Toromont Industries
Annual Report 2018

Plain-text annual report

R E H T E G O T R E G N O R T S E L B M E S N E S T R O F S U L P TOROMONT INDUSTRIES LTD. 2018 ANNUAL REPORT STRONGER TOGETHERPLUS FORTS ENSEMBLE STRONGER TOGETHER PLUS FORTS ENSEMBLE Oui to We In 2018, Toromont employees answered the call to work together to integrate the largest acquisition in our history by saying Oui to We. Yes to teamwork, yes to making the whole greater than the sum of the parts, and yes to bringing a collective and unwavering focus to continuous improvement. By answering in the affirmative, the people of Toromont demonstrated that we are Plus forts ensemble – Stronger Together. CONTENTS 03 Letter to Shareholders 18 Corporate Governance 11 Sustainability Report 20 Executive Operating Team 21 Management’s Discussion and Analysis 46 Management’s and Independent Auditor’s Reports 49 Consolidated Financial Statements 54 Notes to the Consolidated Financial Statements 82 Corporate Information 1 1 MULTIPLE GROWTH PLATFORMS One Toromont Toromont Industries Ltd. (TSX: TIH) is a diversified growth company employing over 6,000 skilled workers at more than 150 locations. Despite the scope and scale of our assets and the differences in industries we serve through our diverse operating units, we are united as One Toromont by our core strategies and business model. Multiple Growth Platforms Toromont Cat With 53 branches across seven provinces and one territory, Toromont is one of the largest Caterpillar dealers in the world. Through Toromont Cat, it serves the specialized heavy equipment, power generation and product support needs of thousands of public infrastructure, construction, demolition, paving, mining, aggregate, waste management, agriculture, forestry, trucking, shipping, transit and data centre customers. SITECH Mid-Canada Ltd. SITECH specializes in providing machine control, site positioning, and asset management technologies backed by professional support services as a Trimble and Cat AccuGrade® dealer in Manitoba, Ontario, Québec, Nova Scotia, New Brunswick, Prince Edward Island, and Newfoundland and Labrador. Battlefield – The Cat Rental Store From 69 stores in our Cat dealer territories, supported by a rapid equipment delivery-to-site system, Battlefield Equipment Rentals addresses the rental and purchase needs of contractors, specialty trades and do-it-yourself customers through its line-up of brand-name machines, tools and supplies. Toromont Material Handling From 21 locations across most of eastern Canada, Toromont Material Handling rents, sells and provides after-sales service for 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, store and protect critical inventories. CIMCO Refrigeration CIMCO is a leading supplier of refrigeration equipment and product support services to customers in North America’s food, dairy, cold storage, beverage, pharmaceutical, automotive, chemical, petrochemical, mining and recreational ice-rink markets. Jobsite Industrial Rental Services Across eight Ontario locations, Jobsite Industrial Rental Services meets the specialized tool crib rental equipment needs of contractors working in industrial plants of all kinds, from automotive to pulp and paper. AgWest Ltd. From six facilities, AgWest serves the year-round equipment and product support needs of Manitoba’s agriculture industry as an official dealer of AGCO and CLAAS, two trusted brands for crop and livestock applications. 2 LETTER TO SHAREHOLDERS Fellow Shareholders In 2018, Toromont began to integrate the largest acquisition in its history by building the cultural and structural underpinnings for long-term success. It did so without losing focus on the critical factors that make Toromont a reliable supplier for customers, a trusted employer and a good investment for shareholders: safety, teamwork, empowerment, accountability, disciplined capital allocation and alignment to our core strategies. The result was another good year for Toromont – our 50th as a public company – and a clear demonstration that we are Plus forts ensemble – Stronger Together. 33 LETTER TO SHAREHOLDERS Customers count on Battlefield to deliver the right equipment, including this hydronic heater, at the right time, to ensure their construction projects are completed on time. Toromont earned $3.07 per diluted share in 2018, 40% more than in 2017, reflecting good operating performance across the business together with accretion from Toromont QM, our acquired operations. On higher earnings, return on opening shareholders’ equity was 22.3%. Strong cash generation supported debt repayment of $252 million, the allocation of $199 million to rental fleets, property and plants to seed future returns, and a 21% increase in common share dividends. Since Toromont’s public listing five decades ago, dividends have been paid every year, making the Company’s addition in early 2018 to the S&P/TSX Canadian Dividend Aristocrats Index possible. With the recent 17% increase the Board announced at its meeting in February 2019, dividends have now increased for 30 years in a row. Toromont’s strong financial position provides the fuel for continued growth. Realizing Growth Together Deepening our relationships with existing customers in construction, mining, power systems and refrigeration was a critical driver of performance. In addition, we converted equipment users who were loyal to other brands in the past, to Toromont, and with new fleet investments, gained access to large infrastructure projects such as Montréal’s Réseau express métropolitain light rail transit system and the new Champlain Bridge. Broader dealership territories with geographic proximity provided additional opportunities to sell used equipment. Investments in the fleet and realignment of the business led to increased rental revenues. Building On Our Natural Advantages We developed our integration priorities prior to completing the acquisition in October 2017 and in 2018 executed the first stages of our plan to unify our operations and structure the combined entity to support sustainable growth, workforce empowerment and improved accountability. Year one of the business combination was broadly productive as we leveraged the scope and scale of the combined business. Bringing together the eastern Canadian Cat dealerships into one cohesive, contiguous unit, stretching from St. John’s, Newfoundland to Brandon, Manitoba and from Windsor, Ontario to Pond Inlet, Nunavut, presents meaningful opportunities for all of our key stakeholders. Revenues increased to $3.5 billion with year-over-year growth of 6% in Legacy Toromont. The clearest sign of change was the introduction of Toromont brands on storefronts, service vehicles, rental equipment and websites across our new Québec and Maritime territories. Every employee in our new regions received Toromont gear, identifying them as members of our cohesive, industry-leading team. We chose to quickly adopt common nomenclature to build equity in our brands and as a promise to customers that we would be building a consistent experience for them, wherever and however they choose to do business with us. 4 LETTER TO SHAREHOLDERS Net debt to total capitalization 40% 2017 18% 2018 Our results 22.3% Return on opening shareholders’ equity, on higher earnings 2018 revenues Earnings per share (diluted) $3.07 $2.20 $1.98 $1.86 $1.71 2014 2015 2016 2017 2018 New & used equipment – 43% Refrigeration equipment – 6% Rentals – 11% Product support – 40% Core strategies Expand markets Strengthen product support Broaden product offerings Invest in resources Maintain a strong financial position 5 5 LETTER TO SHAREHOLDERS Consistency of service is a key factor that large fleet accounts use in choosing their suppliers. In tandem, we addressed succession and appointed leaders to key positions by drawing on the strength of both predecessor organizations. Details of the structural changes are found in the Business Unit Highlights section. Unchanged was the structure of our Executive Operating Team, which provides the critical guidance that supports our decentralized approach. Culturally, we began to ingrain Toromont’s disciplines and business principles, including our decentralized management approach, within acquired operations. To Toromont, decentralization means granting management authority to our business-unit leaders, matched by accountability for performance. Fidelity with Toromont’s specialized product and product-support based business model and core strategies – expand markets, strengthen product support, broaden product offerings, invest in resources and our people and maintain a strong financial position – provides our central organizing principle. Decentralization is not the fastest way to achieve results, but over the years and through three previous Cat dealer acquisitions, it has proven to be the approach that delivers the best long-term performance, engenders the highest level of workforce engagement and develops the strongest, most engaged workforce. As the year progressed, robust go-to-market strategies were implemented across our combined territories, assisted by resourceful marketing and sales groups. ‘‘ Culturally, we began to ingrain Toromont’s disciplines and business principles, including our decentralized management approach, within acquired operations. ’’ Toromont provides industry-leading products, such as this Cat MD6290 rotary blasthole drill, and in-field product support to mining customers throughout its territories. 6 LETTER TO SHAREHOLDERS In human resources, safety and workforce development remained at the forefront despite the distractions inherent in year-one integration. Details are provided in our Sustainability Report, although two metrics stand out. First, we continued our safety journey with five-year total recordable injury frequency rate declining by 46%. Second, we recruited over 290 service technicians – a positive outcome given intense competition for talent. Business Unit Highlights Toromont Cat embraced the addition of new Québec and Maritimes territories by structuring itself to achieve the benefits of both decentralized branch operations and a high level of coordination of services that cut across the entire dealership. To respect the cultural differences of our diverse territories, and in recognition of geographic proximity, we overlaid a senior leadership structure for Central, Québec and Atlantic Canada with key appointments made in each region. Legacy Toromont Cat branches in Newfoundland and Labrador joined with our newly acquired operations in the Maritimes under the broader Atlantic group. Our model runs on empowered branch managers with P&L responsibility. To assist in their development, branch leaders in our new territories participated in Dealer Management Simulation training, a Caterpillar program we tailor to include Toromont return on capital employed and asset management philosophies. Training programs are just one of many advantages that we realize from our partnership with Caterpillar. We marked our 25th anniversary as a Cat dealer in August, 2018, and our relationship has been a difference maker every year. We are particularly grateful for Caterpillar’s support during this period of change. Two pan-regional groups for product support were also created: one specializing in Services and Remanufacturing and the other addressing Parts and Logistics. This shared services structure will allow for the development of Centres of Excellence, and the realization of business synergies and economies of scale over time. One example of the power of scale was seen in our component remanufacturing (“Reman”) operations. Each predecessor organization had two Reman facilities, each managed regionally. The combined portfolio of four facilities allows for much more of a product-specific focus and paves the way to achieving new synergies and increased throughput. Mining, Power Systems and Heavy Rents capabilities grew substantially as a result of the acquisition and in the case of Heavy Rents, new fleet investments. Even with the distractions of integration, product support growth was achieved in both parts and service. Battlefield Equipment Rentals set new time utilization records for its rental fleet on the way to another year of positive performance. Significant investments were made in the fleet, ‘‘ Our model runs on empowered branch managers with P&L responsibility. ’’ 77 LETTER TO SHAREHOLDERS including foundational capital allocations in acquired territories where we installed our rental service model. Our model depends on a full-cycle of equipment uploading, aging and disposition to provide hurdle-rate returns. We draw the analogy that rental is more akin to planting an orchard than sowing a wheat field: value is created over time but is continuous. disciplines to improve efficiencies. We believe this business presents good opportunities for growth, particularly in rental markets, and we are investing accordingly. The recent addition of Nilfisk to our product line helped to diversify the business, while representation of leading lift truck brands and specialized batteries continued to give Toromont Material Handling a competitive edge. Market coverage also improved with new stores in Owen Sound, Ontario, and Fermont, Québec, a new shared store (with AgWest) in Morden, Manitoba and conversion of facilities previously shared with heavy equipment in Québec and the Maritimes to Battlefield-branded stores. Ground heaters, along with saleable goods such as boots, rain suits and shovels were among products added in new territories to improve our positioning as all-weather service centres. To improve product availability, the hub and spoke distribution system, used to good effect in existing markets, was introduced in acquired territories to improve delivery efficiencies. As well, more technicians were recruited to maintain rental fleets for quick turnaround. Toromont Material Handling was designated a standalone business due to its unique customer base and equipment offerings. Prior to the acquisition, we had a relatively small material handling business representing MCFA products and Cat-branded forklifts that operated under the auspices of Toromont Cat’s Manitoba and Newfoundland and Labrador regions. The addition of Ontario and Québec regions created a substantial operation across most of eastern Canada. We transitioned leadership following a retirement to steer pan-regional growth and entrench new operating and financial Steady progress was made in our smaller Equipment Group business units. Jobsite Industrial Rental Services kept busy in 2018 in chemical and refinery markets during customer facility maintenance shutdowns. SITECH brought more focus to professional services and participated in the launch of next-generation software including concrete curb machine technology and earthworks grade control systems. AgWest improved its market position and coverage by partnering with Battlefield in Morden, Manitoba. CIMCO grew across its markets in Canada and the U.S. while innovating and bringing heightened focus to the fundamentals of execution including service delivery, talent recruitment and training. Rising demand for both energy efficiency and natural refrigerants with minimal global warming potential led more users to our ECO2 CHILL® systems. In 2018, Toronto’s College Park and Woodsy Park opened the first two outdoor direct CO2 ice rink systems in North America. Long-standing partnerships with industry leaders in food, beverage and cold storage were nurtured, while new industrial customer relationships were forged. Courtesy of an introduction by Toromont Cat in the Maritimes, CIMCO gained a customer relationship that had previously been outside its orb. Product CIMCO designed this industrial-grade carbon dioxide/ammonia cascade system to provide superior performance using natural refrigerants. 8 LETTER TO SHAREHOLDERS 25 years We marked our 25th anniversary as a Cat dealer in August, 2018, and this relationship is a core competitive advantage. Toromont customers benefit from access to next-generation technology. An example is found in this model excavator, outfitted with Cat® Connect PAYLOAD that provides on-the-go load weighing for better productivity. 50 years 2018 marked our 50th anniversary as a TSX-listed company with a value creation mission for customers and shareholders. 9 LETTER TO SHAREHOLDERS support operations were heavily utilized in most markets in North America including U.S. operations, the latter of which now delivers service under 130 Customer Support Agreements. The third-quarter installation of Customer Relationship Management software gave the CIMCO team a tool that improves customer account visibility and a platform to access standardized quoting templates that reduce response time to customer opportunities. Governance We were pleased to welcome Richard G. Roy to Toromont’s Board on November 6, 2018. Mr. Roy is a Montréal-based business and finance executive with a keen understanding of the Québec market and decades of relevant experience earned principally in automotive equipment distribution. Your Board has been actively managing succession due to scheduled retirements in recent years with others on the horizon and, accordingly, has nominated two new candidates for election at our annual meeting May 3, 2019. Peter J. Blake is an accomplished public company CEO with highly relevant and analogous heavy equipment sales, auction and distribution experience. Sharon L. Hodgson is an accomplished expert in technology, including digital and artificial intelligence, with significant North American-level business leadership experience. With these proposed additions, the Company’s Board of Directors will consist of 11 members, of whom ten are independent. Looking Forward and 2019 will be no different. Detailed planning identified many opportunities to pursue for profitable growth and challenges to manage. Going forward, while running the business for continuous improvement, we will tackle the priorities that remain on our integration agenda, including the meaty assignment of developing common technology platforms. As always, we are committed to doing things properly and pragmatically with regards to strategic alignment, workforce capacity and the creation of long-term value. Our continued focus is on managing our business across the many stages of the economic cycle, not just for the vagaries of specific market conditions, for we believe this creates maximum sustained value for all of our key stakeholders. Thanks Up and down the line, the Toromont team has adapted well to the responsibilities that come with being a much larger company and we thank our employees, Directors and business partners for their many contributions in 2018. We reserve our utmost thanks to our customers and fellow shareholders for the opportunity to serve as one team with many growth platforms. Yours sincerely, Although Toromont is a proven business with a long track record, each year we feel we have something more to accomplish Robert M. Ogilvie Scott J. Medhurst Chairman of the Board President and Chief Executive Officer Toromont’s Aaron Wright is part of a team at our Power Systems operation in Brampton, Ontario, that customized this Cat 3516 diesel generator for a customer’s mission-critical application. Toromont Material Handling provides specialized equipment such as this electric powered Jungheinrich Class II reach truck that is specified to perform in the narrow confines of warehouses and logistics centres. 10 SUSTAINABILITY REPORT Sustainability Report Much has changed at Toromont over the past year as we integrated the largest acquisition in our history and welcomed over 2,100 people to our team. What has not changed is our focus on sustainability – in all its forms – and our commitment to the safe, responsible and productive stewardship of our business on behalf of employees, customers, shareholders and the communities where we work. 11 SUSTAINABILITY REPORT Safety Every year, Toromont makes substantial investments in training, coaching, recognition and employee engagement activities to nurture adherence to its safety culture. The Company’s methodical approach is intended to elevate safety to the forefront of the activities carried out by all employees, regardless of rank or role. Across more than 150 Toromont locations in North America, each day begins with Safety Talk, an informative daily reminder of how to avoid injury. From there, employees working in all shops and at customer sites perform formal pre-job-hazard assessments to document possible risks and the measures that they will take to avoid these risks. An assessment is completed for each job undertaken, and updated as hazards arise, to reinforce the need for safe behaviour at every turn. Supervisors review the assessments daily and provide feedback and coaching to ensure safe practices. In our shops and in the field, employees are provided with the right Personal Protective Equipment (PPE) for each task. Proper PPE use is one of our Five Cardinal Safety Rules intended to emphasize foundational safety principles. help them recognize, avoid and mitigate the risks inherent in their workspaces. We also make safety policies and procedures easily accessible through employee intranet sites. Both CIMCO and Battlefield Equipment Rentals upgraded their sites during 2018 to improve functionality. We believe the best results are achieved when everyone at Toromont is accountable for safety. At the management level, variable compensation is tied to safe operating performance and to involvement in promoting safe behaviours. Managers and supervisors demonstrate their commitment by being visible and active, with a targeted ‘leaders-on-the-floor’ focus that ensures ongoing coaching and reinforcement of safe practices. In 2018, Safety Summits of branch leaders and supervisors were hosted in five Toromont Cat locations to identify ways in which we could continuously improve our efforts and our results. One initiative we centered on was to enhance the safety training given to our branch leaders so that they could make a bigger and better contribution to our safety culture. During 2018, 10 members of our health and safety team were certified to offer Safety Leadership Training, a program that rolls out at Toromont Cat in 2019. In branches and stores, posters are displayed with key safety messages, providing another reminder of the importance we place on safeguarding our employees as well as customers and suppliers who visit our operations. To ensure employees have access to all the latest safety techniques and knowledge, Toromont provides formal safety training. In 2018, employees embraced this training, completing over 128,000 hours of instruction designed to Compliance is a key part of the best safety programs. Throughout Toromont, periodic safety audits are one of the ways we encourage compliance and isolate issues for remedial action. In 2018, CIMCO engaged a third-party specialist to complete a 45-day branch and field safety audit across its operations. The findings of these audits, which included interviews with CIMCO staff to gauge their awareness of safety policies and procedures, were used to develop continuous improvement initiatives for each location. Members of our Val-d’Or, Québec, branch gather to hear about the personal health benefits of a good work environment. Avinash Narine-Jaikaran, an Apprentice Technician, serves at Toromont Cat where he is developing his skills for a productive career in the heavy equipment industry. 12 SUSTAINABILITY REPORT Compliance is also enforced through our Five Cardinal Safety Rules policy: be fit for duty, assess all hazards prior to starting the job, control all hazardous energy, wear the right PPE and report all incidents promptly. While all of our safety rules are important, failure to execute these five required foundational behaviours leads to elevated disciplinary action, up to employment termination, regardless of role or rank. To ensure outside contractors are compliant when working in store locations or customer sites, all divisions maintain a Contractor Management Program. With our expanded organization, additional investments were made in 2018 to transition to a more robust Contractor Management tool in order to mitigate contractor risk and manage the expanded breadth and complexity of our operations effectively. We also celebrate safe performance. Our Safety Bucket and Maurice De Stephano awards single out Toromont Cat branches that surpass all others in safety metrics. For 2018, we were proud to present these coveted awards to our Voisey’s Bay (NL) and Québec City locations, respectively. Battlefield Equipment Rentals also provides quarterly and annual awards for safe driving and clean inspections. In 2018, we began bringing together the best safety practices of acquired and legacy operations to ensure everyone is well protected and well informed. In so doing, we compared, refined and aligned individual policies and procedures to set ourselves on a unified path to achieve our goal of zero workplace injuries. By providing the right stewardship, continuously investing in the best training and tools and ensuring that safety is a workplace characteristic to be admired and aspired to, Toromont has made progress in its safety journey as evidence by the five-year decline in total recordable injury frequency rate of 46%, and an 11% improvement year over year. With an increased focus on safety leadership and accountability, we seek to continue to drive towards a zero-injury workplace. Workforce Development Sustainable growth at the rate and quality Toromont seeks does not just happen. It is the product of our skilled, productive and invested workforce. Each year, we take steps to advance employee knowledge and engagement and 2018 was no different, although the scope of our activities increased dramatically with the addition of Toromont QM. All Toromont Cat employees across our territories participated in setting individual performance goals based on business plan objectives. In tandem, employees were encouraged to set personal skills development goals, taking into account the key competencies that are necessary for them to excel in their roles. Toromont’s deep educational resources are catalogued in a Development Playbook, and customized training is available for all employees to ensure personal and professional growth aligned with business needs. Each month, Toromont Cat provided facilitated workshops on topics that addressed workforce needs including leading remotely while managing closely, project management and change leadership. Managing change in a positive manner is a key skill for our team, particularly during this time of integration. In the third quarter, we launched Leaders@Work, an on-demand platform that provides managers with the choice of how to learn in classroom, online, or in virtual classrooms. Formal study without the need to leave one’s office improves participation and convenience. Over 2,700 hours of additional training was provided through Leaders@ Work and this forum will expand in 2019. To prepare our Toromont QM managers to excel in their roles, we ran multiple dealer management workshops. Attended by over 50 managers, these workshops introduced financial concepts, discussed how to best execute strategies to achieve results, and honed the leadership skills needed to motivate teams. Utilizing business simulation to practice and reinforce learned behaviours, our QM leaders gained the insights needed to manage effectively in a decentralized organization where authority and accountability go hand in hand in producing great results. Succession planning is important because the vast majority of our leaders are promoted from within. We introduced Toromont’s method of succession planning at Toromont QM in the fall. While delivering a record level of training, Toromont Cat’s human resources team was amalgamated and skills shared. To expand internal coaching capabilities, several HR team members from Toromont QM were certified to offer training in foundational development programs in order to better identify high-potential candidates and fully understand and support all employees’ needs and capabilities. Other Toromont businesses provided skills training and development to meet the unique needs of their organizations. As a project-based business, CIMCO offered an intensive program on the fundamental disciplines of great execution. During the year, Toromont Cat employees across the expanded territory completed 189,310 hours of technical and skills training to prepare them for the opportunities and challenges ahead. Skills development is just one of the ways we invest in our workforce. Another is the Toromont Employee Share Ownership Purchase (ESOP) plan. As share owners, 13 SUSTAINABILITY REPORT participating employees have another direct stake in their own success and an alignment of interests with public shareholders. We will introduce ESOP to Toromont QM in 2019 and over time, hope to see the participation rate grow to where it was at the rest of Toromont in 2018 – at over 50%. Broader benefits and a pay-for-performance culture, coupled with dedicated training and opportunities for advancement, are integral to building a Toromont workforce that is motivated, engaged and ready to take on new challenges. Recruitment Continued growth fueled the need for continued recruitment in 2018, particularly to increase the ranks of our highly skilled service technicians. Over 290 new Toromont Cat technicians were recruited, including three from Australia and one from South Africa. Battlefield Equipment Rentals also added over 50 technicians, while CIMCO recruited just over 30. Even with these increases, there remains a significant need. Whether they work on heavy equipment, smaller machines or refrigeration systems, technicians are in high demand. Competition to attract them is fierce and the pipeline of young people entering the “trades” is insufficient to meet long-term demand. Taking all of this into account, Toromont took some bold steps to enhance recruitment activities to set itself up for future success. To build our pipeline of future technicians, changes were made to encourage Toromont Cat branches to more aggressively invest in apprenticeship training, budgets were increased and two dedicated technician recruiters were added. A Mining Apprenticeship Training Program was created and the first two apprentices were recruited. We began to encourage skilled workers in other industries such as automotive to make the leap to heavy equipment repair. Overall, 32 apprentices were added. At CIMCO, we prepared the curriculum for a seven-level Technician Apprenticeship Program in the United States. Unlike Canada, the U.S. does not operate an apprenticeship system to train refrigeration mechanics. With this program, we plan to train newcomers in multiple different equipment types and further develop the skills of our existing field-service personnel in the U.S. so that they can advance to the position of Master Technician. We believe this training program will differentiate CIMCO and support the goal of growing its service technician workforce by 10% per annum. CIMCO also made headway in recruiting technicians using its “friends and family” referral program. Thinking more broadly about resource needs, we continued to recruit university graduates for our management trainee program. Every year, management trainees are given meaty assignments and make a positive contribution. In 2018, five trainees lent their expertise to a number of important projects including the centralization of our preventative maintenance program and the standardization of our service advisor model. Due to the success of this program, and demand for management trainees throughout the organization, we intend to expand it in 2019. Winning Gold Kaleb Czyruk, an apprentice from Toromont Cat’s Peterborough branch, won gold in the Heavy Equipment Service category at the 2018 Skills Ontario Competition, an annual event featuring over 2,100 students from secondary and post-secondary institutions vying for medals in various skilled trades categories. Toromont Cat and Battlefield supported the competition by providing three CAT 924K wheel loaders and three judges. Winning gold qualified Kaleb to represent Ontario at the 2018 Skills Canada Competition in Edmonton where he took the bronze medal. 