar lift truck dealer for Québec and a substantial growth opportunity, and ﬁnancial statements. most of Ontario, in addition to the MaK strengthens the Company’s expertise and Corporate Proﬁle and Business Segmentation As at December 31, 2017, Toromont driven by activity in several industries: road Brunswick, Nova Scotia, Prince Edward employed approximately 6,000 people in building and other infrastructure-related Island and most of Nunavut. Additionally, 146 locations across Canada and the United activities; mining; residential and the Company is now the MaK engine dealer States. Toromont is listed on the Toronto commercial construction; power generation; for the Eastern seaboard of the United Stock Exchange under the symbol TIH. aggregates; waste management; steel; States, from Maine to Virginia. Toromont has two reportable operating forestry; and agriculture. Signiﬁcant CIMCO is a market leader in the design, segments: the Equipment Group and CIMCO. activities include the sale, rental and service engineering, fabrication, installation and The Equipment Group includes of mobile equipment for Caterpillar and after-sale support of refrigeration systems Toromont CAT, one of the world’s larger other manufacturers; sale, rental and in industrial and recreational markets. Caterpillar dealerships, Battleﬁeld – The service of engines used in a variety of Results of CIMCO are inﬂuenced by CAT Rental Store, an industry-leading rental applications including industrial, conditions in the primary market segments operation, Sitech, providing Trimble commercial, marine, on-highway trucks and served: beverage and food processing; cold technology products and services, AgWest, power generation; and sale of storage; food distribution; mining; and an agricultural equipment and solutions complementary and related products, parts recreational ice rinks. CIMCO offers dealer representing AGCO, CLAAS and and service. Pursuant to the acquisition, the systems designed to optimize energy usage other manufacturers’ products, in addition Company is now the exclusive Caterpillar through proprietary products such as ECO to the recently acquired businesses, which dealer for a contiguous geographical CHILL®. CIMCO has manufacturing facilities are in varying stages of integration. territory in Canada that covers Manitoba, in Canada and the United States and sells Performance in the Equipment Group is Ontario, Quebec, Newfoundland, New its solutions globally. TOROMONT 2017 ANNUAL REPORT 19 Primary Objective and Major Strategies The primary objective of the Company is to develop closer relationships with customers advantage. Growth is dependent on build shareholder value through sustainable and differentiate the Company’s product and attracting, retaining and developing and proﬁtable growth, supported by a service offering. The ability to consistently employees with values that are consistent strong ﬁnancial foundation. To guide its meet or exceed customers’ expectations for with Toromont’s. A highly principled culture, activities in pursuit of this objective, service efficiency and quality is critical, as share ownership and proﬁtability-based Toromont works toward speciﬁc, long-term after-market support is an integral part of incentive programs result in a close ﬁnancial goals (see section heading “Key the customer’s decision-making process alignment of employee and shareholder Performance Measures” in this MD&A) and when purchasing equipment. interests. By investing in employee training each of its operating groups consistently and development, the capabilities and employs the following broad strategies: Broaden Product Offerings productivity of employees continually Toromont delivers specialized capital improve to better serve shareholders, Expand Markets equipment to a diverse range of customers customers and business partners. Toromont serves diverse markets that offer and industries. Collectively, hundreds of Toromont’s information technology signiﬁcant long-term potential for proﬁtable thousands of different parts are offered represents another competitive expansion. Each operating group strives to through the Company’s distribution differentiator in the marketplace. The achieve or maintain leading positions in channels. The Company expands its Company’s selective investments in markets served. Incremental revenues are customer base through selectively technology, inclusive of e-commerce derived from improved coverage, market extending product lines and capabilities. initiatives, strengthen customer service share gains and geographic expansion. In support of this strategy, Toromont capabilities, generate new opportunities for Expansion of the installed base of equipment represents product lines that are growth, drive efficiency and increase provides the foundation for product support considered leading and generally best-in- returns to shareholders. growth and leverages the ﬁxed costs class from suppliers and business partners associated with the Company’s infrastructure. who continually expand and develop their Maintain a Strong Financial Position offerings. Strong relationships with A strong, well-capitalized balance sheet Strengthen Product Support suppliers and business partners are critical creates stability and ﬁnancial ﬂexibility, and Toromont’s parts and service business is a in achieving growth objectives. has contributed to the Company’s signiﬁcant contributor to overall proﬁtability long-term track record of proﬁtable growth. and serves to stabilize results through Invest in Resources It is also fundamental to the Company’s economic downturns. Product support The combined knowledge and experience future success. activities also represent opportunities to of Toromont’s people is a key competitive 20 TOROMONT 20 17 ANNUAL R EP O RT Consolidated Annual Operating Results ($ thousands, except per share amounts) 2017 2016 $ change % change Revenues Cost of goods sold $ 2,350,162 1,794,213 $ 1,912,040 1,443,978 $ 438,122 350,235 Gross proﬁt (1) Selling and administrative expenses Gain on sale of internally-developed software Operating income (1) Interest expense Interest and investment income Income before income taxes Income taxes Net earnings 555,949 306,367 — 249,582 12,277 (4,659) 241,964 65,994 175,970 468,062 256,438 (4,939) 216,563 7,242 (4,006) 213,327 57,579 155,748 87,887 49,929 4,939 33,019 5,035 (653) 28,637 8,415 20,222 Basic earnings per share $ 2.22 $ 1.99 $ 0.23 23% 24% 19% 19% nm 15% 70% 16% 13% 15% 13% 12% Key ratios: Gross proﬁt margin (1) Selling and administrative expenses as a % of revenues Operating income margin (1) Income taxes as a % of income before income taxes Return on capital employed (1) Return on equity (1) 23.7% 13.0% 10.6% 27.3% 21.5% 19.3% (1) Deﬁned in the sections titled “Description of Additional GAAP and Non-GAAP Measures.” 24.5% 13.4% 11.3% 27.0% 24.5% 20.0% The Company delivered another solid year, lower average proﬁt margins in Toromont A gain of $4.9 million on the sale of both in terms of incremental volumes and QM. In the Equipment Group, challenging internally-developed software was proﬁt generated by the acquired market conditions continued to exert recorded in 2016. businesses, and on solid organic growth downward pressures on equipment Interest expense increased as a result of generated by the legacy Equipment Group margins. At CIMCO, higher package the debenture offerings and amendments businesses and CIMCO. margins served to offset lower product to the credit facility to partially fund the For the remainder of this document, support margins. Across both Groups, a acquisition. unless otherwise indicated, speciﬁc higher proportion of equipment revenues Interest income increased on higher comments on operating results will refer to to higher margin product support revenues investment income resulting from higher the legacy Toromont businesses only. dampened overall margins. average cash balances held in anticipation Where applicable, the acquired businesses Selling and administrative expenses of the acquisition, partially offset by lower will be referred to collectively as Toromont increased $49.9 million or 19% reﬂecting interest from conversions of equipment on Quebec/Maritimes (“Toromont QM”). the incremental expenses at Toromont QM rent with a purchase option (“RPO”). RPO Toromont QM generated revenues of for the two months ($38.0 million), higher interest income varies based on the length $242.6 million for the two months since compensation costs (up $5.6 million), of the rental period to conversion. acquisition. Excluding this, revenues grew acquisition-related expenses ($6.0 million) The effective income tax rate for 2017 10% or $195.5 million to $2.1 billion. The and higher mark-to-market adjustments on was 27.3% compared to 27.0% in 2016. Equipment Group reported a 10% increase Deferred Share Units (“DSUs”) (up $0.9 Net earnings in 2017 were $176.0 on strong equipment sales and rentals million). Most other expense categories million, up 13% from 2016 while basic along with continued product support growth. CIMCO also reported strong were lower as the Company remains focused on expense management. earnings per share (“EPS”) increased $0.23 or 12% to $2.22. growth of 13% on record package sales and Excluding Toromont QM and acquisition- Excluding all impact of the acquisition of product support revenues. related expenses, selling and administrative Toromont QM together with the software Gross proﬁt margin was lower by 80 expenses as a percentage of revenues were gain in 2016, net earnings increased 16% basis points (“bps”), half of which related to 100 bps lower (12.4% versus 13.4%). while EPS increased 15%. TOROMONT 2017 ANNUAL RE PORT 21 Comprehensive income in 2017 was $168.2 million (2016 - $154.2 million), comprised mainly of net earnings and other comprehensive loss resulting from an actuarial loss on deﬁned beneﬁt pension and other post-employment beneﬁt plans and an unfavorable change in the fair value of cash ﬂow hedges. Business Segment Annual Operating Results The accounting policies of the segments are the same as those of the consolidated entity. Management evaluates overall business segment performance based on revenue growth, operating income relative to revenues and return on capital employed. Corporate expenses are allocated based on each segment’s revenue. Interest expense and interest and investment income are not allocated. Equipment Group ($ thousands) Equipment sales and rentals New Used Rentals Total equipment sales and rentals Power generation Product support Total revenues Operating income Capital expenditures Rental Other Total 2017 2016 $ change % change $ 784,915 227,293 261,641 1,273,849 11,270 746,832 $ 524,931 239,446 221,009 985,386 12,242 634,018 $ 259,984 (12,153) 40,632 288,463 (972) 112,814 $ 2,031,951 $ 1,631,646 $ 400,305 $ 219,814 $ 196,124 $ 23,690 $ 102,343 35,888 $ 98,668 22,938 $ 3,675 12,950 $ 138,231 $ 121,606 $ 16,625 50% (5%) 18% 29% (8%) 18% 25% 12% 4% 56% 14% Key ratios: Product support revenues as a % of total revenues Operating income margin Group total revenues as a % of consolidated revenues Return on capital employed 36.8% 10.8% 86.5% 19.3% 38.9% 12.0% 85.3% 21.8% The Equipment Group results reﬂect good Sales into legacy mining markets slightly (2%) as all regions except Manitoba year-over-year growth for the legacy increased 74% versus last year. Mining and the Arctic reported declines. businesses and two months of operations at activity within our territories remained Rental revenues at the legacy Toromont QM. active, providing opportunities for sales to businesses increased $22.0 million or 10% New equipment sales in the legacy support mine expansion, equipment versus last year. Heavy equipment rentals businesses rebounded from a soft year in replacement and new mine development. were up 17% on improved utilization and a 2016 to record levels. Conversely, used Toromont’s proven track record in this larger ﬂeet. Higher activity levels in equipment sales returned to normal levels sector again led to several key wins during Newfoundland and Manitoba were partially following a record year in 2016. There is the year. Power systems reported strong offset by a decline in Ontario which faced interplay between new and used equipment year-over-year growth of 51%. Demand for softer market conditions. Light equipment sales reﬂecting market conditions, alternative sources of energy as a result of rentals were up 9% with all regions equipment availability and relative pricing. escalating electricity costs in Ontario, in reporting growth. Power rentals increased On a combined basis, equipment sales addition to the construction of large data 33%, driven by strong demand for increased $110.4 million or 14% at the legacy centers in our territories fuelled growth. uninterrupted power supply/generators, businesses as described below. Equipment Agriculture equipment sales increased pumps and temperature control units. sales at Toromont QM were $137.4 million. 14%. Construction market sales contracted Focus remains on growing and diversifying 22 TOROMONT 2017 AN NUAL REP O RT the power ﬂeet offering. Rental revenues Product support revenues at Toromont QM excluding Toromont QM and acquisition- from RPO (equipment on rent with a were $86.6 million. related expenses. purchase option) were up 1%. The RPO Gross margins decreased 130 bps versus Operating income increased $23.7 ﬂeet at December 31, 2017, was $57.2 last year. Lower average proﬁtability at million or 12%. Excluding all impact from the million versus $61.0 million at the end of Toromont QM reduced overall margins by Toromont QM acquisition in 2017, together 2016. Rental revenues at Toromont QM 50 bps. Other than this, lower equipment with the previously described gain on sale of were $18.6 million with an RPO ﬂeet at margins (down 70 bps) and an unfavorable internally-developed software recorded in December 31, 2017 of $14.4 million. sales mix of product support revenues to 2016, underlying operating income Power generation revenues from total revenues (down 40 bps) were partially increased $24.0 million or 13% and was Toromont owned-and-managed plants offset by improved product support margins 30 bps higher as a percentage of revenues decreased $1.0 million or 8% over last year. (up 30 bps). A very tight pricing environment (12.0% versus 11.7% last year). The decrease was mainly attributable to exacerbated by reduced rental conversions Capital expenditures in the legacy lower electricity and thermal revenues at and a lower mix of higher margin used Equipment Group were $8.2 million (7%) the Sudbury Hospital plant. equipment sales exerted downward higher year-over-year, while $8.4 million was Product support revenues at the legacy pressures on equipment margins for most invested at Toromont QM. Replacement and businesses increased $26.2 million or 4% of the year. expansion of the rental ﬂeet, net of reﬂecting strong rebuild activity. Parts Selling and administrative expenses dispositions, accounted for $69.5 million revenues were up 4% with good growth in increased $6.9 million or 3% compared to of total investment in 2017. Other capital most market segments. Service revenues last year, excluding Toromont QM. Higher expenditures include $15.8 million for new were up 6% reﬂecting strong mining activity compensation costs, including the mark-to- and expanded facilities to meet current and which served to offset decreases in other market on DSUs (up $2.5 million) and future growth requirements, $12.5 million for segments. As previously reported, acquisition-related expenses ($6.0 million) service and delivery vehicles, $4.6 million for Caterpillar’s discontinuation of the were partially offset by a gain on sale of machinery and equipment and $1.9 million on-highway truck product line a few years certain assets ($2.6 million). As a for upgrades and enhancements to the ago has led to a gradual reduction of percentage of revenues, expenses were 80 information technology infrastructure. product support opportunities in this space. bps lower than 2016 (12.3% vs. 13.1%) after Bookings and Backlogs ($ millions) 2017 2016 $ change % change Bookings – year ended December 31 Backlogs – as at December 31 $ $ 1,013 327 $ $ 814 147 $ $ 199 180 24% 122% Bookings included $86.3 million for the two Backlogs increased to $327.0 million, to be delivered in 2018. Backlogs can vary months of operations at Toromont QM. including $128.3 million at Toromont QM. signiﬁcantly from period to period on large Excluding these, bookings increased 14% At December 31, 2017, the majority of the project activities, especially in mining and principally due to higher mining (up 45%), backlog related to construction (37%), power power systems, the timing of orders and power systems (up 37%), construction (up systems (33%), mining (20%) and deliveries and the availability of equipment 5%) and agriculture orders (up 6%). agriculture (8%), most of which is expected from either inventory or suppliers. TOROMONT 2017 ANNUAL REPO RT 23 CIMCO ($ thousands) Package sales Product support Total revenues Operating income Capital expenditures 2017 2016 $ change % change $ 189,212 128,999 $ 161,614 118,780 $ 318,211 $ 280,394 $ $ 29,768 1,429 $ $ 20,439 1,888 $ $ $ $ 27,598 10,219 37,817 9,329 (459) 17% 9% 13% 46% (24%) Key ratios: Product support revenues as a % of total revenues Operating income margin Group total revenues as a % of consolidated revenues Return on capital employed 40.5% 9.4% 13.5% 96.4% 42.4% 7.3% 14.7% 73.8% CIMCO delivered another record year on Product support revenues increased support growth and increased proﬁt continued growth in Canada and the US. $10.2 million or 9% versus last year, sharing accrual on the higher earnings Translation of US operations did not have reﬂecting growth in Canada (up 11%) while accounted for the majority of the a signiﬁcant impact on trends. US revenues were relatively unchanged. increase. As a percentage of revenues, Package revenues reﬂect the progress The increased installed base provides a expenses were 30 bps lower than last year of project construction applying the solid growth platform in both Canada and (15.0% vs. 15.3%). percentage-of-completion method for the US. Operating income increased 46% to revenue recognition. This introduces a Gross margins increased 180 bps on $29.8 million largely reﬂecting the higher degree of variability as the timing of higher package margins, partially offset revenues and gross proﬁt margins projects and construction schedules are by lower product support margins and an together with a lower expense ratio. As a largely under the control of third parties unfavorable sales mix of product support percentage of revenues, operating income (contractors and end-customers). In revenues to total revenues. Improved increased 210 bps to 9.4%. Canada, package revenues were up $20.2 package margins reﬂect improved Capital expenditures were down 24% million or 17%, reﬂecting strong sales into execution and lower warranty costs. to $1.4 million with the majority of recreational markets (up 95%), partially Product support revenues were 40.5% expenditures in 2017 related to additional offset by softer industrial activity (down as a percentage of total revenues in 2017 service vehicles ($0.6 million), 5%). Good growth was reported in Ontario compared to 42.4% in 2016. information technology infrastructure and Atlantic Canada, while Quebec was Selling and administrative expenses enhancements and upgrades ($0.3 lower following record activity levels in increased $4.8 million or 11% compared million) and machinery and equipment 2016. In the US, package revenues to last year. Higher compensation costs ($0.2 million). increased $7.4 million or 18% on higher (up $4.1 million) on annual salary sales into recreational markets (up 27%). increases, additional headcount to Bookings and Backlogs ($ millions) Bookings – year ended December 31 Backlogs – as at December 31 2017 233 134 $ $ 2016 $ change % change $ $ 178 99 $ $ 55 35 31% 35% Bookings of $233.0 million surpassed the Backlogs increased $35.0 million or were offset by lower US levels (down 4%). all-time high set last year. Industrial bookings were up 41% with good growth in 35% to $134.0 million. Industrial backlogs were up 68% with terriﬁc growth in Canada The record backlog levels for this time of year provide a solid base entering 2018 Canada (up 39%) and the US (up 50%). (up 84%), partially offset by a slight decline with substantially all expected to be Recreational bookings increased 15% with in the US (down 4%). Recreational backlogs realized as revenue during 2018. strong Canadian activity levels (up 50%) were relatively unchanged year-over-year offsetting lower US levels (down 28%). as higher Canadian activity levels (up 3%) 24 TOROMON T 2017 AN N UAL R EP O RT Consolidated Financial Condition The Company has maintained a strong ﬁnancial position for many years and continues to do so, even after raising ﬁnancing for the substantial acquisition completed this year. At December 31, 2017, the ratio of net debt to total capitalization was 40%. Non-Cash Working Capital The Company’s investment in non-cash working capital was $619.8 million at December 31, 2017. The major components, along with the changes from December 31, 2016, are identiﬁed in the following table. ($ thousands) 2017 2016 $ change % change Accounts receivable Inventories Other current assets Accounts payable and accrued liabilities Provisions Income taxes payable Derivative ﬁnancial instruments Dividends payable Deferred revenues $ 528,748 780,024 8,386 (521,666) (17,436) (204) (5,260) (15,655) (137,129) $ 260,691 435,757 5,236 (231,746) (16,094) (1,262) 1,197 (14,110) (51,211) $ 268,057 344,267 3,150 (289,920) (1,342) 1,058 (6,457) (1,545) (85,918) Total non-cash working capital $ 619,808 $ 388,458 $ 231,350 103% 79% 60% 125% 8% nm nm 11% 168% 60% Accounts receivable increased $268.1 • CIMCO inventories were $2.0 million losses will offset future gains on the million of which $182.9 million related to (11%) higher than this time last year, related hedged items. Toromont QM and $42.7 million related to reﬂecting strong work-in-process levels. Higher dividends payable year-over- amounts owing to the Company as part of The increase in other current assets year reflect the higher dividend rate and the acquisition of Hewitt (refer to note 4 of mainly relates to prepaid expenses at additional dividends on the shares issued the notes of the consolidated ﬁnancial Toromont QM. to partially fund the acquisition. In 2017, statements). For the legacy businesses, Accounts payable and accrued the quarterly dividend rate was increased accounts receivable were up $42.5 million liabilities increased $289.9 million of from $0.18 per share to $0.19 per share, or 16% compared to 2016 largely reﬂecting which $166.4 million related to Toromont a 6% increase. As part of the acquisition, the 18% increase in revenues in the quarter. QM. For the legacy businesses, the 2,249,478 common shares were issued Equipment Group accounts receivable increase of $123.5 million or 53% versus (refer to note 3 of the notes to the increased $19.9 million or 10% while this time last year mainly reflects: consolidated financial statements). CIMCO accounts receivable increased • The timing of payments and terms Deferred revenues represent billings $22.6 million or 44%. related to inventory purchases and to customers in excess of revenue Inventories increased $344.3 million other supplies; recognized. In the Equipment Group, of which $278.9 million related to • Higher DSU liability primarily deferred revenues arise on sales of Toromont QM. For the legacy businesses, attributable to the higher average share equipment with residual value inventories were up $65.4 million or 15% price, partly due to the acquisition guarantees, extended warranty contracts with increases in both Groups. announcement; and and other long-term customer support • Equipment Group inventories were • Higher accrual for performance agreements as well as on progress $63.4 million or 15% higher than this incentive bonuses on the higher income. billings on long-term construction time last year with increases in Income taxes payable reflects the contracts. Excluding $50.6 million of equipment (up $50.4 million or 17%), difference