Toromont Industries Annual Report 2019

Plain-text annual report

BUILDING TOGETHER TOROMONT INDUSTRIES LTD. 2019 ANNUAL REPORT Toromont is a company of 6,500 empowered people working across seven diff erent business units with a variety of product and service off erings, but we do not deﬁ ne ourselves in individual terms. No matter what job we perform or what territory we serve, our success is based on our ability to work collaboratively with each other and our partners in creating value for our customers, shareholders, communities and each other. We are, quite literally, Building Together for an exciting future. Contents 2 Letter to Shareholders 41 Management’s and Independent Auditor’s Reports 9 Environmental, Social and Governance Report 44 Consolidated Financial Statements 16 Corporate Governance 49 Notes to the Consolidated Financial Statements 18 Executive Operating Team 78 Corporate Information 19 Management’s Discussion and Analysis One Toromont Toromont Industries Ltd. (TSX: TIH) is a diversiﬁed growth company employing 6,500 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 Toromont is one of the largest Caterpillar Battleﬁeld – The Cat Rental Store From 68 stores in our Cat dealer CIMCO Refrigeration CIMCO is a leading supplier of refrigeration dealers in the world with 48 branches territories, supported by a rapid equipment and product support services to across seven provinces and one territory. equipment delivery-to-site system, customers in North America’s food, dairy, Through Toromont Cat, we serve the Battleﬁeld addresses the full rental cold storage, beverage, pharmaceutical, specialized heavy equipment, power service and purchase needs of automotive, chemical, petrochemical, generation, heavy rent and product contractors, specialty trades and mining and recreational ice-rink markets. support needs of thousands of public do-it-yourself customers through infrastructure, construction, demolition, its line-up of brand-name machines, paving, mining, aggregate, waste tools and supplies. management, agriculture, forestry, trucking, shipping, transit and data centre customers. Toromont Material Handling From 19 locations across eastern Canada, Toromont Material Handling rents, sells AgWest Ltd. From six facilities, AgWest serves the SITECH Mid-Canada Ltd. SITECH specializes in providing machine and provides after-sales service for leading brand name lift trucks, container handlers, control, site positioning and asset industrial batteries, chargers and racking management technologies as well as systems. This specialized equipment is professional support services as a used by ports and terminals, paper year-round equipment and product Trimble and Cat AccuGrade® dealer producers, automotive parts manufacturers, support needs of Manitoba’s agriculture across eastern Canada. beverage companies, hardware retailers industry as an ofﬁcial dealer of AGCO and CLAAS, two trusted brands for crop and livestock applications. and other customers to safely move, store and protect critical inventories. Jobsite Industrial Rental Services Across seven locations, Jobsite Industrial Rental Services meets the specialized tool crib rental equipment needs of contractors working in reﬁnery industries, healthcare, automotive, steel and pulp and paper. 1 Toromont Annual Report 2019 Letter to Shareholders Fellow Shareholders Toromont embarked on an ambitious journey two years ago to integrate the largest acquisition in its history. The objective was not simply to combine operations and apply business-model discipline; it was to build a new team capable of capitalizing on every strength and every advantage every day for the beneﬁt of customers and shareholders. The journey is far from over but the mile markers of progress in 2019 were unmistakable. Strategically, operationally and ﬁnancially, this was a good year. Toromont earned $3.45 per diluted share, net of a non- recurring gain, on relatively broad-based growth in revenue and disciplined expense management. In a year peppered by complex and time-consuming integration projects, and marked by weaker activity in some markets, bottom-line results attest to the advantage of Toromont’s larger geographic footprint, broader customer base and the diligent efforts of all employees. The increasing proportion of product support and rental revenues to total revenues added to proﬁtability. Continuous re-investment also contributed. In addition to signiﬁcant investments in employees and technologies, over $896 million was allocated to rental ﬂeets, branches and plants over the past ﬁve years including $252 million in 2019. Strategic increases in inventory levels provided better penetration of Toromont’s expanded markets. We view these funds as seed capital that is put to work to grow and nurture Toromont’s competitive advantages. A favoured metaphor is that we are planting an orchard that bears fruit annually, not a wheat ﬁeld. We do, however, expect to achieve hurdle-rate returns. In 2019, return on opening shareholders’ equity was 21.4%. Another year of strong cash generation supported a 17.4% increase in the common share dividend in 2019. With the most recent increase of 14.8% announced in February 2020, Toromont has grown dividends every year since 1989. Payments have been made consistently for 52 years. Toromont’s strong ﬁnancial position supports continued growth and investment. Integration Progress In 2019 (year two of integrating QM operations), the disciplines associated with Toromont’s operating approach began to take hold. Toromont’s branch model was introduced in Québec after a successful roll out in Atlantic Canada in 2018 and provided a solid foundation for decentralized management. 