14 14 Toromont’s long-time investment in the management trainee program has paid dividends for succession planning. Former trainees now serve in positions such as Vice President, Product Support, President, Battlefield Equipment Rentals and President and Chief Executive Officer, Toromont Industries. Diversity Toromont sees the advantage of building a diverse and inclusive team. For this reason, Toromont intentionally seeks to encourage members of underrepresented groups to participate in our industry and join our Company. The first ‘face’ of Toromont that many candidates see is in our recruiting and customer promotional materials. In 2018, we made a conscious effort to ensure the faces used in our marketing campaigns represented the diversity of the communities we serve. Although a symbolic gesture, we believe this conscious choice sent a welcoming signal to the broader community. During 2018, we recruited three technicians from First Nations communities to serve at Toromont Cat in Québec and one apprentice technician from the Inuit community to serve in our Baker Lake, Nunavut operation. We also created an internship opportunity for a member of the Inuit community at our Iqaluit, Nunavut branch and provided another internship to a member of the Cree Nation of Eastmain to develop skills at our Pointe-Claire, Québec Heavy Equipment shop. Toromont continued its efforts to increase the proportion of women in its workforce and in its leadership. Over the past SUSTAINABILITY REPORT few years, we have made inroads with female representation in varied leadership roles including: • Vice President, Power Systems; • Regional Manager, Eastern Ontario, Battlefield Equipment Rentals; Heavy Rents Manager, Toromont Cat; Director, Human Resources, Toromont Cat; Director, Taxation, Toromont Industries; Director, Financial Services, Toromont Industries; General Counsel and Corporate Secretary, Toromont Industries; and, Vice President, Finance, Toromont Industries. • • • • • • We also made a very deliberate choice to improve representation by recruiting Toromont’s first two female Directors to the Company’s Board of Directors several years ago. We continued with this effort across our broader organization in 2018 by participating in events such as “Jill of All Trades” at Conestoga College and Diversity Networking at Ryerson and McMaster universities. Starting the conversation early with elementary school girls was made possible by our participation in the “Women in Trades” conference at the Toronto Congress Centre. To ensure newcomers to Canada are aware of Toromont, we continued to recruit with the help of COSTI Immigrant Services. Overcoming the barriers to diversity and inclusion also requires a commitment to inform and elevate awareness internally. In 2018, we introduced several training modules for employees including Toromont’s Kaleb Czyruk receives his gold medal at the Skills Ontario Competition in Toronto. Samantha McGillion, an Apprentice Technician, at work in our tractor shop in Concord, Ontario. 15 SUSTAINABILITY REPORT Toromont continues to invest in upgraded wash bays to realize improved water efficiency. Toromont is a proud supporter of the annual World Pond Hockey Championship in Plaster Rock, New Brunswick, which attracts over 100 amateur teams playing on 20 outdoor ice surfaces. “The Diversity Advantage” that contained insightful information on how to leverage differences at work for great results. As a metrics-driven organization, Toromont believes it is important to measure the outcomes we seek to achieve. For this reason, diversity metrics are tracked in our quarterly Toromont CAT HR Scorecard. Our intentional efforts show measurable year-over-year improvement in the areas of leadership, gender and ethnic diversity with continued focus on all underrepresented groups. Overall, Toromont’s culture values actions over words. Therefore, the outcome of our diversity and inclusion activities is what counts. In 2018, we made progress in hiring broadly, advancing the skills of our team and – as always – promoting on merit. The outcome is a stronger Toromont. Environment Toromont’s environmental sustainability efforts are an outgrowth of a disciplined approach to capital and operating management. Simply put, what is good for the environment can also be good for cost and efficiency. Energy and Pollution Reduction In aggregate, Toromont has a relatively small environmental footprint, but we never use this as an excuse for inaction. efficiency considerations are part of equipment purchase decisions. To eliminate needless pollution and energy consumption, we maintain anti-idling policies and employ GPS monitoring to assist us with fuel consumption benchmarking. Toromont facilities are the second largest contributor to our GHGs, meaning we must continue to make steady improvements. At Toromont Cat, building energy intensity continued its downward trend in 2018 as a result of additional investments in more efficient HVAC systems, lighting, overhead doors and compressed air tools. Eight branches replaced fluorescent building signs with LED lighting kits, which cut energy usage and maintenance costs with a relatively fast payback. Battlefield Equipment Rentals also continued to upgrade heating and lighting as part of its capital plan. Emission abatement was assisted at Power Systems by the use of selective catalytic reduction equipment that minimizes the release of nitrogen oxide and sulphur during generator testing. More generally, facility care and yard maintenance are priorities because a clean, modern appearance reflects our brand, builds goodwill with customers and neighbours, assists in safe performance and compliance, and creates pride of place. Due to the increase in our footprint with acquired operations, and in support of our growth strategies, we increased capital spending by 33% year over year. Federal and provincial governments are taking various actions to address Canada’s commitment to the Paris Climate Change Accord. Such actions will likely increase the cost of fuel to power our facilities and run our service trucks over time. To counter this impact and to do our part for the environment, we conserve energy use and reduce pollution wherever possible. Small actions can also make a difference. This past year, we encouraged Toromont Cat branches to purchase environmentally friendly cleaning supplies that release lower levels of volatile organic compounds (VOCs), a contributor to ozone depletion. In managing our fleet of vehicles, which is the largest contributor to greenhouse gas (GHG) emissions in our business, fuel Water Management Through the use of specialized wash bays for equipment, Toromont continued to realize improved water efficiency. 16 SUSTAINABILITY REPORT These systems recycle water, allowing us to hold the line on consumption, even with higher activity levels. Energy-efficient, high-temperature steam and pressure washers installed in these systems also eliminate the use of chemical cleaning agents. In 2018, Toromont Cat’s Sault Ste. Marie, Ontario branch was the latest to install such a system. customers and the broader environment. By using a unique and patented heat capture and recycling system, the ECO CHILL installed base has cumulatively offset 851,000 CO2-equivalent tonnes (the same amount produced by 189,000 cars) compared to traditional refrigeration and saved 17 billion cubic feet of natural gas over the past 14 years. The recent replacement of five washing systems used to clean equipment parts also contributed to water conservation. Net water savings were approximately 3.4m3 (900 gallons) for one cleaning cycle, or 817m3 (216,000 gallons) per annum. CIMCO’s applied use of natural CO2 refrigerant also provides customers with another alternative to freon. Customers responded well to this offering in 2018 as ECO2 CHILL reached 8% of all orders booked. Battlefield Equipment Rentals’ water conservation efforts were assisted by specialized wash bays in 25 standalone locations and another three shared with Toromont Cat. Waste Diversion To bring additional attention to the merits of a zero-waste ecosystem, and encourage permanent behavioural change, Zero Waste Champions were appointed at various branches. Toromont Cat also continued to recycle absorbent cloths used in cleaning and repairing machines. Since this program started in 2012, 48,654 kilograms of waste were diverted from landfill and 33,574 litres of liquid including oil were recovered. Helping Customers Go Green Toromont and its business partners produce products that help customers achieve their sustainability objectives. We are proud of our home-grown innovations at CIMCO – sold primarily under the ECO CHILL and ECO2 CHILL brands – that have proven to be game-changers for recreational and industrial refrigeration Community Toromont employees are community minded and as a company, we applaud and encourage their activities. Our official designated charity is the United Way/Centraide, which helps those in need in the communities we serve. In 2018, our employees contributed $285,000 to this important cause. These results were earned at early-morning breakfasts, BBQs, bingo games and through generous pledge donations. Toromont business units provided support to other worthy causes. In 2018, Battlefield Equipment Rentals supported Hope Air, a service connecting residents of remote communities to medical care hundreds of kilometres away. The Children’s Wish Foundation in Québec and in the Maritimes (where we made a rental equipment donation in concert with New Brunswick Road Builder’s Association) and Habitat for Humanity were also worthy recipients of our support. With a larger workforce and facility footprint, Toromont has more corporate social responsibilities than ever and great opportunities to support the communities where we work and live. We take these responsibilities seriously and our focus up and down the organization is on long-term results and on the pragmatic actions that will achieve those results. Overall, our sustainability initiatives form part of the fabric of values that weave together for the Toromont tapestry, executed by the passion and commitment of the Toromont team. 17 17 CORPORATE GOVERNANCE Corporate Governance 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. The Lead Director is an independent Director, appointed annually by the Board to facilitate the Board’s functioning. 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. 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. For more information on the Board of Directors, please refer to the Management Information Circular dated February 28, 2019, prepared in connection with the Corporation’s 2019 Annual Meeting of Shareholders and available on our website at www.toromont.com. 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 18 CORPORATE GOVERNANCE L to R: James W. Gill, Robert M. Franklin, Scott J. Medhurst, Robert M. Ogilvie, Cathryn E. Cranston, Jeffrey S. Chisholm, Richard G. Roy, Katherine A. Rethy, Wayne S. Hill 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 Nominating and Corporate Governance Committee 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. 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 Audit Committee Principal duties include oversight responsibility for financial statements and related disclosures, reports to shareholders and other related communications, establishment of 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. 19 EXECUTIVE OPERATING TEAM Executive Operating Team L to R: Lynn M. Korbak, Paul R. Jewer, David A. Malinauskas, Michael P. Cuddy, Jennifer J. Cochrane, Scott J. Medhurst, Randall B. Casson Randall B. Casson President, Battlefield Equipment Rentals Mr. Casson joined Toromont in 1977. He was appointed Vice President and General Manager, Toromont Cat Northern Region in 1997 and became President of Battlefield in 2001. He is a graduate of Toromont’s Management Trainee Program. 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. 20 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 Mr. Jewer joined Toromont in 2005 as Chief Financial 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 Labrador and holds the ICD.D designation as a member of the Institute of Corporate Directors. Lynn M. Korbak General Counsel and Corporate Secretary Ms. Korbak joined Toromont in 2018 as General Counsel and Corporate Secretary. She previously served in the same capacity at another Canadian publicly listed company for more than 13 years. She has also acted as in-house and external corporate counsel and secretary for a number of other national and international companies. She is a member of the Ontario Bar, and holds an LLB from Osgoode Hall Law School. David A. Malinauskas President, CIMCO Refrigeration Mr. Malinauskas was appointed President of CIMCO in 2015 following a successful 16-year career with the business. He had held various positions of increasing responsibility, including Director of Engineering. He is a Professional Engineer 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 2004 and became President and CEO of Toromont Industries Ltd. in 2012. Mr. Medhurst is a graduate of Toromont’s Management Trainee Program. He is currently an active member of the World Presidents’ Organization and Caterpillar Global Mining Council. Management’s Discussion & Analysis 21 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, 2018, 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, 2018. 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 14, 2019. Additional information is contained in the Company’s filings with Canadian securities regulators, including the Company’s 2018 Annual Report and 2019 Annual Information Form. These filings are available on SEDAR at www.sedar.com and on the Company’s website at www.toromont.com. Advisory distribution or original equipment risks related to integration of the acquired Information in this MD&A that is not a manufacturer agreements; equipment operations with those of Toromont including historical fact is “forward-looking product acceptance and availability of cost of integration and ability to achieve the information”. Words such as “plans”, supply; increased competition; credit of expected benefits. Readers are cautioned “intends”, “outlook”, “expects”, third parties; additional costs associated that the foregoing list of factors is not “anticipates”, “estimates”, “believes”, with warranties and maintenance contracts; exhaustive. “likely”, “should”, “could”, “will”, “may” and changes in interest rates; the availability of Any of the above mentioned risks and similar expressions are intended to identify financing; potential environmental liabilities uncertainties could cause or contribute to statements containing forward-looking of the 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 statements beliefs, and assumptions, which are based reputation of Caterpillar, product quality included in this MD&A. For a further on Toromont’s perception of historical and product safety risks which could expose description of certain risks and trends, current conditions and expected Toromont to product liability claims and uncertainties and other factors that could future developments, as well as other negative publicity; new, or changes to cause or contribute to actual results that are factors management believes are current, federal and provincial laws, rules 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 and acquired in excess of from those expressed or implied by beliefs and assumptions will prove to be those currently contemplated. Risks and statements containing forward-looking correct. This MD&A also contains forward- uncertainties related to the 2017 significant information. looking statements about the recently acquisition could also cause the actual Readers are cautioned not to place acquired businesses. results to differ materially from the undue reliance on statements containing Numerous risks and uncertainties could estimates beliefs and assumptions forward-looking information, which reflect cause the actual results to differ materially expressed or implied in the forward-looking Toromont’s expectations only as of the date from the estimates, beliefs and assumptions statements, including but not limited to: of this MD&A, and not to use such expressed or implied in the forward-looking changes in consumer and business information for anything other than their statements, including, but not limited to: confidence as a result of the change in intended purpose. Toromont disclaims any business cycles, including general economic ownership; the potential for liabilities obligation to update or revise any forward- conditions in the countries in which assumed in the acquisition to exceed our looking information, whether as a result of Toromont operates; commodity price estimates or for material undiscovered new information, future events or otherwise, changes, including changes in the price of liabilities in the 2017 acquisition; the except as required by law. precious and base metals; changes in potential for third parties to terminate or foreign exchange rates, including the Cdn$/ alter their agreements or relationships with US$ exchange rate; the termination of Toromont as a result of the acquisition; and 22 Management’s Discussion and AnalysisCorporate Recap 2017 Acquisition Toromont completed a significant Seaboard of the United States, from Maine large contiguous operating platform acquisition on October 27, 2017, and as a to Virginia. Additional distribution rights extending across all of Eastern and Central consequence became the authorized were also acquired. Collectively, the Canada and into the Far North. Caterpillar dealer for the province of businesses acquired are referenced as For further information on the Québec, Western Labrador and the Toromont Québec/Maritimes (“Toromont accounting for the acquisition, refer to Maritimes, as well as the MCFA lift truck QM or TQM”) throughout this report. note 25 of the notes to the consolidated dealer for Québec and most of Ontario, in This important transaction provides a financial statements. addition to the MaK engine dealer for substantial growth platform and Québec, the Maritimes and the Eastern strengthens our Company by providing a Corporate Profile and Business Segmentation As at December 31, 2018, Toromont dealer for a contiguous geographical including industrial, commercial, marine, employed over 6,000 people in more than territory in Canada that covers Manitoba, on-highway trucks and power generation; 150 locations across Canada and the United Ontario, Québec, Newfoundland, New and sale of complementary and related States. Toromont is listed on the Toronto Brunswick, Nova Scotia, Prince Edward products, parts and service. Stock Exchange under the symbol TIH. Island and most of Nunavut. Additionally, CIMCO is a market leader in the design, Toromont has two reportable operating the Company is the MaK engine dealer for engineering, fabrication, installation and segments: the Equipment Group and CIMCO. the Eastern Seaboard of the United States, after-sale support of refrigeration systems The Equipment Group includes from Maine to Virginia. Performance in the in industrial and recreational markets. Toromont CAT, one of the world’s larger Equipment Group is driven by activity in Results of CIMCO are influenced by Caterpillar dealerships, Battlefield several industries: road building and other conditions in the primary market segments Equipment Rentals, an industry-leading infrastructure-related activities; mining; served: beverage and food processing; cold rental operation, SITECH, providing Trimble residential and commercial construction; storage; food distribution; mining; and technology products and services, AgWest, power generation; aggregates; waste recreational ice rinks. CIMCO offers an agricultural equipment and solutions management; steel; forestry; and systems designed to optimize energy dealer representing AGCO, CLAAS and agriculture. Significant activities include usage through proprietary products such other manufacturers’ products, in addition the sale, rental and service of mobile as ECO CHILL®. CIMCO has manufacturing to the acquired businesses noted above, equipment for Caterpillar and other facilities in Canada and the United States which are in varying stages of integration. manufacturers; sale, rental and service of and sells its solutions globally. The Company is the exclusive Caterpillar engines used in a variety of applications 23 Primary Objective and Major Strategies The primary objective of the Company is to activities also represent opportunities to advantage. Growth is dependent on build shareholder value through sustainable develop closer relationships with customers attracting, retaining and developing and profitable growth, supported by a and differentiate the Company’s product and employees with values that are consistent strong financial foundation. To guide its service offering. The ability to consistently with Toromont’s. A highly principled activities in pursuit of this objective, meet or exceed customers’ expectations for culture, share ownership and profitability- Toromont works toward specific, long-term service efficiency and quality is critical, as based incentive programs result in a close financial goals (see section heading “Key after-market support is an integral part of alignment of employee and shareholder Performance Measures” in this MD&A) and the customer’s decision-making process interests. By investing in employee training each of its operating groups consistently when purchasing equipment. and development, the capabilities and employs the following broad strategies: productivity of employees continually Broaden Product Offerings improve to better serve shareholders, Expand Markets Toromont delivers specialized capital customers and business partners. Toromont serves diverse markets that offer equipment to a diverse range of customers Toromont’s information technology significant long-term potential for and industries. Collectively, hundreds of represents another competitive profitable expansion. Each operating group thousands of different parts are offered differentiator in the marketplace. The strives to achieve or maintain leading through the Company’s distribution channels. Company’s selective investments in positions in markets served. Incremental The Company expands its customer base technology, inclusive of e-commerce revenues are derived from improved through selectively extending product lines initiatives, strengthen customer service coverage, market share gains and and capabilities. In support of this strategy, capabilities, generate new opportunities for geographic expansion. Expansion of the Toromont represents product lines that are growth, drive efficiency and increase installed base of equipment provides the considered leading and generally best-in- returns to shareholders. foundation for product support growth and class from suppliers and business partners leverages the fixed costs associated with who continually expand and develop their Maintain a Strong Financial Position the Company’s infrastructure. offerings. Strong relationships with suppliers A strong, well-capitalized balance sheet Strengthen Product Support achieving growth objectives. has contributed to the Company’s Toromont’s parts and service business is a long-term track record of profitable growth. significant contributor to overall profitability Invest in Resources It is also fundamental to the Company’s and business partners are critical in creates stability and financial flexibility, and and serves to stabilize results through The combined knowledge and experience future success. economic downturns. Product support of Toromont’s people is a key competitive 24 Consolidated Annual Operating Results ($ thousands, except per share amounts) 2018 2017 $ change % change Revenues Cost of goods sold $ 3,504,236 2,640,835 $ 2,350,162 1,794,213 Gross profit (1) Selling and administrative expenses Operating income (1) Interest expense Interest and investment income Income before income taxes Income taxes 863,401 493,827 369,574 30,643 (8,918) 347,849 95,865 555,949 306,367 249,582 12,277 (4,659) 241,964 65,994 $ 1,154,074 846,622 307,452 187,460 119,992 18,366 (4,259) 105,885 29,871 Net earnings $ 251,984 $ 175,970 $ 76,014 Basic earnings per share $ 3.10 $ 2.22 $ 0.88 49% 47% 55% 61% 48% 150% 91% 44% 45% 43% 39% 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) 24.6% 14.1% 10.5% 27.6% 21.7% 22.3% (1) Described in the sections titled “Additional GAAP Measures and Non-GAAP Measures.” 