between tax installments and deferred revenues at Toromont QM, parts (up $7.0 million or 7%) and current tax expense. Equipment Group deferred revenues were service work-in-process (up $6.0 Derivative financial instruments up 62% versus last year due to increased million or 37%). The higher equipment inventory levels were mainly a result of represent the fair value of foreign exchange contracts. Fluctuations in the progress billings for equipment deliveries in the future and progress billings relative certain inventories held in advance of value of the Canadian dollar have led to a to work completed on long-term customer-specified delivery dates cumulative net loss of $5.3 million as at customer service agreements (“CSAs”). later in 2018, while the higher service December 31, 2017. This is not expected At CIMCO, deferred revenues arise on work-in-process reflects busy shops. to affect net income as the unrealized progress billings in advance of revenue TOROMONT 2017 ANNUAL REPO RT 25 recognition and were up 85% versus last matching contributions at a rate of $1 for the respective collective bargaining year, reflecting the strong backlog levels. every $3 contributed, to a maximum of the agreements. In the case of deﬁned greater of 2.5% of an employee’s base contribution plans, regular contributions Goodwill and Intangibles salary or $1,000 per annum. Company are made to the individual employee The Company performs impairment tests contributions vest to the employee accounts, which are administered by a plan on its goodwill and intangibles with immediately. Company contributions trustee in accordance with the plan indeﬁnite lives on an annual basis or as amounting to $2.0 million in 2017 (2016 documents. At December 31, 2017, warranted by events or circumstances. – $1.8 million) were charged to selling and acquired employees at Toromont QM were The assessment entails estimating the fair administrative expense when paid. not part of these plans. value of operations to which the goodwill Approximately 52% (2016 – 50%) of and intangibles relate, using the present eligible employees participate in this plan. Deﬁned Beneﬁt Plans value of expected discounted future cash The Plan is administered by an ﬂows. This assessment affirmed goodwill independent third party. Pre-acquisition The Company sponsors deﬁned beneﬁt and intangibles values as at December 31, The Company also offers a deferred pension plans (Powell Plan, Executive Plan 2017 for balances existing at the beginning share unit (“DSU”) plan for certain and Toromont Plan) for approximately 91 of the year and goodwill and intangibles executives and non-employee directors, qualifying employees. The Powell and acquired as part of the acquisition. See whereby they may elect, on an annual Toromont Plans are administered by a note 8 of the notes to the consolidated basis, to receive all or a portion of their separate Fund that is legally separated ﬁnancial statements. performance incentive bonus or fees, from the Company and as described in respectively, in DSUs. Non-employee note 19 of the notes to the consolidated Employee Share Ownership directors also receive DSUs as part of their ﬁnancial statements. The Company employs a variety of compensation, aligning at-risk and cash The funded status of these plans changed stock-based compensation plans to align compensation components. A DSU is a by $1.0 million (a decrease in the accrued employees’ interests with corporate notional unit that reﬂects the market value pension liability) as at December 31, 2017. objectives. of a single Toromont common share and The Executive Plan is a supplemental The Company maintains an Executive generally vests immediately. DSUs will be plan and is solely the obligation of the Stock Option Plan for its senior employees. redeemed on cessation of employment or Company. All members of the plan are Non-employee directors have not received directorship. DSUs have dividend retired. The Company is not obligated to grants under this plan since 2013. Stock equivalent rights, which are expensed as fund the plan but is obligated to pay options vest 20% per year on each earned. The Company records the cost of beneﬁts under the terms of the plan as they anniversary date of the grant and are the DSU plan as compensation expense in come due. The Company has posted letters exercisable at the designated common share selling and administrative expenses. of credit to secure the obligations under price, which is ﬁxed at prevailing market As at December 31, 2017, 426,279 this plan, which were $18.4 million as at prices at the date the option is granted. Stock DSUs were outstanding with a total value December 31, 2017. As there are no plan options granted in 2013 and after have a of $23.4 million (2016 – 407,731 units at assets, there is no impact on pension 10-year term while those granted prior to a value of $17.3 million). The liability for expense and contributions. 2013 have a seven-year term. At December DSUs is included in accounts payable and A key assumption in pension accounting 31, 2017, 2.6 million options to purchase accrued liabilities on the consolidated is the discount rate. This rate is set with common shares were outstanding, of which statement of financial position. regard to the yield on high-quality 1.1 million were exercisable. corporate bonds of similar average The Company offers an Employee Employee Future Beneﬁts duration to the cash ﬂow liabilities of the Share Purchase Plan whereby employees can purchase shares by way of payroll Deﬁned Contribution Plans The Company sponsors pension Plans. Yields are volatile and can deviate signiﬁcantly from period to period. deductions. At December 31, 2017, arrangements for substantially all of its employees of Toromont QM were not yet employees, primarily through deﬁned eligible to participate in this plan. Under contribution plans in Canada and a 401(k) Acquisition of Hewitt Plans The Company acquired deﬁned beneﬁt plans the terms of this plan, eligible employees matched savings plan in the United States. which provides pension and other post- may purchase common shares of the Certain unionized employees do not retirement beneﬁts covering approximately Company in the open market at the participate in Company-sponsored plans, 1,800 qualifying employees. The Plans are then-current market price. The Company and contributions are made to their administered by a separate Fund that is pays a portion of the purchase price, retirement programs in accordance with legally separated from the Company and as 26 TOROM ONT 2017 ANN UAL R EP O RT described in note 19 of the notes to the matters will have a material effect on the Outstanding Share Data consolidated ﬁnancial statements. Company’s consolidated ﬁnancial position As at the date of this MD&A, the Company The funded status of these plans or results of operations. was a deﬁcit of $99.8 million as at had 80,951,779 common shares and 2,626,076 share options outstanding. December 31, 2017. Normal Course Issuer Bid (“NCIB”) A key assumption is the discount rate. Toromont believes that, from time to time, Dividends This rate is set with regard to the yield on the purchase of its common shares at Toromont pays a quarterly dividend on its high-quality corporate bonds of similar prevailing market prices may be a outstanding common shares and has average duration to the cash ﬂow liabilities worthwhile investment and in the best historically targeted a dividend rate that of the Plans. Yields are volatile and can interests of both Toromont and its approximates 30 - 40% of trailing earnings deviate signiﬁcantly from period to period. shareholders. As such, the normal course from continuing operations. issuer bid with the TSX was renewed in During 2017, the Company declared Off-Balance Sheet Arrangements 2017. This issuer bid allows the Company to dividends of $0.76 per common share, Other than the Company’s operating purchase up to approximately 6.7 million of $0.19 per quarter (2016 - $0.72 per leases, the Company does not have any its common shares, representing 10% of common share or $0.18 per quarter). off-balance sheet arrangements that have, common shares in the public ﬂoat, in the Considering the Company’s solid or are reasonably likely to have, a current or year ending August 30, 2018. The actual ﬁnancial position and positive long-term future effect on its results of operations or number of shares purchased and the outlook, the Board of Directors announced ﬁnancial condition. timing of any such purchases will be it is increasing the quarterly dividend to 23 determined by Toromont. All shares cents per share effective with the dividend Legal and Other Contingencies purchased under the bid will be cancelled. payable on April 2, 2018. This represents a Due to the size, complexity and nature of During the year ended December 31, 2017, 21% increase in Toromont’s regular the Company’s operations, various legal no shares were purchased and cancelled. quarterly cash dividend. The Company has matters are pending. Exposure to these During the year ended December 31, 2016, paid dividends every year since going claims is mitigated through levels of the Company purchased and cancelled public in 1968 and this represents the insurance coverage considered appropriate 89,244 common shares for $2.6 million 29th consecutive year it has announced by management and by active (average cost of $28.84 per share, an increase. management of these matters. In the including transaction costs). opinion of management, none of these Liquidity and Capital Resources Sources of Liquidity Toromont’s liquidity requirements can be Effective October 27, 2017, the credit million (the “Debentures”). The Debentures facility provides a term facility of $250.0 mature in 2027 and bear interest at a rate of met through a variety of sources, including million and a revolving facility of $500.0 3.842% per annum, payable semi-annually. cash generated from operations, long- and million, maturing in October 2022. Debt under The Debentures are unsecured, short-term borrowings and the issuance of the facility is unsecured and ranks pari passu unsubordinated and rank pari passu with common shares. Borrowings are obtained with debt outstanding under Toromont’s other unsecured, unsubordinated debt. through a variety of senior debentures, existing debentures. The facility includes Cash at December 31, 2017, was $160.5 notes payable and committed long-term covenants, restrictions and events of default million, compared to $188.7 million at credit facilities. typical for credit facilities of this nature. December 31, 2016. To partially fund the aforementioned As at December 31, 2017, $250.0 million The Company expects that continued acquisition, the Company expanded and was drawn on the facility (2016 - $nil). cash ﬂows from combined operations in extended its committed unsecured credit Letters of credit utilized an additional $26.7 2018, cash on hand and currently available facility and issued senior unsecured million of the facility (2016 - $21.7 million). credit facilities will be more than sufficient debentures (refer to note 3 of the notes to Effective October 27, 2017, the Company to fund requirements for investments in the consolidated ﬁnancial statements for also issued senior unsecured debentures in working capital and capital assets. further information). an aggregate principal amount of $500.0 TOROMONT 2017 ANNUAL RE PORT 27 Principal Components of Cash Flow Cash from operating, investing and ﬁnancing activities, as reﬂected in the Consolidated Statements of Cash Flows, are summarized in the following table: ($ thousands) Cash, beginning of year Cash, provided by (used in): Operating activities Operations Change in non-cash working capital and other Net rental ﬂeet additions Investing activities Financing activities Effect of foreign exchange on cash balances (Decrease)/increase in cash in the year Cash, end of year 2017 2016 $ 188,735 $ 66,680 258,322 70,010 (66,822) 261,510 (979,978) 690,492 (252) 215,795 34,744 (61,726) 188,813 (18,575) (48,112) (71) (28,228) 122,055 $ 160,507 $ 188,735 Cash Flows From Operating Activities 2017 compared to $18.6 million in 2016, Cash Flows From Financing Activities Operating activities provided signiﬁcantly largely reﬂecting $945.8 million used to Financing activities provided $690.5 million higher cash ﬂow in 2017 compared to 2016, partially fund the acquisition (refer to note versus $48.1 million used in 2016, largely mainly due to increased cash generation 3 of the notes to the consolidated ﬁnancial due to debt, net of ﬁnancing costs, of from non-cash working capital and higher statements for further information). $744.4 million incurred to partially fund the net earnings, partially offset by increased Investments in property, plant and acquisition (refer to note 3 of the notes to investments in net rental ﬂeet additions. equipment accounted for the remainder of the consolidated ﬁnancial statements for The signiﬁcant cash inﬂow from the cash used and included $2.7 million on further information). non-cash working capital was mainly due to facility upgrades and machinery and The Company paid dividends of $58.9 higher accounts payable and accrued equipment at the acquired locations. For million or $0.75 per share in 2017 (2016 liabilities, deferred revenues and provision the legacy businesses, additions included: - $55.4 million or $0.71 per share). for income taxes, partially offset by higher • $14.0 million for land and buildings for The Company received $6.8 million on accounts receivable and inventories. new and expanded branches (2016 the exercise of stock options in 2017 (2016 Net rental ﬂeet additions (purchases - $6.3 million); - $11.6 million). less proceeds of dispositions) included • $13.2 million for service vehicles (2016 There were no normal course purchases $5.8 million spent on growing Toromont - $12.2 million); and cancellations of common shares in QM’s ﬂeet. The Company continues to invest • $4.1 million for machinery and 2017 compared to 89,244 common shares heavily in this very important rental segment. equipment (2016 - $3.1 million); and purchased and cancelled in 2016 for $2.6 The components and changes in • $2.1 million for upgrades and million (average cost of $28.84, including non-cash working capital are discussed in enhancements to information transaction costs). more detail in this MD&A under the heading technology infrastructure (2016 “Consolidated Financial Condition”. - $1.7 million). Cash Flows From Investing Activities on the disposal of internally-developed Investing activities used $980.0 million in software of $4.9 million in 2016. The Company also recorded proceeds 28 TOROMONT 2017 AN NUAL REP O RT Outlook The expansion of our territories to include providing a measure of stability in a variable equipment to support the operations and Quebec and Atlantic Canada is expected business environment. The Company expansion. With the substantially increased to be transformative to the long-term continues to hire technicians in anticipation base of installed equipment, product support performance of Toromont. It provides of an increase in demand, including the activity should continue to grow so long as a substantial growth platform and opportunity for increased equipment mines remain active. strengthens our Company by providing rebuilds and readying used iron. Broader CIMCO’s strong bookings activity and a large contiguous operating platform product lines, investment in rental current backlog levels bode well for future extending across all of Eastern and Central equipment, expanding the agricultural prospects. Increasing product support Canada, and into the far North. Effective business and developing product support levels is also a positive signal for future execution will be required to realize on this technologies supporting remote trends. CIMCO has a wide product offering signiﬁcant potential which will allow for a diagnostics and telematics are expected to using natural refrigerants including greater combined presence in key contribute to longer-term growth. innovative CO2 solutions, which are Canadian economic sectors such as The long-term outlook for infrastructure expected to contribute to growth. In mining, construction and power systems. spending continues to be positive across addition, CIMCO is focused on its growth Focus is currently on safety of our people, most territories. strategy in the US, which represents a customer deliverables, business Increased activity in the mining space has signiﬁcant market opportunity. integration, and transition to generate translated to increased bookings and sales The diversity of the markets served, favorable long-term returns. this year and we are cautiously optimistic that expanding product offering and services, The Equipment Group’s parts and there is the opportunity for continued growth. ﬁnancial strength and disciplined operating service business continues to provide In the meantime, production continues at culture position the Company for continued momentum driven by the larger installed existing mine sites, generating product growth in the long term. base of equipment working in the ﬁeld, support opportunities and incremental 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. Payments due by period ($ thousands) Long-term debt Principal Interest Accounts payable and accrued liabilities Operating leases 2018 2019 2020 2021 2022 Thereafter Total $ 1,941 30,825 $ 1,022 30,825 $ — 30,825 $ — 30,825 $ 250,000 29,748 $ 650,000 $ 902,963 264,390 111,342 537,321 10,725 — 9,097 — 5,083 — 3,488 — 2,171 — 1,642 537,321 32,206 $ 580,812 $ 40,944 $ 35,908 $ 34,313 $ 281,919 $ 762,984 $ 1,736,880 TOROMONT 2017 ANNUAL REPO RT 29 Key Performance Measures Management reviews and monitors its activities and the performance indicators it believes are critical to measuring success. Some of the key ﬁnancial performance measures are summarized in the following table. Others include, but are not limited to, measures such as market share, ﬂeet utilization, customer and employee satisfaction, and employee health and safety. Years ended December 31 2017 2016 2015 2014 2013 Expanding markets and broadening product offerings Revenue growth Revenue per employee (thousands) 22.9% $ 487 $ 3.5% 533 11.2% $ 537 $ 4.2% 501 $ 5.7% 491 Strengthening product support Product support revenue growth Investing in our resources Investment in information technology (millions) Return on capital employed (1) Strong ﬁnancial position Non-cash working capital (millions) (1) Net debt to total capitalization (1) Book value (shareholders’ equity) per share Build shareholder value Basic earnings per share growth Dividends per share growth Return on equity (1) 16.3% 7.6% 24.2% 12.4% 2.5% $ 15.0 $ 21.5% 15.2 24.5% $ 14.0 $ 24.3% 13.4 26.0% $ $ 620 $ 40% 13.89 $ 388 -4% 11.29 $ $ 421 $ 10% 9.95 $ 335 6% 8.65 $ $ $ 12.0 26.5% 282 10% 7.50 11.6% 5.6% 19.3% 6.3% 5.9% 20.0% 8.5% 13.3% 21.6% 7.6% 15.4% 23.0% 2.9% 8.3% 25.7% (1) Deﬁned in the sections titled “Additional GAAP Measures and Non-GAAP Measures.” Measuring Toromont’s results against these ﬂeet size and additional branches; exchange rate impacts the purchase price strategies over the past ﬁve years illustrates • Increased customer demand for formal of equipment that, in turn, is reﬂected in that the Company has made and continues product support agreements; selling prices. Since 2013 there have been to make signiﬁcant progress. The addition of • Governmental funding programs such as ﬂuctuations in the average yearly exchange Toromont QM is expected to further bolster the RinC program which provided rate of Canadian dollar against the US these key performance measures in the near support for recreational spending; and dollar – 2013 - US$0.97, 2014 - US$0.91, and long-term. • Acquisitions, primarily within the 2015 – US$0.78, 2016 – US$0.75 and 2017 Included in the table above are two Equipment Group’s rental operations and – US$0.77. months of operations at Toromont QM which through business combinations in the Toromont has generated a signiﬁcant increased the income statement metrics agricultural space. competitive advantage over the past years presented and conversely diluted the balance by investing in its resources, in part to sheet metrics. The Company estimates that Over the same ﬁve-year period, revenue increase productivity levels, and we will most metrics improved versus last year for growth has been constrained at times by continue this into the future as it is a crucial the legacy businesses. a number of factors including: element to our success in the marketplace. In relation to the legacy businesses, since • General economic weakness and Toromont continues to maintain a strong 2013, revenues increased at an average uncertainty in speciﬁc sectors; balance sheet. Leverage, as represented by annual rate of 7.0%. Revenue per employee • Competitive conditions; the ratio of net debt to total capitalization in 2017 was $561. Product support revenue • Inability to source equipment from was 40%. growth has averaged 10.3% annually. This suppliers to meet customer demand or Toromont has paid dividends consistently growth has mainly been a result of: delivery schedules; and • Increased customer demand in certain • Declines in underlying market conditions since 1968 and has increased the dividend in each of the last 29 years. The regular market segments, most notably such as depressed US industrial markets quarterly dividend rate was increased 6% construction and mining; and Manitoba agricultural markets. from $0.18 to $0.19 per share in 2017 and a • Additional product offerings over the years further 21% to $0.23 per share in 2018, from Caterpillar and other suppliers; Changes in the Canadian/US exchange evidencing our commitment to delivering • Organic growth through increased rental rate also affect reported revenues as the exceptional shareholder value. 30 TOROMONT 2017 AN N UAL RE PO RT Consolidated Fourth Quarter Operating Results Three months ended December 31 ($ thousands, except per share amounts) 2017 2016 $ change % change Revenues Cost of goods sold $ 822,766 630,652 $ 492,223 362,866 $ 330,543 267,786 67% 74% Gross proﬁt Selling and administrative expenses Operating income Interest expense Interest and investment income Income before income taxes Income taxes Net earnings Basic earnings per share Key ratios: Gross proﬁt margin Selling and administrative expenses as a % of revenues Operating income margin Income taxes as a % of income before income taxes 192,114 105,533 86,581 6,788 (1,637) 81,430 22,294 59,136 0.73 23.3% 12.8% 10.5% 27.4% $ $ 129,357 66,469 62,888 1,853 (1,377) 62,412 16,883 45,529 0.58 26.3% 13.5% 12.8% 27.1% $ $ 62,757 39,064 23,693 4,935 (260) 19,018 5,411 13,607 0.15 $ $ 49% 59% 38% 266% 19% 30% 32% 30% 26% Even excluding the impact of Toromont QM accounted for the majority of the decrease. Interest income was up from last year described earlier, the Company delivered Selling and administrative expenses on increased investment income from record fourth quarter results on solid increased $39.1 million or 59% largely higher average cash balances and higher performance in both Groups. reﬂecting the incremental expenses at interest from conversions of equipment on Toromont QM contributed $242.6 million Toromont QM for the two months ($38.0 rent with a purchase option. to revenues in the fourth quarter. At the million) and acquisition-related expenses The effective income tax rate for the legacy businesses, revenues were $87.9 ($3.4 million), partially offset by a lower fourth quarter of 2017 was 27.4% million or 18% higher with strong growth in mark-to-market on DSUs (down $2.3 compared to 27.1% in the same period last both the Equipment Group and CIMCO. million). Excluding Toromont QM and year and largely reﬂects the mix of income Gross proﬁt margin decreased 300 bps acquisition-related expenses, selling and by tax jurisdiction. to 23.3% in the quarter. Compressed administrative expenses as a percentage of Net earnings in the quarter were up equipment margins in the Equipment revenues were down 250 bps to 11.0%. 