2 Local empowerment, a pre-requisite for the achievement of operational excellence, led to decision-making that was better aligned with customer and market needs and more attuned to the key performance indicators used to manage the business. Well-deserved promotions added to esprit de corps and were consistent with our objective of building a new, energized team. Collaboration within business units contributed to the effective fulﬁllment of complex customer assignments. New locations were opened, sales resources were added and our ﬁrst large technology integration was successfully completed. Progress with our journey also allowed all business units to bring greater focus to their digital strategies, a catch-all phrase for how they employ the wealth of data we collect to improve customer service and enhance marketing and sales. We upgraded our approach to used inventory acquisition and sales given that the unit volume of used equipment sales in some territories can be two to three times higher than new unit sales. Collectively, these activities structured Toromont to more efficiently and effectively pursue growth opportunities across our expanded territories. Proven Steady Growth Toromont’s performance is driven by the actions of our business units. These empowered enterprises serve diverse end-use markets and customers under their own brand names, pursue unique growth and development opportunities and thrive on different levels of capital. However, without exception, our businesses are aligned to Toromont’s model of selling specialized equipment and lifetime product support. They also adhere to our management principles: • • Continuous improvement in all activities to seize and sustain market leadership Preservation of our strong ﬁnancial position and corporate reputation for honest and fair dealing • Alignment with world-leading business partners • Accountability for results realized including employee safety, environmental compliance, revenue growth, customer satisfaction and loyalty, market share and pre-tax return on capital employed Our business model, management principles and ﬁve core strategies – expand markets, strengthen product support, broaden product offerings, invest in resources and people, maintain a strong ﬁnancial position – serve as Toromont’s “true north.” As such, they are constant. What changes are the activities energetically undertaken by our businesses to grow and improve. Our Results 2019 Revenues New & used equipment – 42% Refrigeration equipment – 5% Rentals – 11% Product support – 42% Core Strategies Expand markets Strengthen product support Broaden product offerings Invest in resources & people Maintain a strong ﬁnancial position 3 3 a c a. Jobsite technician Paul Hyatt prepares a diesel welder for use during a reﬁnery turnaround. Jobsite recently opened its ﬁrst facility in New Brunswick. b. Brock University recently updated its highly efficient district energy plant with the help of Toromont Power Systems and four Cat G3516H generator sets. c. Toromont Cat’s Rogéna Aboud tests a ﬂuid sample at our recently consolidated, ISO-certiﬁed laboratory in Pointe-Claire. b 4 4 Net debt to total capitalization 18% 2018 15% 2019 21.4% Return on opening shareholders’ equity, on higher earnings 150+ Locations a b Toromont Cat encountered a cautious new capital spending environment in some core markets in 2019, but took advantage of its diversiﬁed platform and customer demand for product support to deliver positive results. The adoption of the traditional branch business model in acquired territories, alongside investments in the heavy equipment rental ﬂeet led to improved market penetration and greater participation in customer projects. Standardization of best practices across construction, power systems and mining groups contributed to the goal of achieving a consistent “One Toromont” experience for customers. To align with a Caterpillar growth initiative, product support operations introduced Customer Value Agreements to bring additional focus to lifecycle support beginning at the point of sale. Customer receptivity to pre-packaged kits containing ﬁlters, belts and seals was positive. New warehouse management systems were installed in Thunder Bay and Ottawa branches to enable more-efficient parts retrieval and inventory tracking while alleviating the need for physical expansion to meet the needs of growth. Toromont’s four remanufacturing facilities implemented common operating procedures, documentation, testing and warranties and improved coordination of inventory and capacity while increasing Cat® Certiﬁed Rebuild volumes by 15%. To serve demand, we recruited more than 300 technicians and apprentices. Fluid analysis for the entire dealership was consolidated at our ISO-certiﬁed laboratory in Pointe-Claire to optimize results for customers. These activities contributed to product support growth on our larger installed base and greater efficiencies. Battleﬁeld Equipment Rentals ﬁnished year two of its journey to install its full rental services model in Québec and the Maritimes with good results. One feature of this formative period has been a signiﬁcant expansion and diversiﬁcation of rental inventory including elevated work platforms, telehandlers, heaters, pumps, generators, small excavators and tools to address the needs of customers. While returns per dollar invested reﬂected the immature state of the inventory aging and product disposition cycle, Battleﬁeld Equipment Rentals’ market penetration improved signiﬁcantly. Battleﬁeld Equipment Rentals also made progress in leveraging its supply chain. Perhaps the biggest advancement was the June 2019 integration of Battleﬁeld Equipment Rentals’ ﬂeet management and reporting system in QM territories. This system serves as the technological backbone of the business, enabling full line-of-sight on inventory location and status. It also powers our TRAC technology, which