23.7% 13.0% 10.6% 27.3% 21.5% 19.3% The Company delivered solid results in the were $4.9 million lower than last year, while CIMCO. Operating income margin for the year, the first across the expanded territories mark-to-market adjustments on Deferred legacy businesses increased 80 bps to 12.5%. in its Equipment Group. Results at CIMCO Share Units (“DSUs”) favorably impacted Interest expense increased $18.4 million were weaker, mainly due to specific items. expenses by $5.6 million, given the relative as a result of the additional debt incurred to The legacy businesses reported share prices. Compensation costs partially fund the acquisition. revenue growth of $127.5 million or 6% for accounted for approximately 60% of the Interest income increased $4.3 million the year with increases across most remaining increase on additional headcount, on higher investment income resulting revenue streams in the Equipment Group regular annual increases and higher profit from higher average cash balances held and higher package sales and product sharing accrual on the increased earnings. throughout the year and higher interest support revenues at CIMCO. Toromont QM Allowance for doubtful accounts were $2.0 from conversions of equipment on rent contributed $1.3 billion in the year versus million higher reflecting the relative aging with a purchase option (“RPO”). $242.6 million generated for the two profiles of accounts receivables. Certain The effective income tax rate for 2018 months of ownership in 2017. other expenses categories such as customer was 27.6% compared to 27.3% in 2017. The Gross profit margin increased 90 basis support costs, insurance, travel, training and increase is substantially due to the higher points (“bps”) to 24.6% versus last year. information technology costs, were higher in proportion of income earned in the higher The legacy Equipment Group reported support of the growth and integration and tax jurisdictions, although this is expected higher margins across most revenue transition efforts. As a percentage of to be mitigated in coming years as Québec streams, partially offset by lower package revenues, expenses net of Toromont QM and continues to phase in reductions in the margins at CIMCO. Both Groups benefitted acquisition-related expenses were 20 bps corporate tax rates. from a favorable sales mix of higher product higher than last year at 12.6%. Net earnings in 2018 were $252.0 support revenues to total revenues. Operating income increased $120.0 million Selling and administrative expenses reflecting the incremental contribution at million, up 43% from 2017, while basic earnings per share (“EPS”) increased increased $187.5 million, largely reflecting Toromont QM, net of acquisition-related costs, $0.88 or 39% to $3.10. The following table the incremental expenses at Toromont QM and solid growth in the legacy Equipment identifies the components of contributions ($172.7 million). Acquisition-related costs Group, partially offset by weaker results at to the 2018 results versus last year: 25 Net earnings Basic EPS(a) Years ended December 31 ($ millions, except per share amounts) 2018 2017 % change 2018 2017 % change Legacy Toromont (b) Toromont QM (c) Acquisition-related interest expense and integration-related costs (e) Dilutive impact of acquisition shares (d) $ 205.9 64.1 $ 175.6 8.3 (18.0) — (7.9) — 17% nm nm — $ 2.61 0.81 $ 2.29 0.11 (0.23) (0.09) (0.10) (0.08) 14% nm nm nm As reported $ 252.0 $ 176.0 43% $ 3.10 $ 2.22 39% (a) Separately identifies impact of shares issued at acquisition for year-over-year comparability. (b) Defined as all businesses continuing from prior to the acquisition. (c) Defined as all businesses acquired October 27, 2017. (d) EPS impact of 2.2 million shares issued on acquisition to total net earnings. (e) Expenses shown net of taxes. Legacy Toromont net earnings increased 17% in the year while EPS increased $0.32 or 14%. Comprehensive income in 2018 was $273.0 million (2017 - $168.2 million), comprised mainly of net earnings and other comprehensive income resulting from actuarial gains on defined benefit pension and other post-employment benefit plans and a favorable change in the fair value of cash flow hedges. Business Segment Annual Operating Results The accounting policies of the segments are the same as those of the consolidated entity. Management evaluates overall business segment performance based on revenue growth, operating income relative to revenues and return on capital employed. Corporate expenses are allocated based on each segment’s revenue. Interest expense and interest and investment income are not allocated. Equipment Group ($ thousands) Equipment sales and rentals New Used Rentals Total equipment sales and rentals Product support Power generation Total revenues Operating income Capital expenditures (net) Rental Other 2018 2017 $ change % change $ 1,197,739 310,381 378,027 1,886,147 1,264,295 10,645 $ 784,915 227,293 261,641 1,273,849 746,832 11,270 $ 412,824 83,088 116,386 612,298 517,463 (625) $ 3,161,087 $ 2,031,951 $ 1,129,136 $ 348,876 $ 219,814 $ 129,062 $ 125,148 37,546 $ 66,822 32,710 $ 58,326 4,836 53% 37% 44% 48% 69% (6%) 56% 59% 87% 15% 63% Total $ 162,694 $ 99,532 $ 63,162 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 40.0% 11.0% 90.2% 21.4% 36.8% 10.8% 86.5% 21.1% 26 Total Equipment Group results Sales into mining markets were lower coming higher parts (up 9%) and service revenues demonstrated significant increases in off a strong year. Material handling or lift (up 15%). Both legacy and Toromont QM’s revenues and earnings on continued truck sales increased with an expanding product support revenues benefitted from year-over-year growth in the legacy product portfolio, together with higher good rebuild activity and a growing operations and an accretive full year of activity levels with the larger customers. technician base. operations in the expanded territories Legacy rental revenues increased $30.2 Power generation revenues were $10.6 (versus two months in 2017). million or 12% versus last year, mainly on million versus $11.3 million last year, The legacy Equipment Group revenues higher utilization and larger fleets. Rental reflecting lower electricity output at the grew 6% to $1.9 billion on increases across rates have remained relatively constant to Waterloo landfill plant and lower thermal most revenue streams. Toromont QM 2017, while the average cost for machines revenues at the Sudbury Hospital plant. contributed $1.3 billion in its first full year of added to the fleets has increased. Heavy Gross margins increased 160 bps operations under Toromont’s ownership, equipment rentals were up 4% with strong versus last year. For the legacy operations, representing a 13% increase over those activity levels reported in Ontario, especially product support, equipment and rental generated in 2017, ten months of which were in the north and southwestern corridor, margins were higher, further buoyed by a at the predecessor organization. To provide a offsetting lower activity in Newfoundland. favorable sales mix of product support more complete understanding of the Light equipment rentals increased 10% with revenues to total revenues. business trends at TQM, year-over-year all regions reporting growth except Selling and administrative expenses revenue comparisons will be against pro Newfoundland. Power rentals increased were up $187.3 million, mainly due to the forma 2017 revenues (i.e. Toromont + 67%, closing out a record year, on strong incremental expenses at Toromont QM, net predecessor organization). growth in the prime power segment. Market of acquisition-related costs. At the legacy At the legacy businesses, total equipment penetration was also good across most other businesses, expenses increased $19.6 sales (new and used) increased $21.6 million industries, reflecting the continued focus on million or 9% and were 40 bps higher as a or 2%. New equipment sales were up 6%. growing and diversifying the fleet to address percentage of revenues, mainly due to higher Growth in construction and agriculture demand signals across the wider market compensation costs, allowance for doubtful followed positive markets, which more than base. Rental revenues from equipment on accounts and general increases across most offset lower sales in mining and power rent with a purchase option (“RPO”) were up other categories in support of growth and systems, following significant orders and 10% on a larger average fleet versus 2017. At integration and transition efforts. record performance in the prior year. Used Toromont QM, rental revenues of $104.8 Operating income was up $129.1 million. equipment sales were down 7%, significantly million represented a 6% increase over 2017. The operating income of the legacy due to tighter availability, together with the Higher investments in the fleets, together businesses increased $42.3 million or 20% strategic curtailment of rental fleet with a diversified portfolio aligning to the and was 160 bps higher as a percentage of dispositions, due to growth focus in rental, legacy operations mix yielded higher revenues (13.7% versus 12.1% last year). together with a view to product availability. revenues. At December 31, 2018, the RPO Capital expenditures, net of At Toromont QM, total new and used fleet across the business was $74.6 million, dispositions, increased $63.2 million, equipment sales of $611.7 million up $3.0 million from a year ago. largely due to investments at Toromont QM represented a 16% increase over total new Product support revenues at the legacy (up $65.1 million). At the legacy businesses, and used revenues generated in 2017 at businesses increased $51.3 million or 8%. replacement and expansion of the rental Toromont and the predecessor organization Parts sales grew 6%, mainly reflecting fleet were up $7.3 million to $68.3 million combined. Sales into construction markets good activity into mining markets. Service while other capital expenditures were were up on good penetration of robust revenues were up 13% with growth across lower by $9.2 million, mainly due to lower markets, and power systems increased on most market segments. At Toromont QM, investments in land and buildings. At higher sales into electric power markets, product support revenues of $552.8 million Toromont QM, $51.1 million of the increase somewhat offset by lower marine activity. represented a 10% increase over 2017 on related to growing the rental fleet. Bookings and Backlogs ($ millions) 2018 Bookings – year ended December 31 Backlogs – as at December 31 $ $ 1,537 342 $ $ 2017 1,013 327 $ change % change $ $ 524 15 52% 5% 27 The legacy businesses bookings increased at the predecessor organization. (26%), mining (19%), agriculture (7%) and $16.0 million or 2%. A large power systems Approximately 60% of the orders in 2018 lift trucks (6%), most of which is expected to order, together with higher construction (up were construction related, with the be delivered in 2019. Backlogs can vary 5%) and agriculture orders (up 14%), served remainder split somewhat evenly between significantly from period to period on large to offset the impact of the large mining mining, power systems and lift truck orders. project activities, especially in mining and package delivered last year. Backlogs, which would be on a power systems, the timing of orders and Toromont QM bookings were $594.0 comparable basis year-over-year, increased deliveries and the availability of equipment million for 2018 versus $86.0 million for the $15.0 million or 5% to $342.0 million. At from either inventory or suppliers. two months of operations in 2017. Prior to December 31, 2018, the total backlog related the acquisition, bookings were not tracked to power systems (42%), construction CIMCO ($ thousands) Package sales Product support Total revenues Operating income Capital expenditures (net) 2018 2017 $ change % change $ 202,367 140,782 $ 189,212 128,999 $ 343,149 $ 318,211 $ $ 20,698 2,452 $ $ 29,768 1,422 $ $ $ $ 13,155 11,783 24,938 (9,070) 1,030 7% 9% 8% (30%) 72% 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 41.0% 6.0% 9.8% 64.1% 40.5% 9.4% 13.5% 99.9% CIMCO delivered record revenues for continues to provide a solid growth down 100 bps as a percentage of revenues the year, mainly on continued growth platform as product support revenues (14.0% versus 15.0%). Higher compensation in Canada as the US contracted slightly have increased every year since 2009. costs were offset by reductions in most following a very strong 2017. The translation Focus remains on growing the technician other expense categories as the Group of financial results at the US operations did base to address demand signals. continues to focus on expense management not have a significant impact on results. Gross margins decreased 440 bps, to mitigate the margin pressures. Lower operating income reflects a specific largely attributable to an inventory Operating income was lower by $9.1 one-time inventory adjustment recorded in write-down recorded in the fourth quarter million or 30% in 2018, principally due to the fourth quarter. ($6.0 million), together with execution the lower margins described above. As a In Canada, package revenues were up problems encountered in the first half of percentage of revenues, operating income $19.2 million or 14%, reflecting strong sales the year on one US project resulting in a was 6.0%. into industrial markets (up 32%), partially charge of $2.9 million for the year. The Capital expenditures, net of offset by lower recreational sales (down inventory charge stemmed from a review of dispositions, were up $1.0 million or 72% 19%). Québec and Western Canada revenues work-in-process costing and aging. Apart to $2.5 million with the majority of increased to record levels while Ontario and from this, project margins continued to expenditures in 2018 related to additional Atlantic Canada returned to more normal face pressures in both Canada and the US, service vehicles ($1.2 million), information levels following the record 2017. In the US, mainly on a very competitive pricing technology infrastructure enhancements package revenues decreased $6.0 million or environment. The growing proportion of and upgrades ($0.7 million) and machinery 13% as strong sales into industrial markets product support revenues to total revenues and equipment ($0.5 million). (up 134%) were partially offset by lower sales continues to somewhat mitigate this into recreational markets (down 61%). Product support revenues increased impact. Product support revenues were 41.0% as a percentage of total revenues $11.8 million or 9% versus last year on compared to 40.5% in 2017. growth in both Canada (up 10%) and the Selling and administrative expenses US (up 8%). The increased installed base were relatively in line with last year but 28 Bookings and Backlogs ($ millions) Bookings – year ended December 31 Backlogs – as at December 31 2018 185 113 $ $ 2017 $ change % change $ $ 233 134 $ $ (48) (21) (21%) (16%) Bookings of $185.0 million were lower by Backlogs of $113.0 million were also lower US activity. The backlog levels for this $48.0 million versus the all-time high lower against the record 2017 levels, but time of year provide a good base entering achieved last year. Industrial orders were still higher than the previous five-year 2019, with substantially all expected to be lower in both Canada (down 21%) and the average. Industrial backlogs were down realized as revenue in 2019. US (down 61%) while recreational orders 19%, mainly in Canada. Recreational were lower in Canada (down 10%) and backlogs were down 11% with higher relatively unchanged in the US. Canadian activity more than offset by 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 of TQM in October 2017. At December 31, 2018, the ratio of net debt to total capitalization decreased to 18% versus 40% at December 31, 2017. Non-cash Working Capital The Company’s investment in non-cash working capital was $309.5 million at December 31, 2018. The major components, along with the changes from December 31, 2017, are identified in the following table. ($ thousands) 2018 2017 $ change % change Accounts receivable Inventories Other current assets Accounts payable and accrued liabilities Provisions Income taxes payable Derivative financial instruments Dividends payable Deferred revenues and contract liabilities $ 522,462 873,507 9,932 (916,300) (24,382) (28,368) 27,624 (18,737) (136,244) $ 528,748 777,524 8,386 (525,166) (22,436) (204) (5,260) (15,655) (137,129) $ (6,286) 95,983 1,546 (391,134) (1,946) (28,164) 32,884 (3,082) 885 (1%) 12% 18% 74% 9% nm nm 20% (1%) Total non-cash working capital $ 309,494 $ 608,808 $ (299,314) (49%) Accounts receivable at December 31, 2017, Inventories increased $96.0 million or customer specified delivery dates later included $42.7 million related to amounts 12% with increases in both Groups: in 2019 together with higher parts owing to the Company stemming from the • Equipment Group inventories were inventory at remote mine sites to acquisition which was subsequently $95.7 million or 13% higher with support higher activity levels. The collected in the first quarter of 2018. increases in equipment (up $51.9 million higher service work-in-process levels Excluding this, accounts receivables or 10%), parts (up $40.9 million or 21%) reflects good activity levels across our increased $36.4 million or 7%, largely and service work-in-process (up $2.9 service operations. reflecting higher revenues at the legacy million or 5%). With increased business • CIMCO inventories were up $0.3 million businesses in the fourth quarter (up 5%), opportunities following the expansion, or 2% on higher work-in-process levels. the impact of Toromont QM in the fourth the Company built up both the The increase in other current assets quarter year-over-year (three months of equipment and parts inventory levels relates to higher prepaid expenses at activity in 2018 versus two months in 2017) throughout the year. Additionally, Toromont QM. and slower collections. certain inventory was held in advance of 29 Accounts payable and accrued liabilities Employee Share Ownership compensation expense in selling and increased $391.1 million or 74%, principally The Company employs a variety of stock- administrative expenses. As at December 31, due to the transitional terms from suppliers based compensation plans to align 2018, 358,151 DSUs were outstanding with a related to inventory purchases. employees’ interests with corporate total value of $19.0 million (2017 – 426,279 Income taxes payable reflects the objectives. units at a value of $23.4 million). The liability difference between tax installments and The Company maintains an Executive for DSUs is included in accounts payable and current tax expense. Stock Option Plan for its senior employees. accrued liabilities on the consolidated Derivative financial instruments Stock options vest 20% per year on each statements of financial position. represent the fair value of foreign exchange anniversary date of the grant and are contracts. Fluctuations in the value of the exercisable at the designated common share Employee Future Benefits Canadian dollar have led to a cumulative price, which is fixed at prevailing market The Company sponsors pension net gain of $27.6 million as at December 31, prices at the date the option is granted. arrangements for substantially all of its 2018. This is not expected to affect net Stock options granted in 2013 and after have employees. These include: earnings as the unrealized gains will offset a 10-year term while those granted prior to • Defined contribution plans, which cover future losses on the related hedged items. 2013 have a seven-year term. At December the largest segment of employees, Higher dividends payable year-over-year 31, 2018, 2.6 million options to purchase including all newly hired employees; reflect the higher dividend rate. Early in common shares were outstanding, of which 2018, the quarterly dividend rate was 1.1 million were exercisable. • Defined benefit plans, which are largely associated with acquired businesses increased from $0.19 per share to $0.23 The Company offers an Employee Share and some historic agreements; per share, a 21% increase. Purchase Plan whereby employees can • 401(k) matched savings plans for Deferred revenues and contract purchase shares by way of payroll employees in the US; and liabilities, which were down $0.9 million or deductions. Under the terms of this plan, • Other post-employment benefit plans 1%, represent billings to customers in eligible employees may purchase common for certain grand-fathered employees in excess of revenue recognized. shares of the Company in the open market the acquired businesses. • In the Equipment Group, these arise at the then-current market price. The Certain unionized employees do not mainly due to progress billings from the Company pays a portion of the purchase participate in Company-sponsored plans, sale of power and energy systems and price, matching contributions at a rate of $1 and contributions are made to their long-term product support maintenance for every $3 contributed, to a maximum of retirement programs in accordance with the contracts, as well as on sales of equipment the greater of 2.5% of an employee’s base respective collective bargaining agreements. with residual value guarantees and salary or $1,000 per annum. Company customer deposits for machinery to be contributions vest to the employee delivered in the future. In 2018, these immediately. Company contributions Defined Contribution Plans In the case of defined contribution plans, increased $8.1 million or 7% largely amounting to $2.4 million in 2018 (2017 regular contributions are made to the related to progress billings and – $2.0 million) were charged to selling and individual employee accounts, which are customer deposits for deliveries in 2019. administrative expense when paid. administered by a plan trustee in • At CIMCO, these arise on progress billings Approximately 53% (2017 – 52%) of eligible accordance with the plan documents. At from the sale of refrigeration packages employees participate in the plan, which is December 31, 2018, 3,647 employees and were down $9.0 million or 31%, administered by an independent third party. participated in Company-sponsored correlating to the lower backlog levels. The Company also offers a deferred share defined contribution plans. unit (“DSU”) plan for executives, certain Goodwill and Intangibles senior managers and non-employee The Company performs impairment tests directors, whereby they may elect, on an Defined Benefit Plans The Company sponsors defined benefit on its goodwill and intangibles with annual basis, to receive all or a portion of pension plans which provide pension and indefinite lives on an annual basis or as their performance incentive bonus (in the other post-retirement benefits for warranted by events or circumstances. The case of employees) or fees (in the case of approximately 2,181 qualifying employees. assessment entails estimating the fair directors) in DSUs. A DSU is a notional unit All Plans are administered by a separate value of operations to which the goodwill that reflects the market value of a single Fund that is legally separated from the and intangibles relate, using the present Toromont common share and generally Company, with the exception of the value of expected discounted future cash vests immediately. DSUs will be redeemed Executive Plan described below. flows. This assessment affirmed goodwill on cessation of employment or directorship. The funded status of these plans changed and intangibles values as at December 31, DSUs have dividend equivalent rights, which by $17.0 million (a decrease in the accrued 2018 as outlined in note 7 of the notes to are expensed as earned. The Company pension liability) as at December 31, 2018. the consolidated financial statements. records the cost of the DSU plan as 30 The Executive Plan is a supplemental insurance coverage considered appropriate Outstanding Share Data plan and is solely the obligation of the by management and by active As at the date of this MD&A, the Company Company. All members of the plan are management of these matters. In the had 81,229,723 common shares and retired. The Company is not obligated to opinion of management, none of these 2,632,730 share options outstanding. fund the plan but is obligated to pay matters will have a material effect on the benefits under the terms of the plan as they Company’s consolidated financial position come due. The Company has posted letters or results of operations. of credit to secure the obligations under Dividends Toromont pays a quarterly dividend on its outstanding common shares and has this plan, which were $17.1 million as at Normal Course Issuer Bid (“NCIB”) historically targeted a dividend rate that December 31, 2018. Toromont believes that, from time to time, approximates 30 - 40% of trailing earnings A key assumption in pension accounting the purchase of its common shares at from continuing operations. is the discount rate. This rate is set with prevailing market prices may be a worthwhile During 2018, the Company declared regard to the yield on high-quality investment and in the best interests of both dividends of $0.92 per common share, corporate bonds of similar average Toromont and its shareholders. As such, the $0.23 per quarter (2017 - $0.76 per duration to the cash flow liabilities of the normal course issuer bid with the TSX was common share or $0.19 per quarter). Plans. Yields are volatile and can deviate renewed in 2018. This issuer bid allows the Considering the Company’s solid financial significantly from period to period. Company to purchase up to approximately position and positive long-term outlook, the 7.0 million of its common shares, Board of Directors announced an increase to Off-balance Sheet Arrangements representing 10.0% of common shares in the the quarterly dividend to 27 cents per share Other than the Company’s operating public float, in the twelve-month period effective with the dividend payable on April 3, leases, the Company does not have any ending August 30, 2019. The actual number 2019. This represents a 17.4% increase in off-balance sheet arrangements that have, of shares purchased and the timing of any Toromont’s regular quarterly cash or are reasonably likely to have, a current or such purchases will be determined by dividend. The Company has paid dividends future effect on its results of operations or Toromont. All shares purchased under the every year since going public in 1968 and financial condition. bid will be cancelled. this represents the 30th consecutive year it During the year ended December 31, 2018, has announced an increase. Legal and Other Contingencies the Company purchased and cancelled Due to the size, complexity and nature of 237,952 common shares for $12.8 million the Company’s operations, various legal (average cost of $53.83 per share, including matters are pending. Exposure to these transaction costs). No shares were claims is mitigated through levels of purchased and cancelled in 2017. Liquidity and Capital Resources Sources of Liquidity Toromont’s liquidity requirements can be maturing in October 2022. The $250.0 encumbrances. The Company was in million drawn on the term facility in 2017 compliance with all covenants at December met through a variety of sources, including was repaid in full during 2018. Standby 31, 2018 and 2017. cash generated from operations, long- and letters of credit utilized $29.9 million of the Cash at December 31, 2018, was $345.4 short-term borrowings and the issuance of revolving facility (2017 - $26.7 million). million, compared to $160.5 million at common shares. Borrowings are obtained Also in October 2017, the Company December 31, 2017. through a variety of senior debentures, issued senior unsecured debentures The Company expects that continued notes payable and committed long-term (“Debentures”) in the principal amount of cash flows from combined operations in credit facilities. $500.0 million which mature in 2027 and 2019, cash on hand and currently available Toromont’s debt portfolio is unsecured, bear interest at a rate of 3.842% per credit facilities will be more than sufficient unsubordinated and ranks pari passu. annum, payable semi-annually. to fund requirements for investments in To partially fund the aforementioned These credit arrangements include working capital and capital assets. acquisition on October 27, 2017, the covenants, restrictions and events of Company expanded and extended its default usually present in credit facilities of committed unsecured credit facility to this nature, including requirements to meet include a term facility of $250.0 million and certain financial tests periodically and a revolving facility of $500.0 million, restrictions on additional indebtedness and 31 Principal Components of Cash Flow Cash from operating, investing and financing activities, as reflected in the Consolidated Statements of Cash Flows, are summarized in the following table: ($ 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 Increase (decrease) in cash in the year Cash, end of year 2018 2017 $ 160,507 $ 188,735 395,281 236,050 (125,148) 506,183 258,322 70,010 (66,822) 261,510 2,475 (979,978) (323,985) 690,492 254 184,927 (252) (28,228) $ 345,434 $ 160,507 Cash Flows from Operating Activities Cash Flows from Investing Activities Cash Flows from Financing Activities Operating activities provided significantly Investing activities provided $2.5 million Financing activities used $324.0 million in higher cash flow in 2018 compared to 2017. in 2018 compared to $980.0 million used 2018 versus $690.5 million provided in 2017. The higher cash generated from in 2017. To partially fund the acquisition of operations reflect the increased cash The majority of the cash invested in Toromont QM in 2017, the Company issued earnings generated by both Toromont QM 2017 was to fund the acquisition of senior debentures of $500.0 million and and at the legacy businesses. Toromont QM, including a final working drew $250.0 million against its term credit Non-cash working capital and other capital adjustment of $42.7 million which facility. Debt issuance costs of $5.6 million provided significantly higher cash in 2018, was collected from the vendor in 2018 were also incurred. During 2018, the mainly as a result of higher accounts (refer to note 25 of the notes to the Company repaid the $250.0 million drawn payable and accrued liabilities, higher consolidated financial statements for on the term credit facility. income taxes payable and lower accounts further information). Other significant sources and uses of receivables, partially offset by higher Investments in property, plant and cash in 2018 included: inventories, lower deferred revenues and equipment, net of disposition proceeds, • Dividends paid to