30% to $59.1 million while basic EPS was Group, the impact of lower average Interest expense increased as a result of up 26% to $0.73. Toromont QM margins (140 bps) and an the debenture offerings and amendments Excluding all impact of the acquisition of unfavorable sales mix of product support to the credit facility to partially fund the Toromont QM, net earnings increased 25% revenues to total revenues in both Groups acquisition. while EPS increased 21%. TOROMONT 2017 ANNUAL REPORT 31 Business Segment Fourth Quarter Operating Results Equipment Group Three months ended December 31 ($ thousands) Equipment sales and rentals New Used Rentals Total equipment sales and rentals Power generation Product support Total revenues Operating income Bookings ($ millions) 2017 2016 $ change % change $ 308,528 69,219 90,039 467,786 2,462 255,763 $ 133,218 66,270 64,294 263,782 3,137 151,874 $ 175,310 2,949 25,745 204,004 (675) 103,889 $ 726,011 $ 418,793 $ 307,218 $ $ 75,434 328 $ $ 56,651 224 $ $ 18,783 104 132% 4% 40% 77% (22%) 68% 73% 33% 46% Key ratios: Product support revenues as a % of total revenues Operating income margin Group total revenues as a % of consolidated revenues 35.2% 10.4% 88.2% 36.3% 13.5% 85.1% The Equipment Group reported strong activity in support of the Puerto Rico compensation costs partially offset by results even after excluding the impact hurricane relief efforts and demand in the lower mark-to-market on DSUs and a of the two months of operations for cryptocurrency space. favorable change in the allowance for Toromont QM. Product support revenues at Toromont doubtful accounts resulting from the Combined new and used equipment QM were $86.6 million. For the legacy relative aging proﬁle of accounts sales at Toromont QM were $137.4 million businesses, product support revenues receivables. As a percentage of revenues, for the two months of operations in the increased $17.3 million or 11% on higher expenses decreased 210 bps as a fourth quarter. For the legacy businesses, parts (up 13%) and service revenues percentage of revenues (11.2% vs. 13.3%) total equipment sales increased $40.9 (up 8%). Activity levels were good across after excluding Toromont QM and million or 20% versus last year. Deliveries most segments, notably in mining and acquisition-related expenses. into most market segments were up, led by construction. Operating income was up 33% to $75.4 mining (up 64%), construction (up 7%), Gross proﬁt margins decreased 340 million in the quarter. Excluding all impact agriculture (up 120%) and power systems bps in the quarter versus last year, half of from the Toromont QM acquisition, (up 29%). which related to the impact of lower operating income increased 20% and was Rental revenues at Toromont QM were average margins for Toromont QM. For the 60 bps higher as a percentage of revenues $18.6 million. For the legacy businesses, all legacy businesses, lower equipment (14.1% versus 13.5% last year). rental segments reported increases, with margins and an unfavorable sales mix of Excluding Toromont QM, bookings in light equipment up 10%, heavy equipment product support revenues to total revenues the fourth quarter of 2017 of $86.3 million, up 12%, power rentals up 60% and were partially offset by slightly higher the legacy businesses grew bookings by equipment on rent with a purchase option product support and rental margins. $17.7 million or 8%, with increases in up 2%. Milder temperatures extended the Selling and administrative expenses construction, power systems and construction season and led to improved increased by $39.2 million mainly due to agriculture orders, partially offset by lower utilization of a larger more rebalanced ﬂeet the incremental expenses at Toromont QM, mining orders. offering. Power rentals beneﬁtted from acquisition-related expenses and higher 32 TOROMON T 2017 AN N UAL RE PO RT CIMCO Three months ended December 31 ($ thousands) Package sales Product support Total revenues Operating income Bookings ($ millions) Key ratios: Product support revenues as a % of total revenues Operating income margin Group total revenues as a % of consolidated revenues $ $ $ $ 2017 64,641 32,114 96,755 11,147 26 33.2% 11.5% 11.8% 2016 $ change % change $ $ $ $ 21,489 1,836 23,325 4,910 50% 6% 32% 79% (15) (37%) $ $ $ $ 43,152 30,278 73,430 6,237 41 41.2% 8.5% 14.9% CIMCO delivered record results in the Product support revenues increased versus 14.9% last year). Higher compensation fourth quarter. Translation of US operations 6% versus last year on higher Canadian costs were more than offset by decreases did not have a signiﬁcant impact on results. activity levels as the US remained relatively across most other expense categories. Package revenues increased 50% on unchanged. Operating income increased 79% to higher activity in Canada (up 32%) and the Gross margins decreased 70 bps $11.1 million and was up 300 bps to 11.5% US (up 132%). In Canada, with the principally due to the impact of an as a percentage of revenues, mainly on the exception of Atlantic Canada, all regions unfavorable sales mix of product support higher revenues and lower relative expense reported growth, led by Ontario and revenues to total revenues, partially offset ratio, partially offset by the lower margins. Quebec. Recreational revenues more than by higher package and product support Bookings in the quarter of $26.0 million tripled versus last year and were partially margins. Product support revenues as a were down 37% versus last year with lower offset by softer industrial revenues (down percentage of total revenues were 33.2% US bookings accounting for approximately 10%). In the US, both market segments compared to 41.2% in the fourth quarter 90% of the decrease. Record US bookings in increased considerably with industrial of 2016. the fourth quarter last year were not repeated. revenues more than tripling and Selling and administrative expenses were recreational revenues nearly doubling last down $0.2 million or 1% and were 380 bps year’s reported amounts for the quarter. lower as a percentage of revenues (11.1% TOROMONT 2017 ANNUAL RE PORT 33 Quarterly Results The following table summarizes unaudited quarterly consolidated ﬁnancial data for the eight most recently completed quarters. This quarterly information is unaudited but has been prepared on the same basis as the 2017 annual audited consolidated ﬁnancial statements. ($ thousands, except per share amounts) Q1 2017 Q2 2017 Q3 2017 Q4 2017 Revenues Equipment Group CIMCO Total revenues Net earnings $ 359,763 52,545 $ 458,158 72,772 $ 488,020 96,138 $ 726,011 96,755 $ 412,308 $ 530,930 $ 584,158 $ 822,766 $ 27,024 $ 40,455 $ 49,355 $ 59,136 Per share information: Basic earnings per share Diluted earnings per share Dividends paid per share Weighted average common shares outstanding – basic (in thousands) $ $ $ 0.34 0.34 0.18 $ $ $ 0.52 0.51 0.19 $ $ $ 0.63 0.62 0.19 $ $ $ 0.73 0.72 0.19 78,434 78,474 78,522 80,916 ($ thousands, except per share amounts) Q1 2016 Q2 2016 Q3 2016 Q4 2016 Revenues Equipment Group CIMCO Total revenues Net earnings $ 337,847 50,072 $ 453,145 68,979 $ 421,862 87,912 $ 418,793 73,430 $ 387,919 $ 522,124 $ 509,774 $ 492,223 $ 24,170 $ 38,406 $ 47,643 $ 45,529 Per share information: Basic earnings per share Diluted earnings per share Dividends paid per share Weighted average common shares outstanding – basic (in thousands) $ $ $ 0.31 0.31 0.17 $ $ $ 0.49 0.49 0.18 $ $ $ 0.61 0.60 0.18 $ $ $ 0.58 0.58 0.18 77,898 78,056 78,211 78,344 Interim period revenues and earnings the timing of signiﬁcant sales to mining and weather. Revenues increase in subsequent historically reﬂect signiﬁcant variability other customers, resulting from the timing of quarters as construction schedules ramp from quarter to quarter. mine site development and access, and up. This trend can be, and has been, The Equipment Group has historically had construction project schedules. The impacted somewhat by signiﬁcant a distinct seasonal trend in activity levels. Company does not expect this trend to be governmental funding initiatives and Lower revenues are recorded during the ﬁrst impacted by the acquisition; however, a better signiﬁcant industrial projects. quarter due to winter shutdowns in the understanding of the customers, industries Historically, inventories have increased construction industry. The fourth quarter had and economic climate of the new territories is through the year to meet the expected typically been the strongest due in part to the needed before arriving at a conclusion. demand for higher deliveries in the third timing of customers’ capital investment CIMCO has also had a distinct seasonal and fourth quarters of the ﬁscal year. This decisions, delivery of equipment from trend in results historically, due to timing of seasonal sales trend also leads accounts suppliers for customer-speciﬁc orders and construction activity. Lower revenues are receivable to be at their highest level conversions of equipment on rent with a recorded during the ﬁrst quarter on slower at year-end. purchase option. This pattern is impacted by construction schedules due to winter 34 TOROMONT 2017 ANN UAL R EP O RT Selected Annual Information ($ thousands, except per share amounts) 2017 2016 2015 Revenues Net earnings Earnings per share Basic Diluted Dividends declared per share $ 2,350,162 $ 175,970 $ 1,912,040 $ 155,748 $ 1,846,723 $ 145,666 $ $ $ 2.22 2.20 0.76 $ $ $ 1.99 1.98 0.72 $ 1,394,212 $ 152,528 78.7 $ $ $ 1.88 1.86 0.68 $ 1,276,077 $ 153,769 77.7 Total assets Total long-term debt Weighted average common shares outstanding – basic (in millions) $ 2,857,909 $ 895,747 79.9 Revenues grew 23% in 2017 inclusive of the mark-to-market expenses on the higher 6% to $0.18 per share, in 2017 by 6% to two months of operations at Toromont QM average share price following the $0.19 per share and in 2018 by 21% to $0.23 which generated revenues of $242.6 million. announcement of the acquisition. Higher per share. The Company has paid dividends For the legacy businesses, revenues grew 10% interest expense resulting from increased every year since 1968. on good sales execution in the Equipment debt levels to partially fund the acquisition, Total assets more than doubled in 2017 Group and CIMCO, underpinned by continued also dampened net earnings. In 2016, net (up 105%) reﬂecting the acquisition and product support growth. In 2016, revenues earnings increased 7% on higher revenues growth in the Company’s operations and grew 4% mainly through strong performance and slightly improved gross margins, supports the higher revenues and earnings. at CIMCO, as the Equipment Group grew partially offset by a higher selling and Total assets increased 9% in 2016. modestly on product support growth which administrative expense ratio. A one-time Long-term debt increased in 2017 to served to offset the impact of challenging pre-tax gain of $4.9 million on the sale of partially fund the acquisition. In 2016, equipment market conditions. internally-developed software recorded in long-term debt had decreased relative to Net earnings increased 13% in 2017, 2016 also lifted earnings. 2015 mainly due to principal repayments on reﬂecting higher revenues and a relatively Earnings per share (“EPS”) have the senior debenture due in March 2019, lower expense ratio, in addition to the generally followed earnings with basic EPS net of the amortization of debt issuance incremental impact of the acquisition. Lower increasing 12% in 2017 and 6% in 2016. costs. Net debt to total capitalization at margins, especially in the Equipment Group, Dividends have generally increased in December 31, 2017, was 40% compared to diluted earnings. Selling and administrative proportion to trailing earnings growth. The -4% at December 31, 2016 (cash exceeded expenses included acquisition-related quarterly dividend rate was increased in total debt). expenses and the impact of higher DSU 2015 by 13% to $0.17 per share, in 2016 by 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. Acquisition and Integration of the Hewitt operations Risks and uncertainties exist related to the acquisition of the Hewitt operations including but not limited to: changes in consumer and business conﬁdence as a result of the change in ownership; the potential for liabilities assumed in the acquisition to exceed our estimates or for material undiscovered liabilities in the Hewitt business; the potential for third parties to terminate or alter their agreements or relationships with Toromont as a result of the acquisition. The anticipated beneﬁts and synergies from acquiring Hewitt will depend in part on whether the operations, systems, management and cultures of Hewitt and Toromont can be integrated in an efficient and effective manner. While certain operational and strategic decisions with respect to the combined organization have been made, other decisions remain and some may not have been identiﬁed. These decisions and the integration of Hewitt with the existing Toromont businesses will present signiﬁcant challenges to management. The integration process may lead to greater than expected operating costs, customer loss and business disruption (including, without limitation, difficulties in maintaining relationships with employees, customers or suppliers) for Toromont or the combined organization that TOROMONT 2017 ANNUAL REPORT 35 may affect the ability of the combined organization to realize the anticipated beneﬁts of the combination or may otherwise materially and adversely affect Toromont’s business, results of operations or ﬁnancial condition. Business Cycle Expenditures on capital goods have historically been cyclical, reﬂecting a variety of factors including interest rates, foreign exchange rates, consumer and business conﬁdence, commodity prices, corporate proﬁts, credit conditions and the availability of capital to ﬁnance purchases. Toromont’s customers are typically affected, to varying degrees, by these factors and trends in the general business cycle within their respective markets. As a result, Toromont’s ﬁnancial performance is affected by the impact of such business cycles on the Company’s customer base. Commodity prices, and, in particular, changes in the view on long-term trends, affects 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 36 TOROMONT 2017 AN NUAL R EPO RT 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 25 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 US 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 US dollar has an impact on revenue trends. The Canadian dollar averaged US$0.77 in 2017 compared to US$0.75 in 2016, a 2% increase. As substantially all of the equipment and parts sold in the Equipment Group are sourced in US 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, 2017, the Company’s debt portfolio included $653.0 million in ﬁxed-rate debt (72% of total debt outstanding) and a $750.0 million ﬂoating- rate credit facility, of which $250 million was drawn (28% of total debt outstanding). Fixed-rate debt amortizes or matures between 2018 and 2027. 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 ﬁxed-rate 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 signiﬁcant and ever-increasing environmental legislation and regulation. This legislation can impact Toromont in two ways. First, it may increase the technical difficulty in meeting environmental requirements in product design, which could increase the cost of these businesses’ products. Second, it may result in a reduction in activity by Toromont’s customers in environmentally sensitive areas, in turn reducing the sales opportunities available to Toromont. Toromont is also subject to a broad range of environmental laws and regulations. These may, in certain circumstances, impose strict liability for environmental contamination, which may render Toromont liable for remediation costs, natural resource damages and other damages as a result of conduct that was lawful at the time it occurred or the conduct of, or conditions caused by, prior owners, operators or other third parties. In addition, where contamination may be present, it is not uncommon for neighbouring land owners and other third parties to ﬁle claims for personal injury, property damage and recovery of response costs. Remediation costs and other damages arising as a result of environmental laws and regulations, and costs associated with new information, changes in existing environmental laws and regulations or the adoption of new environmental laws and regulations could be substantial and could negatively impact Toromont’s business, results of operations or ﬁnancial condition. TOROMONT 2017 ANNUAL REPO RT 37 Signiﬁcant Accounting Policies and Estimates The Company’s signiﬁcant accounting exceed one year, adjustments of the initial manufacture of equipment using the policies are described in note 1 of the notes estimates may be required to ﬁnalize the percentage-of-completion method requires to the consolidated ﬁnancial statements. fair value of assets acquired and liabilities management to make a number of The preparation of the Company’s assumed. After the measurement period, estimates and assumptions about the consolidated ﬁnancial statements in a revision of fair value may impact the expected proﬁtability of the contract, the conformity with IFRS requires Company’s net income. estimated degree of completion based on management to make judgments, cost progression and other detailed estimates and assumptions that affect the Property, Plant and Equipment factors. These factors are routinely reported amounts of revenues, expenses, Depreciation is calculated based on the reviewed as part of the project assets and liabilities, and the disclosure of estimated useful lives of the assets and management process. contingent liabilities, at the end of the estimated residual values. Depreciation The Company also generates revenue reporting period. However, uncertainty expense is sensitive to the estimated from long-term maintenance and repair about these assumptions and estimates service lives and residual values determined contracts whereby it is obligated to could result in outcomes that require a for each type of asset. Actual lives and maintain equipment for its customers. The material adjustment to the carrying residual values may vary depending on a contracts are typically ﬁxed price on either amount of the asset or liability affected in number of factors including technological machine hours or cost per hour, with future periods. innovation, product life cycles and physical provisions for inﬂationary and exchange In making estimates and judgments, condition of the asset, prospective use, and adjustments. Revenue is recognized using management relies on external information maintenance programs. and observable conditions where possible, the percentage-of-completion method based on work completed. This method supplemented by internal analysis as Impairment of Non-ﬁnancial Assets requires management to make a number required. Management reviews its estimates Judgment is used in identifying an of estimates and assumptions surrounding and judgments on an ongoing basis. appropriate discount rate and growth rate machine usage, machine performance, In the process of applying the for the calculations required in assessing future parts and labour pricing, Company’s accounting policies, potential impairment of non-ﬁnancial manufacturers’ warranty coverage and management has made the following assets. Judgment is also used in identifying other detailed factors. These factors are judgments, estimates and assumptions the cash generating units (“CGUs”) to routinely reviewed as part of the contract which have the most signiﬁcant effect on which the intangible assets should be management process. the amounts recognized in the allocated, and the CGU or group of CGUs at consolidated ﬁnancial statements. The which goodwill is monitored for internal Inventories critical accounting policies and estimates management purposes. The impairment Management is required to make an described below affect the operating calculations require the use of estimates assessment of the net realizable value of segments similarly, and therefore are not related to the future operating results and inventory at each reporting period. These discussed on a segmented basis. cash generating ability of the assets. The estimates are determined on the basis of key assumptions used to determine the age, stock levels, current market prices, Acquisitions recoverable amount for the different current economic trends and past In a business combination, the Company groups of CGUs, including a sensitivity experience in the measurement of net may acquire certain assets and assume analysis, are disclosed and further realizable value. certain liabilities of an acquired entity. The explained in note 8 of the notes to the estimate of fair values for these consolidated ﬁnancial statements. Allowance for Doubtful Accounts transactions involves judgment to determine the fair values assigned to the Income Taxes The main components of this allowance are a speciﬁc loss component that relates to tangible and intangible assets (i.e., backlog, Estimates and judgments are made for individually signiﬁcant exposures, and a client relationships, and distribution uncertainties which exist with respect to the collective loss component established for networks) acquired and the liabilities interpretation of complex tax regulations, groups of similar assets in respect of losses assumed on the acquisition. Determining fair value involves a variety of assumptions, changes in tax laws, and the amount and timing of future taxable income. that may have been incurred but not yet speciﬁcally identiﬁed. By their nature, these including revenue growth rates, expected operating income, and discount rates. Revenue Recognition are estimates based on management’s judgment and historical experience. During a measurement period, not to Recording revenues from the assembly and 38 TOROMON T 2017 AN N UAL R EP O RT Share-based Compensation plans that provide certain beneﬁts to its from ﬁnancing activities, included changes The option pricing model used to determine employees. Actuarial valuations of these arising from cash ﬂows and non-cash ﬂows. the fair value of share-based payments plans are based on assumptions which The required disclosures have been added requires various estimates relating to include discount rates, retail price inﬂation, to note 21 of the notes to the consolidated volatility, interest rates, dividend yields and mortality rates, employee turnover and ﬁnancial statements. expected life of the options granted. Fair salary escalation rates. Judgment is value inputs are subject to market factors exercised in setting these assumptions. Pending Accounting Changes as well as internal estimates. The Company These assumptions impact the A number of new standards and considers historic trends together with any measurement of the net employee beneﬁt amendments to standards have been new information to determine the best obligation, funding levels, the net beneﬁt issued but were not yet effective for the estimate of fair value at the date of grant. cost and the actuarial gains and losses ﬁnancial year ending December 31, 2017, Separate from the fair value calculation, recognized in other comprehensive income. and accordingly, have not been applied in the Company is required to estimate the preparing these consolidated ﬁnancial expected forfeiture rate of equity-settled Changes in Accounting Policies statements. The effect of future accounting share-based payments. Effective January 1, 2017, the Company pronouncements and effective dates are Post-Employment Beneﬁt Plans – Statement of Cash Flows. The consolidated ﬁnancial statements. adopted the amendments to IAS 7 discussed in note 1 of the notes to the The Company has deﬁned beneﬁt pension amendments introduce new requirements plans and other post-employment beneﬁt to disclose changes in liabilities arising Controls and Procedures Disclosure Controls and Procedures Management, under the supervision of the of consolidated revenues and 4% of the effectiveness of the Company’s internal consolidated net income. The design of control over ﬁnancial reporting as at President and Chief Executive Officer Hewitt’s disclosure controls and December 31, 2017, using the criteria set (“CEO”) and Executive Vice President and procedures will be completed for the fourth forth in Internal Control - Integrated Chief Financial