supports efficient equipment pickup and delivery, enables customers to use their smartphones to manage their rentals and request maintenance and provides real-time machine utilization data. The ﬁnancial payback from this investment will be quick at 1.5 years and the positive impact on business efficiency and competitiveness will be long lasting. a. This Genie S 85XC lift is one of many specialized units Battleﬁeld Equipment Rentals provided to Montréal’s Réseau Express Métropolitain (REM) transit project in 2019. By broadening its product offering, Battleﬁeld Equipment Rentals has positioned itself to serve large scale infrastructure projects in the province. b. Toromont Cat’s branch in Hamilton, Ontario, working with our Remanufacturing operations and ﬁeld service team, delivered the ﬁrst-ever Cat Certiﬁed rebuild of a 992K loader. The project involved engine and torque rebuilds, the installation of a remanufactured transmission, cleaning and painting of the disassembled frame, cab and boom, reassembly of 7,000 parts and the latest Caterpillar software upgrades. 5 Toromont Annual Report 2019 Letter to Shareholders Toromont Material Handling (“TMH”), a business unit serving over 6,000 users of brand-name lift trucks and other specialized equipment, made several important moves. Among them, it invested in its rental inventory, created a rental operations team in Ontario, improved its ﬁeld product support services and added Nordco’s Shuttlewagon mobile railcar movers to the MCFA, Cat, Jungheinrich and Nilﬁsk brands it sells. As a result of broader representation, TMH is now Eastern Canada’s one-stop shop for all ﬁve classes of lift trucks with capacities ranging from 680 to 104,000 kilograms. A consolidated regional parts centre, centralized technical and administration operations, a new Winnipeg facility for the Manitoba market and the formation of a major accounts team supported better customer service, efficiencies and expense control. Demonstrating its focus on good execution, MCFA presented TMH with a Dealer of Excellence award and Kalmar Ottawa named TMH a Premium Partner. Toromont’s other Equipment Group businesses were also active. Jobsite Industrial Rental Services improved its market coverage by opening a facility in Saint John, New Brunswick (its ﬁrst outside Ontario) and delivered tool cribs to reﬁneries, hospitals and a number of other institutional customers. SITECH found success in selling data services and technology support and acquired Silver Top Supply, a distributor of weigh- scale systems for loaders and dump trucks used in SITECH’s core construction, aggregate, demolition and waste management markets. AgWest intensiﬁed its focus on equipment monitoring and proactive parts sales to grow product support in a weak market environment for new machine sales. CIMCO delivered healthy gains in proﬁtability following a reset on project bidding and warranty management. Product support revenues increased for the 8th consecutive year despite lower package sales compared to the record set in 2018. With 34 new technicians added, CIMCO was better able to serve customers throughout Canada and the continental US. High-proﬁle assignments were awarded by customers including an ammonia refrigeration package for the New York Islanders arena on Long Island. CIMCO’s reputation as an innovator was advanced with the continued development of SMART products. The newest product, SMART Transfer, is a patent-pending technology that monitors for system leaks and transfers refrigerant to a storage vessel when required. For customers, CIMCO’s ECO CHILL® branded equipment and family of automated SMART rink technologies reduce energy usage, enhance safety and enable faster troubleshooting. These competitive advantages are bolstered by CIMCO’s ability to harness natural refrigerants like CO2. CO2 systems accounted for 16% of CIMCO’s order bookings in 2019 compared to 8% in 2018; a clear sign of the growing popularity of this climate- safe alternative to Freon and its synthetic derivatives. 6 Toromont Annual Report 2019 Letter to Shareholders Safety Toromont’s most important objective is to create a workplace free of injury. In 2019, we did not meet this objective, although total recordable injury frequency rate has declined over the past ﬁve years. Our Environmental, Social and Governance report documents our efforts. We are committed to continuous improvement in 2020. A Tribute to Robert Franklin In February 2020, we were saddened by the sudden passing of Mr. Robert Franklin after a courageous battle with cancer. Rob’s contributions over his 26 year tenure as a Director were foundational to the Toromont that you see today; leveraging his extensive business experience and connections throughout the business community to assist and guide Toromont. Over the years, Rob served on the Audit Committee and had been the Chair of our Human Resources and Compensation Committee from 2003 up until the time of his passing. We will miss him. Governance and Succession Your Board operates with a disciplined and proactive succession protocol that has enabled us to recruit four new Directors in the past ﬁve years, each with relevant experience and expertise to ensure continuity of approach, continuous improvement and independence. At the senior leadership level, 2019 saw the retirement of Randall B. Casson as President of Battleﬁeld Equipment Rentals. Mr. Casson joined Toromont in 1977 and successfully led Battleﬁeld Equipment Rentals from 2001. We thank Mr. Casson for his leadership and for preparing Colin Goheen who assumed the role of Battleﬁeld Equipment Rentals’ President in September 2019. Mr. Goheen is a 21-year Toromont veteran. In the near term, Toromont will see the retirement of Paul R. Jewer Executive Vice President and Chief Financial Officer. Mr. Jewer