common shareholders contract liabilities and the unfavorable were $40.0 million in 2018 versus $34.1 of $71.4 million or $0.88 per share impact of the fair value on derivative million in 2017 as follows: (2017 - $58.9 million or $0.75 per share); financial instruments. • $18.5 million for service vehicles • Cash received on exercise of share Net rental fleet additions (purchases less (2017 - $12.5 million); proceeds of dispositions) were higher mainly • $11.4 million for machinery and options of $12.2 million (2017 - $6.8 million); and due to investments at Toromont QM to grow equipment (2017 - $2.7 million); • Normal course purchases and the fleet (up $51.1 million). At Legacy • $5.2 million for land and buildings cancellations of 237,952 common Toromont, net additions were $7.3 million for new and expanded branches shares at an average cost of $53.83, higher. The Company continues to invest (2017 - $15.5 million); and including transaction costs, for heavily in this very important rental segment • $4.9 million for upgrades and $12.8 million (2017 – $nil). to address strong retail demand signals. enhancements to information The components and changes in technology infrastructure and furniture non-cash working capital are discussed in and fixtures (2017 - $3.4 million). more detail in this MD&A under the heading Included in the net property, plant and “Consolidated Financial Condition”. equipment additions above were $16.7 million at Toromont QM versus $2.7 million for the two months of ownership last year. 32 Outlook The expansion of our territories to include momentum driven by the larger installed substantially increased base of installed Québec and Atlantic Canada is proving to base of equipment working in the field, equipment bodes well for future product be transformative to the long-term providing a measure of stability in a support activity. performance of Toromont. It provides a variable business environment. The CIMCO’s increasing installed base and substantial growth platform and Company continues to hire technicians in long-term product support levels are strengthens our Company by providing a anticipation of an increase in demand, positive signals for future growth trends. large contiguous operating platform including the opportunity for increased CIMCO has a wide product offering using extending across all of Eastern and Central equipment rebuilds and readying used iron. natural refrigerants including innovative Canada and into the Far North. Effective Broader product lines, investment in rental CO2 solutions, which remains a execution will be required to realize on this equipment and developing product support differentiator in recreational markets. In significant potential for a greater combined technologies supporting remote industrial markets, CIMCO’s proven track presence in key Canadian economic diagnostics and telematics are expected to record and strong geographical coverage sectors such as mining, construction and contribute to longer-term growth. provides continued growth opportunities. power systems, combined with the growing The long-term outlook for infrastructure Tariffs implemented this year have not rental services and material handling projects and other construction activity had a material, direct impact to Toromont’s markets. Focus is currently on safety of our remains positive across most territories. businesses. people, customer deliverables, business The Company has experienced good The diversity of the markets served, integration, operational excellence growth in mining product support this year. expanding product offering and services, initiatives and transition to generate Production continues at existing mine sites, financial strength and disciplined operating favorable long-term returns. generating meaningful product support culture position the Company for continued The Equipment Group’s parts and opportunities and incremental equipment growth in the long term. service business continues to provide sales to facilitate mine expansion. The 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 2019 2020 2021 2022 2023 Thereafter Total $ 1,022 24,811 $ — 24,775 $ — 24,775 $ — 24,775 $ — 24,775 $ 650,000 $ 651,022 207,057 83,146 935,037 12,895 — 8,764 — 5,325 — 3,115 — 4,285 — 1,166 935,037 35,550 $ 973,765 $ 33,539 $ 30,100 $ 27,890 $ 29,060 $ 734,312 $ 1,828,666 33 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 2018 2017 2016 2015 2014 Expanding markets and broadening product offerings Revenue growth Revenue per employee (thousands) 49.1% $ 578 $ 22.9% 487 3.5% $ 533 $ 11.2% 537 $ 4.2% 501 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) 60.4% 16.3% 7.6% 24.2% 12.4% $ 27.4 $ 21.7% 15.0 21.5% $ 15.2 $ 24.5% 14.0 24.3% $ $ 309.5 $ 18% 16.35 $ 608.8 40% 13.89 $ $ 388.5 $ -4% 11.29 $ 421.3 10% 9.95 39.4% 21.1% 22.3% 11.6% 5.6% 19.3% 6.3% 5.9% 20.0% 8.5% 13.3% 21.6% $ $ $ 13.4 26.0% 335.4 6% 8.65 7.6% 15.4% 23.0% (1) Defined in the sections titled “Additional GAAP Measures and Non-GAAP Measures.” Measuring Toromont’s results against these strategies over the past five years illustrates that the Company has delivered consistent, steady growth. The addition of Toromont QM bolstered these key performance measures in 2018, a trend that is expected to continue in the near and long term. Included in the table above were two months of operations at Toromont QM in 2017 which increased the income statement metrics presented for that year and conversely diluted the balance sheet metrics. The Company estimated that most metrics in 2017 improved versus 2016 for the legacy businesses. The 2018 amounts shown above include one full year of results at Toromont QM and would affect the comparability of results versus the prior years. In relation to the legacy businesses only, since 2014, revenues increased at an average annual rate of 7.0%, with product support growing at 11.4% annually. Over this period, revenue growth has been mainly a result of: Increased customer demand in certain • market segments, most notably construction and mining; • Additional product offerings over the years from Caterpillar and other suppliers; • Organic growth through increased • rental fleet size and additional branches; Increased customer demand for formal product support agreements; • Governmental funding programs such as the RinC program which provided support for recreational spending; and • Acquisitions, primarily within the Equipment Group’s rental operations and through business combinations in the agricultural space. Over the same five-year period, revenue growth has been constrained at times by a number of factors including: • General economic weakness and uncertainty in specific sectors; • Competitive conditions; • Inability to source equipment from suppliers to meet customer demand or delivery schedules; and • Declines in underlying market conditions such as depressed US industrial markets and Manitoba agricultural markets. Changes in the Canadian/US exchange rate also affect reported revenues as the exchange rate impacts the purchase price of equipment that, in turn, is reflected in selling prices. Since 2014 there have been fluctuations in the average yearly exchange rate of Canadian dollar against the US dollar – 2014 - US$0.91, 2015 - US$0.78, 2016 - US$0.75, 2017 - US$0.77 and 2018 - US$0.77. Toromont has generated a significant competitive advantage over the past years by investing in its resources, in part to increase productivity levels. We will continue this into the future as it is a crucial element to our success in the marketplace. Toromont continues to maintain a strong balance sheet. Leverage, as represented by the ratio of net debt to total capitalization was 18% at the end of 2018 versus 40% at the end of 2017. Toromont has paid dividends consistently since 1968 and has increased the dividend in each of the last 30 years. The regular quarterly dividend rate was increased 21.1% from $0.19 per share to $0.23 per share in 2018 and a further 17.4% to $0.27 per share in 2019, evidencing our commitment to delivering exceptional shareholder value. 34 Consolidated Fourth Quarter Operating Results Three months ended December 31 ($ thousands, except per share amounts) 2018 2017 $ change % change Revenues Cost of goods sold $ 966,047 722,581 $ 822,766 630,652 $ 143,281 91,929 17% 15% 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 243,466 121,837 121,629 6,550 (2,488) 117,567 32,669 $ $ 84,898 1.04 $ $ 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 25.2% 12.6% 12.6% 27.8% 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% 51,352 16,304 35,048 (238) (851) 36,137 10,375 25,762 0.31 $ $ 27% 15% 40% (4%) 52% 44% 47% 44% 43% Results in the fourth quarter reflect solid package sales margins as a consequence in the Equipment Group. Operating income execution in the legacy Equipment Group of a specific adjustment. margin for the legacy businesses increased together with the contribution at Toromont Selling and administrative expenses 70 bps to 14.2%. QM. Results at CIMCO were lower on increased $16.3 million. Incremental Interest expense decreased $0.2 million an inventory adjustment recorded in expenses at Toromont QM were $11.1 or 4% in the quarter and benefitted from the quarter. million. Acquisition-related costs were $3.1 the lower average debt balances resulting Revenues grew $143.3 million or 17%. million lower while mark-to-market from the repayment of the $250.0 million Toromont QM’s fourth quarter revenues adjustments on DSUs represented a $3.9 term credit facility in 2018. were $356.7 million versus $242.6 million million reduction to expenses. Interest income increased $0.9 million for the two months last year and $361.7 Compensation costs accounted for the on higher investment income resulting million, pro forma for the full fourth quarter majority of the remaining increase together from higher average cash balances held of 2017, including revenues generated at the with an increase in the allowance for throughout the year and higher interest predecessor organization. The legacy doubtful accounts (up $1.6 million). As a from conversions of RPOs. businesses were up $29.2 million or 5%, percentage of revenues, expenses net of The effective income tax rate for the with growth in the Equipment Group (up 7%) Toromont QM and acquisition-related fourth quarter was 27.8% compared to offsetting softness at CIMCO (down 5%). expenses were 90 bps higher than last year 27.4% in 2017. The increase is substantially Gross profit margin increased 190 bps at 11.5%. due to the higher proportion of income to 25.2% in the quarter. Legacy Equipment Operating income increased $35.0 earned in the higher tax jurisdictions, Group reported higher equipment and million reflecting the incremental although this is expected to be mitigated in product support margins across the contribution at Toromont QM, net of coming years as Québec continues to phase business while CIMCO recorded lower acquisition-related costs, and solid growth in reductions in the corporate tax rates. 35 Net earnings in the quarter were up 44% to $84.9 million with EPS tracking the increase at $0.31 to $1.04. The following table identifies the components of contributions to the fourth results versus last year: Three months ended December 31 Net earnings Basic EPS(a) ($ millions, except per share amounts) 2018 2017 % change 2018 2017 % change Legacy Toromont (b) Toromont QM (c) Acquisition-related interest expense and integration-related costs (e) Dilutive impact of acquisition shares (d) $ 67.2 21.4 $ 56.8 8.3 (3.7) – (6.0) – 18% nm nm – $ 0.85 0.27 $ 0.72 0.11 (0.05) (0.03) (0.07) (0.03) 18% nm nm – As reported $ 84.9 $ 59.1 44% $ 1.04 $ 0.73 43% (a) Separately identifies impact of shares issued at acquisition for year-over-year comparability. (b) Defined as all businesses continuing from prior to the acquisition. (c) Defined as all businesses acquired October 27, 2017. (d) EPS impact of 2.2 million shares issued on acquisition to total net earnings. (e) Expenses shown net of taxes. Legacy Toromont net earnings and EPS grew 18%. 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 Product support Power generation Total revenues Operating income Bookings ($ millions) 2018 2017 $ change % change $ 341,497 101,773 103,093 546,363 324,641 2,864 $ 308,528 69,219 90,039 467,786 255,763 2,462 $ 32,969 32,554 13,054 78,577 68,878 402 $ 873,868 $ 726,011 $ 147,857 $ 115,741 $ 423 $ $ 75,434 328 $ $ 40,307 95 11% 47% 14% 17% 27% 16% 20% 53% 29% Key ratios: Product support revenues as a % of total revenues Operating income margin Group total revenues as a % of consolidated revenues 37.1% 13.2% 90.5% 35.2% 10.4% 88.2% The legacy operations revenues increased $361.7 million pro forma for the full fourth at the predecessor organization. $33.8 million or 7% with growth across all quarter of 2017, including one month from Total legacy equipment sales (new and revenue streams. Toromont QM the predecessor organization. Similar to used) increased $14.8 million or 6%. Higher contributed $356.7 million, versus $242.6 the comments for the full year above, focus sales into construction (up 15%), power million generated at Toromont for the two in this section will be on comparable basis systems (up 35%) and agriculture markets months of operations post-acquisition, and which will include the one month of overlap (up 79%) were partially offset by lower 36 mining sales (down 51%). At Toromont QM, total equipment sales of $188.1 million represented a decrease of $8.2 million or 4% versus the pro forma total equipment sales for the fourth quarter revenues last year, mainly as a result of lower mining sales, which were partially offset by increases across the other segments. Mining sales can vary substantially from period to period due to the timing of deliveries. Rental revenues at the legacy businesses increased $6.3 million or 9%. All rental segments reported growth, led by light equipment (up 8%), power (up 33%), heavy rentals (up 6%) and equipment on rent with a purchase option (up 3%). Toromont QM rental revenues of $25.4 million represented a decrease of $4.8 million or 16% versus the pro forma revenues in 2017. Product support revenues at the legacy businesses increased $12.3 million or 7% on higher parts (up 4%) and service (up 15%). Activity levels were good across most segments, notably in mining and construction. Toromont QM product support revenues of $143.1 million represented an increase of 6% versus the pro forma revenues 2017 with higher parts (up 3%) and service (up 17%). Power generation revenues were $2.9 million versus $2.5 million last year on higher electricity output at the Sudbury Hospital plant. Gross margins increased 250 bps in the quarter versus last year, principally due to higher equipment and product support margins at the legacy businesses. Selling and administrative expenses increased by $16.1 million, largely reflecting the incremental expenses at Toromont QM (up $11.1 million). At the legacy businesses, higher compensation costs and allowance for doubtful accounts accounted for the majority of the increase. As a percentage of revenues, selling and administrative expenses at the legacy businesses were up 90 bps. Operating income was up $40.3 million in the quarter. Operating income in the legacy businesses increased $13.5 million or 20% and was 170 bps higher as a percentage of revenues at 15.6%, largely reflecting the higher margins and revenues, partially offset by the higher expense ratio. Bookings at the legacy businesses increased $15.0 million or 6% to $257.0 million, reflecting higher mining, construction and agriculture orders, partially offset by lower power systems orders. Toromont QM bookings were $166.0 million for the three months in 2018 versus $86.0 million for the two months in 2017. CIMCO Three months ended December 31 ($ 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 $ $ $ $ 2018 50,931 41,248 92,179 5,888 37 44.7% 6.4% 9.5% 2017 $ change % change $ $ $ $ (13,710) 9,134 (4,576) (5,259) 11 (21%) 28% (5%) (47%) 44% $ $ $ $ 64,641 32,114 96,755 11,147 26 33.2% 11.5% 11.8% CIMCO results were dampened in the fourth quarter by an inventory write-down. Translation of US operations did not have a significant impact on results. Package revenues were down $13.7 million or 21% versus the record levels last year, approximately two-thirds of which related to lower US sales. Canadian revenues were lower by 10% as higher industrial sales (up 9%) were more than offset by lower recreational sales (down 35%). In the US, both market segments experienced significant growth in the fourth quarter last year which were not repeated. Despite this however, fourth quarter revenues in the US were relatively in line with the previous five-year average. Product support revenues grew $9.1 million or 28% to record levels for a fourth quarter in both Canada (up 28%) and the US (up 29%). Gross margins decreased 440 bps in the quarter. The inventory write-down of $6.0 million recorded in the fourth quarter largely accounted for the erosion, partially offset by a favorable sales mix of product support revenues to total revenues (44.7% versus 33.2% in 2017). Selling and administrative expenses were relatively in line with last year for similar reasons outlined earlier for the year-to-date commentary. As a percentage of revenues, selling and administrative expenses were up 80 bps as a percentage of revenues (11.9% versus 11.1% last year). Operating income was lower by $5.3 million or 47% in 2018, mainly due to the inventory write-down. Despite this however, operating income was relatively in line with the previous five-year average which included the record last year. As a percentage of revenues, operating income was 6.4%. Bookings increased $11.0 million or 44% to $37.0 million on strong orders in both Canada and the US. Recreational orders were up in both Canada and the US, while industrial orders increased only in the US. 37 Quarterly Results The following table summarizes unaudited quarterly consolidated financial data for the eight most recently completed quarters. This quarterly information is unaudited but has been prepared on the same basis as the 2018 annual audited consolidated financial statements. ($ thousands, except per share amounts) Q1 2018 Q2 2018 Q3 2018 Q4 2018 Revenues Equipment Group CIMCO Total revenues Net earnings $ 612,971 63,857 $ 874,120 87,147 $ 800,128 99,966 $ 873,868 92,179 $ 676,828 $ 961,267 $ 900,094 $ 966,047 $ 30,779 $ 67,610 $ 68,697 $ 84,898 Per share information: Basic earnings per share Diluted earnings per share Dividends paid per share Weighted average common shares outstanding – basic (in thousands) $ $ $ 0.38 0.38 0.19 $ $ $ 0.83 0.83 0.23 $ $ $ 0.84 0.84 0.23 $ $ $ 1.04 1.03 0.23 80,976 81,131 81,383 81,427 ($ 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 Interim period revenues and earnings This pattern is impacted by the timing of construction schedules due to winter historically reflect variability from quarter to significant sales to mining and other weather. Revenues increase in subsequent quarter due to seasonality. The acquisition customers, resulting from the timing of quarters as construction schedules ramp in the fourth quarter of 2017 also affects mine site development and access, and up. This trend can be, and has been, comparability on a year-over-year basis. construction project schedules. The impacted somewhat by significant The Equipment Group has historically Company is still in the process of gathering governmental funding initiatives and had a distinct seasonal trend in activity data and analyzing the dynamics of the significant industrial projects. levels. Lower revenues are recorded during customers, industries and economic Historically, inventories have increased the first quarter due to winter shutdowns in climates of the acquired territories and through the year to meet the expected the construction industry. The fourth does not expect the historical trend to be demand for higher deliveries in the third quarter had typically been the strongest impacted; however more analysis is needed and fourth quarters of the fiscal year. This due in part to the timing of customers’ before arriving at a conclusion. capital investment decisions, delivery of CIMCO has also had a distinct seasonal seasonal sales trend also leads accounts receivable to be at their highest level at equipment from suppliers for customer- trend in results historically, due to timing of year end. specific orders and conversions of construction activity. Lower revenues are equipment on rent with a purchase option. recorded during the first quarter on slower 38 Selected Annual Information ($ thousands, except per share amounts) 2018 2017 2016 Revenues Net earnings Earnings per share (“EPS”) Basic Diluted Dividends declared per share $ 3,504,236 $ 251,984 $ 2,350,162 $ 175,970 $ 1,912,040 $ 155,748 $ $ $ 3.10 3.07 0.92 $ $ $ 2.22 2.20 0.76 $ 2,866,945 $ 895,747 79.1 $ $ $ 1.99 1.98 0.72 $ 1,394,212 $ 152,528 78.1 Total assets Total long-term debt Weighted average common shares outstanding – basic (in millions) $ 3,234,531 $ 645,562 81.2 Revenues grew 49% in 2018. Toromont QM Toromont QM, the legacy Equipment Group increase - in 2016 by 5.9% to $0.18 per contributed $1.3 billion in its first full year delivered good results, which served to share, in 2017 by 5.6% to $0.19 per share, of operations in 2018, versus $242.6 million offset weaker results at CIMCO and the in 2018 by 21.1% to $0.23 per share and in for the two months of ownership in 2017. higher net interest expense as a result of 2019 by 17.4% to $0.27 per share. The The legacy businesses revenues increased the additional debt incurred to partially Company has paid dividends every year 6% on good growth in the Equipment Group fund the acquisition in 2017. In 2017, net since 1968. and CIMCO, both buoyed by good product earnings had increased 13%, reflecting Total assets increased 13% in 2018 after support growth. In 2017, revenues had higher revenues and a relatively lower more than doubling in 2017 (up 106%). The increased 23%, inclusive of the two months expense ratio, in addition to the Company continues to invest in strategic of operations at Toromont QM noted above, incremental impact of the acquisition. opportunities and assets to drive and with the legacy businesses growing 10% on EPS have generally tracked earnings sustain the earnings growth experienced. good sales execution in the Equipment with basic EPS increasing 39% in 2018 and Long-term debt had increased in 2017 to Group and at CIMCO, underpinned by 12% in 2017. partially fund the acquisition. The decrease continued product support growth. Dividends have generally increased in 2018 mainly represents repayment of the Net earnings increased 43% in 2018. In in proportion to trailing earnings growth. amounts drawn on the term credit facility addition to the incremental net earnings at The quarterly dividend rate continues to at that time. 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 of Toromont QM Risks and uncertainties exist related to the acquisition, 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; 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 the acquisition will depend in part on whether the operations, systems, management and cultures can be integrated in an efficient and effective manner. While progress regarding certain operational and strategic decisions with respect to the combined organization has been made, other decisions remain and some may not have been identified. These decisions and the integration 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 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 39 business confidence, commodity prices, corporate profits, credit conditions and the availability of capital to finance purchases. Toromont’s customers are typically affected, to varying degrees, by these factors and trends in the general business cycle within their respective markets. As a result, Toromont’s financial performance is affected by the impact of such business cycles on the Company’s customer base. Commodity prices, and, in particular, changes in the view on long-term trends, affect demand for the Company’s products and services in the Equipment Group. Commodity price movements in base and precious metals sectors in particular can have an impact on customers’ demands for equipment and service. With lower commodity prices, demand is reduced as development of new projects is often stopped and existing projects can be curtailed, both leading to less demand for heavy equipment. The business of the Company is diversified across a wide range of industry market segments, serving to temper the effects of business cycles on consolidated results. Continued diversification strategies such as expanding the Company’s customer base, broadening product offerings and geographic diversification are designed to moderate business cycle impacts. The Company has focused on the sale of specialized equipment and ongoing support through parts distribution and skilled service. Product support growth has been, and will continue to be, fundamental to the mitigation of downturns in the business cycle. The product support business contributes significantly higher profit margins and is typically subject to less volatility than equipment supply activities. Product and Supply The Equipment Group purchases most of its equipment inventories and parts from Caterpillar under a dealership agreement that dates back to 1993. As is customary in distribution arrangements of this type, the agreement with Caterpillar can be terminated by either party upon 90 days’ notice. In the event Caterpillar terminates, it must repurchase substantially all inventories of new equipment and parts at cost. Toromont has maintained an excellent relationship with Caterpillar since inception 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 amounts on the statement of financial position represent 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. 40 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 both 2018 and 2017. 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, 2018, the Company’s outstanding debt of $651.0 million was all fixed-rate. Fixed-rate debt amortizes or matures between 2019 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. The Company’s revolving credit facility of $500.0 million is a floating-rate debt which exposes the Company to fluctuations in short-term interest rates by causing related interest payments and finance expense to vary. At December 31, 2018, no amounts were drawn on this facility while standby letters of credit utilized $29.9 million. 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, are 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. 