Officer (“CFO”), is responsible quarter of ﬁscal 2018. Framework (2013 edition) issued by the for establishing and maintaining disclosure Based on that evaluation, which Committee of Sponsoring Organizations of controls and procedures, as deﬁned in excluded Hewitt’s disclosure controls and the Treadway Commission (“COSO”). National Instrument 52-109 – Certiﬁcation procedures, the CEO and CFO concluded The CEO and CFO have limited the of Disclosure in Issuers’ Annual and Interim that the Company’s disclosure controls scope of their design and evaluation of the Filings, and have designed such disclosure and procedures were effective as at Company’s internal control over ﬁnancial controls and procedures, or have caused it December 31, 2017. reporting to exclude the internal control to be designed under their supervision, to provide reasonable assurance that material information with respect to Toromont is Internal Control over Financial Reporting Management, under the supervision of the over ﬁnancial reporting of the Hewitt operations, which were acquired on October 27, 2017. made known to them. CEO and CFO, is responsible for Based on that evaluation, which The CEO and the CFO, together with establishing and maintaining adequate excluded Hewitt’s internal control over other members of management, have internal control over ﬁnancial reporting, ﬁnancial reporting, the CEO and CFO evaluated the effectiveness of the as deﬁned by National Instrument 52-109 concluded that the Company’s internal Company’s disclosure controls and – Certiﬁcation of Disclosure in Issuers’ control over ﬁnancial reporting was procedures. The CEO and CFO have limited Annual and Interim Filings, and have effective as at December 31, 2017. the scope of their design and evaluation of designed such internal control over There have been no changes in the the Company’s disclosure controls and ﬁnancial reporting, or caused it to be design of the Company’s internal control procedures to exclude the disclosure designed under their supervision, to over ﬁnancial reporting during 2017 that controls and procedures of Hewitt’s operations, which were acquired on provide reasonable assurance regarding the reliability of ﬁnancial reporting and the would materially affect, or are reasonably likely to materially affect, the Company’s October 27, 2017. Hewitt’s contribution to preparation of the consolidated ﬁnancial the overall consolidated ﬁnancial statements in accordance with IFRS. internal control over ﬁnancial reporting. Due to its inherent limitations, internal statements of Toromont for the year ended The CEO and the CFO, together with other control over ﬁnancial reporting may not December 31, 2017 was approximately 10% members of management, have evaluated prevent or detect misstatements on a timely TOROMONT 2017 ANNUAL REPORT 39 basis. Also, a projection of the evaluation of with the policies or procedures may reporting may not prevent all errors and the effectiveness of internal control over deteriorate. Therefore, even those systems fraud. A control system, no matter how well ﬁnancial reporting to future periods are determined to be effective can provide only conceived or operated, can only provide subject to the risk that the controls may reasonable assurance with respect to the reasonable, not absolute, assurance that become inadequate because of changes in ﬁnancial statement preparation and the objectives of the control system are met. conditions, or that the degree of compliance presentation. Internal controls over ﬁnancial Additional GAAP Measures IFRS mandates certain minimum line items for ﬁnancial statements and also requires presentation of additional line items, headings and subtotals when such presentation is relevant to an understanding of the Company’s ﬁnancial position or performance. IFRS also requires the notes to the ﬁnancial statements to provide information that is not presented elsewhere in the ﬁnancial statements, but is relevant to understanding them. Such measures outside of the minimum mandated line items are considered additional GAAP measures. The Company’s consolidated ﬁnancial statements and notes thereto include certain additional GAAP measures where management considers such information to be useful to the understanding of the Company’s results. Gross Proﬁt Gross Proﬁt is deﬁned as total revenues less cost of goods sold. Operating Income Operating income is deﬁned as net earnings before interest expense, interest and investment income and income taxes and is used by management to assess and evaluate the ﬁnancial performance of its operating segments. Financing and related interest charges cannot be attributed to business segments on a meaningful basis that is comparable to other companies. Business segments do not correspond to income tax jurisdictions, and it is believed that the allocation of income taxes distorts the historical comparability of the performance of the business segments. Three months ended December 31 Years ended December 31 ($ thousands) Net earnings plus: Interest expense less: Interest and investment income plus: Income taxes $ 2017 59,136 6,788 (1,637) 22,294 $ 2016 45,529 1,853 (1,377) 16,883 2017 2016 $ 175,970 12,277 (4,659) 65,994 $ 155,748 7,242 (4,006) 57,579 Operating income $ 86,581 $ 62,888 $ 249,582 $ 216,563 40 TOROMON T 2017 AN N UAL R EP O RT Net Debt to Total Capitalization and Equity Net debt to total capitalization and equity are calculated as net debt divided by total capitalization and shareholders’ equity, respectively, as deﬁned below, and are used by management as measures of the Company’s ﬁnancial leverage. Net debt is calculated as long-term debt plus current portion of long-term debt less cash. Total capitalization is calculated as shareholders’ equity plus net debt. The calculations are as follows: ($ thousands) Long-term debt Current portion of long-term debt less: Cash Net debt Shareholders’ equity Total capitalization Net debt to total capitalization Net debt to equity 2017 2016 $ 893,806 1,941 160,507 $ 150,717 1,811 188,735 735,240 (36,207) 1,124,727 885,432 $ 1,859,967 $ 849,225 40% 0.65:1 -4% -0.04:1 For the year ended December 31, 2016, cash exceeded total debt and effectively resulted in negative net debt to total capitalization and equity ratios, as illustrated above. Non-GAAP Measures Management believes that providing management believes that users are therefore unlikely to be comparable to certain non-GAAP measures provides provided a better overall understanding of similar measures presented by other users of the Company’s consolidated the Company’s business and its ﬁnancial issuers. Accordingly, these measures ﬁnancial statements with important performance during the relevant period should not be considered as a substitute or information regarding the operational than if they simply considered the IFRS alternative for net income or cash ﬂow, in performance and related trends of the measures alone. each case as determined in accordance Company’s business. By considering The non-GAAP measures used by with IFRS. these measures in combination with the management do not have any standardized comparable IFRS measures set out below, meaning prescribed by IFRS and are Working Capital Working capital is deﬁned as total current assets less total current liabilities. Management views working capital as a measure for assessing overall liquidity. ($ thousands) Total current assets less: Total current liabilities Working capital 2017 2016 $ 1,477,665 699,291 $ 891,616 316,234 $ 778,374 $ 575,382 TOROMONT 2017 ANNUAL REPORT 41 Non-Cash Working Capital Non-cash working capital is deﬁned as total current assets (excluding cash) less total current liabilities (excluding current portion of long-term debt). ($ thousands) Total current assets less: Cash Total current liabilities less: Current portion of long-term debt Non-cash working capital 2017 2016 $ 1,477,665 160,507 $ 891,616 188,735 1,317,158 702,881 699,291 1,941 697,350 316,234 1,811 314,423 $ 619,808 $ 388,458 Market Capitalization and Total Enterprise Value Market capitalization represents the total market value of the Company’s equity. It is calculated by multiplying the market price of the Company’s share by the total outstanding shares. Total enterprise value represents the total value of the Company and is often used as a more comprehensive alternative to market capitalization. It is calculated by adding net debt (deﬁned above) to market capitalization. The calculations are as follows: ($ thousands, except for share price) Outstanding common shares, December 31 x Ending share price, December 31 Market capitalization Long-term debt Current portion of long-term debt less: Cash Net debt 2017 2016 80,950 55.10 $ 78,398 42.35 $ $ 4,460,335 $ 3,320,175 $ 893,806 1,941 160,507 $ 150,717 1,811 188,735 $ 735,240 $ (36,207) Total enterprise value $ 5,195,575 $ 3,283,968 42 TOROMON T 2017 ANN UAL R EP O RT Key Performance Indicators (“KPIs”) Management uses key performance margin, operating margin, order bookings have a standardized meaning under IFRS indicators to consistently measure and backlogs, return on capital employed and may not be comparable to similar performance against the Company’s and return on equity. Although some of measures used by other issuers. priorities across the organization. The these KPIs are expressed as ratios, they are Company’s KPIs include gross proﬁt non-GAAP ﬁnancial measures that do not Gross Proﬁt Margin This measure is deﬁned as gross proﬁt (deﬁned above) divided by total revenues. Operating Income Margin This measure is deﬁned as operating income (deﬁned above) divided by total revenues. Order Bookings and Backlogs The Company’s order bookings represent equipment unit orders that management believes are ﬁrm. Backlogs are deﬁned as the retail value of equipment unit ordered by customers for future deliveries. Management uses order backlog as a measure of projecting future equipment deliveries. There are no directly comparable IFRS measures for order bookings or backlog. Return on Capital Employed (“ROCE”) ROCE is utilized to assess both current operating performance and prospective investments. The numerator used for the calculation is income before income taxes, interest expense and interest income (excluding interest on rental conversions). The denominator in the calculation is the monthly average capital employed, which is deﬁned as net debt plus shareholders’ equity or total capitalization. ($ thousands) Net earnings plus: Interest expense less: Interest and investment income plus: Interest income – rental conversions (see note 14) plus: Income taxes Average capital employed Return on capital employed Return on Equity (“ROE”) 2017 2016 $ 175,970 12,277 (4,659) 2,308 65,994 $ 155,748 7,242 (4,006) 2,811 57,579 $ 251,890 $ 219,374 $ 1,171,449 $ 894,765 21.5% 24.5% ROE is monitored to assess the proﬁtability of the consolidated Company and is calculated by dividing net earnings by opening shareholders’ equity (adjusted for shares issued and redeemed during the year). ($ thousands) Net earnings Opening shareholders’ equity (net of adjustments) Return on equity 2017 2016 $ 175,970 $ 155,748 $ 909,715 $ 778,896 19.3% 20.0% TOROMONT 2017 ANNUAL REPORT 43 Management’s Report The preparation and presentation of the assurance that transactions are independent directors, is responsible for Company’s consolidated ﬁnancial appropriately authorized, assets are determining that management fulﬁls its statements is the responsibility of safeguarded from loss or unauthorized responsibilities in the preparation of the management. The ﬁnancial statements use and ﬁnancial records are properly consolidated ﬁnancial statements and the have been prepared in accordance with maintained to provide reliable information ﬁnancial control of operations. The Audit International Financial Reporting Standards for preparation of the consolidated Committee recommends the independent as issued by the International Accounting ﬁnancial statements. auditors for appointment by the Standards Board and necessarily include Ernst & Young LLP, an independent ﬁrm shareholders. It meets regularly with estimates. The consolidated ﬁnancial of Chartered Professional Accountants, ﬁnancial management and the internal and statements reﬂect amounts which must, of were appointed by the shareholders as external auditors to discuss internal necessity, be based on the best estimates external auditors to examine the controls, auditing matters and ﬁnancial and judgment of management. Information consolidated ﬁnancial statements in reporting issues. The independent auditors contained in the Company’s Management’s accordance with generally accepted have unrestricted access to the Audit Discussion and Analysis is consistent, auditing standards in Canada and provide Committee. The consolidated ﬁnancial where applicable, with that contained in the an independent professional opinion. Their statements and Management’s Discussion consolidated ﬁnancial statements. report is presented with the consolidated and Analysis have been approved by the Management maintains appropriate ﬁnancial statements. Board of Directors, based on the review and systems of internal control. Policies and The Board of Directors, acting through recommendation of the Audit Committee. procedures are designed to give reasonable an Audit Committee comprised solely of Scott J. Medhurst President and Chief Executive Officer Paul R. Jewer Executive Vice President and Chief Financial Officer February 22, 2018 Toronto, Canada 44 TOROMON T 2017 ANN UAL REP O RT Independent Auditors’ Report To the Shareholders of Toromont Industries Ltd. We have audited the accompanying Auditors’ Responsibility procedures that are appropriate in the consolidated ﬁnancial statements of Our responsibility is to express an opinion circumstances, but not for the purpose of Toromont Industries Ltd., which comprise on these consolidated ﬁnancial statements expressing an opinion on the effectiveness the consolidated statements of ﬁnancial based on our audits. We conducted our of the entity’s internal control. An audit also position as at December 31, 2017 and 2016, audits in accordance with Canadian includes evaluating the appropriateness of and the consolidated income statements, generally accepted auditing standards. accounting policies used and the and consolidated statements of Those standards require that we comply reasonableness of accounting estimates comprehensive income, cash ﬂows and with ethical requirements and plan and made by management, as well as evaluating changes in equity for the years then ended, perform the audits to obtain reasonable the overall presentation of the consolidated and a summary of signiﬁcant accounting assurance about whether the consolidated ﬁnancial statements. policies and other explanatory information. ﬁnancial statements are free from material We believe that the audit evidence we Management’s Responsibility for the An audit involves performing procedures and appropriate to provide a basis for our misstatement. have obtained in our audits is sufficient Consolidated Financial Statements to obtain audit evidence about the amounts audit opinion. Management is responsible for the and disclosures in the consolidated ﬁnancial preparation and fair presentation of these statements. The procedures selected Opinion consolidated ﬁnancial statements in depend on the auditors’ judgment, including In our opinion, the consolidated ﬁnancial accordance with International Financial the assessment of the risks of material statements present fairly, in all material Reporting Standards, and for such internal misstatement of the consolidated ﬁnancial respects, the ﬁnancial position of Toromont control as management determines is statements, whether due to fraud or error. Industries Ltd. as at December 31, 2017 necessary to enable the preparation of In making those risk assessments, the and 2016, and its ﬁnancial performance consolidated ﬁnancial statements that are auditors consider internal control relevant and its cash ﬂows for the years then ended, free from material misstatement, whether to the entity’s preparation and fair in accordance with International Financial due to fraud or error. presentation of the consolidated ﬁnancial Reporting Standards. statements in order to design audit Ernst & Young LLP Chartered Professional Accountants Licensed Public Accountants February 22, 2018 Toronto, Canada TOROMONT 2017 ANNUAL REPORT 45 Consolidated Statements of Financial Position As at December 31 ($ thousands) Assets Current assets Cash Accounts receivable Inventories Derivative ﬁnancial instruments Other current assets Total current assets Property, plant and equipment Rental equipment Other assets Deferred tax assets Goodwill and intangible assets Total assets Liabilities Current liabilities Accounts payable and accrued liabilities Provisions Deferred revenues Current portion of long-term debt Derivative ﬁnancial instruments Income taxes payable Total current liabilities Deferred revenues Long-term debt Net post-employment obligations Shareholders’ equity Share capital Contributed surplus Retained earnings Accumulated other comprehensive income Shareholders’ equity Note 2017 2016 4 5 12 6 6 7 15 8 9 10 12 10 19 11 $ 160,507 528,748 780,024 — 8,386 $ 188,735 260,691 435,757 1,197 5,236 1,477,665 891,616 413,178 469,342 17,206 411 480,107 181,827 272,277 15,381 5,610 27,501 $ 2,857,909 $ 1,394,212 $ 537,321 17,436 137,129 1,941 5,260 204 699,291 18,750 893,806 121,335 444,427 10,290 669,813 197 1,124,727 $ 245,856 16,094 51,211 1,811 — 1,262 316,234 19,259 150,717 22,570 315,078 8,166 559,252 2,936 885,432 Total liabilities and shareholders’ equity $ 2,857,909 $ 1,394,212 Commitments - see note 22 See accompanying notes Approved by the Board: Robert M. Ogilvie Director Wayne S. Hill Director 46 TOROMON T 2017 ANN UAL REP O RT Consolidated Income Statements Years ended December 31 ($ thousands, except share amounts) Note 2017 2016 Revenues Cost of goods sold Gross proﬁt Selling and administrative expenses Gain on sale of internally-developed software Operating income Interest expense Interest and investment income Income before income taxes Income taxes Net earnings Earnings per share Basic Diluted Weighted average number of shares outstanding Basic Diluted See accompanying notes 23 5,6 $ 2,350,162 1,794,213 $ 1,912,040 1,443,978 14 14 15 16 16 555,949 306,367 — 249,582 12,277 (4,659) 241,964 65,994 468,062 256,438 (4,939) 216,563 7,242 (4,006) 213,327 57,579 $ 175,970 $ 155,748 $ $ 2.22 2.20 $ $ 1.99 1.98 79,091,706 79,907,470 78,127,400 78,674,297 TOROMONT 2017 ANNUAL REPORT 47 Consolidated Statements of Comprehensive Income Years ended December 31 ($ thousands) Net earnings 2017 2016 $ 175,970 $ 155,748 Other comprehensive (loss) income, net of income taxes: Items that may be reclassiﬁed subsequently to net earnings: Foreign currency translation adjustments Unrealized loss on derivatives designated as cash ﬂow hedges Income tax recovery Unrealized loss on cash ﬂow hedges, net of income taxes Realized loss on derivatives designated as cash ﬂow hedges Income tax recovery Realized loss on cash ﬂow hedges, net of income taxes Items that will not be reclassiﬁed subsequently to net earnings: Actuarial losses Income tax recovery Actuarial losses, net of income taxes Other comprehensive loss Total comprehensive income See accompanying notes (716) (5,946) 1,548 (4,398) 3,211 (836) 2,375 (6,765) 1,758 (5,007) (277) (948) 248 (700) 644 (169) 475 (1,465) 389 (1,076) (7,746) (1,578) $ 168,224 $ 154,170 48 TOROMON T 2017 AN N UAL R EP O RT Consolidated Statements of Cash Flows Years ended December 31 ($ thousands) Note 2017 2016 Operating activities Net earnings Items not requiring cash: Depreciation and amortization Stock-based compensation Post-employment beneﬁt expense Deferred income taxes Gain on sale of rental equipment and property, plant and equipment Gain on sale of internally-developed software 6,8,10 17 21 3 3 10 10 10 11 11 Net change in non-cash working capital and other Additions to rental equipment Proceeds on disposal of rental equipment Cash provided by operating activities Investing activities Additions to property, plant and equipment Proceeds on disposal of property, plant and equipment Proceeds on disposal of internally-developed software Increase in other assets Business acquisition Cash used in investing activities Financing activities Issue of senior debentures Issue of term bank debt Repayment of senior debentures Debt issuance costs Dividends Cash received on exercise of stock options Shares purchased for cancellation Cash provided by (used in) ﬁnancing activities Effect of currency translation on cash balances (Decrease) increase in cash Cash, at beginning of year Cash, at end of year Supplemental cash ﬂow information (note 21) See accompanying notes $ 175,970 $ 155,748 89,705 3,502 448 10,287 (21,590) — 258,322 70,010 (102,343) 35,521 76,726 3,261 10 2,960 (17,971) (4,939) 215,795 34,744 (98,668) 36,942 261,510 188,813 (37,317) 3,185 — (42,950) (902,896) (979,978) 500,000 250,000 (1,811) (5,597) (58,858) 6,758 — 690,492 (252) (28,228) 188,735 (24,826) 1,521 4,939 (209) — (18,575) — — (1,690) — (55,422) 11,574 (2,574) (48,112) (71) 122,055 66,680 $ 160,507 $ 188,735 TOROMONT 2017 ANNUAL REPO RT 49 Consolidated Statements of Changes in Equity Share Capital Accumulated other comprehensive income Foreign currency ($ thousands) Number Contributed surplus Amount Retained earnings adjustments translation Cash ﬂow hedges Total Total At January 1, 2016 77,905,821 $ 301,413 $ 7,236 $ 463,194 $ 2,904 $ 534 $ 3,438 $ 775,281 Net earnings Other comprehensive loss Total comprehensive income — — — — — — — 155,748 (1,076) — — (277) — (225) — (502) 155,748 (1,578) — 154,672 (277) (225) (502) 154,170 Exercise of stock options Stock-based compensation expense Stock options exercised 581,879 14,009 — — — — — 3,261 (2,331) Effect of stock compensation plans 581,879 14,009 930 — — — — Shares purchased for cancellation Dividends (89,244) — (344) — — — (2,334) (56,280) — — — — — — — — — — — — 14,009 3,261 (2,331) — — 14,939 — — — — (2,678) (56,280) At December 31, 2016 78,398,456 $ 315,078 $ 8,166 $ 559,252 $ 2,627 $ 309 $ 2,936 $ 885,432 Net earnings Other comprehensive loss Total comprehensive income — — — — — — — — 175,970 (5,007) — (716) — (2,023) — (2,739) 175,970 (7,746) — 170,963 (716) (2,023) (2,739) 168,224 Exercise of stock options Stock-based compensation expense Stock options exercised 301,885 — — 8,136 — — — 3,502 (1,378) Effect of stock compensation plans 301,885 8,136 2,124 — — — — Business acquisition Dividends 2,249,478 121,213 — — — — — (60,402) — — — — — — — — — — — — — — — — — — 8,136 3,502 (1,378) 10,260 121,213 (60,402) At December 31, 2017 80,949,819 $ 444,427 $ 10,290 $ 669,813 $ 1,911 $ (1,714) $ 197 $ 1,124,727 See accompanying notes 50 TOROMONT 2017 AN NUAL REP O RT Notes to the Consolidated Financial Statements December 31, 2017 ($ thousands except where otherwise indicated) 1. Description of Business and Signiﬁcant Accounting Policies Corporate Information thousand, except where otherwise business need not include all of the inputs or Toromont Industries Ltd. (the “Company” indicated. Certain balances in the processes that the seller used in operating or “Toromont”) is a limited company comparative numbers in the consolidated that business if the Company is capable of incorporated and domiciled in Canada income statements and statements of acquiring the business and continuing to whose shares are publicly traded on the ﬁnancial position have been reclassiﬁed produce outputs, for example, by integrating Toronto Stock Exchange under the symbol from statements previously presented to the business with their own inputs and TIH. The registered office is located at 3131 conform to the presentation of the 2017 processes. If the transaction does not meet Highway 7 West, Concord, Ontario, Canada. consolidated ﬁnancial statements. the criteria of a business, it is accounted for Toromont operates through two as an asset acquisition. reportable segments: the Equipment Group Basis of Consolidation Business combinations are accounted and CIMCO. The Equipment Group includes The consolidated ﬁnancial statements for using the acquisition method. The cost of one of the larger Caterpillar dealerships by include the accounts of the Company and an acquisition is measured as the aggregate revenue and geographic territory in addition its wholly owned subsidiaries. of consideration transferred, measured at to industry leading rental operations and an Subsidiaries are fully consolidated from acquisition date fair value. Acquisition costs expanding agricultural equipment business. the date of acquisition, being the date on are expensed as incurred. CIMCO is a market leader in the design, which the Company obtains control, and Goodwill is initially measured at cost, engineering, fabrication and installation of continue to be consolidated until the date being the excess of the cost of the business industrial and recreational refrigeration that such control ceases. The ﬁnancial combination over the Company’s share in systems. Both segments offer statements of the subsidiaries are the net fair value of the acquiree’s comprehensive product support capabilities. prepared for the same reporting period as identiﬁable assets, liabilities and contingent Toromont employs approximately 6,000 the parent company, using consistent liabilities. If the cost of acquisition is less people in 146 locations. accounting policies. All intra-group than the fair value of the net assets of the balances, income and expenses and subsidiary acquired, the difference is Statement of Compliance unrealized gains and losses resulting from recognized directly in the consolidated These consolidated ﬁnancial statements intra-group transactions are eliminated in income statements. are prepared in accordance with full upon consolidation. International Financial Reporting Standards After initial recognition, goodwill is measured at cost less any accumulated (“IFRS”), as issued by the International Business Combinations and Goodwill impairment losses. For the purpose of Accounting Standards Board (“IASB”). When determining the nature of an impairment testing, goodwill acquired These consolidated ﬁnancial acquisition, as either a business combination in a business combination is, from the statements were authorized for issue by or an asset acquisition, management deﬁnes acquisition date, allocated to each of the the Audit Committee of the Board of a business as ‘an integrated set of activities Company’s cash-generating units (“CGUs”) Directors on February 22, 2018. and assets that is capable of being that are expected to beneﬁt from the conducted and managed for the purpose of synergies of the combination, irrespective Basis of Preparation providing a return in the form of dividends, of whether other assets or liabilities of the These consolidated ﬁnancial statements were prepared on a historical cost basis, lower costs or other economic beneﬁts acquiree are assigned to those units. directly to investors or other owners, Where goodwill forms part of a CGU and except for derivative instruments that have members or participants.’ An integrated set part of the operation within that unit is been measured at fair value. The of activities and assets requires two disposed of, the goodwill associated with consolidated ﬁnancial statements are essential elements - inputs and processes the operation disposed of is included in the presented in Canadian dollars and all applied to those inputs, which together are carrying amount of the operation when values are rounded to the nearest or will be used to create outputs. However, a determining the gain or loss on disposal TOROMONT 2017 ANNUAL REPO RT 51 of the operation. Goodwill disposed of in this circumstance is measured based on the relative fair values of the operation disposed of and the portion of the CGU retained. Cash and Cash Equivalents Cash consists of petty cash and demand deposits. Cash equivalents, when applicable, consist of short-term deposits with an original maturity of three months or less. Accounts Receivable Accounts receivable are amounts due from customers for merchandise sold or services performed in the ordinary course of business. If collection is expected in one year or less (or in the normal operating cycle of the business, if longer), they are classiﬁed as current assets. If not, they are presented as non-current assets. Accounts receivable are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, less provision for impairment. The Company maintains an allowance for doubtful accounts to provide for impairment of trade receivables. The expense relating to doubtful accounts is included within “Selling and administrative expenses” in the consolidated income statements. Inventories Inventories are valued at the lower of cost and net realizable value. Cost of equipment, repair and distribution parts and direct materials include purchase cost and costs incurred in bringing each product to its present location and condition. Serialized inventory is determined on a speciﬁc-item basis. Non-serialized inventory is determined based on a weighted average actual cost. Cost of work-in-process includes cost of direct materials, labour and an allocation of manufacturing overheads, excluding borrowing costs, based on normal operating capacity. Cost of inventories includes the transfer of gains and losses on qualifying cash ﬂow hedges, recognized in other comprehensive income, in respect of the purchase of inventory. Net realizable value is the estimated selling price in the ordinary course of 52 TOROMON T 2017 ANN UAL R EPO RT business, less estimated costs of completion and the estimated costs necessary to make the sale. Amortization is recorded as follows: • Customer Relationships – 8 years, straight-line Property, Plant and Equipment Property, plant and equipment are recorded at cost, net of accumulated depreciation and accumulated impairment losses, if any. Depreciation is recognized principally on a straight-line basis over the estimated useful lives of the assets. Estimated useful lives range from 20 to 30 years for buildings, 3 to 10 years for equipment and 20 years for power generation assets. Leasehold improvements and lease inducements are amortized on a straight-line basis over the term of the lease. Land is not depreciated. The assets’ residual values, useful lives and methods of depreciation are reviewed at each ﬁnancial year end and adjusted prospectively, if appropriate. Rental Equipment Rental equipment is recorded at cost, net of accumulated depreciation and any impairment losses. Cost is determined on a speciﬁc-item basis. Rental equipment is depreciated to its estimated residual value over its estimated useful life on a straight- line basis, which ranges from 1 to 10 years. The assets’ residual values, useful lives and methods of depreciation are reviewed at each ﬁnancial year end and adjusted prospectively, if appropriate. Intangible Assets Intangible assets acquired separately are measured on initial recognition at cost. Intangible assets acquired as part of a business acquisition are initially recorded at the acquisition date fair value. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and accumulated impairment losses, as applicable. Intangible assets with a ﬁnite useful life are amortized over their estimated useful lives and are assessed for impairment whenever there is an indication that the intangible assets may be impaired. The amortization period and the amortization method for intangible assets with ﬁnite useful lives are reviewed at least at the end of each reporting period. • ERP System – 5 years, straight-line • Customer Order Backlog – speciﬁc basis • Patents and Licenses – remaining life, straight-line Intangible assets with indeﬁnite useful lives are not amortized, but are tested for impairment annually or when indicators of impairment are present. Distribution networks are considered to have an indeﬁnite life based on the terms of the distribution rights contracts. The assessment of indeﬁnite life is reviewed annually to determine whether the indeﬁnite life continues to be supportable. Provisions Provisions are recognized when the Company has a present obligation, legal or constructive, as a result of a past event, it is probable that an outﬂow of resources embodying economic beneﬁts will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Provisions for warranty costs are recognized when the product is sold or service provided. Initial recognition is based on historical experience. Financial Instruments The Company determines the classiﬁcation of its ﬁnancial assets and liabilities at initial recognition. Initially, all ﬁnancial assets and liabilities are recognized at fair value. Regular-way trades of ﬁnancial assets and liabilities are recognized on the trade date. Transaction costs are expensed as incurred except for loans and receivables and loans and borrowings, in which case transaction costs are included in initial cost. Financial Assets Subsequent measurement of ﬁnancial assets depends on the classiﬁcation. The Company has made the following classiﬁcations: • Cash is classiﬁed as held for trading and as such is measured at fair value, with changes in fair value being included in proﬁt or loss. • Accounts receivable are classiﬁed as loans and receivables and are recorded at amortized cost using the effective interest rate method, less provisions for doubtful accounts. The Company assesses, as at each consolidated statement of ﬁnancial position date, whether there is any objective evidence that a ﬁnancial asset or a group of ﬁnancial assets is impaired. Financial Liabilities Subsequent measurement of ﬁnancial liabilities depends on the classiﬁcation. The Company has made the following classiﬁcations: • Accounts payable and accrued liabilities are classiﬁed as ﬁnancial liabilities and as such are measured at amortized cost. The Company has not designated any ﬁnancial liability at fair value through proﬁt or loss. • Long-term debt is classiﬁed as loans and borrowings and as such is subsequently measured at amortized cost using the effective interest rate method. Discounts, premiums and fees on acquisition are taken into account in determining amortized cost. Derivatives Derivative assets and liabilities are classiﬁed as held for trading and are measured at fair value with changes in fair value being included in proﬁt or loss, unless they are designated as hedging instruments, in which case changes in fair value are included in other comprehensive income. Fair Value of Financial Instruments The Company uses the following hierarchy for determining and disclosing the fair value of ﬁnancial instruments by valuation technique: • Level 1 – unadjusted quoted prices in active markets for identical assets or liabilities. • Level 2 – other techniques for which all inputs that have a signiﬁcant effect on the recorded fair value are observable, either directly or indirectly. • Level 3 – techniques that use inputs that have a signiﬁcant effect on the recorded fair value that are not based on observable market data. Derivative Financial Instruments and Hedge Accounting Derivative ﬁnancial arrangements are used to hedge exposure to ﬂuctuations in exchange rates. Such derivative ﬁnancial instruments are initially recognized at fair value on the date on which a derivative contract is entered into and are subsequently measured at fair value. Derivatives are carried as ﬁnancial assets when the fair value is positive and as ﬁnancial liabilities when the fair value is negative. At inception, the Company designates and documents the hedge relationship, including identiﬁcation of the transaction and the risk management objectives and strategy for undertaking the hedge. The Company also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash ﬂows of hedged items. The Company has designated certain derivatives as cash ﬂow hedges. These are hedges of ﬁrm commitments and highly probable forecast transactions. The effective portion of changes in the fair value of derivatives that are designated as a cash ﬂow hedge is recognized in other comprehensive income. The gain or loss relating to the ineffective portion is recognized immediately in the consolidated income statements. Additionally: • If a hedge of a forecast transaction subsequently results in the recognition of a non-ﬁnancial asset, the associated gains or losses that were recognized in other comprehensive income are included in the initial cost or other carrying amount of the asset; • For cash ﬂow hedges other than those identiﬁed above, amounts accumulated in other comprehensive income are recycled to the consolidated income statements in the period when the hedged item will affect earnings (for instance, when the forecast sale that is hedged takes place); • When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss in other comprehensive income remains in other comprehensive income and is recognized when the forecast transaction is ultimately recognized in the consolidated income statements; and • When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in other comprehensive income is immediately recognized in the consolidated income statements. Impairment of Non-ﬁnancial Assets The Company assesses whether goodwill or intangible assets with indeﬁnite lives may be impaired annually during the fourth quarter, or when indicators of impairment are present. For the purpose of impairment testing, goodwill arising from acquisitions is allocated to each of the Company’s CGUs or group of CGUs expected to beneﬁt from the acquisition. The level at which goodwill is allocated represents the lowest level at which goodwill is monitored for internal management purposes, and is not higher than an operating segment. Intangible assets with indeﬁnite lives that do not have separate identiﬁable cash ﬂows are also allocated to CGUs or a group of CGUs. Any potential impairment of goodwill or intangible assets is identiﬁed by comparing the recoverable amount of a CGU or a group of CGUs to its carrying value. The recoverable amount is the higher of its fair value less costs to sell and its value-in-use. If the recoverable amount is less than the carrying amount, then the impairment loss is allocated ﬁrst to reduce the carrying amount of any goodwill and then to the other assets pro-rata on the basis of the carrying amount of each asset. In determining fair value less costs to sell, recent market transactions are taken into account, if available. In assessing value-in- use, the estimated future cash ﬂows are discounted to their present value using a pre-tax discount rate that reﬂects current market assessments of the time value of money and the risks speciﬁc to the asset. Impairment losses are recognized in the consolidated income statements. The Company bases its impairment calculation on detailed three-year budgets and extrapolated long-term growth rate for periods beyond the third year. For non-ﬁnancial assets other than goodwill and intangible assets with indeﬁnite TOROMONT 2017 ANNUAL RE PORT 53 lives, an assessment is made at each reporting date whether there is any indication of impairment, or that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, the Company estimates the asset’s recoverable amount. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. A previously recognized impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognized. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in the consolidated income statements. Revenue Recognition Revenue is recognized to the extent that it is probable that the economic beneﬁts will ﬂow to the Company and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received or receivable, excluding discounts, rebates, sales taxes and duty. The following speciﬁc recognition criteria must also be met before revenue is recognized: • Revenues from the sale of equipment are recognized when the signiﬁcant risks and rewards of ownership of the goods have passed to the buyer, usually on shipment of the goods and/or invoicing. • The sale of equipment for which the Company has provided a guarantee to repurchase the equipment at predetermined residual values and dates, are accounted for as operating leases. Revenues are recognized over the period extending to the date of the residual value guarantee. estimated cost for each contract. Periodically, amounts are received from customers in advance of the associated contract work being performed. These amounts are recorded as deferred revenues. Any foreseeable losses on such projects are recognized immediately in proﬁt or loss as identiﬁed. • Revenues from equipment rentals are recognized in accordance with the terms of the relevant agreement with the customer, generally on a straight-line basis over the term of the agreement. • Product support services include sales of parts and servicing of equipment. For the sale of parts, revenues are recognized when the part is shipped to the customer. For servicing of equipment, revenues are recognized on completion of the service work. • Revenues from long-term maintenance contracts and separately priced extended warranty contracts are recognized on a percentage-of- completion basis proportionate to the service work that has been performed based on the parts and labour service provided. Any losses estimated during the term of the contract are recognized when identiﬁed. At the completion of the contract, any remaining proﬁt on the contract is recognized as revenue. • Deferred revenues represent billings to customers in excess of revenue recognized and arise as a result of: a. 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; and b. Progress billings in advance of revenue recognition. • Interest income is recognized using the effective interest rate method. • Revenues from the sale of equipment systems involving design, manufacture, installation and start-up are recorded using the percentage-of-completion method. Percentage-of-completion is normally measured by reference to costs incurred to date as a percentage of total Foreign Currency Translation The functional and presentation currency of the Company is the Canadian dollar. Each of the Company’s subsidiaries determines its functional currency. Transactions in foreign currencies are initially recorded at the functional currency rate prevailing at the date of the transaction or at the average rate for the period when this is a reasonable approximation. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency spot rate of exchange as at the reporting date. All differences are taken directly to proﬁt or loss. Non- monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. The assets and liabilities of foreign operations (having a functional currency other than the Canadian dollar) are translated into Canadian dollars at the rate of exchange prevailing at the consolidated statement of ﬁnancial position dates and the consolidated income statements are translated at the average exchange rate for the period. The exchange differences arising on translation are recognized in accumulated other comprehensive income in shareholders’ equity. On disposal of a foreign operation, the deferred cumulative amount recognized in equity is recognized in the consolidated income statements. Share-based Payment Transactions The Company maintains both equity- settled and cash-settled share-based compensation plans under which the Company receives services from employees, including senior executives and directors, as consideration for equity instruments of the Company. For equity-settled plans, expense is based on the fair value of the awards granted determined using the Black- Scholes option pricing model and the best estimate of the number of equity instruments that will ultimately vest. For awards with graded vesting, each tranche is considered to be a separate grant based on its respective vesting period. The fair value of each tranche is determined separately on the date of the grant and is recognized as stock-based compensation expense, net of forfeiture estimate, over its respective vesting period. For cash-settled plans, the expense is determined based on the fair value of the liability incurred at each award date. The fair value of the liability is measured by 54 TOROMONT 2017 ANN UAL R EPO RT applying quoted market prices. Changes in fair value are recognized in the consolidated income statements in selling and administrative expenses. Employee Future Beneﬁts For deﬁned contribution plans, the pension expense recorded in the consolidated income statements is the amount of the contributions the Company is required to pay in accordance with the terms of the plans. For deﬁned beneﬁt pension plans and other post-employment beneﬁt plans, the expense is determined separately for each plan using the following policies: • The cost of future beneﬁts earned by employees is actuarially determined using the projected unit credit method pro-rated on length of service and management’s best estimate assumptions using a measurement date of December 31; • Net interest is calculated by applying the discount rate to the net deﬁned beneﬁt liability or asset; • Past service costs from plan amendments are recognized immediately in net earnings to the extent that the beneﬁts have vested; otherwise, they are amortized on a straight-line basis over the vesting period; and • Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are recognized in retained earnings and included in the consolidated statements of comprehensive income in the period in which they occur. Income Taxes Current income tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities. Deferred taxes are provided for using the liability method on temporary differences between the tax bases of assets and liabilities and their carrying amounts for ﬁnancial reporting purposes at the reporting date. Deferred tax assets and liabilities are measured using enacted or substantively enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in income tax rates is recognized in the consolidated income statements in the period that includes the date of substantive enactment. The Company assesses recoverability of deferred tax assets based on the Company’s estimates and assumptions. Deferred tax assets are recorded at an amount that the Company considers probable to be realized. Current and deferred income taxes relating to items recognized directly in shareholders’ equity are also recognized directly in shareholders’ equity. Leases The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at inception date. Leases that transfer substantially all of the beneﬁts and risks of ownership of the property to the lessee are classiﬁed as ﬁnance leases; all other leases are classiﬁed as operating leases. Classiﬁcation is re-assessed if the terms of the lease are changed. Toromont as Lessee Operating lease payments are recognized as an operating expense in the consolidated income statements on a straight-line basis over the lease term. Beneﬁts received and receivable as an incentive to enter into an operating lease are deferred and amortized on a straight- line basis over the term of the lease. Toromont as Lessor Rental income from operating leases is recognized on a straight-line basis over the term of the relevant lease. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognized on a straight-line basis over the lease term. Borrowing Costs Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalized as part of the cost of the respective asset. All other borrowing costs are expensed in the period they occur. Amendments to Standard Adopted in 2017 The following amendments were adopted on January 1, 2017. Statement of Cash ﬂows Amendments to IAS 7 - Statement of Cash Flows, require disclosures that enable users of ﬁnancial statements to evaluate changes in liabilities arising from ﬁnancing activities; including both changes arising from cash ﬂows and non-cash ﬂows. The required disclosures have been included in note 21 herein. Standards Issued But Not Effective The following new standards and amendments to standards have been issued but are not effective for the ﬁnancial year ended December 31, 2017 and, accordingly, have not been applied in preparing these consolidated ﬁnancial statements. a) Revenue Recognition IFRS 15 – Revenue from Contracts with Customers, establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. Under IFRS 15, revenue is recognized at an amount that reﬂects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The principles in IFRS 15 provide a more structured approach to measuring and recognizing revenue. Additionally, IFRS 15 will increase disclosures related to revenue recognition. The new revenue standard is applicable to all entities and will supersede all current revenue recognition requirements under IFRS. Entities choose either a full retrospective approach with some limited relief provided or a modiﬁed retrospective approach for annual periods beginning on or after January 1, 2018. Management evaluated the new standard and assessed the impact, including a review of revenue contracts TOROMONT 2017 ANNUAL REPORT 55 with customers. Management has determined that the new standard will not have a material impact on the amount or timing of revenue recognition. b) Share-based Payment Amendments to IFRS 2 – Share-based payment, clarify how to account for certain types of share-based payment transactions. The amendments provide requirements on the accounting for: (i) the effect of vesting and non-vesting conditions on the measurement of cash-settled share-based payments; (ii) share-based payment transactions with a net settlement feature for withholding tax obligations; and (iii) a modiﬁcation to the terms and conditions of a share-based payment that changes the classiﬁcations of the transaction from cash-settled to equity-settled. The amendments are effective for annual periods beginning on or after January 1, 2018. Adoption of this standard has no impact on the Company’s ﬁnancial position or net earnings. c) Financial Instruments In July 2014, the IASB completed the three- part project to replace IAS 39 - Financial Instruments: Recognition and Measurement by issuing IFRS 9, Financial instruments. IFRS 9 includes classiﬁcation and measurement of ﬁnancial assets and ﬁnancial liabilities, a forward-looking ‘expected loss’ impairment model and a substantially-reformed approach to hedge accounting. IFRS 9 uses a new approach to determine whether a ﬁnancial asset is measured at amortized cost or fair value, replacing the multiple rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its ﬁnancial instruments and the contractual cash ﬂow characteristics of the ﬁnancial assets. Most of the requirements in IAS 39 for classiﬁcation and measurement of ﬁnancial liabilities were carried forward in IFRS 9. IFRS 9 also introduced a new expected- loss impairment model that will require more timely recognition of expected credit losses. Speciﬁcally, the new standard requires entities to account for expected credit losses from when ﬁnancial instruments are ﬁrst recognized and to recognize full lifetime expected losses on a more timely basis. Lastly, IFRS 9 introduced a new hedge accounting model, together with corresponding disclosures about risk management activities. The new hedge accounting model represents a substantial overhaul of hedge accounting that will enable entities to better reﬂect their risk management activities in their consolidated ﬁnancial statements. IFRS 9 will be effective for the Company’s ﬁscal year beginning on January 1, 2018. The Company’s analysis has not identiﬁed signiﬁcant differences resulting from the adoption of this standard. d) Foreign Currency Transactions and Advance Consideration IFRIC 22 - Foreign Currency Transactions and Advance Consideration, clariﬁes the appropriate exchange rate to use on initial recognition of an asset, expense or income when advance consideration is paid or received in a foreign currency. The new interpretation is effective for annual periods beginning on or after January 1, 2018. Management has determined that the new standard will not have a material impact on the Company’s ﬁnancial position. e) Leases IFRS 16 – Leases, introduces new requirements for the classiﬁcation and measurement of lessees. For lessors, there is little change to the existing accounting in IAS 17 - Leases. The new standard is effective for annual periods beginning on or after January 1, 2019, with early adoption permitted, provided the new revenue standard, IFRS 15, has been applied, or is applied at the same date. The Company is currently assessing the impact of adopting this new standard on its consolidated ﬁnancial statements, however expects that IFRS 16 will result in higher non-current assets and non-current liabilities recorded on the consolidated statements of ﬁnancial position. f) Uncertainty over Income Tax Treatments IFRIC 23 - Uncertainty over Income Tax Treatments, provides guidance when there is uncertainty over income tax treatments including (but not limited to) whether uncertain tax treatments should be considered separately; assumptions made about the examination of tax treatments by tax authorities; the determination of taxable proﬁt, tax bases, unused tax losses, unused tax credits, and tax rates; and, the impact of changes in facts and circumstances. The new interpretation is effective for annual periods beginning on or after January 1, 2019. The Company is currently assessing the impact of the new interpretation on its consolidated ﬁnancial statements. 2. Signiﬁcant Accounting Estimates and Assumptions The preparation of the Company’s However, uncertainty about these supplemented by internal analysis as consolidated ﬁnancial statements in assumptions and estimates could result in required. Management reviews its estimates conformity with IFRS requires management to make judgments, estimates and outcomes that require a material adjustment to the carrying amount of the and judgments on an ongoing basis. In the process of applying the assumptions that affect the reported asset or liability affected in future periods. Company’s accounting policies, amounts of revenues, expenses, assets and In making estimates and judgments, management has made the following liabilities, and the disclosure of contingent management relies on external information judgments, estimates and assumptions liabilities at the end of the reporting period. and observable conditions where possible, which have the most signiﬁcant effect on 56 TOROMONT 2017 ANN UAL RE PO RT the amounts recognized in the estimates related to the future operating estimates are determined on the basis of consolidated ﬁnancial statements. results and cash generating ability of the age, stock levels, current market prices, assets. The key assumptions used to current economic trends and past Acquisitions determine the recoverable amount for experience in the measurement of net In a business combination, the Company the different groups of CGUs, including realizable value. may acquire certain assets and assume a sensitivity analysis, are disclosed and certain liabilities of an acquired entity. The further explained in note 8. estimate of fair values for these Allowance for Doubtful Accounts The Company makes estimates for transactions involves judgment to Income Taxes allowances that represent its estimate of determine the fair values assigned to the Estimates and judgments are made for potential losses in respect of trade tangible and intangible assets (i.e. backlog, uncertainties which exist with respect to the receivables. The main components of this client relationships, and distribution interpretation of complex tax regulations, allowance are a speciﬁc loss component networks) acquired and the liabilities changes in tax laws, and the amount and that relates to individually signiﬁcant assumed on the acquisition. Determining timing of future taxable income. exposures, and a collective loss component fair value involves a variety of assumptions, established for groups of similar assets in including revenue growth rates, expected Revenue Recognition respect of losses that may have been operating income, and discount rates. Recording revenues from the assembly and incurred but not yet speciﬁcally identiﬁed. During a measurement period, not to manufacture of equipment using the exceed one year, adjustments of the initial percentage-of-completion method, Share-based Compensation estimates may be required to ﬁnalize the requires management to make a number of The option pricing model used to determine fair value of assets acquired and liabilities estimates and assumptions about the the fair value of share-based payments assumed. After the measurement period, expected proﬁtability of the contract, the requires various estimates relating to a revision of fair value may impact the estimated degree of completion based on volatility, interest rates, dividend yields and Company’s net income. cost progression and other detailed expected life of the options granted. Fair factors. These factors are routinely value inputs are subject to market factors Property, Plant and Equipment and reviewed as part of the project as well as internal estimates. The Company Rental Equipment management process. considers historic trends together with any Depreciation is calculated based on the The Company also generates revenue new information to determine the best estimated useful lives of the assets and from long-term maintenance and repair estimate of fair value at the date of grant. estimated residual values. Depreciation contracts whereby it is obligated to Separate from the fair value calculation, expense is sensitive to the estimated maintain equipment for its customers. The the Company is required to estimate the service lives and residual values determined contracts are typically ﬁxed price on either expected forfeiture rate of equity-settled for each type of asset. Actual lives and machine hours or cost per hour, with share-based payments. residual values may vary depending on a provisions for inﬂationary and exchange number of factors including technological adjustments. Revenue is recognized using Post-Employment Beneﬁt Plans innovation, product life cycles and physical the percentage-of-completion method The Company has deﬁned beneﬁt pension condition of the asset, prospective use, and based on work completed. This method plans and other post-employment beneﬁt maintenance programs. requires management to make a number of plans that provide certain beneﬁts to its estimates and assumptions surrounding employees. Actuarial valuations of these Impairment of Non-ﬁnancial Assets machine usage, machine performance, plans are based on assumptions which Judgment is used in identifying an future parts and labour pricing, include discount rates, retail price inﬂation, appropriate discount rate and growth rate manufacturers’ warranty coverage and mortality rates, employee turnover and for the calculations required in assessing other detailed factors. These factors are salary escalation rates. Judgment is potential impairment of non-ﬁnancial routinely reviewed as part of the contract exercised in setting these assumptions. assets. Judgment is also used in identifying management process. These assumptions impact the the CGUs to which the intangible assets should be allocated, and the CGU or group Inventories measurement of the net employee beneﬁt obligation, funding levels, the net beneﬁt of CGUs at which goodwill is monitored for Management is required to make an cost and the actuarial gains and losses internal management purposes. The assessment of the net realizable value of recognized in other comprehensive income. impairment calculations require the use of inventory at each reporting period. These TOROMONT 2017 ANNUAL REPORT 57 3. Business Acquisition Hewitt Group of Companies (“Hewitt”) On October 27, 2017, the Company acquired the businesses and net operating assets of Hewitt and became the approved Caterpillar dealer for the province of Québec, Western Labrador and the Maritimes, as well as the Caterpillar lift truck dealer for Quebec and most of Ontario and the MaK engine dealer for Québec, the Maritimes and the Eastern seaboard of the United States, from Maine to Virginia. Additional distribution rights were also acquired in this transaction. The acquisition expands the Company’s Eastern operations into a contiguous territory covering all of Eastern and Central Canada extending into the far North and provides a platform for long-term growth opportunities and diversiﬁcation into new markets. The Company acquired the businesses and net operating assets of Hewitt in exchange for consideration of $902.9 million cash (net of a preliminary closing working capital adjustment) plus the issuance of 2.25 million Toromont common shares ($121.2 million) for a total consideration of $1.02 billion. Toromont funded the cash portion of the acquisition through cash on hand, the issuance of long-term senior debentures and drawings on an unsecured term credit facility (see note 10 for further details). The acquisition has been accounted for using the purchase method of accounting. Revenues of $242.6 million and net income of $7.8 million were included in the consolidated income statements and statements of comprehensive income from the date of acquisition. Results from the acquired businesses were included in the Equipment Group reportable segment. Purchase Price Cash consideration Issuance of Toromont common shares Total Purchase Price Allocation $ 902,896 121,213 $ 1,024,109 Final valuations of certain items are not yet complete due to the inherent complexity associated with valuations and the timing of the acquisition. Therefore, the purchase price allocation is preliminary and subject to adjustment on completion of the valuation process. The Company determined the preliminary fair values based on discounted cash ﬂows, market information, independent valuations and management’s estimates. Accounts receivable Inventories Property, plant and equipment Rental equipment Deferred tax asset Intangible assets with an indeﬁnite life: Distribution network Intangible assets with a ﬁnite life: ERP system Customer relationships Other Accounts payable and accrued liabilities Provisions Deferred revenues Post-employment beneﬁt obligations Net identiﬁable assets Residual purchase price allocated to goodwill Total $ 159,539 291,035 216,755 169,993 2,617 345,989 10,000 14,731 4,243 (127,124) (1,045) (51,503) (91,555) 943,675 80,434 $ 1,024,109 Accounts receivable represents gross contractual amounts receivable of $166.1 million less management’s best estimate of the allowance for doubtful accounts of $6.6 million. Goodwill arises principally from the ability to leverage the larger base of operations, the assembled workforce, future growth and the potential to realize synergies in the form of cost savings. The amount assigned to goodwill is expected to be deductible for tax purposes. Acquisition-related costs, primarily for advisory services, were approximately $6.0 million and were included in selling and administrative expenses for the year ended December 31, 2017. 58 TOROMON T 2017 AN NUAL REP O RT Pro-forma Disclosures The following pro-forma supplemental information presents certain results of operations as if the acquisition had been completed at the beginning of the ﬁscal period presented. Revenues Net earnings As reported $ 2,350,162 175,970 $ Pro-forma (unaudited) $ 3,235,043 199,330 $ The pro-forma supplemental information is based on estimates and assumptions which are believed to be reasonable. The pro-forma supplemental information is not necessarily indicative of the Company’s consolidated ﬁnancial results in future periods or the results that would have been realized had the business acquisition been completed at the beginning of the period presented. The pro-forma supplemental information excludes business integration costs and opportunities. 4. Accounts Receivable Trade receivables Less: allowance for doubtful accounts Trade receivables – net Other receivables Trade and other receivables 2017 2016 $ 479,832 (10,573) $ 256,985 (9,700) 469,259 59,489 247,285 13,406 $ 528,748 $ 260,691 Other receivables at December 31, 2017 included $42.7 million related to amounts owing to the Company from the seller with respect to the purchase price of the acquisition (see note 3). The aging of gross trade receivables at each reporting date was as follows: Current to 90 days Over 90 days The following table presents the movement in the Company’s allowance for doubtful accounts: Balance, beginning of year Provisions and revisions, net Balance, end of year 5. Inventories Equipment Repair and distribution parts Direct materials Work-in-process 2017 2016 $ 448,115 31,717 $ 240,418 16,567 $ 479,832 $ 256,985 $ 2017 9,700 873 $ 10,573 2016 9,168 532 9,700 $ $ 2017 2016 $ 497,033 199,283 4,048 79,660 $ 300,344 99,297 4,001 32,115 $ 780,024 $ 435,757 TOROMONT 2017 ANNUAL REPO RT 59 The amount of inventory recognized as an expense in cost of goods sold (accounted for other than by the percentage-of-completion method) during 2017 was $1.4 billion (2016 - $1.1 billion). Cost of goods sold included inventory write-downs pertaining to obsolescence and aging, together with recoveries of past write-downs upon disposition. A net reversal of write-downs of $0.8 million was recorded in 2017 (2016 – net write-down of $0.3 million). 6. Property, Plant and Equipment and Rental Equipment Land Buildings Equipment Power Generation Property, Plant and Equipment Rental Equipment Cost January 1, 2017 Additions Additions - acquisition Disposals Currency translation effects $ 50,151 $ 148,030 $ 158,646 $ 4,493 73,266 (193) (11) 12,800 124,341 (3,931) (183) 22,920 19,148 (10,394) (280) 38,827 $ 395,654 40,286 216,755 (14,518) (474) 73 — — — $ 479,554 104,996 169,993 (57,112) — December 31, 2017 $ 127,706 $ 281,057 $ 190,040 $ 38,900 $ 637,703 $ 697,431 Accumulated depreciation January 1, 2017 Depreciation charge Depreciation of disposals Currency translation effects $ — $ — — — 73,782 $ 112,063 $ 6,870 (3,681) (18) 16,529 (10,374) (182) 27,982 $ 213,827 24,953 (14,055) (200) 1,554 — — $ 207,277 61,334 (40,522) — December 31, 2017 $ — $ 76,953 $ 118,036 $ 29,536 $ 224,525 $ 228,089 Net book value – December 31, 2017 $ 127,706 $ 204,104 $ 72,004 $ 9,364 $ 413,178 $ 469,342 Land Buildings Equipment Power Generation Property, Plant and Equipment Rental Equipment Cost January 1, 2016 Additions Disposals Currency translation effects $ 49,988 $ 143,223 $ 154,924 $ 539 (371) (5) 4,912 (20) (85) 16,850 (13,030) (98) 38,771 $ 386,906 22,357 (13,421) (188) 56 — — $ 438,607 98,696 (57,749) — December 31, 2016 $ 50,151 $ 148,030 $ 158,646 $ 38,827 $ 395,654 $ 479,554 Accumulated depreciation January 1, 2016 Depreciation charge Depreciation of disposals Currency translation effects $ — $ — — — 67,923 $ 108,413 $ 5,884 (18) (7) 16,321 (12,604) (67) 26,416 $ 202,752 23,771 (12,622) (74) 1,566 — — $ 192,937 52,476 (38,136) — December 31, 2016 $ — $ 73,782 $ 112,063 $ 27,982 $ 213,827 $ 207,277 Net book value – December 31, 2016 $ 50,151 $ 74,248 $ 46,583 $ 10,845 $ 181,827 $ 272,277 During 2017, depreciation expense of $76.9 million was charged to cost of goods sold (2016 - $69.4 million) and $9.4 million was charged to selling and administrative expenses (2016 - $6.8 million). Operating income from rental operations for the year ended December 31, 2017, was $38.1 million (2016 - $28.4 million). 60 TOROM ONT 2017 ANN UAL R EP O RT 7. Other Assets Equipment sold with guaranteed residual values Other 8. Goodwill and Intangible Assets 2017 2016 $ 12,464 4,742 $ 13,147 2,234 $ 17,206 $ 15,381 Patents and Licenses Customer Order Backlog ERP System Relationships Customer Distribution Network Goodwill Total Cost At January 1, 2016 and December 31, 2016 Acquisition At December 31, 2017 Accumulated amortization At January 1, 2016 Amortization At December 31, 2016 Amortization At December 31, 2017 Net book value – At December 31, 2016 At December 31, 2017 $ $ $ $ $ $ $ 500 $ — $ — $ — 4,243 10,000 — $ 13,669 $ 13,450 $ 27,619 455,397 345,989 80,434 14,731 500 $ 4,243 $ 10,000 $ 14,731 $ 359,658 $ 93,884 $ 483,016 88 $ 30 — $ — — $ — — $ — 118 $ — $ — $ — $ 29 2,122 333 147 $ 2,122 $ 333 $ 307 307 — $ — — $ — — $ — — $ — 88 30 118 2,791 — — 2,909 382 $ — $ — $ — $ 13,669 $ 13,450 $ 27,501 353 $ 2,121 $ 9,667 $ 14,424 $ 359,658 $ 93,884 $ 480,107 Impairment testing of Goodwill and Intangible Assets with Indeﬁnite Lives The carrying amount of goodwill and distribution networks has been allocated to the following CGUs and/or group of CGUs: Equipment Group - Toromont Quebec/Maritimes - Toromont CAT dealership - Battleﬁeld Equipment CIMCO 2017 76,374 13,000 4,060 93,434 450 $ $ Goodwill 2016 $ $ — 13,000 — 13,000 450 Distribution Network 2017 2016 $ 340,541 13,669 5,448 $ 359,658 — $ $ — 13,669 — 13,669 — $ 93,884 $ 13,450 $ 359,658 $ 13,669 TOROMONT 2017 ANNUAL REPORT 61 The Company performed the annual equity risk premium, size premium and the the underlying assets that have not been impairment test of goodwill and intangible risks speciﬁc to each asset or CGU’s cash incorporated in the cash ﬂow estimates. assets as at December 31, 2017. The test ﬂow projections. The discount rate ranged The discount rate is derived from the CGU’s for impairment is to compare the from 10.0% – 13.0%. As a result of the weighted average cost of capital, taking recoverable amount of the CGU or group of analysis, management determined there into account both debt and equity. CGUs to their carrying value. The was no impairment of goodwill or indeﬁnite The cost of equity is derived from the recoverable amounts have been lived intangible assets. expected return on investment by the determined based on a value-in-use Company’s shareholders. The cost of debt calculation using cash ﬂow projections Key Assumptions to Value-in-Use is based on the interest-bearing borrowings from ﬁnancial budgets approved by senior Calculations and Sensitivity Analysis the Company is obliged to service. management covering a three-year period. The calculation of value-in-use is most Segment-speciﬁc risk is incorporated by Cash ﬂows beyond the three-year period sensitive to the following assumptions: applying different debt to equity ratios. were extrapolated using a 2.0% growth • Discount rates Growth rate estimates are based on rate which represents the expected growth • Growth rate to extrapolate cash ﬂows published data, historical experiences and in the Canadian economy. The discount beyond the budget period management’s best estimate. rate applied to each CGU or group of CGUs Discount rates represent the current Management believes that within to determine value-in-use is a pre-tax rate market assessment of the risks speciﬁc to reasonably possible changes to any of the that reﬂects an optimal debt-to-equity ratio each CGU, taking into consideration the above key assumptions, recoverable and considers the risk-free rate, market time value of money and individual risks of amounts exceed carrying values. 9. Provisions Activities related to provisions were as follows: Balance as at January 1, 2016 New provisions Charges/credits against provisions Balance as at December 31, 2016 Acquisition New provisions Charges/credits against provisions $ $ Warranty 8,016 17,420 (14,636) 10,800 1,045 21,940 (20,554) $ $ Other 8,806 1,290 (4,802) 5,294 — 1,145 (2,234) $ $ Total 16,822 18,710 (19,438) 16,094 1,045 23,085 (22,788) Balance as at December 31, 2017 $ 13,231 $ 4,205 $ 17,436 Warranty At the time of sale, a provision is recognized for expected warranty claims on products and services, based on past experience and known issues. It is expected that most of these costs will be incurred in the next ﬁnancial year. Other Other provisions relate largely to open legal and insurance claims and potential onerous contracts. No one claim is signiﬁcant. 62 TOROMON T 2017 AN NUAL RE PO RT 10. Long-Term Debt All debt is unsecured. 7.06%, $15.0 million, due March 29, 2019 (1) 3.71%, $150.0 million, due September 30, 2025 (2) 3.84%, $500.0 million, due October 27, 2027 (2) Senior debentures $250.0 million term credit facility due on October 27, 2022 (3) Debt issuance costs, net of amortization Total long-term debt Less: current portion of long-term debt Non-current portion of long-term debt (1) Blended principal and interest payments payable semi-annually through to maturity. (2) Interest payable semi-annually, principal due on maturity. (3) Interest payable monthly, principal due on maturity. 