Toromont Industries Annual Report 2017

FY2017 Annual Report · Toromont Industries

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STRONGER TOGETHER
PLUS FORTS ENSEMBLE

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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

Letter to Shareholders

Map of Operations

Sustainability Report

Corporate Governance

Board of Directors

Executive Operating Team

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

37%

44%

New & used equipment – 44%
Refrigeration equipment – 8%
Rental – 11%
Product support – 37%

11%

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

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

$ 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%

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

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

41.2%
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

10
12

10
19

$ 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

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

3
3

10
10

10
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

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 $

— $

2,122

333

147 $

2,122 $

333 $

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