41 Significant Accounting Policies and Estimates The preparation of the Company’s consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities, at the end of the reporting period. However, uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of the asset or liability affected in future periods. In making estimates and judgments, management relies on external information and observable conditions where possible, supplemented by internal analysis as required. Management reviews its estimates and judgments on an ongoing basis. In the process of applying the Company’s accounting policies, management has made the following judgments, estimates and assumptions which have the most significant effect on the amounts recognized in the consolidated financial statements. The critical accounting policies and estimates affect the operating segments similarly, and therefore are not discussed on a segmented basis. The Company’s significant accounting policies, estimates and assumptions are described in notes 1 and 2 of the notes to the consolidated financial statements. Changes in Accounting Policies Effective January 1, 2018, the Company adopted IFRS 15 - Revenue from Contracts with Customers, IFRS 9 - Financial Instruments and amendments to IFRS 2 - Share-based payment. The impact upon adoption of these standards and amendments are described in full in note 1 of the notes to the consolidated financial statements. Pending Accounting Changes A new standard (IFRS 16 – Leases) and an interpretation (IFRIC 23 - Uncertainty over Income Tax Treatments) have been issued but were not yet effective for the financial year ending December 31, 2018, and accordingly, have not been applied in preparing the consolidated financial statements. The effect of this new standard and interpretation, together with effective dates are discussed in note 1 of the notes to the consolidated financial statements. Controls and Procedures Disclosure Controls and Procedures Management, under the supervision of the President and Chief Executive Officer (“CEO”) and Executive Vice President and Chief Financial Officer (“CFO”), is responsible for establishing and maintaining disclosure controls and procedures, as defined in National Instrument 52-109 – Certification of Disclosure in Issuers’ Annual and Interim Filings, and have designed such disclosure controls and procedures, or have caused it to be designed under their supervision, to provide reasonable assurance that material information with respect to Toromont is made known to them. The CEO and the CFO, together with other members of management, have evaluated the effectiveness of the Company’s disclosure controls and procedures. Based on that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as at December 31, 2018. Internal Control over Financial Reporting Management, under the supervision of the CEO and CFO, is responsible for establishing and maintaining adequate internal control over financial reporting, as defined by National Instrument 52-109 – Certification of Disclosure in Issuers’ Annual and Interim Filings, and have designed such internal control over financial reporting, or caused it to be designed under their supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements in accordance with IFRS. The CEO and the CFO, together with other members of management, have evaluated the effectiveness of the Company’s internal control over financial reporting as at December 31, 2018, using the criteria set forth in Internal Control - Integrated Framework (2013 edition) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on that evaluation, the CEO and CFO concluded that the Company’s internal control over financial reporting was effective as at December 31, 2018. There have been no changes in the design of the Company’s internal control over financial reporting during 2018 that would materially affect, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements on a timely basis. Also, a projection of the evaluation of the effectiveness of internal control over financial reporting to future periods is subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to the financial statement preparation and presentation. Internal controls over financial reporting may not prevent all errors and fraud. A control system, no matter how well conceived or operated, can only provide reasonable, not absolute, assurance that the objectives of the control system are met. 42 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 $ 2018 84,898 6,550 (2,488) 32,669 $ 2017 59,136 6,788 (1,637) 22,294 2018 2017 $ 251,984 30,643 (8,918) 95,865 $ 175,970 12,277 (4,659) 65,994 Operating income $ 121,629 $ 86,581 $ 369,574 $ 249,582 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 2018 2017 $ 644,540 1,022 345,434 $ 893,806 1,941 160,507 300,128 735,240 1,327,679 1,124,727 $ 1,627,807 $ 1,859,967 18% 0.23:1 40% 0.65:1 43 Non-GAAP Measures Management believes that providing certain non-GAAP measures provides users of the Company’s consolidated financial statements with important information regarding the operational performance and related trends of the Company’s business. By considering these measures in combination with the comparable IFRS measures set out below, management believes that users are provided a better overall understanding of the Company’s business and its financial performance during the relevant period than if they simply considered the IFRS measures alone. The non-GAAP measures used by management do not have any standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other issuers. Accordingly, these measures should not be considered as a substitute or alternative for net income or cash flow, in each case as determined in accordance with IFRS. 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 2018 2017 $ 1,779,100 1,125,194 $ 1,475,701 708,327 $ 653,906 $ 767,374 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 2018 2017 $ 1,779,100 345,434 $ 1,475,701 160,507 1,433,666 1,315,194 1,125,194 1,022 1,124,172 708,327 1,941 706,386 $ 309,494 $ 608,808 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 times: Ending share price at December 31 Market capitalization Long-term debt Current portion of long-term debt less: Cash Net debt 2018 2017 81,226 54.26 $ 80,950 55.10 $ $ 4,407,344 $ 4,460,335 $ 644,540 1,022 345,434 $ 300,128 893,806 1,941 160,507 735,240 Total enterprise value $ 4,707,472 $ 5,195,575 44 Key Performance Indicators (“KPIs”) Management uses key performance indicators to consistently measure performance against the Company’s priorities across the organization. The Company’s KPIs include gross profit margin, operating income margin, order bookings and backlogs, return on capital employed and return on equity. Although some of these KPIs are expressed as ratios, they are non-GAAP financial measures that do not have a standardized meaning under IFRS and may not be comparable to similar measures used by other issuers. 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 backlogs as a measure of projecting future equipment deliveries. There are no directly comparable IFRS measures for order bookings or backlogs. Return on Capital Employed (“ROCE”) ROCE is utilized to assess both current operating performance and prospective investments. The adjusted earnings 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”) 2018 2017 $ 251,984 30,643 (8,918) 3,461 95,865 $ 175,970 12,277 (4,659) 2,308 65,994 $ 373,035 $ 251,890 $ 1,720,921 $ 1,171,449 21.7% 21.5% 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 2018 2017 $ 251,984 $ 175,970 $ 1,130,947 $ 909,715 22.3% 19.3% 45 Management’s Report The preparation and presentation of the assurance that transactions are appropriately determining that management fulfils its Company’s consolidated financial authorized, assets are safeguarded from responsibilities in the preparation of the statements is the responsibility of loss or unauthorized use and financial consolidated financial statements and the management. The financial statements records are properly maintained to provide financial control of operations. The Audit have been prepared in accordance with reliable information for preparation of the Committee recommends the independent International Financial Reporting Standards consolidated financial statements. auditors for appointment by the as issued by the International Accounting Ernst & Young LLP, an independent firm shareholders. It meets regularly with Standards Board and necessarily include of Chartered Professional Accountants, financial management and the internal and estimates. The consolidated financial were appointed by the shareholders external auditors to discuss internal statements reflect amounts which must, of as external auditors to examine the controls, auditing matters and financial necessity, be based on the best estimates consolidated financial statements in reporting issues. The independent auditors and judgment of management. Information accordance with generally accepted have unrestricted access to the Audit contained in the Company’s Management’s auditing standards in Canada and provide Committee. The consolidated financial Discussion and Analysis is consistent, an independent professional opinion. Their statements and Management’s Discussion where applicable, with that contained in the report is presented with the consolidated and Analysis have been approved by the consolidated financial statements. financial statements. Board of Directors, based on the review and Management maintains appropriate The Board of Directors, acting through recommendation of the Audit Committee. systems of internal control. Policies and an Audit Committee comprised solely of procedures are designed to give reasonable independent directors, is responsible for Scott J. Medhurst President and Chief Executive Officer Paul R. Jewer Executive Vice President and Chief Financial Officer February 14, 2019 Toronto, Canada 46 Independent Auditor’s Report To the Shareholders of Toromont Industries Ltd. We have audited the consolidated financial Our opinion on the consolidated liquidate the Group or to cease operations, statements of Toromont Industries Ltd. and financial statements does not cover the or has no realistic alternative but to do so. its subsidiaries (the Group), which comprise other information and we do not express Those charged with governance are the consolidated statements of financial any form of assurance conclusion thereon. responsible for overseeing the Group’s position as at December 31, 2018 and 2017, In connection with our audit of the financial reporting process. the consolidated income statements, the consolidated financial statements, our consolidated statements of comprehensive responsibility is to read the other Auditor’s Responsibilities for the Audit of income, consolidated statements of information, and in doing so, consider the Consolidated Financial Statements changes in equity and consolidated whether the other information is materially Our objectives are to obtain reasonable statements of cash flows for the years then inconsistent with the consolidated financial assurance about whether the consolidated ended, and notes to the consolidated statements or our knowledge obtained in financial statements as a whole are free financial statements, including a summary the audit or otherwise appears to be from material misstatement, whether due of significant accounting policies. materially misstated. to fraud or error, and to issue an auditor’s In our opinion, the accompanying We obtained Management’s Discussion report that includes our opinion. consolidated financial statements present & Analysis prior to the date of this auditor’s Reasonable assurance is a high level of fairly, in all material respects the report. If, based on the work we have assurance, but is not a guarantee that an consolidated financial position of the Group performed, we conclude that there is a audit conducted in accordance with as at December 31, 2018 and 2017, and its material misstatement of this other Canadian generally accepted auditing consolidated financial performance and its information, we are required to report that standards will always detect a material consolidated cash flows for the years then fact in this auditor’s report. We have misstatement when it exists. ended in accordance with International nothing to report in this regard. Misstatements can arise from fraud or error Financial Reporting Standards (“IFRS”). The Annual Report is expected to be and are considered material if, individually made available to us after the date of this or in the aggregate, they could reasonably Basis for opinion auditor’s report. If based on the work we be expected to influence the economic We conducted our audit in accordance with will perform on this other information, we decisions of users taken on the basis of Canadian generally accepted auditing conclude there is a material misstatement of these consolidated financial statements. standards. Our responsibilities under those other information, we are required to report As part of an audit in accordance with standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of this report. We are independent of the Group that fact to those charged with governance. Canadian generally accepted auditing standards, we exercise professional Responsibilities of Management and judgment and maintain professional Those Charged with Governance for the skepticism throughout the audit. We also: in accordance with the ethical requirements Consolidated Financial Statements • Identify and assess the risks of material that are relevant to our audit of the Management is responsible for the misstatement of the consolidated consolidated financial statements in Canada, preparation and fair presentation of the financial statements, whether due to and we have fulfilled our other ethical consolidated financial statements in fraud or error, design and perform audit responsibilities in accordance with these accordance with IFRS, and for such internal procedures responsive to those risks, requirements. We believe that the audit control as management determines is and obtain audit evidence that is evidence we have obtained is sufficient and necessary to enable the preparation of sufficient and appropriate to provide a appropriate to provide a basis for our opinion. consolidated financial statements that are basis for our opinion. The risk of not free from material misstatement, whether detecting a material misstatement Other information due to fraud or error. resulting from fraud is higher than for Management is responsible for the other In preparing the consolidated financial one resulting from error, as fraud may information which comprises: statements, management is responsible for involve collusion, forgery, intentional • Management’s Discussion & Analysis assessing the Group’s ability to continue as omissions, misrepresentations, or the • The information other than the a going concern, disclosing, as applicable, override of internal control. consolidated financial statements and matters related to going concern and using • Obtain an understanding of internal our auditor’s report thereon, in this the going concern basis of accounting control relevant to the audit in order to Annual Report unless management either intends to design audit procedures that are 47 appropriate in the circumstances, but statements or, if such disclosures are direction, supervision and performance not for the purpose of expressing an inadequate, to modify our opinion. Our of the Group audit. We remain solely opinion on the effectiveness of the conclusions are based on the audit responsible for our audit opinion. Group’s internal control. evidence obtained up to the date of our We communicate with those charged • Evaluate the appropriateness of auditor’s report. However, future events with governance regarding, among other accounting policies used and the or conditions may cause the Group to matters, the planned scope and timing reasonableness of accounting cease to continue as a going concern. of the audit and significant audit findings, estimates and related disclosures made • Evaluate the overall presentation, including any significant deficiencies in by management. structure, and content of the internal control that we identify during • Conclude on the appropriateness of consolidated financial statements, our audit. management’s use of the going concern including the disclosures, and whether We also provide those charged with basis of accounting and, based on the the consolidated financial statements governance with a statement that we have audit evidence obtained, whether a represent the underlying transactions complied with relevant ethical material uncertainty exists related to and events in a manner that achieves requirements regarding independence, and events or conditions that may cast fair presentation. to communicate with them all relationships significant doubt on the Group’s ability • Obtain sufficient appropriate audit and other matters that may reasonably be to continue as a going concern. If we evidence regarding the financial thought to bear on our independence, and conclude that a material uncertainty information of the entities or business where applicable, related safeguards. exists, we are required to draw attention activities within the Group to express an The engagement partner on the audit in our auditor’s report to the related opinion on the consolidated financial resulting in this independent auditor’s disclosures in the consolidated financial statements. We are responsible for the report is Don Linsdell. Ernst & Young LLP Chartered Professional Accountants Licensed Public Accountants February 14, 2019 Toronto, Canada 48 Consolidated Statements of Financial Position As at December 31 ($ thousands) Assets Current assets Cash Accounts receivable Inventories Income taxes receivable 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 and contract liabilities Current portion of long-term debt Derivative financial instruments Income taxes payable Total current liabilities Deferred revenues and contract liabilities Long-term debt Post-employment obligations Deferred tax liabilities Shareholders’ equity Share capital Contributed surplus Retained earnings Accumulated other comprehensive income Shareholders’ equity Total liabilities and shareholders’ equity Commitments - see note 22 See accompanying notes Approved by the Board: Note 2018 2017 3 4 12 5 5 6 15 7 8 9 10 12 9 10 19 15 11 $ 345,434 522,462 873,507 118 27,647 9,932 $ 160,507 528,748 777,524 536 — 8,386 1,779,100 1,475,701 412,776 541,530 13,206 1,610 486,309 412,535 469,342 17,206 411 491,750 $ 3,234,531 $ 2,866,945 $ 935,037 24,382 136,244 1,022 23 28,486 1,125,194 17,247 644,540 104,342 15,529 457,800 12,879 851,049 5,951 $ 540,821 22,436 137,129 1,941 5,260 740 708,327 18,750 893,806 121,335 — 444,427 10,290 669,813 197 1,327,679 1,124,727 $ 3,234,531 $ 2,866,945 Robert M. Ogilvie Director Wayne S. Hill Director 49 Consolidated Income Statements Years ended December 31 ($ thousands, except share amounts) Note 2018 2017 Revenues Cost of goods sold Gross profit Selling and administrative expenses 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 4,5 $ 3,504,236 2,640,835 $ 2,350,162 1,794,213 863,401 493,827 369,574 30,643 (8,918) 347,849 95,865 555,949 306,367 249,582 12,277 (4,659) 241,964 65,994 $ 251,984 $ 175,970 $ $ 3.10 3.07 $ $ 2.22 2.20 81,231,282 81,975,310 79,091,706 79,907,470 14 14 15 16 16 16 16 50 Consolidated Statements of Comprehensive Income Years ended December 31 ($ thousands) Net earnings Other comprehensive income (loss), net of income taxes: Items that may be reclassified subsequently to net earnings: 2018 2017 $ 251,984 $ 175,970 Foreign currency translation adjustments 789 (716) Unrealized gains (losses) on derivatives designated as cash flow hedges Income tax (expense) recovery Unrealized gains (losses) on cash flow hedges, net of income taxes Realized (gains) losses on derivatives designated as cash flow hedges Income tax expense (recovery) Realized (gains) losses on cash flow hedges, net of income taxes Items that will not be reclassified subsequently to net earnings: Actuarial and other gains (losses) Income tax expense (recovery) Actuarial and other gains (losses), net of income taxes Other comprehensive income (loss) Total comprehensive income See accompanying notes 8,239 (2,144) 6,095 (1,528) 398 (1,130) 20,652 (5,413) 15,239 (5,946) 1,548 (4,398) 3,211 (836) 2,375 (6,765) 1,758 (5,007) 20,993 (7,746) $ 272,977 $ 168,224 51 Consolidated Statements of Cash Flows Years ended December 31 ($ thousands) Note 2018 2017 Operating activities Net earnings Items not requiring cash: Depreciation and amortization Stock-based compensation Post-employment obligations Deferred income taxes Interest accretion on repayment of term credit facility Gain on sale of rental equipment and property, plant and equipment 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 Decrease (increase) in other assets Business acquisition Cash provided by (used in) investing activities Financing activities Issue of senior debentures Drawings on term credit facility Repayment of term credit facility Repayment of senior debentures Debt issuance costs Dividends Cash received on exercise of stock options Shares purchased for cancellation Cash (used in) provided by financing activities Effect of currency translation on cash balances Increase (decrease) in cash Cash, at beginning of year Cash, at end of year Supplemental cash flow information (note 21) See accompanying notes 5,7,10 18 10 21 5 5 25 10 10 10 11 11 $ 251,984 $ 175,970 141,535 5,101 3,659 7,171 821 (14,990) 395,281 236,050 (149,650) 24,502 89,705 3,502 448 10,287 — (21,590) 258,322 70,010 (102,343) 35,521 506,183 261,510 (49,504) 9,506 42,473 — (37,317) 3,185 (42,950) (902,896) 2,475 (979,978) — — (250,000) (1,941) — (71,434) 12,198 (12,808) (323,985) 254 184,927 160,507 500,000 250,000 — (1,811) (5,597) (58,858) 6,758 — 690,492 (252) (28,228) 188,735 $ 345,434 $ 160,507 52 Consolidated Statements of Changes in Equity Share Capital Accumulated other comprehensive income Foreign currency ($ thousands, except share numbers) Number Contributed surplus Amount Retained earnings adjustments translation Cash flow hedges Total Total At January 1, 2017 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 Net earnings Other comprehensive income Total comprehensive income — — — — — — — — 251,984 15,239 — 789 4,965 5,754 251,984 20,993 — 267,223 789 4,965 5,754 272,977 Exercise of stock options Stock-based compensation expense Stock options exercised 514,516 — — 14,710 — — — 5,101 (2,512) Effect of stock compensation plans 514,516 14,710 2,589 — — — — Shares purchased for cancellation Dividends (237,952) — (1,337) — — — (11,471) (74,516) — — — — — — — — — — — — — — — — — — 14,710 5,101 (2,512) 17,299 (12,808) (74,516) At December 31, 2018 81,226,383 $ 457,800 $ 12,879 $ 851,049 $ 2,700 $ 3,251 $ 5,951 $ 1,327,679 See accompanying notes 53 Notes to the Consolidated Financial Statements December 31, 2018 ($ thousands except where otherwise indicated) 1. Description of Business and Significant Accounting Policies Corporate Information except for derivative instruments that applied to those inputs, which together are Toromont Industries Ltd. (the “Company” have been measured at fair value. The or will be used to create outputs. However, a or “Toromont”) is a limited company consolidated financial statements are business need not include all of the inputs or incorporated and domiciled in Canada presented in Canadian dollars and all values processes that the seller used in operating whose shares are publicly traded on the are rounded to the nearest thousand, that business if the Company is capable of Toronto Stock Exchange under the symbol except where otherwise indicated. Certain acquiring the business and continuing to TIH. The registered office is located at 3131 balances in the comparative numbers of the produce outputs, for example, by integrating Highway 7 West, Concord, Ontario, Canada. statements of financial position have been the business with their own inputs and The Company operates through two reclassified from statements previously processes. If the transaction does not meet business segments: the Equipment Group presented to conform to the presentation of the criteria of a business, it is accounted for and CIMCO. The Equipment Group includes the 2018 consolidated financial statements. as an asset acquisition. one of the larger Caterpillar dealerships by Business combinations are accounted revenue and geographic territory - spanning Basis of Consolidation for using the acquisition method. The cost of the Canadian provinces of Newfoundland & The consolidated financial statements an acquisition is measured as the aggregate Labrador, Nova Scotia, New Brunswick, include the accounts of the Company and of consideration transferred, measured at Prince Edward Island, Québec, Ontario and its wholly owned subsidiaries. acquisition date fair value. Acquisition costs Manitoba, in addition to most of the territory Subsidiaries are fully consolidated from are expensed as incurred. of Nunavut. The Group includes industry the date of acquisition, being the date on Goodwill is initially measured at cost, leading rental operations, a complementary which the Company obtains control, and being the excess of the cost of the business material handling business and an continue to be consolidated until the date combination over the Company’s share in agricultural equipment business. CIMCO is a that such control ceases. The financial the net fair value of the acquiree’s market leader in the design, engineering, statements of the subsidiaries are prepared identifiable assets, liabilities and contingent fabrication and installation of industrial and for the same reporting period as the parent liabilities. If the cost of acquisition is less recreational refrigeration systems. Both company, using consistent accounting than the fair value of the net assets of the segments offer comprehensive product policies. All intra-group balances, income and subsidiary acquired, the difference is support capabilities. Toromont employs over expenses and unrealized gains and losses recognized directly in the consolidated 6,000 people in more than 150 locations. resulting from intra-group transactions are income statement. eliminated in full upon consolidation. After initial recognition, goodwill is Statement of Compliance measured at cost less any accumulated These consolidated financial statements Business Combinations and Goodwill impairment losses. For the purpose of are prepared in accordance with When determining the nature of an impairment testing, goodwill acquired in a International Financial Reporting Standards acquisition, as either a business combination business combination is, from the (“IFRS”), as issued by the International or an asset acquisition, management defines acquisition date, allocated to each of the Accounting Standards Board (“IASB”). a business as ‘an integrated set of activities Company’s cash-generating units (“CGUs”) These consolidated financial statements and assets that is capable of being that are expected to benefit from the were authorized for issue by the Audit conducted and managed for the purpose of Committee of the Board of Directors on providing a return in the form of dividends, synergies of the combination, irrespective of whether other assets or liabilities of the February 14, 2019. 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 Basis of Preparation members or participants.’ An integrated set part of the operation within that unit is These consolidated financial statements of activities and assets requires two disposed of, the goodwill associated with the were prepared on a historical cost basis, essential elements - inputs and processes operation disposed of is included in the 54 carrying amount of the operation when Cost of work-in-process (contracts) are amortization and accumulated impairment determining the gain or loss on disposal of costs specifically chargeable to customers losses, as applicable. the operation. Goodwill disposed of in this that are deferred in inventories and are Intangible assets with a finite useful life circumstance is measured based on the probable of recovery. are amortized over their estimated useful relative fair values of the operation disposed Cost of inventories includes the transfer lives and are assessed for impairment of and the portion of the CGU retained. of gains and losses on qualifying cash flow whenever there is an indication that the hedges, recognized in other comprehensive intangible assets may be impaired. The Cash and Cash Equivalents income, in respect of the purchase amortization period and the amortization Cash consists of petty cash and demand of inventory. method for intangible assets with finite deposits. Cash equivalents, when applicable, Net realizable value is the estimated useful lives are reviewed at least at the end consist of short-term deposits with an selling price in the ordinary course of of each reporting period. original maturity of three months or less. business, less estimated costs of completion and the estimated costs necessary to make Accounts Receivable the sale. Trade accounts receivable are amounts due from customers for merchandise sold or Property, Plant and Equipment services performed in the ordinary course Property, plant and equipment are recorded of business. If collection is expected in one at cost, net of accumulated depreciation Amortization is recorded as follows: • Customer Relationships – 8 years, straight-line • ERP System – 5 years, straight-line • Customer Order Backlog – specific basis • Patents and Licenses – remaining life, year or less (or in the normal operating cycle and accumulated impairment losses, if any. straight-line of the business, if longer), they are classified Depreciation is recognized principally on as current assets. If not, they are presented a straight-line basis over the estimated Intangible assets with indefinite useful lives as non-current assets. Trade accounts useful lives of the assets. Estimated useful are not amortized, but are tested for receivable are recognized initially at lives range from 20 to 30 years for buildings, impairment annually or when indicators of amounts due, net of impairment for 3 to 10 years for equipment and 20 years for impairment are present. Distribution estimated expected credit loss (allowance power generation assets. Leasehold networks are considered to have an for doubtful accounts). The expense relating improvements and lease inducements are indefinite life based on the terms of the to expected credit loss is included within amortized on a straight-line basis over the distribution rights contracts. The “Selling and administrative expenses” in the term of the lease. Land is not depreciated. assessment of indefinite life is reviewed consolidated income statements. The assets’ residual values, useful lives annually to determine whether the Unbilled receivables represent contract and methods of depreciation are reviewed at indefinite life continues to be supportable. assets related to the Company’s rights to each financial year end and adjusted consideration for work completed but not prospectively, if appropriate. Provisions billed as at the reporting date on the sale of power and energy systems and refrigeration Rental Equipment Provisions are recognized when the Company has a present obligation, legal packages. These are transferred to Rental equipment is recorded at cost, net or constructive, as a result of a past event, receivables when the entitlement to of accumulated depreciation and any it is probable that an outflow of resources payment becomes unconditional. impairment losses. Cost is determined on a embodying economic benefits will be specific-item basis. Rental equipment is required to settle the obligation and a Inventories depreciated to its estimated residual value reliable estimate can be made of the Inventories are valued at the lower of cost over its estimated useful life on a straight- amount of the obligation. and net realizable value. line basis, which ranges from 1 to 10 years. Provisions for warranty costs are Cost of equipment, repair and The assets’ residual values, useful lives recognized when the product is sold or distribution parts and direct materials and methods of depreciation are reviewed service provided. Initial recognition is include purchase cost and costs incurred in at each financial year end and adjusted based on historical experience. bringing each product to its present prospectively, if appropriate. location and condition. Serialized inventory is determined on a specific-item basis. Intangible Assets Financial Instruments Financial assets and liabilities are Non-serialized inventory is determined Intangible assets acquired separately are recognized when the entity becomes a based on a weighted average actual cost. measured on initial recognition at cost. party to the contractual provisions of the Cost of work-in-process includes cost of Intangible assets acquired as part of a instrument. The Company determines the direct materials, labour and an allocation of business acquisition are initially recorded classification of its financial assets and manufacturing overheads, excluding at the acquisition date fair value. Following liabilities at initial recognition or when borrowing costs, based on normal initial recognition, intangible assets are reclassified on the consolidated statements operating capacity. carried at cost less any accumulated of financial position. Financial assets and 55 liabilities are classified in the following remaining amount of change in the fair value simplified approach does not require the measurement categories: i) amortized cost; of liability is recognized in the consolidated tracking of changes in credit risk, but ii) fair value through other comprehensive income statements. Changes in fair value instead requires the recognition of lifetime income (“FVTOCI”); or iii) fair value through attributable to a financial liability’s credit ECLs at all times. Lifetime ECL represents profit and loss (“FVTPL”). Initially, all risk that are recognized in OCI are not the ECL that would result from all possible financial assets and liabilities are subsequently reclassified to the default events over the expected life of a recognized at fair value. Regular-way trades consolidated income statements; instead, financial instrument. of financial assets and liabilities are they are transferred to retained earnings The Company considers the following recognized on the trade date. Transaction upon derecognition of the financial liability. as constituting an event of a default for costs are expensed as incurred except for Financial liabilities that are not: (i) internal credit risk management purposes, loans and receivables and loans and contingent consideration of an acquirer in a as historical experience indicates that borrowings, in which case transaction costs business combination; (ii) held for trading; receivables that meet either of the following are included in the initial cost. or (iii) are designated as FVTPL, are criteria are generally not recoverable: subsequently measured at amortized cost (i) when there is a breach of financial Financial Assets using the effective interest method. covenants by the customer; or Subsequent measurement of financial assets depends on the classification. Derivatives (ii) information developed internally or obtained from external sources The Company has made the following Derivative assets and liabilities are classified indicates that the debtor is unlikely to classifications: as held for trading and are measured at fair pay its creditors, including the • Cash is classified as held for trading and as such is measured at fair value, with value with changes in fair value being Company, in full. included in profit or loss, unless they are changes in fair value being included in designated as hedging instruments, in A financial asset is credit-impaired when one profit or loss. which case changes in fair value are or more events that have a detrimental • Accounts receivable are classified as included in other comprehensive income. impact on the estimated future cash flows of loans and receivables and are recorded that financial asset have occurred. Evidence at amortized cost using the effective Fair Value of Financial Instruments that a financial asset is credit-impaired interest rate method, less provisions for The Company uses the following hierarchy includes observable data about the doubtful accounts. for determining and disclosing the following events: fair value of financial instruments by (i) significant financial difficulty of the The Company assesses, as at each valuation technique: customer; consolidated statement of financial • Level 1 – unadjusted quoted prices (ii) a breach of contract, such as a default position date, whether there is any in active markets for identical assets discussed above; or objective evidence that a financial asset or or liabilities. (iii) it is becoming probable that the a group of financial assets is impaired. • Level 2 – other techniques for which all borrower will enter bankruptcy or other inputs that have a significant effect on financial reorganization. Financial Liabilities the recorded fair value are observable, All financial liabilities are subsequently either directly or indirectly. A financial asset is considered in default measured at amortized cost using the • Level 3 – techniques that use inputs when contractual payments are 90 days effective interest method or at FVTPL. that have a significant effect on the past due. A financial asset may also be Financial liabilities are classified as FVTPL recorded fair value that are not based considered to be in default if internal or when the financial liability is: (i) contingent on observable market data. external information indicates that the consideration of an acquirer in a business Company is unlikely to receive the combination; (ii) held for trading; or (iii) it is Impairment of Financial Assets outstanding contractual amounts in full designated as FVTPL. An allowance for expected credit losses before taking into account any credit For financial liabilities that are (“ECL”) is recognized for all debt instruments enhancements held. A financial asset is designated as FVTPL, the amount of change not held at fair value through profit or loss. written off when there is no reasonable in the fair value of the financial liability that The amount of ECL is updated at each expectation of recovering the contractual is attributable to changes in the credit risk of reporting period to reflect changes in credit cash flows. that liability is recognized in other risk of the respective financial instrument. comprehensive income (“OCI”), unless the As the Company’s financial assets are Derivative Financial Instruments and recognition of the effects of changes in the substantially comprised of trade liability’s credit risk in OCI would create or receivables, a simplified approach is used Hedge Accounting Derivative financial arrangements are used enlarge an accounting mismatch in the for measuring the loss allowance at an to hedge exposure to fluctuations in consolidated income statements. The amount equal to lifetime ECL. The exchange rates. Such derivative financial 56 instruments are initially recognized at fair expected to occur, the cumulative gain recognized impairment losses may no longer value on the date on which a derivative or loss that was reported in other exist or may have decreased. If such contract is entered into and are subsequently comprehensive income is immediately indication exists, the Company estimates measured at fair value. Derivatives are recognized in the consolidated the asset’s recoverable amount. An carried as financial assets when the fair value income statements. is positive and as financial liabilities when the impairment loss is recognized for the amount by which the asset’s carrying fair value is negative. Impairment of Non-financial Assets amount exceeds its recoverable amount. A At inception, the Company designates The Company assesses whether goodwill previously recognized impairment loss is and documents the hedge relationship, or intangible assets with indefinite lives reversed only if there has been a change in including identification of the transaction may be impaired annually during the fourth the assumptions used to determine the and the risk management objectives and quarter, or when indicators of impairment asset’s recoverable amount since the last strategy for undertaking the hedge. The are present. For the purpose of impairment impairment loss was recognized. The Company also documents its assessment, testing, goodwill arising from acquisitions is reversal is limited so that the carrying both at hedge inception and on an ongoing allocated to each of the Company’s CGUs amount of the asset does not exceed its basis, of whether the derivatives that are or group of CGUs expected to benefit from recoverable amount, nor exceed the carrying used in hedging transactions are highly the acquisition. The level at which goodwill amount that would have been determined, effective in offsetting changes in cash flows is allocated represents the lowest level at net of depreciation, had no impairment loss of hedged items. which goodwill is monitored for internal been recognized for the asset in prior years. The Company has designated certain management purposes, and is not higher Such reversal is recognized in the derivatives as cash flow hedges. These are than an operating segment. Intangible consolidated income statements. hedges of firm commitments and highly assets with indefinite lives that do not have probable forecast transactions. The separate identifiable cash flows are also Revenue from Contracts with Customers effective portion of changes in the fair allocated to CGUs or a group of CGUs. Any Revenue from contracts with customers, is value of derivatives that are designated as potential impairment of goodwill or recognized when control of the goods or a cash flow hedge is recognized in other intangible assets is identified by comparing services are transferred to the customer at comprehensive income. The gain or loss the recoverable amount of a CGU or a an amount that reflects the consideration to relating to the ineffective portion is group of CGUs to its carrying value. The which the Company expects to be entitled recognized immediately in the consolidated recoverable amount is the higher of its fair income statements. Additionally: value less costs to sell and its value-in-use. in exchange for those goods or services. • Sale of Equipment – Revenue is recognized when control of the • If a hedge of a forecast transaction subsequently results in the recognition If the recoverable amount is less than the carrying amount, then the impairment loss equipment has been transferred to the of a non-financial asset, the associated is allocated first to reduce the carrying customer. This usually occurs when the gains or losses that were recognized in amount of any goodwill and then to the equipment is delivered or picked up by other comprehensive income are other assets pro-rata on the basis of the the customer. The transaction price is included in the initial cost or other carrying amount of each asset. In documented on the sales invoice and carrying amount of the asset; determining fair value less costs to sell, agreed to by the customer. Payment is • For cash flow hedges other than those recent market transactions are taken into generally due at the time of delivery, as identified above, amounts accumulated account, if available. In assessing value-in- such, a receivable is recognized as the in other comprehensive income are use, the estimated future cash flows are consideration is unconditional and only recycled to the consolidated income discounted to their present value using a the passage of time is required before statements in the period when the pre-tax discount rate that reflects current payment is due. In certain situations, hedged item will affect earnings (for market assessments of the time value of control transfers to the customer instance, when the forecast sale that is money and the risks specific to the asset. through a bill and hold arrangement hedged takes place); Impairment losses are recognized in the when the following criteria are met: (i) • When a hedging instrument expires or is consolidated income statements. there is a substantive reason for the sold, or when a hedge no longer meets The Company bases its impairment arrangement; (ii) the equipment is the criteria for hedge accounting, any calculation on detailed three-year budgets separately identified as belonging to the cumulative gain or loss in other and extrapolated long-term growth rate for customer; (iii) Toromont is no longer comprehensive income remains in other periods beyond the third year. able to use the equipment or direct it to comprehensive income and is recognized For non-financial assets other than another customer; and (iv) the when the forecast transaction is goodwill and intangible assets with indefinite equipment is currently ready for ultimately recognized in the consolidated lives, an assessment is made at each income statements; and reporting date whether there is any physical transfer to the customer. • Sale of Equipment with a Guaranteed • When a forecast transaction is no longer indication of impairment, or that previously Residual Value or Repurchase 57 Commitment – The sale of equipment for which the Company has provided a • Long-term Maintenance Contracts Consideration is given whether there are – Long-term maintenance contracts other promises in a contract with a customer guarantee to repurchase the equipment range from one to five years and are that are separate performance obligations to at a predetermined residual value and customer-specific. These contracts are which a portion of the transaction price date is accounted for as an operating sold either separately or bundled needs to be allocated. In determining the lease in accordance with IAS 17 – Leases. Revenue is therefore recognized over the period extending to the date of the residual guarantee. • Sale of Systems – The Company sells systems, including power and energy together with the sale of equipment to a transaction price for the sale of equipment, customer. These arrangements cover a variable consideration, the existence of range of services from regular significant financing components, non-cash maintenance to major repairs. The consideration, and consideration payable to Company has concluded that these are the customer (if any) are considered. two separate performance obligations facilities and industrial and recreational as each of the promises to transfer Foreign Currency Translation refrigeration systems, which involve the equipment and provide services is The functional and presentation currency design, manufacture, installation and capable of being distinct and separately of the Company is the Canadian dollar. commissioning of longer-term projects identifiable. If the sales are bundled, the Each of the Company’s subsidiaries under the customer’s control and can Company allocates a portion of the determines its functional currency. span from three months to one year. transaction price based on the relative Transactions in foreign currencies are Revenue is recognized progressively stand-alone selling price to each initially recorded at the functional currency based on the percentage-of-completion performance obligation. Customers are rate prevailing at the date of the transaction method. This method is normally invoiced on a periodic basis reflecting or at the average rate for the period when measured by reference to costs incurred the terms of the agreement, generally this is a reasonable approximation. to date as a percentage of the total based on machine hours, with payment Monetary assets and liabilities denominated estimated costs as outlined in the terms of 30 days from invoicing. These in foreign currencies are retranslated at the contract. Payment terms are usually amounts are recognized as deferred functional currency spot rate of exchange as based on set milestones outlined in the revenue. Revenue is recognized as work at the reporting date. All differences are contract. Periodically: (i) amounts are is performed under the contract based taken directly to profit or loss. Non- received in advance of the associated on standard or contract rates. Revenue monetary items that are measured in terms contract work being performed - these from maintenance services is of historical cost in a foreign currency are amounts are recorded as deferred recognized over time, using an input translated using the exchange rates as at revenues; and (ii) revenue is recognized method to measure progress towards the dates of the initial transactions. without issuing an invoice – this entitlement to consideration is recognized as unbilled receivables. Any foreseeable complete satisfaction of the service. • Extended Warranty – Extended warranty may be purchased by a customer at time The assets and liabilities of foreign operations (having a functional currency other than the Canadian dollar) are losses on such projects are recognized of purchase of a machine to provide translated into Canadian dollars at the rate immediately in profit or loss as identified. additional warranty coverage beyond of exchange prevailing at the consolidated • Equipment Rentals – Revenue is the initial one-year standard warranty statement of financial position dates and the accounted for in accordance with IAS 17. covered by the supplier. Extended consolidated income statements are Revenue is recognized on a straight-line warranty generally covers specified translated at the average exchange rate for basis over the term of the agreement. components for a term from 3 to 5 the period. The exchange differences arising Payment terms are generally 30 days years. Extended warranty is normally on translation are recognized in from invoicing. invoiced at time of purchase and accumulated other comprehensive income • Product Support Services – Revenue payment is expected at time of invoicing. in shareholders’ equity. On disposal of a from product support services includes These billings are included in deferred foreign operation, the deferred cumulative the sale of parts and performance of revenue. The Company recognizes amount recognized in equity is recognized service work on equipment. For the sale revenue for extended warranty as work in the consolidated income statements. of parts, revenue is recognized when the is performed under the extended part is shipped or picked-up by the customer. For the servicing of equipment, revenue on both the labour warranty contract using standard rates. • Power Generation – The Company owns and operates power generation plants Share-based Payment Transactions The Company maintains both equity-settled and cash-settled share-based compensation and parts used in performing the work is that sell electricity and thermal power. plans under which the Company receives recognized when the job is completed. Revenue is recognized monthly based on services from employees, including senior Payment terms are generally 30 days set rates as power is consumed. Payment executives and directors, as consideration from invoicing. is due within 30 days of invoicing. for equity instruments of the Company. 58 For equity-settled plans, expense is Income Taxes Toromont as Lessor 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 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 statement 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. Current income tax assets and liabilities Rental income from operating leases is are measured at the amount expected to recognized on a straight-line basis over the be recovered from or paid to the taxation term of the relevant lease. Initial direct costs authorities. incurred in negotiating and arranging an Deferred taxes are provided for, using operating lease are added to the carrying the liability method on temporary amount of the leased asset and recognized differences between the tax bases of assets on a straight-line basis over the lease term. and liabilities and their carrying amounts for financial reporting purposes at the reporting Borrowing Costs date. Deferred tax assets and liabilities are Borrowing costs directly attributable to the measured using enacted or substantively acquisition, construction or production of enacted income tax rates expected to apply an asset that necessarily takes a to taxable income in the years in which substantial period of time to get ready for those temporary differences are expected its intended use or sale are capitalized as to be recovered or settled. The effect on part of the cost of the respective asset. All deferred tax assets and liabilities of a other borrowing costs are expensed in the change in income tax rates is recognized in period they occur. the consolidated income statements in the period that includes the date of substantive Standards Adopted in 2018 enactment. The Company assesses The following standards, amendments and recoverability of deferred tax assets based interpretation to standards were adopted on the Company’s estimates and on January 1, 2018. 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 a) Revenue Recognition IFRS 15 – Revenue from Contracts with Customers (“IFRS 15”), establishes a single comprehensive model for entities to use in shareholders’ equity, are also recognized accounting for revenue arising from directly in shareholders’ equity. contracts with customers. Under IFRS 15, Leases revenue is recognized at an amount that reflects the consideration to which an The determination of whether an entity expects to be entitled in exchange for arrangement is, or contains, a lease is transferring goods or services to a based on the substance of the arrangement customer. The principles in IFRS 15 provide at inception date. Leases that transfer a more structured approach to measuring substantially all of the benefits and risks of and recognizing revenue. ownership of the property to the lessee are The transition to the new standard had classified as finance leases; all other leases no material impact on the measurement or are classified as operating leases. recognition of revenue of prior periods, Classification is re-assessed if the terms of however, additional required disclosures the lease are changed. have been added. The Company elected to Toromont as Lessee apply the standard on a full retrospective basis, whereby the cumulative effect of Operating lease payments are recognized adoption is applied to the earliest as an operating expense in the comparative period presented, which is consolidated income statements on a January 1, 2017. The Company applied straight-line basis over the lease term. certain practical expedients, as permitted Benefits received and receivable as an by the standard in determining the impact incentive to enter into an operating lease on transition. are deferred and amortized on a straight- The Company’s accounting policy for line basis over the term of the lease. revenue recognition is described above in the section titled “Revenue from Contracts 59 with Customers” and is determined to be in compliance with the requirements of IFRS 15. Disclosures relating to contract balances are included in note 3 – Accounts Receivables, note 4 - Inventories and note 9 – Deferred Revenues and Contract Liabilities, respectively. The disaggregation of the Company’s revenues for each reportable segment is disclosed in note 23 – Segmented Information. 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. Adoption of these amendments had no impact on the Company’s financial position or net earnings. c) Financial Instruments IFRS 9 - Financial Instruments (“IFRS 9”) replaces IAS 39 - Financial Instruments: Recognition and Measurement (“IAS 39”). 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. The Company applied IFRS 9 retrospectively, with the initial application date of January 1, 2018. As permitted by the transitional provisions of IFRS 9, the Company elected not to restate comparative figures or note disclosures. Any adjustments to the carrying amounts of financial assets and liabilities at the transition date are to be recognized in the opening retained earnings of the current period. higher finance costs under this new standard, as operating lease expenses are replaced by higher depreciation expense and higher interest expense and a reduction in selling and administrative expenses. No adjustments to the carrying Toromont expects to adopt IFRS 16 using amounts of financial assets and liabilities were required upon adoption of IFRS 9. 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. There was no significant impact on the Company’s financial position. Standard and Interpretation Issued But Not Effective The following standard and interpretation have been issued but are not effective for the financial year ended December 31, 2018, and accordingly, have not been applied in preparing these consolidated financial statements. a) Leases IFRS 16 – Leases, introduces new requirements for the classification and measurement of leases. For lessors, there is little change to the existing accounting in IAS 17. The new standard is effective for annual periods beginning on or after January 1, 2019. The Company expects to recognize higher non-current assets and non-current liabilities recorded on the consolidated statements of financial position. The Company also expects to recognize an increase in depreciation, lower selling, general, and administrative expenses and the modified retrospective approach, using practical expedients, which do not require the restatement of prior period financial information. The cumulative financial effect of the adoption will be recognized as an adjustment to opening retained earnings, with the standard applied prospectively. The Company’s implementation plan is currently on track having selected a software tool for calculating and maintaining lease arrangements, identifying the major types of operating leases - service vehicles and branch facilities, and determining the incremental borrowing rate. The current and final data quantification and implementation phases are underway and the Company is currently in the process of calculating the transition adjustments. b) 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 consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities at the end of the reporting period. However, uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of the asset or liability affected in future periods. In making estimates and judgments, management relies on external information and observable conditions where possible, supplemented by internal analysis as required. Management reviews its estimates and judgments on an ongoing basis. In the process of applying the Company’s accounting policies, management has made 60 the following judgments, estimates and assumptions which have the most significant effect on the amounts recognized in the consolidated financial statements. Sale of Power and Energy Systems and Refrigeration Packages Revenue is recognized over time for the sale of power and energy systems and refrigeration packages. Because of the control transferring over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products and services to be provided. The percentage-of-completion method is used as the measure of progress for these contracts as it best depicts the transfer of assets to the customer, which occurs as costs are incurred on the contracts. Under the percentage-of-completion method, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs of completion of the performance obligation. Revenues are recorded proportionally as costs are incurred. Costs to fulfill include labour, materials and subcontractors’ costs, other direct costs, and an allocation of indirect costs. This method requires management to make a number of estimates and assumptions about the expected profitability of the contract. These factors are routinely reviewed as part of the project management process. Long-term Maintenance Contracts These contracts typically have fixed prices based on either machine hours or cost per hour, with provisions for inflationary and exchange adjustments. Revenue is recognized as work is performed under the contract based on standard or contract rates. Revenue from maintenance services is recognized over time, using an input method to measure progress towards complete satisfaction of the service. Management makes a number of estimates and assumptions surrounding machine usage, machine performance, future parts and labour pricing, manufacturers’ warranty coverage and other detailed factors. These factors are routinely reviewed as part of the project management process. Property, Plant and Equipment and Rental Equipment Depreciation is calculated based on the estimated useful lives of the assets and estimated residual values. Depreciation expense is sensitive to the estimated service lives and residual values determined for each type of asset. Actual lives and residual values may vary depending on a number of factors including technological innovation, product life cycles and physical condition of the asset, prospective use, and maintenance programs. Impairment of Non-financial Assets Judgment is used in identifying an appropriate discount rate and growth rate for the calculations required in assessing potential impairment of non-financial assets. Judgment is also used in identifying the CGUs to which the intangible assets should be allocated, and the CGU or group of CGUs at which goodwill is monitored for internal management purposes. The impairment calculations require the use of estimates related to the future operating results and cash generating ability of the assets. The key assumptions used to determine the recoverable amount for the different groups of CGUs, including a sensitivity analysis, are disclosed and further explained in note 7. Income Taxes Estimates and judgments are made for uncertainties which exist with respect to the interpretation of complex tax regulations, changes in tax laws, and the amount and timing of future taxable income. Inventories Management is required to make an assessment of the net realizable value of inventory at each reporting period. These estimates are determined on the basis of age, stock levels, current market prices, current economic trends and past experience in the measurement of net realizable value. Allowance for Doubtful Accounts The Company makes estimates for allowances that represent its estimate of potential losses in respect of trade receivables. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loss component established for groups of similar assets in respect of losses that may have been incurred but not yet specifically identified. Share-based Compensation The option pricing model used to determine the fair value of share-based payments requires various estimates relating to volatility, interest rates, dividend yields and expected life of the options granted. Fair value inputs are subject to market factors as well as internal estimates. The Company considers historic trends together with any new information to determine the best estimate of fair value at the date of grant. Separate from the fair value calculation, the Company is required to estimate the expected forfeiture rate of equity-settled share-based payments. Post-employment Benefit Plans The Company has defined benefit pension plans and other post-employment benefit plans that provide certain benefits to its employees. Actuarial valuations of these plans are based on assumptions which include discount rates, retail price inflation, mortality rates, employee turnover and salary escalation rates. Judgment is exercised in setting these assumptions. These assumptions impact the measurement of the net employee benefit obligation, funding levels, the net benefit cost and the actuarial gains and losses recognized in other comprehensive income. Acquisitions In a business combination, the Company may acquire certain assets and assume certain liabilities of an acquired entity. The estimate of fair values for these transactions involves judgment to determine the fair values assigned to the tangible and intangible assets (i.e. customer order backlog, client relationships, and distribution networks) acquired and the liabilities assumed on the acquisition. Determining fair value involves a variety of assumptions, including revenue growth rates, expected operating income, and discount rates. During a measurement period, not to exceed one year, adjustments of the initial estimates may be required to finalize the fair value of assets acquired and liabilities assumed. After the measurement period, a revision of fair value may impact the Company’s net income. 61 3. Accounts Receivable Trade receivables Less: Allowance for doubtful accounts Trade receivables – net Unbilled receivables Other receivables 2018 2017 $ 495,615 (19,484) $ 460,946 (10,573) 476,131 28,738 17,593 450,373 18,886 59,489 $ 522,462 $ 528,748 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 25) which was subsequently collected in full during the year ended December 31, 2018. The aging of gross trade receivables were as follows: Current to 90 days Over 90 days Trade receivables The movement in the Company’s allowance for doubtful accounts were as follows: Balance, January 1 Provisions and revisions, net Balance, December 31 The movement in the Company’s unbilled receivables were as follows: Balance, January 1 Transfer from opening balance to trade receivables Increase as a result of changes in the measure of progress Balance, December 31 4. Inventories Equipment Repair and distribution parts Direct materials Work-in-process Work-in-process (contracts) 2018 2017 $ 465,183 30,432 $ 429,229 31,717 $ 495,615 $ 460,946 2018 $ 10,573 8,911 $ 2017 9,700 873 $ 19,484 $ 10,573 2018 $ 18,886 (14,512) 24,364 $ 28,738 2018 2017 $ 548,934 237,843 3,931 71,560 11,239 $ 497,033 196,783 4,048 70,139 9,521 $ 873,507 $ 777,524 The amount of inventory recognized as an expense in cost of goods sold (accounted for other than by the percentage-of-completion method) during 2018 was $2.1 billion (2017 - $1.4 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 $4.8 million was recorded in 2018 (2017 – $0.8 million). 62 5. Property, Plant and Equipment and Rental Equipment Land Buildings Equipment Power Generation Property, Plant and Equipment Rental Equipment Cost January 1, 2018 Additions Disposals Currency translation effects $ 127,703 $ 283,040 $ 188,801 $ 6,330 (3,801) 226 36,661 (9,197) 414 4,094 (2,112) 14 38,922 $ 638,466 47,217 (15,110) 654 132 — — $ 697,433 179,052 (40,450) — December 31, 2018 $ 129,699 $ 285,795 $ 216,679 $ 39,054 $ 671,227 $ 836,035 Accumulated depreciation January 1, 2018 Depreciation charge Depreciation of disposals Currency translation effects $ — $ — — — 77,515 $ 118,857 $ 12,388 (278) 30 26,054 (7,553) 288 29,559 $ 225,931 40,034 (7,831) 317 1,592 — (1) $ 228,091 95,125 (28,711) — December 31, 2018 $ — $ 89,655 $ 137,646 $ 31,150 $ 258,451 $ 294,505 Net book value – December 31, 2018 $ 129,699 $ 196,140 $ 79,033 $ 7,904 $ 412,776 $ 541,530 Land Buildings Equipment Power Generation Property, Plant and Equipment Rental Equipment Cost January 1, 2017 Additions Business acquisition Disposals Currency translation effects $ 50,148 $ 150,656 $ 157,407 $ 4,493 73,266 (193) (11) 12,800 123,698 (3,931) (183) 22,920 19,148 (10,394) (280) 38,849 $ 397,060 40,286 216,112 (14,518) (474) 73 — — — $ 479,556 104,996 169,993 (57,112) — December 31, 2017 $ 127,703 $ 283,040 $ 188,801 $ 38,922 $ 638,466 $ 697,433 Accumulated depreciation January 1, 2017 Depreciation charge Depreciation of disposals Currency translation effects $ — $ — — — 74,344 $ 112,884 $ 6,870 (3,681) (18) 16,529 (10,374) (182) 28,005 $ 215,233 24,953 (14,055) (200) 1,554 — — $ 207,279 61,334 (40,522) — December 31, 2017 $ — $ 77,515 $ 118,857 $ 29,559 $ 225,931 $ 228,091 Net book value – December 31, 2017 $ 127,703 $ 205,525 $ 69,944 $ 9,363 $ 412,535 $ 469,342 During 2018, depreciation expense of $112.6 million was charged to cost of goods sold (2017 - $76.9 million) and $22.6 million was charged to selling and administrative expenses (2017 - $9.4 million). Operating income from rental operations for the year ended December 31, 2018, was $50.2 million (2017 - $38.2 million). 6. Other Assets Equipment sold with guaranteed residual values Other 2018 2017 $ 10,493 2,713 $ 12,464 4,742 $ 13,206 $ 17,206 63 7. Goodwill and Intangible Assets Patents and Customer Licenses Order Backlog ERP System Relationships Customer Distribution Networks Goodwill Total Cost January 1, 2017 Business acquisition December 31, 2017 December 31, 2018 Accumulated amortization January 1, 2017 Amortization December 31, 2017 Amortization December 31, 2018 Net book value – December 31, 2017 December 31, 2018 $ $ $ $ $ $ $ $ 500 $ — $ — $ — 8,691 5,000 — $ 13,669 $ 13,450 $ 27,619 467,040 357,882 80,330 15,137 500 $ 8,691 $ 5,000 $ 15,137 $ 371,551 $ 93,780 $ 494,659 500 $ 8,691 $ 5,000 $ 15,137 $ 371,551 $ 93,780 $ 494,659 118 $ 29 — $ — $ — $ 2,122 333 307 147 $ 29 2,122 $ 2,520 333 $ 307 $ 1,000 1,892 176 $ 4,642 $ 1,333 $ 2,199 $ — $ — — $ — — $ — $ — — $ — 118 2,791 2,909 5,441 — $ 8,350 353 $ 6,569 $ 4,667 $ 14,830 $ 371,551 $ 93,780 $ 491,750 324 $ 4,049 $ 3,667 $ 12,938 $ 371,551 $ 93,780 $ 486,309 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 Québec/Maritimes Toromont Cat dealership Battlefield Equipment Rentals CIMCO Goodwill Distribution Networks 2018 2017 2018 2017 $ $ 76,270 13,000 4,060 93,330 450 $ $ 76,270 13,000 4,060 $ 352,434 13,669 5,448 $ 352,434 13,669 5,448 93,330 450 $ 371,551 — $ 371,551 — $ 93,780 $ 93,780 $ 371,551 $ 371,551 The Company performed the annual management covering a three-year period. Key Assumptions to Value-in-Use impairment test of goodwill and intangible Cash flows beyond the three-year period Calculations and Sensitivity Analysis assets as at December 31, 2018. The test for were extrapolated using a 2.0% growth rate The calculation of value-in-use is most impairment is to compare the recoverable which represents the expected growth in the sensitive to the following assumptions: amount of the CGU or group of CGUs to Canadian economy. The discount rate • Discount rates their carrying value. Goodwill is tested at the applied to each CGU or group of CGUs to • Growth rate to extrapolate cash flows group of CGUs that represent the lowest determine value-in-use, is a pre-tax rate that beyond the budget period level within the entity at which goodwill is reflects an optimal debt-to-equity ratio and monitored for internal management considers the risk-free rate, market equity Discount rates represent the current purposes that is not larger than an operating risk premium, size premium and the risks market assessment of the risks specific to segment. Intangible assets are assessed for specific to each asset or CGU’s cash flow each CGU, taking into consideration the impairment at the CGU level to which they projections. The pre-tax discount rate time value of money and individual risks of are allocated. The recoverable amounts ranged from 5.9 – 6.3%. As a result of the the underlying assets that have not been have been determined based on a value-in- analysis, management determined there incorporated in the cash flow estimates. use calculation using cash flow projections was no impairment of goodwill or indefinite The discount rate is derived from the CGU’s from financial budgets approved by senior lived intangible assets. weighted average cost of capital, taking 64 into account both debt and equity. the Company is obliged to service. management’s best estimate. The cost of equity is derived from the Segment-specific risk is incorporated by Management believes that within expected return on investment by the applying different debt to equity ratios. reasonably possible changes to any of the Company’s shareholders. The cost of debt Growth rate estimates are based on above key assumptions, recoverable is based on the interest-bearing borrowings published data, historical experiences and amounts exceed carrying values. 8. Provisions Activities related to provisions were as follows: Balance, January 1, 2017 Business acquisition New provisions Charges/credits against provisions Balance, December 31, 2017 New provisions Charges/credits against provisions Warranty $ $ 10,800 1,045 21,940 (20,554) 13,231 24,563 (24,010) $ $ Other 5,294 5,000 1,145 (2,234) 9,205 1,915 (522) $ $ Total 16,094 6,045 23,085 (22,788) 22,436 26,478 (24,532) Balance, December 31, 2018 $ 13,784 $ 10,598 $ 24,382 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, insurance and potential environmental claims, and potential onerous contracts. No one claim is significant. 9. Deferred Revenues and Contract Liabilities Deferred revenues or contract liabilities represent billings to customers in excess of revenue recognized and arise as a result of the sale of equipment with residual guarantees, extended warranty contracts and progress billings on long-term maintenance agreements, sale of power and energy systems and refrigeration packages. During the year ended December 31, 2018, the Company recognized as revenues, $137.1 million of the opening deferred revenues and contract liability balances at January 1, 2018. The Company elected to use the practical expedient to not disclose the Company’s remaining performance obligations as those obligations are part of contracts that have an original expected duration of one year or less. 65 10. Long-term Debt The Company’s debt portfolio is unsecured, unsubordinated and ranks pari passu. 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 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. 2018 2017 $ 1,022 150,000 500,000 $ 2,963 150,000 500,000 651,022 — 651,022 (5,460) 652,963 250,000 902,963 (7,216) $ 645,562 (1,022) $ 895,747 (1,941) $ 644,540 $ 893,806 The Company has a committed revolving To partially fund the business acquisition These credit arrangements include credit facility of $500.0 million, maturing in in 2017 (see note 25), the Company drew covenants, restrictions and events of default October 2022. Interest is based on a floating $250.0 million on a term credit facility which usually present in credit facilities of this rate, primarily bankers’ acceptances, plus was subsequently repaid in full during the nature, including requirements to meet applicable margins and fees based on the year ended December 31, 2018. Unamortized certain financial tests periodically and terms of the credit facility. No amounts were deferred financing costs of $0.8 million restrictions on additional indebtedness drawn on this facility at December 31, 2018 associated with this debt were expensed and and encumbrances. or 2017. Standby letters of credit issued recorded within interest expense on the The Company was in compliance with all utilized $29.9 million (2017 - $26.7 million). consolidated income statement. covenants at December 31, 2018 and 2017. Scheduled principal repayments and interest payments on long-term debt are as follows: 2019 2020 2021 2022 2023 Thereafter $ Principal 1,022 — — — — 650,000 $ Interest 24,811 24,775 24,775 24,775 24,775 83,146 $ 651,022 $ 207,057 Interest expense includes interest on debt initially incurred for a term greater than one year of $30.6 million (2017 - $11.8 million). 11. Share Capital Authorized The Company is authorized to issue an unlimited number of common shares (no par value) and preferred shares. No preferred shares were issued or outstanding for the years ended December 31, 2018 and 2017. A continuity of the shares issued and outstanding for the years ended December 31, 2018 and 2017, is presented in the consolidated statements of changes in equity. Shareholder Rights Plan The Shareholder Rights Plan is designed to encourage the fair treatment of shareholders in connection with any takeover offer for the Company. Rights issued under the plan become exercisable 66 when a person, and any related parties, acquires or commences a takeover bid to acquire 20.0% or more of the Company’s outstanding common shares without complying with certain provisions set out in the plan or without approval of the Company’s Board of Directors. Should such an acquisition occur, each rights’ holder, other than the acquiring person and related parties, will have the right to purchase common shares of the Company at a 50.0% discount to the market price at that time. The Plan expires at the end of the annual meeting of shareholders in 2021. Normal Course Issuer Bid (“NCIB”) Toromont renewed its NCIB program in 2018. The current issuer bid allows the Company to purchase up to approximately 7.0 million of its common shares in the twelve-month period ending August 30, 2019, representing 10.0% of common shares in the public float, as estimated at the time of renewal. The actual number of shares purchased and the timing of any such purchases will be determined by Toromont. All shares purchased under the bid will be cancelled. During the year ended December 31, 2018, the Company purchased and cancelled 237,952 common shares for $12.8 million (average cost of $53.83 per share, including transaction costs) under its NCIB program. No shares were purchased and cancelled in 2017. Dividends The Company paid dividends of $71.4 million ($0.88 per share) for the year ended December 31, 2018, and $58.9 million ($0.75 per share) for the year ended December 31, 2017. Subsequent to the year ended December 31, 2018, the Board of Directors approved a quarterly dividend of $0.27 per share payable on April 3, 2019, to shareholders on record at the close of business on March 8, 2019. 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 assets: Foreign exchange forward contracts 2018 2017 1,022 $ $ 644,540 1,941 $ $ 893,806 $ 27,624 $ (5,260) 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 2018 2017 $ 655,575 $ 651,022 $ 917,583 $ 902,963 The fair value was determined using the risk. The Company has no plans to prepay of the asset or liability. discounted cash flow method, a generally these instruments prior to maturity. The During the years ended December 31, accepted valuation technique. The valuation is determined using Level 2 inputs 2018 and 2017, there were no transfers discounted factor is based on market rates which are observable inputs or inputs between Level 1 and Level 2 fair value for debt with similar terms and remaining which can be corroborated by observable measurements. maturities and based on Toromont’s credit market data for substantially the full term 67 Derivative Financial Instruments and Hedge Accounting Foreign exchange contracts are transacted with financial institutions to hedge foreign currency denominated obligations related to purchases of inventory and sales of products. As at December 31, 2018, the Company was committed to: (i) US dollar purchase contracts with a notional amount of $553.8 million at an average exchange rate of $1.3084, maturing between January 2019 and February 2020; and (ii) US dollar sell contracts with a notional amount of $31.9 million at an average exchange rate of $1.3097, maturing between January 2019 and April 2020. Management estimates that a net gain of $27.6 million (2017 – loss of $5.3 million) would be realized if the contracts were terminated on December 31, 2018. Certain of these forward contracts are designated as cash flow hedges and, accordingly, an unrealized gain of $4.4 million (2017 – unrealized loss of $2.3 million) has been included in other comprehensive income. These gains will be reclassified to net earnings within the next 12 months and will offset losses recorded on the underlying hedged items, namely foreign- denominated accounts payable. Certain of these forward contracts are not designated as cash flow hedges but are entered into for periods consistent with foreign currency exposure of the underlying transactions. A gain of $23.2 million (2017 – loss of $3.0 million) on these forward contracts is included in net earnings, which offsets losses recorded on the foreign-denominated items, namely accounts payable. All hedging relationships are formally documented, including the risk management objective and strategy. On an ongoing basis, an assessment is made as to whether the designated derivative financial instruments continue to be effective in offsetting changes in cash flows of the hedged transactions. 13. Financial Instruments – Risk Management In the normal course of business, Toromont is exposed to financial risks that may potentially impact its operating results in one or all of its reportable segments. The Company employs risk management strategies with a view to mitigating these risks on a cost-effective basis. Derivative financial agreements are used to manage exposure to fluctuations in exchange rates. The Company does not enter into derivative financial agreements for speculative purposes. Currency Risk The Canadian operations of the Company source the majority of its products and major components from the United States. Consequently, reported costs of inventory and the transaction prices charged to customers for equipment and parts are affected by the relative strength of the Canadian dollar. The Company mitigates exchange rate risk by entering into foreign currency contracts to fix the cost of imported inventory where appropriate. In addition, pricing to customers is customarily adjusted to reflect changes in the Canadian dollar landed cost of imported goods. The Company also sells its products to certain customers in US currency. The Company mitigates exchange rate risk by entering into foreign currency contracts to fix the cash inflows where appropriate. The Company maintains a hedging policy whereby all significant transactional currency risks are identified and hedged. Sensitivity Analysis The following sensitivity analysis is intended to illustrate the sensitivity to changes in foreign exchange rates on the Company’s financial instruments and show the impact on net earnings and comprehensive income. It is provided as a reasonably possible change in currency in a volatile environment. Financial instruments affected by currency risk include cash, accounts receivable, accounts payable and derivative financial instruments. As at December 31, 2018, a 5.0% weakening/(strengthening) of the Canadian dollar against the US dollar would result in a $1.0 million (decrease)/increase in OCI for financial instruments held in foreign operations, and a $2.2 million increase/ (decrease) in net earnings and $4.1 million (decrease)/increase in OCI for financial instruments held in Canadian operations. Credit Risk Financial instruments that potentially subject the Company to credit risk consist of cash, accounts receivable and derivative financial instruments. The carrying amount of assets included on the consolidated statements of financial position represents the maximum credit exposure. 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 customers engaged in various industries including mining, construction, food and beverage, and governmental agencies. These specific customers may be affected by economic factors that may impact accounts receivable. Management does not believe that any single customer represents significant credit risk. Credit risk concentration with respect to trade receivables is mitigated by the Company’s large customer base. The credit risk associated with derivative financial instruments arises from the possibility that the counterparties may default on their obligations. In order to minimize this risk, the Company enters into derivative transactions only with highly rated financial institutions. Interest Rate Risk The Company minimizes its interest rate risk by managing its portfolio of floating- and fixed-rate debt, as well as managing the term to maturity. The Company may use derivative instruments such as interest rate swap agreements to manage its current and anticipated exposure to interest rates. There were no interest rate swap agreements outstanding as at December 31, 2018 or 2017. The Company had no floating rate debt outstanding as at December 31, 2018 (2017 - $250.0 million). Liquidity Risk Liquidity risk is the risk that the Company may encounter difficulties in meeting 68 obligations associated with financial liabilities. As at December 31, 2018, the Company had unutilized lines of credit of $470.1 million (2017 - $473.3 million). Accounts payable are primarily due within 90 days and will be satisfied from current working capital. The Company expects that continued cash flows from operations in 2019, together with currently available cash on hand and credit facilities, will be more than sufficient to fund its requirements for investments in working capital, capital assets and dividend payments through the next 12 months, and that the Company’s credit ratings provide reasonable access to capital markets to facilitate future debt issuance. 14. Interest Income and Expense The components of interest expense were as follows: Credit facilities Senior debentures Interest accretion on repayment of term credit facility The components of interest and investment income were as follows: Equipment on rent with purchase options Other 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 $ 2018 4,553 25,269 821 $ 2017 2,381 9,896 — $ 30,643 $ 12,277 2018 3,461 5,457 8,918 $ $ 2017 2,308 2,351 4,659 $ $ 2018 2017 $ 88,196 7,669 $ 55,699 10,295 $ 95,865 $ 65,994 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 2018 26.5% 2017 26.5% $ 92,180 $ 64,120 1,619 (65) 2,286 (1,267) 200 912 973 (171) 1,565 (655) 249 (87) $ 95,865 $ 65,994 27.6% 27.3% 69 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 sources of deferred income taxes were as follows: Accrued liabilities Deferred revenues and contract liabilities Accounts receivable Inventories Deferred tax assets on current assets and current liabilities Capital assets Goodwill and intangible assets Other Cash flow hedges in other comprehensive income Post-employment obligations Deferred tax (liabilities) on non-current assets and non-current liabilities $ 2018 16,656 3,503 4,157 5,392 29,708 (44,139) (6,375) 1,119 (1,141) 6,909 (43,627) $ 2017 16,857 1,869 2,241 5,216 26,183 (36,375) 1,428 926 604 7,645 (25,772) Net deferred tax (liabilities) assets $ (13,919) $ 411 The movement in net deferred income taxes were as follows: Balance, January 1 Tax expense recognized in income Foreign exchange and others Tax (expense) recovery recognized in other comprehensive income Balance, December 31 $ 2018 411 (7,669) 498 (7,159) $ 2017 5,610 (10,295) 2,626 2,470 $ (13,919) $ 411 The aggregate amount of unremitted earnings in the Company’s subsidiaries was $20.4 million (2017 - $19.4 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 2018 2017 $ 251,984 $ 175,970 81,231,282 744,028 79,091,706 815,764 Diluted weighted average common shares outstanding 81,975,310 79,907,470 Earnings per share Basic Diluted $ $ 3.10 3.07 $ $ 2.22 2.20 For the calculation of diluted earnings per share for the year ended December 31, 2018, 584,250 (2017 – 514,550) outstanding stock options with a weighted average exercise price of $66.22 (2017 - $53.88) were considered anti-dilutive (exercise price in excess of average market price during the year) and, as such, were excluded from the calculation. 