2017 2016 $ 2,963 150,000 500,000 652,963 250,000 902,963 (7,216) $ 4,774 150,000 — 154,774 — 154,774 (2,246) $ 895,747 (1,941) $ 152,528 (1,811) $ 893,806 $ 150,717 On October 27, 2017, the Company issued provides a term facility of $250.0 million interest rate on these drawings was 2.42%. senior unsecured debentures in an and a revolving facility of $500.0 million, At December 31, 2017, standby letters aggregate principal amount of $500.0 maturing in October 2022. Debt incurred of credit issued utilized $26.7 million of the million (the “Debentures”) to partially fund under the facility is unsecured and ranks credit lines (2016 - $21.7 million). the Hewitt acquisition (see note 3 for pari passu with debt outstanding under These credit arrangements include further details). The Debentures mature in Toromont’s other outstanding debt. covenants, restrictions and events of 2027 and bear interest at a rate of 3.842% Interest is based on a ﬂoating rate, default usually present in credit facilities of per annum, payable semi-annually. The primarily bankers’ acceptances and prime, this nature, including requirements to meet Debentures are unsecured, unsubordinated plus applicable margins and fees based on certain ﬁnancial tests periodically and and rank pari passu with debt outstanding the terms of the credit facility. Debt under restrictions on additional indebtedness under Toromont’s existing debentures. either facility may be repaid at any time. To and encumbrances. On October 27, 2017, the Company also partially fund the aforementioned The Company was in compliance with all expanded and extended its committed acquisition, $250.0 million was drawn on covenants at December 31, 2017 and 2016. unsecured credit facility. The facility the term facility. At December 31, 2017, the Scheduled principal repayments and interest payments on long-term debt are as follows: 2018 2019 2020 2021 2022 Thereafter $ Principal 1,941 1,022 — — 250,000 650,000 $ Interest 30,825 30,825 30,825 30,825 29,748 111,342 $ 902,963 $ 264,390 Interest expense includes interest on debt initially incurred for a term greater than one year of $11.8 million (2016 - $7.1 million). TOROMONT 2017 ANNUAL RE PORT 63 11. Share Capital Authorized outstanding common shares without bid will be cancelled. The Company is authorized to issue an complying with certain provisions set out in There were no shares purchased under unlimited number of common shares (no the plan or without approval of the the NCIB program for the year ended par value) and preferred shares. No Company’s Board of Directors. Should December 31, 2017. During the year ended preferred shares were issued or such an acquisition occur, each rights December 31, 2016, the Company outstanding for the years ended December holder, other than the acquiring person and purchased and cancelled 89,244 common 31, 2017 and 2016. related parties, will have the right to shares for $2.6 million (average cost of A continuity of the shares issued and purchase common shares of the Company $28.84 per share, including transaction outstanding for the years ended December at a 50.0% discount to the market price at costs) under its NCIB program. 31, 2017 and 2016 is presented in the that time. The Plan expires in April 2018. consolidated statements of changes Dividends in equity. Normal Course Issuer Bid (“NCIB”) The Company paid dividends of $58.9 Toromont renewed its NCIB program in 2017. million ($0.75 per share) for the year ended Shareholder Rights Plan The current issuer bid allows the Company December 31, 2017, and $55.4 million The Shareholder Rights Plan is designed to to purchase up to approximately 6.7 million ($0.71 per share) for the year ended encourage the fair treatment of of its common shares in the 12-month period December 31, 2016. shareholders in connection with any ending August 30, 2018, representing 10.0% Subsequent to the year ended takeover offer for the Company. Rights of common shares in the public ﬂoat, as December 31, 2017, the Board of Directors issued under the plan become exercisable estimated at the time of renewal. The actual approved a quarterly dividend of $0.23 when a person, and any related parties, number of shares purchased and the timing per share payable on April 2, 2018, acquires or commences a takeover bid to of any such purchases will be determined by to shareholders on record at the close acquire 20.0% or more of the Company’s Toromont. All shares purchased under the of business on March 9, 2018. 12. Financial Instruments Financial Assets and Liabilities – Classiﬁcation and Measurement The following table highlights the carrying amounts and classiﬁcations of certain ﬁnancial assets and liabilities: Other ﬁnancial liabilities: Current portion of long-term debt Long-term debt Derivative ﬁnancial instruments: Foreign exchange forward contracts 2017 2016 $ 1,941 $ 893,806 $ 1,811 $ 150,717 $ (5,260) $ 1,197 The fair value of derivative ﬁnancial the comparable foreign exchange rate at which can be corroborated by observable instruments is measured using the period end under the same conditions. The market data for substantially the full term of discounted value of the difference between ﬁnancial institution’s credit risk is also taken the asset or liability, most signiﬁcantly the contract’s value at maturity, based on into consideration in determining fair value. foreign exchange spot and forward rates. the contracted foreign exchange rate and The valuation is determined using Level 2 the contract’s value at maturity based on inputs which are observable inputs or inputs The fair value and carrying value of long-term debt is as follows: Long-term debt Fair value Carrying value 64 TOROMONT 2017 AN N UAL RE P O RT 2017 2016 $ 917,583 $ 902,963 $ 154,929 $ 154,774 The fair value was determined using the currency denominated obligations related of these forward contracts are not designated discounted cash ﬂow method, a generally to purchases of inventory and sales of as cash ﬂow hedges but are entered into accepted valuation technique. The products. As at December 31, 2017, the for periods consistent with foreign currency discounted factor is based on market rates Company was committed to US dollar exposure of the underlying transactions. for debt with similar terms and remaining purchase contracts with a notional amount A loss of $3.0 million (2016 – gain of maturities and based on Toromont’s credit of $276.6 million at an average exchange $0.8 million) on these forward contracts is risk. The Company has no plans to prepay rate of $1.2737, maturing between January included in net earnings, which offsets gains these instruments prior to maturity. The 2018 and February 2019. recorded on the foreign-denominated items, valuation is determined using Level 2 inputs Management estimates that a loss of namely accounts payable. which are observable inputs or inputs $5.3 million (2016 – gain of $1.2 million) All hedging relationships are formally which can be corroborated by observable would be realized if the contracts were documented, including the risk management market data for substantially the full term terminated on December 31, 2017. Certain objective and strategy. On an ongoing basis, of the asset or liability. of these forward contracts are designated an assessment is made as to whether the During the years ended December 31, as cash ﬂow hedges and, accordingly, an designated derivative ﬁnancial instruments 2017 and 2016, there were no transfers unrealized loss of $2.3 million (2016 continue to be effective in offsetting changes between Level 1 and Level 2 fair value – unrealized gain of $0.4 million) has been in cash ﬂows of the hedged transactions. measurements. included in other comprehensive income. These losses will be reclassiﬁed to net Derivative Financial Instruments and earnings within the next 12 months and will Hedge Accounting offset gains recorded on the underlying Foreign exchange contracts are transacted hedged items, namely foreign- with ﬁnancial institutions to hedge foreign denominated accounts payable. Certain 13. Financial Instruments – Risk Management In the normal course of business, Toromont is the Canadian dollar landed cost of $0.4 million (decrease)/increase in OCI for exposed to ﬁnancial risks that may potentially imported goods. ﬁnancial instruments held in foreign impact its operating results in one or all of its The Company also sells its products to operations, and a $1.4 million increase reportable segments. The Company employs certain customers in US currency. The (decrease) in net earnings and $5.4 million risk management strategies with a view to Company mitigates exchange rate risk by (decrease)/increase in OCI for ﬁnancial mitigating these risks on a cost-effective entering into foreign currency contracts to instruments held in Canadian operations. basis. Derivative ﬁnancial agreements are ﬁx the cash inﬂows where appropriate. used to manage exposure to ﬂuctuations in The Company maintains a hedging Credit Risk exchange rates. The Company does not enter policy whereby all signiﬁcant transactional Financial instruments that potentially into derivative ﬁnancial agreements for currency risks are identiﬁed and hedged. subject the Company to credit risk consist speculative purposes. Sensitivity Analysis of cash, accounts receivable and derivative ﬁnancial instruments. The carrying amount Currency Risk The following sensitivity analysis is of assets included on the consolidated The Canadian operations of the Company intended to illustrate the sensitivity to statement of ﬁnancial position represents source the majority of its products and changes in foreign exchange rates on the the maximum credit exposure. major components from the United States. Company’s ﬁnancial instruments and show The Company has deposited cash with Consequently, reported costs of inventory the impact on net earnings and reputable ﬁnancial institutions, from which and the transaction prices charged to comprehensive income. It is provided as a management believes the risk of loss to customers for equipment and parts are reasonably possible change in currency in a be remote. affected by the relative strength of the volatile environment. Financial instruments The Company has accounts receivable Canadian dollar. The Company mitigates affected by currency risk include cash, from customers engaged in various exchange rate risk by entering into foreign accounts receivable, accounts payable and industries including mining, construction, currency contracts to ﬁx the cost of derivative ﬁnancial instruments. food and beverage, and governmental imported inventory where appropriate. In As at December 31, 2017, a 5.0% agencies. These speciﬁc customers may be addition, pricing to customers is weakening/(strengthening) of the Canadian affected by economic factors that may customarily adjusted to reﬂect changes in dollar against the US dollar would result in a impact accounts receivable. Management TOROMONT 2017 ANNUAL REPO RT 65 does not believe that any single customer rate swap agreements to manage its obligations associated with ﬁnancial represents signiﬁcant credit risk. Credit current and anticipated exposure to liabilities. As at December 31, 2017, the risk concentration with respect to trade interest rates. There were no interest rate Company had unutilized lines of credit receivables is mitigated by the Company’s swap agreements outstanding as at of $473.3 million (2016 - $228.3 million). large customer base. December 31, 2017 or 2016. Accounts payable are primarily due The credit risk associated with The Company had a ﬂoating rate debt within 90 days and will be satisﬁed from derivative ﬁnancial instruments arises from of $250.0 million as at December 31, 2017 current working capital. the possibility that the counterparties may (2016 - $nil). default on their obligations. In order to minimize this risk, the Company enters into Sensitivity Analysis The Company expects that continued cash ﬂows from operations in 2018, together with currently available credit derivative transactions only with highly An increase of 1.0% in interest rates for a facilities, will be more than sufficient to rated ﬁnancial institutions. full year relative to the interest rates at the fund its requirements for investments in reporting date would increase interest working capital, capital assets and dividend Interest Rate Risk expense by $2.5 million (decrease net payments through the next 12 months, and The Company minimizes its interest rate income after tax by $1.8 million). that the Company’s credit ratings provide risk by managing its portfolio of ﬂoating- and ﬁxed-rate debt, as well as managing Liquidity Risk reasonable access to capital markets to facilitate future debt issuance. the term to maturity. The Company may Liquidity risk is the risk that the Company use derivative instruments such as interest may encounter difficulties in meeting 14. Interest Income and Expense The components of interest expense were as follows: Credit facilities Senior debentures The components of interest and investment income were as follows: Interest income on rental conversions Other $ 2017 2,381 9,896 $ 12,277 $ 2017 2,308 2,351 $ $ $ 2016 820 6,422 7,242 2016 2,811 1,195 $ 4,659 $ 4,006 66 TOROM ONT 2017 AN NUAL REP O RT 15. Income Taxes Signiﬁcant components of the provision for income tax expense were as follows: Current income tax expense Deferred income tax expense Total income tax expense 2017 2016 $ 55,699 10,295 $ 54,846 2,733 $ 65,994 $ 57,579 A reconciliation of income taxes at Canadian statutory rates with the reported income taxes was as follows: Statutory Canadian federal and provincial income tax rates Expected taxes on income Increase (decrease) in income taxes resulting from: Higher effective tax rates in other jurisdictions Manufacturing and processing rate reduction Expenses not deductible for tax purposes Non-taxable gains Effect of change in future income tax rate Other Provision for income taxes Effective income tax rate 2017 26.50% 2016 26.50% $ 64,120 $ 56,532 973 (171) 1,565 (655) 249 (87) 490 (330) 1,539 (853) 13 188 $ 65,994 $ 57,579 27.3% 27.0% The statutory income tax rate represents the combined Canadian federal and Ontario provincial income tax rates which are the relevant tax jurisdictions for the Company. The source of deferred income taxes was as follows: Accrued liabilities Deferred revenues Accounts receivable Inventories Capital assets Intangible assets and goodwill Net post-employment obligations Other Cash ﬂow hedges in other comprehensive income $ 2017 16,857 1,869 2,241 5,216 (36,375) 1,428 7,645 926 604 $ 2016 15,267 1,960 2,072 5,245 (24,740) (791) 5,759 946 (108) Deferred tax assets $ 411 $ 5,610 TOROMONT 2017 ANNUAL REPO RT 67 The movement in net deferred tax assets was as follows: Balance, January 1 Tax expense recognized in income Acquisition Tax recovery recognized in other comprehensive income Balance, December 31 $ 2017 5,610 (10,295) 2,617 2,479 $ 2016 8,102 (2,733) — 241 $ 411 $ 5,610 The aggregate amount of unremitted earnings in the Company’s subsidiaries was $19.4 million (2016 - $17.3 million). These earnings can be remitted with no tax consequences. 16. Earnings Per Share Net earnings available to common shareholders Weighted average common shares outstanding Dilutive effect of stock option conversions 2017 2016 $ 175,970 $ 155,748 79,091,706 815,764 78,127,400 546,897 Diluted weighted average common shares outstanding 79,907,470 78,674,297 Earnings per share Basic Diluted $ $ 2.22 2.20 $ $ 1.99 1.98 For the calculation of diluted earnings per share for the year ended December 31, 2017, 514,550 (2016 – 513,500) outstanding stock options with a weighted average exercise price of $53.88 (2016 - $39.79) were considered anti-dilutive (exercise price in excess of average market price during the year) and, as such, were excluded from the calculation. 17. Employee Beneﬁts Expense Wages and salaries Other employment beneﬁt expenses Share options granted to directors and employees Pension costs 2017 2016 $ 368,497 57,937 3,502 17,321 $ 315,050 54,125 3,261 13,276 $ 447,257 $ 385,712 68 TOROM ONT 2017 ANN UAL R EP O RT 18. Stock-based Compensation The Company maintains a stock option shall not exceed 1.0% of the outstanding prices of the common shares at the date the program for certain employees. Under the shares as of the beginning of the year in option is granted. Stock options granted in plan, up to 7,000,000 options may be which a grant is made (2017 - 783,985). 2013 and after have a 10-year term while granted for subsequent exercise in exchange Stock options vest 20.0% per year on each those granted prior to 2013 have a seven- for common shares. It is the Company’s anniversary date of the grant and are year term. Toromont accrues compensation policy that the aggregate number of options exercisable at the designated common share cost over the vesting period based on the that may be granted in any one calendar year price, which is ﬁxed at prevailing market grant date fair value. A reconciliation of the outstanding options for the years ended December 31, 2017 and 2016, was as follows: Options outstanding, January 1 Granted Exercised (1) Forfeited Options outstanding, December 31 Options exercisable, December 31 2017 2016 Number of Options Weighted Average Exercise Price Number of Options Weighted Average Exercise Price 2,430,871 514,550 (301,885) (15,500) 2,628,036 1,123,236 $ $ $ 29.25 53.88 22.39 31.63 34.85 26.15 2,512,250 517,500 (581,879) (17,000) 2,430,871 931,056 $ $ $ 24.91 39.79 19.89 29.06 29.25 23.12 (1) The weighted average share price at date of exercise for the year ended December 31, 2017, was $51.65 (2016 – $37.36). The following table summarizes stock options outstanding and exercisable as at December 31, 2017. Range of Exercise Prices $17.10 – $23.40 $23.41 – $26.79 $36.65 $39.79 $53.88 Number 701,366 427,240 482,540 502,340 514,550 2,628,036 Options Outstanding Options Exercisable Weighted Average Remaining Life (years) Weighted Average Exercise Price Number Weighted Average Exercise Price 3.3 6.6 7.6 8.6 9.7 6.9 $ 21.17 26.52 36.65 39.79 53.88 614,476 235,400 179,420 93,940 — $ 20.85 26.52 36.65 39.79 — $ 34.85 1,123,236 $ 26.15 The fair value of the stock options granted during 2017 and 2016 were determined at the time of grant using the Black-Scholes option pricing model with the following weighted average assumptions: Fair value price per option Share price Expected life of options (years) Expected stock price volatility Expected dividend yield Risk-free interest rate $ $ 2017 12.28 53.88 8.06 22.0% 1.41% 1.75% $ $ 2016 7.61 39.79 8.25 22.0% 1.81% 0.96% TOROMONT 2017 ANNUAL REPO RT 69 Deferred Share Unit Plan a portion of their performance incentive The liability for DSUs is recorded in The Company offers a deferred share unit bonus or fees, respectively, in DSUs. In accounts payable and accrued liabilities. (“DSU”) plan for executives and non- addition, the Board may grant discretionary employee directors, whereby they may DSUs. Non-employee directors also receive elect on an annual basis to receive all or a portion of their compensation in DSUs. The following table summarizes information related to DSU activity: Number of DSUs Value Number of DSUs 2017 Outstanding, January 1 Units taken or taken in lieu and dividends Redemptions Fair market value adjustment 407,731 35,937 (17,389) — $ 17,265 1,722 (778) 5,208 377,311 47,240 (16,820) — 2016 Value $ 12,000 1,661 (683) 4,287 Outstanding, December 31 426,279 $ 23,417 407,731 $ 17,265 Employee Share Ownership Plan deductions. There is a Company match at to $2.0 million in 2017 (2016 - $1.8 million) The Company offers an Employee Share the rate of $1 for every $3 contributed, to a were charged to selling and administrative Ownership Plan (“ESOP”) whereby maximum of the greater of 2.5% of an expenses when paid. The ESOP is employees who meet the eligibility criteria employee’s base salary or $1,000 per administered by a third party. can purchase shares by way of payroll annum. Company contributions amounting 19. Employee Future Beneﬁts Deﬁned Contribution Plans Certain unionized employees do not contribution plans, regular contributions are The Company sponsors pension participate in Company-sponsored plans, made to the individual employee accounts, arrangements for approximately 3,000 of and contributions are made to these which are administered by a plan trustee in its employees, primarily through deﬁned retirement programs in accordance with the accordance with the plan documents. contribution plans in Canada and a 401(k) respective collective bargaining Pension expense recognized in net matched savings plan in the United States. agreements. In the case of deﬁned earnings for these plans was as follows: Deﬁned contribution plans 401(k) matched savings plans Net pension expense 2017 2016 $ 11,765 281 $ 11,140 248 $ 12,046 $ 11,388 Deﬁned Beneﬁt Plans by Toromont in 2001. The plan is a Manitoba. Manitoba’s minimum funding The Company sponsors funded and contributory plan that provides pension regulations require special payments for unfunded deﬁned beneﬁt pension plans beneﬁts based on length of service and Toromont to amortize any shortfalls of and post-employment beneﬁt plans as career average earnings. The plan is plan assets relative to the cost of settling described below with approximately 1,900 administered by the Toromont Pension all accrued beneﬁt entitlements through qualifying employees. The plans described Management Committee with assets the purchase of annuities or payments in d) and e) below are plans which were held in a pension fund that is legally of an equivalent lump sum value assumed on acquisition of the Hewitt separate from the Company and cannot (solvency funding basis). Security in the operations (note 3): be used for any purpose other than form of letters of credit is permitted in a) Powell Pension Plan – This is a legacy payment of pension beneﬁts and related lieu of some or all of these solvency plan whose members were employees of administrative fees. The plan is special payments. If the fair value of Powell Equipment when it was acquired registered with the Province of deﬁned beneﬁt assets were to exceed 70 TOROMON T 2017 AN N UAL R EP O RT 105.0% of this solvency funding target, the Company. The most recent actuarial the excess can be applied to the cost of valuation was completed on January 1, Company to risks as described below: • Investment risk - The present value of the the deﬁned beneﬁts and deﬁned 2017, with the next valuation scheduled deﬁned beneﬁt plan liability is calculated contributions in future periods. The for January 1, 2020. using a discount rate determined by most recent actuarial valuation was d) Quebec/Maritimes Pension Plan – The reference to high-quality corporate bond completed as at December 31, 2016, Company sponsors six contributory plans yields; if the return on plan assets is with the next valuation scheduled for that provide pension beneﬁts based on below this rate, it will create a plan deﬁcit. December 31, 2017. length of service and career average Currently, the plans have a relatively b) Executive Pension Plan – The plan is a earnings. The plans are now administered balanced investment in equity securities, supplemental pension plan and is solely by the Toromont Pension Management debt instruments and real estate assets. the obligation of the Company. All Committee with assets held in a pension The Toromont Pension Management members of the plan are retired. The fund that is legally separate from the Committee reviews the asset mix and Company is not obligated to fund the Company and cannot be used for any performance of the plan assets on a plan but is obligated to pay beneﬁts purpose other than payment of pension quarterly basis with the balanced under the terms of the plan as they beneﬁts and related administrative fees. investment strategy intention. come due. At December 31, 2017, the The most recent actuarial valuation was • Interest rate risk - A decrease in the Company has posted letters of credit completed as at December 31, 2016, with bond interest rates will increase the plan in the amount of $18.4 million to secure the next valuation scheduled as at liability; however, this will be partially the obligations under this plan. The December 31, 2017. offset by an increase in the plan’s most recent actuarial valuation was e) Post-Employment Beneﬁt Plans – These holdings in debt instruments completed as at December 31, 2017, plans provide supplementary post- • Longevity risk - The present value of the with the next