has served Toromont with distinction for over 14 years and was frequently recognized as one of Canada’s top CFOs. We thank Mr. Jewer for his many contributions including his leadership on several transformative, value-creating M&A transactions. After an extensive search, we announced the appointment of Michael McMillan as Executive Vice President and Chief Financial Officer, effective March 1, 2020. Mr. McMillan is an accomplished CFO with more than 25 years of ﬁnancial experience, including controllership, planning, M&A and investor relations. Mr. McMillan is a Chartered Professional Accountant and holds an MBA from the University of Calgary. A New Team for a New World The widespread improvements made in our operations in 2019 are a signal that Toromont’s team is working well together. Entering 2020, each business unit introduced new three-year plans with aggressive new performance targets that will challenge, and we hope reward, every stakeholder. The Barbara Ann Scott Ice Trail at Toronto’s College Park opened in late 2019 with a CIMCO package – the world’s ﬁrst transcritical CO2 system used in an outdoor ice rink. Pumping CO2 directly to the ice undersurface not only reduced horsepower needs, it eliminated temperature changes that degrade ice quality. The City of Toronto rejected Freon-based options and chose CIMCO’s solution to achieve signiﬁcant annual operational and maintenance cost savings and a 70% reduction in greenhouse gas emissions. 7 Toromont Annual Report 2019 Letter to Shareholders Our plans recognize that we are operating in a rapidly changing environment. Technology is redeﬁning how customers wish to be served and placing greater emphasis on collecting, interpreting and harnessing data right down to the machine level. Climate change is bringing focus to energy efficiency and alternative energy sources. Customer consolidation is heightening the importance of supplier scale, geographic reach and consistent service. Shortage of skilled trades represents a pinch point for industry growth. The acquisition of QM territories, investments in employee recruitment and training, homegrown innovation and transformative product developments by our partners, most especially Caterpillar, position Toromont to compete in this new world. In the ﬁnal analysis, however, staying ahead of the curve will require something old-fashioned: teamwork. We thank our team of employees, Directors and business partners for the mighty efforts they made to deliver good results in 2019. We are excited by what the future holds in store and grateful to our customers and shareholders for their participation in our journey. Yours sincerely, Robert M. Ogilvie Chairman of the Board Scott J. Medhurst President and Chief Executive Officer a b a. Used equipment sales beneﬁted from the launch of an upgraded Toromont Cat website that allows customers to search inventory across all territories and receive a quote online. b. Toromont Material Handling’s Peter Lambropoulos services a lift truck at our Concord shop. As part of its focus on operational excellence, TMH made several changes and investments in 2019. 8 Toromont Annual Report 2019 Environmental, Social and Governance Report Environmental, Social and Governance Report Across our territories and around the clock, Toromont commits to operating in a safe, efficient and responsible manner. Our sustainability efforts are guided by our Board of Directors, led by our empowered executives and business leaders and made manifest by our team of 6,500 dedicated individuals. Together, we stand accountable to our customers, shareholders and neighbours for responsible stewardship every day. ESG Priorities & Approach Toromont’s Core Principles reﬂect what we value as an organization and serve to guide us in the performance of our duties: • safe and respectful workplace • social responsibility • uncompromising integrity • empowerment at all levels • growth of the individual and enterprise • returns to all stakeholders 9 Toromont’s Board sets the tone for responsible management and behaviours that are aligned to our Core Principles by providing guidance and active oversight of the key priority areas set forth in this report. In each area, the Board ensures we operate with speciﬁc objectives, structured programs and monitoring/compliance systems to measure progress, evaluate outcomes and address areas for improvement. Through their actions, our Directors have built a strong governance framework that creates value for all stakeholders, enhances long-term corporate sustainability and reduces business risk. Please see our 2020 Management Information Circular for details at toromont.com. Also consistent with our Core Principles, our executive team provides the leadership to embed our values across our operations and empowers Toromont’s decentralized business units to take actions and make investments that are relevant to their operational realities. This approach not only ensures plans are speciﬁc to the needs of our diversiﬁed businesses and appropriate for Toromont as a responsible organization, it breeds a broad, deep and abiding sense of ownership and accountability. Safety Policies and Governance Creating the safest possible workplace is Toromont’s paramount objective. To protect employees, those we work with and our neighbours, we have invested to create a strong safety culture and an extensive safety program. Our commitment begins at the Board level – where our policies are set and regularly reviewed for effectiveness – and cascades throughout our organization. Quite literally, everyone at Toromont is accountable for compliance to safe operating practices (see Five Cardinal Safety Rules). The variable compensation of our senior leaders is tied to safety outcomes measured by Total Recordable Injury Rate “TRIR,” as well as a consistent demonstration of proper leadership practices. It’s these behaviours, executed consistently, that deﬁne and mold a safety culture. Dedicated business unit personnel, supported by external subject-matter experts when needed, ensure safety programs are well designed and functioning, deliver educational programs for employees, monitor for compliance and, with the full support of our Board and senior leaders, drive continuous improvements so that safety is not just top of mind at work but a way of life. Our Safety Outside Work intranet site, replete with safety tips and strategies, is available to all employees and their families as part of our corporate commitment. 