70 17. Employee Benefits Expense Wages and salaries Other employment benefit expenses Stock-based compensation expense Pension costs 2018 2017 $ 558,759 74,094 5,101 31,033 $ 368,497 57,937 3,502 17,321 $ 668,987 $ 447,257 18. Stock-based Compensation The Company maintains a stock option shall not exceed 1.0% of the outstanding market prices of the common shares at the program for certain employees. Under the shares as of the beginning of the year in date the option is granted. Stock options plan, up to 7.0 million options may be which a grant is made (2018 – 809,498). granted in 2013 and after, have a 10-year granted for subsequent exercise in exchange Stock options vest 20.0% per year on term while those granted prior to 2013 have for common shares. It is the Company’s each anniversary date of the grant and are a seven-year term. Toromont accrues policy that the aggregate number of options exercisable at the designated common compensation cost over the vesting period that may be granted in any one calendar year share price, which is fixed at prevailing based on the grant date fair value. A reconciliation of the outstanding options for the years ended December 31, 2018 and 2017, was as follows: Options outstanding, January 1 Granted Exercised (1) Forfeited Options outstanding, December 31 Options exercisable, December 31 2018 2017 Number of Options Weighted Average Exercise Price Number of Options Weighted Average Exercise Price 2,628,036 589,750 (514,516) (67,200) 2,636,070 1,093,480 $ $ $ 34.85 66.22 23.71 45.12 43.78 31.87 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 (1) The weighted average share price at date of exercise for the year ended December 31, 2018, was $60.49 (2017 – $51.65). The following table summarizes stock options outstanding and exercisable as at December 31, 2018. Range of Exercise Prices $20.76 $23.40 – $26.79 $36.65 – $39.79 $53.88 – $66.22 Number 131,090 559,600 873,150 1,072,230 2,636,070 Options Outstanding Options Exercisable Weighted Average Remaining Life (years) Weighted Average Exercise Price Number Weighted Average Exercise Price 0.6 5.2 7.1 9.2 7.2 $ 20.76 25.49 38.29 60.60 131,090 470,080 395,570 96,740 $ 20.76 25.29 37.98 53.88 $ 43.78 1,093,480 $ 31.87 71 The fair value of the stock options granted during 2018 and 2017 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 $ $ 2018 13.31 66.22 5.90 21.0% 1.39% 2.15% $ $ 2017 12.28 53.88 8.06 22.0% 1.41% 1.75% Deferred Share Unit Plan elect, on an annual basis, to receive all or a DSUs. Non-employee directors also receive The Company offers a deferred share unit portion of their performance incentive a portion of their compensation in DSUs. (“DSU”) plan for executives and non- bonus or fees, respectively, in DSUs. In The liability for DSUs is recorded in employee directors, whereby they may addition, the Board may grant discretionary accounts payable and accrued liabilities. The following table summarizes information related to DSU activity: Number of DSUs Value Number of DSUs 2018 Outstanding, January 1 Units taken or taken in lieu and dividends Redemptions Fair market value adjustment 426,279 28,733 (96,861) — $ 23,417 1,647 (5,716) (343) 407,731 35,937 (17,389) — $ 2017 Value 17,265 1,722 (778) 5,208 Outstanding, December 31 358,151 $ 19,005 426,279 $ 23,417 Employee Share Ownership Plan (“ESOP”) the rate of $1 for every $3 contributed, to a - $2.0 million) were charged to selling and The Company offers an ESOP whereby maximum of the greater of 2.5% of an administrative expenses when paid. The employees who meet the eligibility criteria employee’s base salary or $1,000 per ESOP is administered by a third party. can purchase shares by way of payroll annum. Company contributions deductions. There is a Company match at amounting to $2.4 million in 2018 (2017 19. Employee Future Benefits Defined Contribution Plans in the United States. Certain unionized agreements. In the case of defined The Company sponsors pension arrangements employees do not participate in Company- contribution plans, regular contributions are for more than 3,000 of its employees, sponsored plans, and contributions are made made to the individual employee accounts, primarily through defined contribution plans to these retirement programs in accordance which are administered by a plan trustee in in Canada and a 401(k) matched savings plan with the respective collective bargaining accordance with the plan documents. Pre-tax pension expenses recognized in net earnings were as follows: Defined contribution plans 401(k) matched savings plans 72 2018 2017 $ 13,008 305 $ 11,765 281 $ 13,313 $ 12,046 Defined Benefit Plans members of the plan are retired. The Company is not obligated to fund the The Company sponsors funded and Company is not obligated to fund the plans but is obligated to pay benefits unfunded defined benefit pension plans plan but is obligated to pay benefits under the terms of the plan as they come and post-employment benefit plans as under the terms of the plan as they due. The most recent actuarial valuation described below with approximately 2,181 come due. At December 31, 2018, the was completed as at December 31, 2018, qualifying employees. The plans described Company has posted letters of credit in with the next valuation scheduled as at in d) and e) below are plans which were the amount of $17.1 million to secure the December 31, 2019. assumed as part of the business obligations under this plan. The most acquisition described in note 25. recent actuarial valuation was Risks a) Powell Pension Plan – This is a legacy completed as at December 31, 2018, Defined benefit pension plans and other plan whose members were employees of with the next valuation scheduled for post-employment benefit plans expose the Powell Equipment when it was acquired December 31, 2019. Company to risks as described below: by Toromont in 2001. The plan is a c) Other pension plan assets and • Investment risk - The present value of the contributory plan that provides pension obligations – This plan provides for defined benefit plan liability is calculated benefits based on length of service and certain retirees and terminated vested using a discount rate determined by career average earnings. The plan is employees of businesses previously reference to high-quality corporate bond administered by the Toromont Pension acquired by the Company as well as for yields; if the return on plan assets is Management Committee with assets retired participants of the defined below this rate, it will create a plan deficit. held in a pension fund that is legally contribution plan at that time, that, in Currently, the plans have a relatively separate from the Company and cannot accordance with the plan provisions, balanced investment in equity securities, be used for any purpose other than had elected to receive a pension directly debt instruments and real estate assets. payment of pension benefits and related from the plan. The plan is administered The Toromont Pension Management administrative fees. The plan is by a fund that is legally separated from Committee reviews the asset mix and registered with the Province of Manitoba. the Company. The most recent actuarial performance of the plan assets on a Manitoba’s minimum funding regulations valuation was completed on January 1, quarterly basis with the balanced require special payments for Toromont 2017, with the next valuation scheduled investment strategy intention. to amortize any shortfalls of plan assets for January 1, 2020. • Interest rate risk - A decrease in the relative to the cost of settling all accrued d) Québec/Maritimes Pension Plan – The bond interest rates will increase the benefit entitlements through the Company sponsors six contributory plans plan liability; however, this will be purchase of annuities or payments of an that provide pension benefits based on partially offset by an increase in the equivalent lump sum value (solvency length of service and career average plan’s holdings in debt instruments funding basis). Security, in the form of earnings. The plans are now administered • Longevity risk - The present value letters of credit, is permitted in lieu of by the Toromont Pension Management of the defined benefit plan liability some or all of these solvency special Committee with assets held in a pension is calculated by reference to the best payments. If the fair value of defined fund that is legally separate from the estimate of the mortality of plan benefit assets were to exceed 105.0% of Company and cannot be used for any participants both during and after their this solvency funding target, the excess purpose other than payment of pension employment. An increase in the life can be applied to the cost of the defined benefits and related administrative fees. expectancy of the plan participants will benefits and defined contributions in The most recent actuarial valuation was increase the plan’s liability. future periods. The most recent actuarial completed as at December 31, 2017, with • Salary risk - The present value of the valuation was completed as at December the next valuation scheduled as at defined benefit plan liability is calculated 31, 2017, with the next valuation December 31, 2018. by reference to the future salaries of scheduled for December 31, 2018. e) Post-Employment Benefit Plans – These plan participants. As such, an increase b) Executive Pension Plan – The plan is a plans provide supplementary post- in the salary of the plan participants will supplemental pension plan and is solely employment health and life insurance increase the plan’s liability. the obligation of the Company. All coverage to certain employees. The 73 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 Actuarial remeasurement (gains) losses arising from: Experience adjustments Demographic assumptions Changes in financial assumptions Benefits paid Contributions by plan participants Pension Benefit Plans Other Post-Employment Benefit Plans 2018 2017 2018 2017 $ 493,745 — 12,973 16,511 $ 83,370 401,986 3,814 5,274 $ (963) — (31,315) (21,365) 4,963 (699) 99 8,152 (9,375) 1,124 24,858 — 875 827 39 — (1,895) (978) — $ — 24,740 141 140 35 — — (198) — Balance, December 31 $ 474,549 $ 493,745 $ 23,726 $ 24,858 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 Net post-employment obligations $ 397,268 — 13,466 $ 60,800 335,171 4,094 $ $ — — — (13,482) 13,083 4,963 (21,365) 822 4,632 1,124 (9,375) $ 393,933 $ 397,268 $ 80,616 $ 96,477 $ $ — 978 — (978) — 23,726 $ $ — — — — 198 — (198) — 24,858 The funded status of the Company’s defined benefit plans at December 31 was as follows: Powell Plan Executive Plan Québec/Maritimes Plan Québec/Maritimes other post-employment benefits Other plan assets and obligations 2018 2017 Defined Benefit Obligations Plan Assets Net Post- employment Obligations Defined Benefit Obligations Plan Assets Net Post- employment Obligations $ 54,975 17,575 395,818 $ 55,342 — 333,910 $ 367 (17,575) (61,908) $ 57,660 18,368 410,451 $ 56,245 — 335,526 $ (1,415) (18,368) (74,925) 23,726 6,181 — 4,681 (23,726) (1,500) 24,858 7,266 — 5,497 (24,858) (1,769) $ 498,275 $ 393,933 $ (104,342) $ 518,603 $ 397,268 $ (121,335) The significant weighted average actuarial assumptions adopted in measuring the Company’s defined benefit obligations were as follows: Discount rate Expected rate of salary increase 2018 3.89% 3.00% 2017 3.40% 3.47% 74 Pre-tax pension and other post-retirement benefit expenses recognized in net earnings were as follows: Service cost Net interest expense 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 (gains) losses arising from changes in financial assumptions Return on plan assets (excluding amounts included in net interest expense) 2018 $ 13,848 3,872 $ 17,720 $ 2018 (924) — (33,210) 13,482 $ $ $ 2017 3,955 1,320 5,275 2017 (664) 99 8,152 (822) $ (20,652) $ 6,765 The Company’s pension plans weighted average asset allocations by asset category were as follows: Equity securities Debt securities Real estate assets Cash and cash equivalents 2018 58.5% 37.2% 3.7% 0.6% 2017 53.9% 42.5% 2.8% 0.8% The fair values of the plan assets were determined based on the following methods: • Equity securities – generally quoted market prices in active markets. • Debt securities – generally quoted market prices in active markets. • Real estate assets – valued based on appraisals performed by a qualified external real estate appraiser. Real estate assets are located primarily in Canada. • Cash and cash equivalents – generally recorded at cost which approximates fair value. The actual return on plan assets for the year ended December 31, 2018, was $nil (2017 - $4.9 million). The Company expects to contribute $26.0 million to pension and other benefit plans in 2019, inclusive of defined contribution plans. The weighted average duration of the defined benefit plan obligations at December 31, 2018 and 2017, was 14.5 years. Sensitivity Analysis Significant actuarial assumptions for the determination of the defined benefit obligations (“DBO”) are the discount rate and the life expectancy. The sensitivity analyses have been determined based on reasonably possible changes of the respective assumptions occurring at the end of the reporting period, while holding all other assumptions constant. As at December 31, 2018, the following quantitative analysis shows changes to the significant actuarial assumptions and the corresponding impact to the DBO: Actuarial Assumption Sensitivity Period end discount rate 1% increase 1% decrease Pension Benefit Plans $ $ (68,700) 80,526 Mortality Increase of 1 year in expected lifetime of plan participants $ 10,301 Increase (decrease) in DBO Other Post- retirement Benefit Plans $ $ $ (3,402) 4,197 (451) Total (72,102) 84,723 9,850 $ $ $ The sensitivity analysis presented above may not be representative of the actual change in the DBO as it is unlikely that the change in assumptions would occur in isolation of one another as some of the assumptions may be correlated. 75 20. Capital Management The Company defines capital as the optimization of the cost of capital at associated with the timing of cash flows. aggregate of shareholders’ equity and acceptable risk while balancing the Also, if appropriate opportunities are long-term debt, less cash. interests of both equity and debt holders. identified, the Company is prepared to The Company’s capital management The Company generally targets a net significantly increase this ratio depending framework is designed to maintain a debt to total capitalization ratio of 33.0%, upon the opportunity. flexible capital structure that allows for although there is a degree of variability The Company’s capital management criteria can be illustrated as follows: Long-term debt Current portion of long-term debt Less: Cash Net debt Shareholders’ equity Total capitalization Net debt as a % of total capitalization Net debt to equity ratio 2018 2017 $ 644,540 1,022 345,434 $ 893,806 1,941 160,507 300,128 735,240 1,327,679 1,124,727 $ 1,627,807 $ 1,859,967 18% 0.23:1 40% 0.65:1 The Company is subject to minimum capital requirements relating to bank credit facilities and senior debentures. The Company has met these minimum requirements during the years ended December 31, 2018 and 2017. There were no changes in the Company’s approach to capital management during the years ended December 31, 2018 and 2017. 21. Supplemental Cash Flow Information Net change in non-cash working capital and other Accounts receivable Inventories Accounts payable and accrued liabilities Provisions Deferred revenues and contract liabilities Income taxes Derivative financial instruments Other Cash paid during the year for: Interest Income taxes Cash received during the year for: Interest Income taxes 76 2018 2017 $ (36,392) (95,983) 364,019 1,946 (2,388) 28,164 (26,173) 2,857 $ (65,840) (53,232) 162,797 297 33,906 (1,058) 3,722 (10,582) $ 236,050 $ 70,010 $ $ $ $ 28,803 62,054 8,703 2,562 $ $ $ $ 7,863 57,686 4,130 1,705 A reconciliation of liabilities arising from financing activities during the year, was as follows: Balance, January 1, 2017 Cash flows Other Balance, December 31, 2017 Cash flows Other Balance, December 31, 2018 22. Commitments The Company has entered into leases on buildings, vehicles and office equipment. The vehicle and office equipment leases generally have an average life between Current Portion of Long-term Debt Long-term Debt Total $ $ 1,811 (1,811) 1,941 1,941 (1,941) 1,022 $ 150,717 750,000 (6,911) $ 893,806 (250,000) 734 $ 152,528 748,189 (4,970) $ 895,747 (251,941) 1,756 $ 1,022 $ 644,540 $ 645,562 three and five years with no renewal options. The building leases have a maximum lease term of 20 years including renewal options. Some of the contracts include a lease escalation clause, which is usually based on the Consumer Price Index. Future minimum lease payments under non-cancellable operating leases as at December 31, 2018, were as follows: 2019 2020 2021 2022 2023 Thereafter $ 12,895 8,764 5,325 3,115 4,285 1,166 $ 35,550 23. Segmented Information The Company has two reportable segments: the Equipment Group and CIMCO, each supported by the corporate office. These segments are strategic business units that offer different products and services, and each is managed separately. The corporate office provides finance, treasury, legal, human resources and other administrative support to the segments. The accounting policies of each of the reportable segments are the same as the significant accounting policies described in note 1. The operating segments are being reported based on the financial information provided to the Chief Executive Officer and Chief Financial Officer, who have been identified as the Chief Operating Decision Makers (“CODMs”) in monitoring segment performance and allocating resources between segments. The CODMs assess segment performance based on segment operating income, which is measured differently than income from operations in the consolidated financial statements. Corporate overheads are allocated to the segments based on revenue. Income taxes, interest expense, interest and investment income are managed at a consolidated level and are not allocated to the reportable operating segments. Current taxes, deferred taxes and certain financial assets and liabilities are not allocated to the segments as they are also managed on a consolidated level. The aggregation of the operating segments is based on the economic characteristics of the business units. These business units are considered to have similar economic characteristics including nature of products and services, class of customers and markets served and similar distribution models. No reportable segment is reliant on any single external customer. Equipment Group The Equipment Group comprises the following: • Toromont Cat – supplies, rents and provides support services for specialized mobile equipment and industrial engines. • Battlefield Equipment Rentals – supplies and rents specialized mobile equipment as well as specialty supplies and tools. • Toromont Material Handling – supplies, rents and services material handling lift trucks. • AgWest – supplies specialized mobile equipment to the agriculture industry. • Toromont Energy – develops distributed generators and combined heat and power projects using Caterpillar engines. • SITECH – supplies control systems for specialized mobile equipment. 77 CIMCO Provides design, engineering, fabrication, installation, and product support for industrial and recreational refrigeration systems. Corporate Office The corporate office does not meet the definition of a reportable operating segment as defined in IFRS 8 – Operating Segments, as it does not earn revenue. The following table sets forth information by segment for the years ended December 31: Equipment Group CIMCO Consolidated 2018 2017 2018 2017 2018 2017 Equipment/package sales Rentals Product support Power generation $ 1,508,120 378,027 1,264,295 10,645 $ 1,012,208 261,641 746,832 11,270 $ 202,367 — 140,782 — $ 189,212 — 128,999 — $ 1,710,487 378,027 1,405,077 10,645 $ 1,201,420 261,641 875,831 11,270 Total revenues $ 3,161,087 $ 2,031,951 $ 343,149 $ 318,211 $ 3,504,236 $ 2,350,162 Operating income $ 348,876 $ 219,814 $ 20,698 $ 29,768 $ 369,574 $ 249,582 Interest expense Interest and investment income Income taxes Net earnings Selected statements of financial position information: 30,643 (8,918) 95,865 12,277 (4,659) 65,994 $ 251,984 $ 175,970 As at December 31 Identifiable assets Corporate assets Total assets Identifiable liabilities Corporate liabilities Total liabilities Equipment Group CIMCO Consolidated 2018 2017 2018 2017 2018 2017 $ 2,755,039 $ 2,560,610 $ 104,498 $ 101,719 $ 1,091,029 $ 611,730 $ 71,730 $ 76,323 $ 2,859,537 374,994 $ 2,662,329 204,616 $ 3,234,531 $ 2,866,945 $ 1,162,759 744,093 $ 688,053 1,054,165 $ 1,906,852 $ 1,742,218 Capital expenditures (net) $ 162,694 Depreciation $ 133,323 $ $ 99,532 84,922 $ $ 2,452 1,836 $ $ 1,422 $ 165,146 $ 100,954 1,365 $ 135,159 $ 86,287 Operations are based in Canada and the United States. The following tables summarize the final destination of revenues to customers and the capital assets and goodwill held in each geographic segment: Years ended December 31 Canada United States International Revenues As at December 31 Canada United States Capital Assets and Goodwill 78 2018 2017 $ 3,387,552 110,552 6,132 $ 2,252,343 96,666 1,153 $ 3,504,236 $ 2,350,162 2018 2017 $ 1,043,007 5,079 $ 971,339 4,318 $ 1,048,086 $ 975,657 24. Related Party Disclosures Key management personnel and director compensation comprised: Salaries Stock options and DSU awards Annual non-equity incentive based plan compensation Pension All other compensation $ 2018 3,068 2,461 3,400 648 135 $ 2017 3,271 2,169 2,733 647 148 $ 9,712 $ 8,968 The remuneration of directors and key management is determined by the Human Resources Committee having regard to the performance of the individual and Company and market trends. 25. Business Acquisition in 2017 On October 27, 2017, the Company acquired the businesses and net operating assets of the Hewitt Group of Companies 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 Québec 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 expanded 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. 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. The Company acquired the businesses The acquisition was accounted for using and net operating assets in exchange for consideration of $902.9 million cash (net of a final closing working capital adjustment) the purchase method of accounting. The final allocation of the purchase price was as follows: Accounts receivable Inventories Property, plant and equipment Rental equipment Deferred tax asset Intangible asset with an indefinite life: Distribution network Intangible assets with a finite life: ERP system Customer relationships Customer order backlog Accounts payable and accrued liabilities Provisions Deferred revenues and contract liabilities Post-employment benefit obligations Net identifiable assets Residual purchase price allocated to goodwill Total $ 159,539 288,535 216,112 169,993 2,617 357,882 5,000 15,137 8,691 (130,624) (6,045) (51,503) (91,555) 943,779 80,330 $ 1,024,109 26. Economic Relationship The Company, through its Equipment Group, sells and services heavy equipment and related parts. Distribution agreements are maintained with several equipment manufacturers, of which the most significant are with subsidiaries of Caterpillar Inc. The distribution and servicing of Caterpillar products account for the major portion of the Equipment Group’s operations. Toromont has had a strong relationship with Caterpillar since inception in 1993. 79 Ten-Year Financial Review (1) For the years ended December 31 ($ thousands, except ratios and share data) Operating Results Revenues Net earnings Net interest expense (2) Capital expenditures (net) (2) Dividends declared Financial Position Working capital Capital assets Total assets Non-current portion of long-term debt (3)(8)(9) Shareholders’ equity Financial Ratios Working capital Return on opening shareholders’ equity (%) (4) Total debt, net of cash, to shareholders’ equity Per Share Data ($) Basic earnings per share Diluted earnings per share Dividends declared Book value (shareholders’ equity) Shares outstanding at year end (8) Price range (5) High Low Close 2018 2017(7)(8) 2016 2015 2014 2013 2012(6) 2011 2010 2009 3,504,236 2,350,162 1,912,040 1,846,723 1,660,390 1,593,431 1,507,173 1,381,974 1,207,028 1,824,592 251,984 21,725 165,146 74,516 653,906 954,306 3,234,531 644,540 1,327,679 1.6:1 22.3 .23:1 3.10 3.07 0.92 16.35 81,226,383 68.11 46.24 54.26 175,970 7,618 100,954 60,402 767,374 881,877 2,866,945 893,806 1,124,727 2.1:1 19.3 .65:1 2.22 2.20 0.76 13.89 80,949,819 58.44 41.10 55.10 155,748 3,236 85,031 56,280 575,382 454,104 1,394,212 150,717 885,432 2.8:1 20.0 (.04):1 1.99 1.98 0.72 11.29 78,398,456 44.44 27.25 42.35 145,666 5,246 113,911 52,882 486,293 429,824 1,276,077 152,079 775,281 2.6:1 21.6 .11:1 1.88 1.86 0.68 9.95 77,905,821 37.61 26.70 31.55 133,196 4,034 76,893 46,267 294,753 371,661 1,107,802 4,942 668,075 1.7:1 23.0 .07:1 1.73 1.71 0.60 8.65 28.97 24.48 28.51 123,031 4,900 71,267 39,854 356,347 341,152 1,030,555 130,948 576,557 2.2:1 25.7 .11:1 1.61 1.59 0.52 7.50 26.94 21.12 26.65 119,473 5,740 77,245 36,728 302,919 316,925 936,170 158,395 476,575 2.2:1 29.9 .33:1 1.56 1.55 0.48 6.24 25.00 18.61 21.10 246,459 5,798 55,757 36,968 251,122 287,290 913,331 132,815 403,861 1.7:1 28.9 .15:1 3.20 3.18 0.48 5.27 33.25 15.39 21.32 103,912 8,826 49,385 47,716 478,289 556,991 2,271,763 413,040 1,196,838 1.8:1 9.1 .21:1 1.36 1.35 0.62 15.50 32.40 22.86 30.76 120,516 2,460 25,835 38,848 539,264 369,666 1,364,667 144,051 854,063 2.6:1 15.5 (.06):1 1.86 1.86 0.60 13.17 27.80 19.26 27.79 77,259,396 76,844,897 76,407,658 76,629,777 77,149,626 64,867,467 (1) 2010 - 2017 results were prepared in accordance with IFRS. Results for 2009 were prepared in accordance with Canadian GAAP. (2) Figures for 2010 onwards are presented on a continuing operations basis, excluding the spinoff discussed in (5) below. (3) In 2015, debentures totalling $125.0 million matured and as such were shown as “Current portion of long-term debt” in working capital in 2014. (4) 2011 ROE was calculated excluding earnings and equity from discontinued operations. (5) On June 1, 2011, Toromont completed the spinoff of Enerflex. Toromont shareholders received one share of Enerflex for each Toromont share held. (6) The Company adopted revisions to IAS 19 - Employee Benefits, effective January 1, 2013. As a result, certain 2012 amounts were restated - refer to note 1 of the 2013 audited financial statements. (7) The Company completed the acquisition of the businesses and net operating assets of the Hewitt Group of Companies on October 27, 2017 for $1.02 billion - refer to note 25 of the 2018 audited financial statements. (8) Long-term debt and common shares were issued on October 27, 2017, to partially fund the aforementioned acquisition - refer to note 25 of the 2018 audited financial statements. (9) $250.0 million drawn on a term credit facility to partially fund the acquisition in 2017 was fully repaid during the year ended December 31, 2018. 80 Ten-Year Financial Review (1) For the years ended December 31 ($ thousands, except ratios and share data) Operating Results Revenues Net earnings Net interest expense (2) Capital expenditures (net) (2) Dividends declared Financial Position Working capital Capital assets Total assets Shareholders’ equity Financial Ratios Working capital Non-current portion of long-term debt (3)(8)(9) Return on opening shareholders’ equity (%) (4) Total debt, net of cash, to shareholders’ equity Per Share Data ($) Basic earnings per share Diluted earnings per share Dividends declared Book value (shareholders’ equity) Shares outstanding at year end (8) Price range (5) High Low Close 251,984 21,725 165,146 74,516 653,906 954,306 3,234,531 644,540 1,327,679 1.6:1 22.3 .23:1 3.10 3.07 0.92 16.35 68.11 46.24 54.26 175,970 7,618 100,954 60,402 767,374 881,877 2,866,945 893,806 1,124,727 2.1:1 19.3 .65:1 2.22 2.20 0.76 13.89 58.44 41.10 55.10 155,748 3,236 85,031 56,280 575,382 454,104 1,394,212 150,717 885,432 2.8:1 20.0 (.04):1 1.99 1.98 0.72 11.29 44.44 27.25 42.35 145,666 5,246 113,911 52,882 486,293 429,824 1,276,077 152,079 775,281 2.6:1 21.6 .11:1 1.88 1.86 0.68 9.95 37.61 26.70 31.55 81,226,383 80,949,819 78,398,456 77,905,821 (1) 2010 - 2017 results were prepared in accordance with IFRS. Results for 2009 were prepared in accordance with Canadian GAAP. (2) Figures for 2010 onwards are presented on a continuing operations basis, excluding the spinoff discussed in (5) below. (3) In 2015, debentures totalling $125.0 million matured and as such were shown as “Current portion of long-term debt” in working capital in 2014. (4) 2011 ROE was calculated excluding earnings and equity from discontinued operations. (5) On June 1, 2011, Toromont completed the spinoff of Enerflex. Toromont shareholders received one share of Enerflex for each Toromont share held. (6) The Company adopted revisions to IAS 19 - Employee Benefits, effective January 1, 2013. As a result, certain 2012 amounts were restated - refer to note 1 of the 2013 audited financial statements. of the 2018 audited financial statements. (7) The Company completed the acquisition of the businesses and net operating assets of the Hewitt Group of Companies on October 27, 2017 for $1.02 billion - refer to note 25 (8) Long-term debt and common shares were issued on October 27, 2017, to partially fund the aforementioned acquisition - refer to note 25 of the 2018 audited financial statements. (9) $250.0 million drawn on a term credit facility to partially fund the acquisition in 2017 was fully repaid during the year ended December 31, 2018. 2018 2017(7)(8) 2016 2015 2014 2013 2012(6) 2011 2010 2009 3,504,236 2,350,162 1,912,040 1,846,723 1,660,390 1,593,431 1,507,173 1,381,974 1,207,028 1,824,592 133,196 4,034 76,893 46,267 294,753 371,661 1,107,802 4,942 668,075 1.7:1 23.0 .07:1 1.73 1.71 0.60 8.65 77,259,396 28.97 24.48 28.51 123,031 4,900 71,267 39,854 356,347 341,152 1,030,555 130,948 576,557 2.2:1 25.7 .11:1 1.61 1.59 0.52 7.50 76,844,897 26.94 21.12 26.65 119,473 5,740 77,245 36,728 302,919 316,925 936,170 158,395 476,575 2.2:1 29.9 .33:1 1.56 1.55 0.48 6.24 76,407,658 25.00 18.61 21.10 246,459 5,798 55,757 36,968 251,122 287,290 913,331 132,815 403,861 1.7:1 28.9 .15:1 3.20 3.18 0.48 5.27 76,629,777 33.25 15.39 21.32 103,912 8,826 49,385 47,716 478,289 556,991 2,271,763 413,040 1,196,838 1.8:1 9.1 .21:1 1.36 1.35 0.62 15.50 77,149,626 32.40 22.86 30.76 120,516 2,460 25,835 38,848 539,264 369,666 1,364,667 144,051 854,063 2.6:1 15.5 (.06):1 1.86 1.86 0.60 13.17 64,867,467 27.80 19.26 27.79 81 Corporate Information Toromont Cat 3131 Highway 7 West 5001 Trans-Canada Highway P.O. Box 5511 Pointe-Claire, Québec H9R 1B8 Concord, Ontario L4K 1B7 T: 416.667.5511 F: 416.667.5555 www.toromontcat.com T: 514.630.3100 F: 514.630.9020 Battlefield Equipment Rentals 880 South Service Road Stoney Creek, Ontario L8H 7S8 T: 905.577.7777 F: 905.643.6008 www.battlefieldequipment.ca Toromont Material Handling 4000 Trans-Canada Highway Pointe-Claire, Québec H9R 1B2 T: 514.426.6700 F: 514.630.3577 www.toromontmaterialhandling.com AgWest Ltd. Highway #1 West P.O. Box 432 Elie, Manitoba R0H 0H0 T: 204.353.3850 F: 877.353.4343 www.agwest.com CIMCO Refrigeration 65 Villiers Street Toronto, Ontario M5A 3S1 T: 416.465.7581 F: 416.465.8815 www.cimcorefrigeration.com Annual Meeting The Annual Meeting of the Shareholders of Toromont Industries Ltd. will be held at 10:00 am (EST) on Friday, May 3, 2019 at the Toromont Cat offices at 5001 Trans-Canada Highway, Pointe-Claire, Québec H9R 1B8. 82 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, Québec 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 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. c d Toromont Industries Ltd. Corporate Office 3131 Highway 7 West P.0. Box 5511 Concord ON L4K 1B7 Tel: 416 667 5511 www.toromont.com 

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