valuation scheduled for employment health and life insurance deﬁned beneﬁt plan liability is December 31, 2018. coverage to certain employees. The calculated by reference to the best c) Other pension plan assets and Company is not obligated to fund the estimate of the mortality of plan obligations – This plan provides for plans but is obligated to pay beneﬁts participants both during and after their certain retirees and terminated vested under the terms of the plan as they come employment. An increase in the life employees of businesses previously due. The most recent actuarial valuation expectancy of the plan participants will acquired by the Company as well as for was completed as at December 31, 2017, increase the plan’s liability. retired participants of the deﬁned with the next valuation scheduled as at • Salary risk - The present value of the contribution plan at that time, that, in December 31, 2018. accordance with the plan provisions, had elected to receive a pension directly Risks deﬁned beneﬁt plan liability is calculated by reference to the future salaries of plan participants. As such, an increase from the plan. The plan is administered Deﬁned beneﬁt pension plans and other in the salary of the plan participants will by a fund that is legally separated from post-employment beneﬁt plans expose the increase the plan’s liability. The signiﬁcant weighted average actuarial assumptions adopted in measuring the Company’s beneﬁt obligations were as follows: Discount rate Expected rate of salary increase Pension and other post-retirement beneﬁt expense recognized in net earnings were as follows: Service cost Net interest expense 2017 3.40% 3.47% 2016 3.60% 3.50% $ 2017 3,955 1,320 $ 2016 1,055 833 Components of deﬁned beneﬁt costs recognized in net earnings $ 5,275 $ 1,888 TOROMONT 2017 ANNUAL REPORT 71 Pre-tax amounts recognized in other comprehensive income were as follows: Actuarial gains arising from experience adjustments Actuarial losses arising from changes in demographic assumptions Actuarial losses arising from changes in ﬁnancial assumptions Return on plan assets (excluding amounts included in net interest expense) $ 2017 (664) 99 8,152 (822) $ 2016 (551) — 3,096 (1,080) Components of deﬁned beneﬁt costs recognized in other comprehensive income $ 6,765 $ 1,465 Information about the Company’s deﬁned beneﬁt plans as at December 31, in aggregate, is as follows: Deﬁned beneﬁt obligations: Balance, January 1 Business acquisition Current service cost Interest cost Remeasurement (gains) losses: Actuarial (gains) losses arising from experience adjustments Actuarial losses arising from demographic assumptions Actuarial losses arising from changes in ﬁnancial assumptions Beneﬁts paid Contributions by plan participants Balance, December 31 Plan assets: Fair value, January 1 Business acquisition Interest income on plan assets Return on plan assets (excluding amounts included in net interest expense) Contributions from the Company Contributions from plan participants Beneﬁts paid Fair value, December 31 Pension Beneﬁt Plans Other Post- Employment Beneﬁt Plans 2017 2016 2017 $ $ 83,370 401,986 3,814 5,274 (699) 99 8,152 (9,375) 1,124 493,745 60,800 335,171 4,094 822 4,632 1,124 (9,375) 397,268 81,778 — 1,055 3,116 (551) — 3,096 (5,435) 311 83,370 60,683 — 2,283 1,080 1,878 311 (5,435) 60,800 $ — 24,740 141 140 35 — — (198) — 24,858 — — — — 198 — (198) — Net post-employment obligations $ 96,477 $ 22,570 $ 24,858 The funded status of the Company’s deﬁned beneﬁt pension plans at December 31 was as follows: Powell Plan Executive Plan Quebec/Maritimes Plan Quebec/Maritimes other post-employment beneﬁts Other plan assets and obligations 2017 Deﬁned beneﬁt obligations Plan assets Net post- employment obligations Deﬁned beneﬁt obligations $ 57,660 18,368 410,451 $ 56,245 — 335,526 $ (1,415) (18,368) (74,925) $ 56,723 18,377 — $ 2016 Net post- employment obligations $ (1,489) (18,377) — Plan assets 55,234 — — 24,858 7,266 — 5,497 (24,858) (1,769) — 8,270 — 5,566 — (2,704) $ 518,603 $ 397,268 $ (121,335) $ 83,370 $ 60,800 $ (22,570) 72 TOROMONT 2017 AN N UAL R EP O RT The Company’s pension plans weighted average asset allocations by asset category were as follows: Equity securities Debt securities Real estate assets Cash and cash equivalents 2017 53.9% 42.5% 2.8% 0.8% 2016 43.9% 38.2% 17.8% 0.1% The fair values of the plan assets were external real estate appraiser. Real The Company expects to contribute determined based on the following methods: estate assets are located primarily $27.0 million to pension and other beneﬁt • Equity securities – generally quoted in Canada. plans in 2018, inclusive of deﬁned market prices in active markets. • Cash and cash equivalents – generally contribution plans. • Debt securities – generally quoted recorded at cost which approximates The weighted average duration of the market prices in active markets. fair value. deﬁned beneﬁt plan obligation at • Real estate assets – valued based on The actual return on plan assets was December 31, 2017, was 14.5 years (2016 appraisals performed by a qualiﬁed $4.9 million (2016 - $3.4 million). - 13.4 years). Sensitivity Analysis Signiﬁcant actuarial assumptions for the determination of the deﬁned obligation are the discount rate and the life expectancy. The sensitivity analyses have been determined based on reasonably possible changes of the respective assumptions occurring at the end of the reporting period, while holding all other assumptions constant. As at December 31, 2017, the following quantitative analysis shows changes to the signiﬁcant actuarial assumptions and the corresponding impact to the deﬁned beneﬁt obligation (“DBO”): Actuarial Assumption Sensitivity Increase (decrease) in DBO Pension beneﬁt plans Other post- retirement beneﬁt plans Total Period end discount rate Mortality 1% increase 1% decrease $ $ (71,202) 83,426 Increase of 1 year in expected lifetime of plan participants $ 10,725 $ $ $ (1,865) 2,121 $ $ (73,067) 85,547 (479) $ 10,246 The sensitivity analysis presented above may not be representative of the actual change in the DBO as it is unlikely that the change in assumptions would occur in isolation of one another as some of the assumptions may be correlated. TOROMONT 2017 ANNUAL REPO RT 73 20. Capital Management The Company deﬁnes capital as the optimization of the cost of capital at associated with the timing of cash ﬂows. aggregate of shareholders’ equity and acceptable risk while balancing the Also, if appropriate opportunities are long-term debt, less cash. interests of both equity and debt holders. identiﬁed, the Company is prepared to The Company’s capital management The Company generally targets a net signiﬁcantly increase this ratio depending framework is designed to maintain a debt to total capitalization ratio of 33.0%, upon the opportunity. ﬂexible capital structure that allows for although there is a degree of variability The Company’s capital management criteria can be illustrated as follows: Long-term debt Current portion of long-term debt Less: Cash Net debt Shareholders’ equity Total capitalization Net debt as a % of total capitalization Net debt to equity ratio 2017 2016 $ 893,806 1,941 160,507 $ 150,717 1,811 188,735 735,240 (36,207) 1,124,727 885,432 $ 1,859,967 $ 849,225 40% 0.65:1 -4% -0.04:1 The Company is subject to minimum capital requirements relating to bank credit facilities and senior debentures. The Company has met these minimum requirements during the years ended December 31, 2017 and 2016. There were no changes in the Company’s approach to capital management during the years ended December 31, 2017 and 2016. 21. Supplemental Cash Flow Information Net change in non-cash working capital and other Accounts receivable Inventories Accounts payable and accrued liabilities Provisions Deferred revenues Income taxes payable Other Cash paid during the year for: Interest Income taxes Cash received during the year for: Interest Income taxes 74 TOROMONT 2017 ANN UAL REP O RT 2017 2016 $ (65,840) (53,232) 162,797 297 33,906 (1,058) (6,860) $ 1,832 27,453 8,364 (728) 1,046 (1,790) (1,433) $ 70,010 $ 34,744 $ $ $ $ 7,863 57,686 4,130 1,705 $ $ $ $ 6,587 57,328 3,599 1,845 Reconciliation of liabilities arising from ﬁnancing activities was as follows: Current Portion of Long-term Debt Long-term Debt Total Balance, January 1, 2017 Cash ﬂow provided by ﬁnancing activities Balance, December 31, 2017 $ $ 1,811 130 1,941 $ 150,717 743,089 $ 152,528 743,219 $ 893,806 $ 895,747 22. Commitments The Company has entered into leases on options. The building leases have a Future minimum lease payments under buildings, vehicles and office equipment. maximum lease term of 20 years including non-cancellable operating leases as at The vehicle and office equipment leases renewal options. Some of the contracts December 31, 2017, were as follows: generally have an average life between include a lease escalation clause, which is three and ﬁve years with no renewal usually based on the Consumer Price Index. 2018 2019 2020 2021 2022 Thereafter $ 10,725 9,097 5,083 3,488 2,171 1,642 $ 32,206 23. Segmented Information The Company has two reportable segments: differently than income from operations in the Equipment Group the Equipment Group and CIMCO, each consolidated ﬁnancial statements. Corporate The Equipment Group comprises supported by the corporate office. These overheads are allocated to the segments segments are strategic business units that based on revenue. Income taxes, interest the following: • Toromont CAT – supplies, rents and offer different products and services, and expense, interest and investment income are provides support services for each is managed separately. The corporate managed at a consolidated level and are not specialized mobile equipment and office provides ﬁnance, treasury, legal, allocated to the reportable operating industrial engines. human resources and other administrative segments. Current taxes, deferred taxes and • Battleﬁeld – The CAT Rental Store support to the segments. The accounting certain ﬁnancial assets and liabilities are not – supplies and rents specialized mobile policies of each of the reportable segments allocated to the segments as they are also equipment as well as specialty supplies are the same as the signiﬁcant accounting managed on a consolidated level. and tools. policies described in note 1. The aggregation of the operating • Toromont Material Handling – supplies, The operating segments are being segments is based on the economic rents and services lift trucks. reported based on the ﬁnancial information characteristics of the business units. These provided to the Chief Executive Officer and business units are considered to have Chief Financial Officer, who have been similar economic characteristics including identiﬁed as the Chief Operating Decision nature of products and services, class of • AgWest – supplies specialized mobile equipment to the agriculture industry. • Toromont Energy – develops distributed generators and combined heat and Makers (“CODMs”) in monitoring segment customers and markets served and similar power projects using Caterpillar engines. performance and allocating resources distribution models. between segments. The CODMs assess No reportable segment is reliant on any segment performance based on segment single external customer. • SITECH – supplies control systems for specialized mobile equipment. operating income, which is measured TOROMONT 2017 ANNUAL REPORT 75 CIMCO Provider of design, engineering, fabrication, installation, and product support of industrial and recreational refrigeration systems. Corporate Office The corporate office does not meet the deﬁnition of a reportable operating segment as deﬁned in IFRS 8 – Operating Segments, as it does not earn revenue. The following table sets forth information by segment for the years ended December 31: Equipment Group CIMCO Consolidated 2017 2016 2017 2016 2017 2016 Equipment/package sales Rentals Product support Power generation $ 1,012,208 261,641 746,832 11,270 $ 764,377 221,009 634,018 12,242 $ 189,212 — 128,999 — $ 161,614 — 118,780 — $ 1,201,420 261,641 875,831 11,270 $ 925,991 221,009 752,798 12,242 Total revenues $ 2,031,951 $ 1,631,646 $ 318,211 $ 280,394 $ 2,350,162 $ 1,912,040 Operating income $ 219,814 $ 196,124 $ 29,768 $ 20,439 $ 249,582 $ 216,563 Interest expense Interest and investment income Income taxes Net earnings Selected statements of ﬁnancial position information: 12,277 (4,659) 65,994 7,242 (4,006) 57,579 $ 175,970 $ 155,748 As at December 31 Identiﬁable assets Corporate assets Total assets Identiﬁable liabilities Corporate liabilities Total liabilities Equipment Group CIMCO Consolidated 2017 2016 2017 2016 2017 2016 $ 2,551,574 $ 1,109,223 $ 101,719 $ 77,079 $ 602,694 $ 243,410 $ 76,323 $ 53,176 $ 2,653,293 204,616 $ 1,186,302 207,910 2,857,909 $ 1,394,212 $ 679,017 1,054,165 $ 296,586 212,194 1,733,182 $ 508,780 Capital expenditures $ 138,231 $ 121,606 Depreciation $ 84,922 $ 74,812 $ $ 1,429 1,365 $ $ 1,888 $ 139,660 $ 123,494 1,435 $ 86,287 $ 76,247 Operations are based in Canada and the United States. The following summarizes the ﬁnal destination of revenues to customers and the capital assets held in each geographic segment: Revenues Canada United States International 76 TOROMONT 2017 AN NUAL REP O RT 2017 2016 $ 2,252,343 96,666 1,153 $ 1,822,196 88,523 1,321 $ 2,350,162 $ 1,912,040 Capital Assets and Goodwill Canada United States 24. Related Party Disclosures Key management personnel and director compensation comprised: Salaries Stock options and DSU awards Annual non-equity incentive based plan compensation Pension All other compensation 2017 2016 $ 972,086 4,318 $ 462,937 4,617 $ 976,404 $ 467,554 $ 2017 3,271 2,169 2,733 647 148 8,968 $ 2016 3,273 1,912 2,799 607 118 $ 8,709 The remuneration of directors and key management is determined by the Human Resources Committee having regard to the performance of the individual and Company and market trends. 25. Economic Relationship The Company, through its Equipment equipment manufacturers, of which the for the major portion of the Equipment Group, sells and services heavy most signiﬁcant are with subsidiaries of Group’s operations. Toromont has had a equipment and related parts. Distribution Caterpillar Inc. The distribution and strong relationship with Caterpillar since agreements are maintained with several servicing of Caterpillar products account inception in 1993. TOROMONT 2017 ANNUAL REPORT 77 Ten-Year Financial Review (1) For the years ended December 31 ($ thousands, except where otherwise indicated) Operating Results Revenues Net earnings Net interest expense (income) (2) Capital expenditures (2) Dividends declared Financial Position Working capital Capital assets Total assets Long-term debt (3)(8) Shareholders’ equity Financial Ratios Working capital Return on opening shareholders’ equity (%) (4) Total debt, net of cash, to shareholders’ equity Per Share Data ($) Basic earnings per share Diluted earnings per share Dividends declared Book value (shareholders’ equity) Shares outstanding at year end (8) Price range (5) High Low Close 2017(7)(8) 2016 2015 2014 2013 2012(6) 2011 2010 2009 2008 2,350,162 1,912,040 1,846,723 1,660,390 1,593,431 1,507,173 1,381,974 1,207,028 1,824,592 2,121,209 175,970 7,618 139,660 60,402 778,374 882,520 2,857,909 893,806 1,124,727 2.1:1 19.3 .65:1 2.22 2.20 0.76 13.89 80,949,819 58.44 41.10 55.10 155,748 3,236 123,494 56,280 575,382 454,104 1,394,212 150,717 885,432 2.8:1 20.0 (.04):1 1.99 1.98 0.72 11.29 78,398,456 44.44 27.25 42.35 145,666 5,246 150,106 52,882 486,293 429,824 1,276,077 152,079 775,281 2.6:1 21.6 .11:1 1.88 1.86 0.68 9.95 77,905,821 37.61 26.70 31.55 133,196 4,034 107,815 46,267 294,753 371,661 1,107,802 4,942 668,075 1.7:1 23.0 .07:1 1.73 1.71 0.60 8.65 77,259,396 28.97 24.48 28.51 123,031 4,900 94,803 39,854 356,347 341,152 1,030,555 130,948 576,557 2.2:1 25.7 .11:1 1.61 1.59 0.52 7.50 26.94 21.12 26.65 119,473 5,740 101,311 36,728 302,919 316,925 936,170 158,395 476,575 2.2:1 29.9 .33:1 1.56 1.55 0.48 6.24 25.00 18.61 21.10 246,459 5,798 82,877 36,968 251,122 287,290 913,331 132,815 403,861 1.7:1 28.9 .15:1 3.20 3.18 0.48 5.27 33.25 15.39 21.32 103,912 8,826 71,143 47,716 478,289 556,991 2,271,763 413,040 1,196,838 1.8:1 9.1 .21:1 1.36 1.35 0.62 15.50 32.40 22.86 30.76 120,516 2,460 61,041 38,848 539,264 369,666 1,364,667 144,051 854,063 2.6:1 15.5 (.06):1 1.86 1.86 0.60 13.17 27.80 19.26 27.79 140,524 (3,246) 96,475 36,391 509,276 402,647 1,533,450 158,112 779,103 1.9:1 21.5 .05:1 2.16 2.15 0.56 12.06 32.90 19.03 22.99 76,844,897 76,407,658 76,629,777 77,149,626 64,867,467 64,620,677 (1) 2010 - 2017 results were prepared in accordance with IFRS. Results for 2009 and prior were prepared in accordance with Canadian GAAP. (2) Figures for 2010 onwards are presented on a continuing operations basis, excluding the spinoff discussed in (5) below. (3) In 2015, debentures totalling $125.0 million matured and as such were shown as “Current portion of long-term debt” in 2014. (4) 2011 ROE was calculated excluding earnings and equity from discontinued operations. (5) On June 1, 2011, Toromont completed the spinoff of Enerﬂex. Toromont shareholders received one share of Enerﬂex for each Toromont share held. (6) The Company adopted revisions to IAS 19 - Employee Beneﬁts, effective January 1, 2013. As a result, certain 2012 amounts were restated - refer to Note 1 of the 2013 audited ﬁnancial statements. (7) The Company completed the acquisition of the businesses and net operating assets of the Hewitt Group of Companies on October 27, 2017 for $1.02 billion - refer to Note 3 of the 2017 audited ﬁnancial statements. (8) Long-term debt and common shares were issued on October 27, 2017, to partially fund the aforementioned acquisition - refer to Note 3 of the 2017 audited ﬁnancial statements. 78 TOROMONT 2017 ANN UAL R EP O RT Ten-Year Financial Review (1) For the years ended December 31 Operating Results Revenues Net earnings Net interest expense (income) (2) Capital expenditures (2) Dividends declared Financial Position Working capital Capital assets Total assets Long-term debt (3)(8) Shareholders’ equity Financial Ratios Working capital Per Share Data ($) Basic earnings per share Diluted earnings per share Dividends declared Book value (shareholders’ equity) Shares outstanding at year end (8) Price range (5) High Low Close Return on opening shareholders’ equity (%) (4) Total debt, net of cash, to shareholders’ equity 175,970 7,618 139,660 60,402 778,374 882,520 2,857,909 893,806 1,124,727 2.1:1 19.3 .65:1 2.22 2.20 0.76 13.89 58.44 41.10 55.10 155,748 3,236 123,494 56,280 575,382 454,104 1,394,212 150,717 885,432 2.8:1 20.0 (.04):1 1.99 1.98 0.72 11.29 44.44 27.25 42.35 145,666 5,246 150,106 52,882 486,293 429,824 1,276,077 152,079 775,281 2.6:1 21.6 .11:1 1.88 1.86 0.68 9.95 37.61 26.70 31.55 133,196 4,034 107,815 46,267 294,753 371,661 1,107,802 4,942 668,075 1.7:1 23.0 .07:1 1.73 1.71 0.60 8.65 28.97 24.48 28.51 80,949,819 78,398,456 77,905,821 77,259,396 (1) 2010 - 2017 results were prepared in accordance with IFRS. Results for 2009 and prior were prepared in accordance with Canadian GAAP. (2) Figures for 2010 onwards are presented on a continuing operations basis, excluding the spinoff discussed in (5) below. (3) In 2015, debentures totalling $125.0 million matured and as such were shown as “Current portion of long-term debt” in 2014. (4) 2011 ROE was calculated excluding earnings and equity from discontinued operations. (5) On June 1, 2011, Toromont completed the spinoff of Enerﬂex. Toromont shareholders received one share of Enerﬂex for each Toromont share held. (6) The Company adopted revisions to IAS 19 - Employee Beneﬁts, effective January 1, 2013. As a result, certain 2012 amounts were restated - refer to Note 1 of the 2013 audited ﬁnancial statements. of the 2017 audited ﬁnancial statements. (7) The Company completed the acquisition of the businesses and net operating assets of the Hewitt Group of Companies on October 27, 2017 for $1.02 billion - refer to Note 3 (8) Long-term debt and common shares were issued on October 27, 2017, to partially fund the aforementioned acquisition - refer to Note 3 of the 2017 audited ﬁnancial statements. ($ thousands, except where otherwise indicated) 2017(7)(8) 2016 2015 2014 2013 2012(6) 2011 2010 2009 2008 2,350,162 1,912,040 1,846,723 1,660,390 1,593,431 1,507,173 1,381,974 1,207,028 1,824,592 2,121,209 123,031 4,900 94,803 39,854 356,347 341,152 1,030,555 130,948 576,557 2.2:1 25.7 .11:1 1.61 1.59 0.52 7.50 76,844,897 26.94 21.12 26.65 119,473 5,740 101,311 36,728 302,919 316,925 936,170 158,395 476,575 2.2:1 29.9 .33:1 1.56 1.55 0.48 6.24 76,407,658 25.00 18.61 21.10 246,459 5,798 82,877 36,968 251,122 287,290 913,331 132,815 403,861 1.7:1 28.9 .15:1 3.20 3.18 0.48 5.27 76,629,777 33.25 15.39 21.32 103,912 8,826 71,143 47,716 478,289 556,991 2,271,763 413,040 1,196,838 1.8:1 9.1 .21:1 1.36 1.35 0.62 15.50 77,149,626 32.40 22.86 30.76 120,516 2,460 61,041 38,848 539,264 369,666 1,364,667 144,051 854,063 2.6:1 15.5 (.06):1 1.86 1.86 0.60 13.17 64,867,467 27.80 19.26 27.79 140,524 (3,246) 96,475 36,391 509,276 402,647 1,533,450 158,112 779,103 1.9:1 21.5 .05:1 2.16 2.15 0.56 12.06 64,620,677 32.90 19.03 22.99 TOROMONT 2017 ANNUAL REPO RT 79 Corporate Information Toromont Cat 3131 Highway 7 West 5001 Trans-Canada Highway P.O. Box 5511 Pointe-Claire, Quebec H9R 1B8 Concord, Ontario L4K 1B7 T: 416.667.5511 F: 416.667.5555 toromontcat.com T: 514.630.3100 F: 514.630.9020 Battleﬁeld – The Cat Rental Store 880 South Service Road Stoney Creek, Ontario L8H 7S8 T: 905.577.7777 F: 905.643.6008 battleﬁeldequipment.ca AgWest Ltd. Highway #1 West P.O. Box 432 Elie, Manitoba R0H 0H0 T: 204.353.3850 F: 877.353.4343 agwest.com Toromont Material Handling 4000 Trans-Canada Highway Pointe-Claire, Quebec H9R 1B2 T: 514.426.6700 F: 514.630.3577 toromontmaterialhandling.com CIMCO Refrigeration 65 Villiers Street Toronto, Ontario M5A 3S1 T: 416.465.7581 F: 416.465.8815 cimcorefrigeration.ca Annual and Special Meeting The Annual and Special Meeting of the Shareholders of Toromont Industries Ltd. will be held at 10:00 am (EST) on Thursday, April 26, 2018 in the Toscana Banquet Hall at The Hilton Garden Inn Toronto/Vaughan, 3201 Highway 7 West, Vaughan, Ontario L4K 5Z7. 80 TOROMONT 2017 AN N UAL R EP O RT STRONGER TOGETHER PLUS FORTS ENSEMBLE is the mantra we have marched to since expanding our employee base and dealership territory through acquisition in October of 2017. While apropos for this business combination, the ability to maximize the collective capabilities of our employees, partners and business units (newly acquired and long-held) by working together has long been the key to value creation at Toromont; and it will be the way we achieve our ambitious goals for the future. How to Get in Touch With Us Tel: 416.667.5511 Fax: 416.667.5555 E-mail: investorrelations@toromont.com www.toromont.com How to Reach Our Transfer Agent and Registrar Investors are encouraged to contact AST Trust Company (Canada) for information regarding their security holdings. AST Trust Company (Canada) P.O. Box 700 Station B Montreal, Quebec H3B 3K3 Toll-Free North America: 1.800.387.0825 Local: 416.682.3860 E-mail: inquiries@astﬁnancial.com www.astﬁnancial.com/ca-en Common Shares Listed on the Toronto Stock Exchange Stock Symbol – TIH Contents 02 06 08 14 15 16 Letter to Shareholders Map of Operations Sustainability Report Corporate Governance Board of Directors Executive Operating Team 17 44 46 51 78 80 Management’s Discussion and Analysis Management’s and Independent Auditors’ Reports Consolidated Financial Statements Notes to the Consolidated Financial Statements Ten-Year Financial Review Corporate Information This annual report was printed in Canada on stock manufactured chlorine-free with 10% post-consumer ﬁbre. Design and Coordination: Ove Design & Communications www.ovedesign.com Editorial: Fundamental Creative Inc. STRONGER TOGETHER PLUS FORTS ENSEMBLE T o r o m o n t I n d u s t r i e s L t d . 2 0 1 7 A n n u a l R e p o r t Toromont Industries Ltd. Corporate Office 3131 Highway 7 West P.0. Box 5511 Concord ON L4K 1B7 Tel: 416 667 5511 www.toromont.com TOROMONT INDUSTRIES LTD. ANNUAL REPORT 2017

Continue reading text version or see original annual report in PDF format above