2019 Safety Actions and Outcomes Toromont invested heavily in employee safety including over 170,000 hours of training in 2019, as well as investments in safety equipment speciﬁc to the hazards encountered in each working environment. However, training alone does not embed safety as a cultural norm. To model the right behaviours, Toromont Cat and Toromont Material Handling introduced Supervisor Training in Accountability and Recognition Techniques (“START”). During the year, 400 leaders participated in START’s role-playing exercises and were coached on setting clear safety expectations and improving communications. START was instrumental in improving accountability and led to the introduction of monthly leadership meetings where participants discussed safety challenges, set expectations and scrutinized a b a. Toromont Cat sponsored the 2019 Skills Canada National Competition in Halifax. Several members of the team participated including Michael Gaetz from Dartmouth branch (pictured above). Toromont’s Technical Instructor from Dartmouth also assisted in the World Competition held in Russia. b. On a daily basis, Toromont technicians always engage in stretching exercises to limber up before tackling their assignments. 10 Toromont Annual Report 2019 Environmental, Social and Governance Report results. Toromont Cat safety specialists saw their roles adjusted to increase shop ﬂoor coaching time. Additional support was provided to branch safety committees to increase their effectiveness. To raise employee awareness, enhance safety compliance and support additional training, CIMCO invested in additional full time health and safety resources in 2019. Discipline and enabling technology play important roles. Toromont Cat branches are evaluated monthly as part of a formal safety recognition program. Marks are assigned for completion of safety training, hazard identiﬁcation reporting, timely incident investigations and ﬁeld spot audits. At CIMCO, third-party safety audits of all branches were completed in 2019 to validate best practices and identify opportunities for improvement. Velocity EHS, Toromont’s technology platform, was enhanced and expanded such that Toromont Cat safety activities are now recorded online, including the risk assessments performed by all technicians before they start any project. Managers are notiﬁed in real time when a near miss occurs. Data and information are tracked and used to take immediate corrective actions and to shape future training. Velocity EHS was introduced at Battleﬁeld Equipment Rentals in 2019 with CIMCO scheduled to onboard it in 2020. We have also found success in recognizing great performance by our employees through the Safety Bucket and the Maurice De Stéphano awards given each year to the Toromont Cat branches that surpass all others in safety indicators. Battleﬁeld Equipment Rentals provided quarterly and annual awards for safe driving and clean inspections. Ownership of safety outcomes is a responsibility of every Toromont employee. To reﬂect our uncompromising approach, we introduced Five Cardinal Safety Rules in 2015, and deployed them across all operations in Québec and the Maritimes including at Toromont Material Handling in 2019. These rules are modelled on the best practices used by leading corporations in key industries. As a result of greater awareness and focus, Total Recordable Injury Frequency rate has declined 16% over the past ﬁve years, even though exposure hours (the total number of hours worked by all employees) increased 77%. While good, this is not good enough. We will continue to focus on keeping all eyes on task, reﬁning and refreshing our approach and holding each other accountable at all levels for creating and sustaining a safe workplace. Workforce Development Policies and Governance We value employee empowerment and believe our culture of authority with accountability has contributed signiﬁcantly to Toromont’s long-term success. To foster an empowered culture, attract and retain the industry’s best people and ensure the sustainability and competitiveness of our workforce, Toromont employs comprehensive human resources strategies and programs. The Human Resources and Compensation Committee of our Board of Directors oversees our policies and practices including short- and long-term incentive plans and is responsible for executive officer appointments and overseeing succession planning and leadership development. In turn, our corporate executives provide guidance and support to our business units to ensure that workforce development and succession programs are in place and functioning. Our business units design and deliver programs that best reﬂect their needs with a focus on improving employee knowledge, skills, productivity and effectiveness. The long running Toromont Employee Share Purchase Plan (see below) serves to align the interests of employees and shareholders. 2019 Training and Development Actions and Outcomes Toromont Cat employees set personal goals for performance and skills development aligned to our business plan objectives and collectively completed 285,000 training hours. Instruction was provided in workshops and delivered through Leaders@ Work, a platform that gives managers and aspiring leaders the ability to study online and in live virtual classrooms – a key beneﬁt for our dispersed workforce. Leaders@Work resides within Toromont University, a constantly evolving learning portal that offers access to thousands of technical, sales and personal development tools. Signiﬁcant attention was paid to adopting and embedding the best training programs and practices of both legacy Toromont and Québec and Maritimes operations so that a consistent standard of excellence applies across the enterprise. The recent adoption of the Red Seal as the standard all apprentices must meet is one example of best-practice standardization. For 2020, we will align our programs towards this standard across Toromont Cat. Battleﬁeld has developed many in-house training programs over the years within their BERC program (Battleﬁeld Equipment Rental College). The BERC program for Rental Coordinators was developed over a decade ago and provides newer front-line counter staff with insights into customer service as well as systems and equipment training, and imparts product knowledge. Additionally, there is now a BERC Driver program focused on G-class drivers to give them the necessary skill sets and experience to deliver and pickup equipment. At CIMCO, a new structure was implemented to support on-the-job service technician development through coaching and to provide a more formal pathway for advancement. In the U.S., where the refrigeration industry does not have a recognized technician training and licensing regimen, CIMCO designed and introduced an apprenticeship program and 11 Toromont Annual Report 2019 Environmental, Social and Governance Report attracted its ﬁrst cohort of trainees. The program is based on best practices used in Canada and will assist recruiting efforts and improve the skillsets and advancement prospects of U.S. technicians while enhancing industry professionalism. Reﬂecting our teamwork focus, and commitment to building the best team in our industry, we hosted the largest-ever leadership conference. A total of 65 new and high-potential leaders from all Toromont businesses gathered in Montreal to analyze topics relevant to Toromont’s improvement initiatives including digital transformation, data analytics and critical leadership behaviours required to enable ongoing success. Employee wellness goes together with the development of a high-performing workforce. We promote wellness through training and awareness programs and our leaders are coached to recognize and support employee wellbeing. In 2019, Toromont Cat supported employees in managing mental wellness challenges by offering a Mental Health Certiﬁcation for leaders. Working at Toromont is demanding, but there are rewards. One is the Toromont Employee Share Purchase Plan which makes it easier for all salaried employees to own a piece of the Company they are building. Approximately 33% of eligible employees were enrolled in our ESPP at the end of 2019 after it was made available in Québec and the Maritimes. 2019 Recruitment & Retention Actions and Outcomes Toromont’s ability to grow is, in large part, determined by our ability to recruit and retain highly skilled workers. The dearth of such workers in Canada has caused us to become more assertive and thoughtful in our recruitment efforts – with positive results. During the year: • 303 technicians were recruited to achieve our growth targets • 208 student apprenticeship positions were created • 19 vocational institutions worked with Toromont as we shared ideas with teachers to keep training current and introduced our Company as a future employer to students • 4th-year students in the engineering faculty at Queen’s and McMaster universities were invited to participate in a centralized tool crib automation and redesign project under the auspices of a new Toromont Cat partnership • our Québec operations created an Honourable Journey Award to encourage diversity by supporting skilled trades students, ideally from a designated group who achieve impressive academic standing despite hardship circumstances. Overall, our workforce grew approximately 8% in 2019 reﬂecting successful recruitment and onboarding and a retention rate that is superior to external benchmarks. Workforce Diversity Policies and Governance Our ability to understand, embrace and operate in a culturally and gender-diverse environment is critical to our long-term sustainability. Consequently, we operate with a Diversity Policy (updated by the Board this year to include speciﬁc references to our leadership team) and related objectives. The beneﬁts of a diverse workforce are fully acknowledged, and diversity is considered in promotions and new hires consistent with our Employment Equity Policy. Our Board, together with its Nominating and Corporate Governance Committee and senior management, regularly review the outcomes of our diversity strategies and look for new opportunities to foster a culture of inclusion. Like all business pursuits at Toromont, we track the results of our diversity policies and efforts as part of disciplined management and to encourage continuous improvement. 12 12 Toromont Annual Report 2019 Environmental, Social and Governance Report 2019 Diversity Actions and Outcomes We began the year with an independent audit of our efforts to recruit and promote individuals from four groups that are underrepresented in our industry: women, aboriginals, visible minorities and disabled persons. The audit found Toromont to be compliant with the Federal Contractors Program (enabling it to bid for government projects) and provided a clear indication of where improvements have been made since our last audit and where additional focus is needed. Recruiting and promoting women to positions of leadership are areas of progress and opportunity. Four women now serve in senior management positions and represent 22% of our leadership team. Three members of our 10-member Board of Directors are women. In 2019, women were promoted to serve as Branch Managers at Toromont Cat Concord and at Battleﬁeld Equipment Rentals in Québec and the Maritimes. Women also serve in supervisory positions in various Toromont Cat locations as well as our recently established data analytics team. Even in traditionally male-dominated roles such as engineering at CIMCO, parts and service at Toromont Cat and small engine repair at Battleﬁeld Equipment Rentals, women excelled in 2019. To build on this success and ensure we continue to encourage women to enter our workforce, our recruiters presented Toromont as a career destination to hundreds of young women in 2019 and developed A Let’s Celebrate Women’s Day video posted across social media. Growth in our employment of Canada’s indigenous peoples, visible minorities and disabled persons was also demonstrated in our audit, although progress in each area was slower than desired. Accordingly, we continue to reﬁne our programs. In 2019, greater focus allowed us to recruit 10 apprentice technicians, ﬁve licensed technicians, two co-op students, two managers and four administrators from aboriginal communities. Members of these communities achieved success in leadership roles within our mining division and at Battleﬁeld Equipment Rentals. Those with disabilities were welcomed into important roles including account management and product support. Engagement with COSTI Immigration Services continued to diversify our workforce. While maintaining our principle of promoting the best candidates regardless of race, gender or physical ability, we identify members of under-represented groups during our succession planning process to ensure career development opportunities are equal and the candidate pipeline is diverse. Toromont’s THINK BIG scholarships and Management Trainee Program reﬂect our desire to build our talent pipeline with excellent candidates while diversifying our workforce. In 2019: • 60% of our scholarship recipients not only excelled academically, they belonged to diverse groups • three of eight new Management Trainees were from a designated group • three new Management Trainee recruits were bilingual as beﬁtting an organization with signiﬁcant operations in French-speaking parts of Canada Environmental Policies and Governance Respect for the environment is a Toromont Core Principle. To show respect, our Board of Directors and executive team provide oversight of our environmental performance and take Toromont Codes of Conduct Toromont’s Code of Conduct is available at toromont.com. Among Code provisions are requirements to uphold all laws including international anti-corruption and trade regulations. The Code speciﬁcally prohibits employees from giving or receiving entertainment, gifts or beneﬁts that could improperly inﬂuence business decisions. Toromont’s Supplier Code of Conduct commits suppliers to, among other items, ensuring the safety of our employees, the community and the environment. Toromont Cat’s online Contractor Compliance system allows our branches to conﬁrm that a contractor has appropriate certiﬁcations and credentials. 13 13 Toromont Annual Report 2019 Environmental, Social and Governance Report responsibility for compliance with all environmental regulations in the markets we serve. Beyond basic compliance, we recognize that climate change and government policy responses are having an impact on our customers, suppliers and our business. As responsible, market-driven operators, we work along with our customers and supply partners to reduce greenhouse gas emissions and more generally eliminate waste and use technology to build a more efficient, sustainable future. As a matter of strategy, we track our environmental impact and set goals for continuous improvement as part of annual business planning. A dedicated Toromont Cat environmental team is responsible for developing annual priorities, educating and training the workforce, as well as performing compliance and audit functions under the auspices of a formal Environmental Management Program. Initiatives developed by this team are incorporated into the Company’s corporate strategic planning process. The Board receives reports from this team on compliance and progress on a quarterly basis. 2019 Environmental Actions and Outcomes Toromont Cat’s Environmental Management Program was extended to all operations in Québec and the Maritimes in 2019 and was supported by training and an online tracking tools. Once again, a key area of focus was reducing greenhouse gas (“GHG”) emissions. Toromont’s largest source of GHGs is our ﬂeet and to reduce emissions we: • operate with an anti-idling policy for all Company vehicles and vehicles on our properties • use telematics to track idling time and monitor for hard accelerations and speeding that are unsafe for our team and hard on the environment • employ Auxiliary Power Units on our service vehicles, alleviating the need to idle engines and needlessly burn fuel • assess ﬂeet additions on total cost of ownership including fuel economy, which has led to the acquisition of smaller ﬁeld-service vehicles wherever possible that are 20% more fuel efficient than larger vehicles. Within the Equipment Group, energy intensity in our buildings is monitored and improved through ongoing investments in energy-efficient HVAC systems, lighting, overhead doors and compressed air tools. Emission abatement is assisted by selective catalytic reduction equipment that minimizes the release of nitrogen oxide and sulphur during generator testing at Toromont Power Systems in Ontario. Over the past three years, GHG emission carbon intensity was reduced by over 10% in our legacy operations due to these ongoing initiatives. To provide a baseline for action, GHG assessments were completed for Québec and the Maritimes operations in 2019. Reducing GHG emissions is important for our customers and we are playing our part: • • at seven landﬁlls in Ontario and one in New Brunswick, Toromont-supplied generators capture harmful methane to transform it into electricity in mining, we recruited our ﬁrst battery electric machine (BEM) specialist to prepare Toromont’s strategy for the future launch of new technology In refrigeration, CIMCO works closely with customers to advise them on the environmental impact of various refrigerants and employs integrated building design to offset GHG emissions. For customers, selecting a refrigerant is increasingly complex due to the evolution of environmental regulations, the introduction of new synthetic solutions and the phase-out of others. The alternative is natural refrigerants, such as ammonia and CO2. CIMCO helps customers opt for the best refrigerant choice based on factors including lifecycle costs, safety and environmental impact. Customers also use CIMCO’s unique design methodology to lower their carbon footprint. More speciﬁcally, the byproduct of refrigeration is heat, which is traditionally wasted through atmospheric release. CIMCO’s ECO CHILL® employs a patented system to recover heat and apply it elsewhere. This offsets operating costs, reduces GHG emissions and lowers natural gas usage – without compromising performance. ECO CHILL® has cumulatively offset 966,000 CO2-equivalent tonnes (the same amount produced by 215,000 cars operating for one year) compared to traditional refrigeration and saved 17.6 billion cubic feet of natural gas over the past 15 years. Reducing water consumption is an ongoing priority. Multiple Battleﬁeld Equipment Rental stores now operate specialized wash bay systems that recycle water. The largest, in our Stoney Creek, Ontario store, reduces water usage by over 1.4 million liters per year. Toromont Cat conserves water and reduces chemical usage during component cleaning through steam and pressure washers. During the year, we upgraded water/oil interceptor systems at three branches. These systems capture oil, sediment and water runoff in service bays and separate the ingredients for safe disposal. We continue to foster zero-waste behaviour in our branches by drawing attention to day-to-day habits that improve landﬁll diversion rates. In legacy operations, landﬁll diversion increased by more than 25% over the past three years. In Québec and the Maritimes operations, we introduced waste diversion programs in 2019. Recycling is also a key feature of Toromont Cat’s four remanufacturing operations where used and highly worn hydraulic cylinders, engines and other components are rebuilt as many as four times. Battleﬁeld Equipment Rentals participates in waste diversion through battery recycling. 14 Community Impact Policies and Governance From our Board, through our leadership ranks and across our workforce, we believe Toromont has a role to play in the health and wellbeing of the communities where we live and work. In line with our values and focus on social responsibility, Toromont encourages community volunteerism through our Day of Caring program. It provides all employees with paid time off to volunteer for a charitable cause of their choice. Corporately, Toromont’s official charity is the United Way, an organization chosen because it reaches all communities connected to our business units and provides opportunities for our employees to work together, in an enjoyable way, to focus fundraising efforts for the biggest community impact. We also encourage our business units to contribute to philanthropic causes that resonate with them. 2019 Community Impact Actions and Outcomes In 2019, employees from across all Toromont Cat territories joined together during our annual campaign to raise funds for United Way through payroll deductions and cash pledges made during BBQs, raffles, bake sales, a baseball tournament and other grassroots events. This year’s campaign – and numerous other charity drives in support of organizations such as Feed Nova Scotia, CHUM City Christmas Wish and the Sporting Life run/walk in support of Camp Ooch – fostered a remarkable team spirit and proved once again that we are building together for a better future. a b d c As an inspiring reminder of the importance of caring for the environment, Toromont Cat held its ﬁrst ever Earth Day photo competition in 2019. All employee photos were shared across our intranet site. a. Martin Cadieux, Sales System Specialist, Pointe-Claire, QC b. Bruce Darling, Senior Business Analyst, Concord, ON c. Dominique Lavoie, Credit Manager, Pointe-Claire, QC d. Hélène Lebreux, Administrative Assistant, Sept-Îles, QC 15 Toromont Annual Report 2019 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. such matters as strategic planning, identiﬁcation and management of risks, succession planning, communication policy, internal controls and governance. The Company’s corporate governance program is in compliance with National Policy 58-201 – Corporate Governance Guidelines and Multilateral Instrument 52-110 – Audit Committees. Board of Directors The role of the Board of Directors, its activities and responsibilities are documented and are assessed at least annually, as are the terms of reference for each of the committees of the Board, the Chairs of the committees, the Lead Director and the Chairman, inclusive of scope and limits of authority of management. The Board acts in a supervisory role and any responsibilities not delegated to management remain with the Board. The Board’s supervisory role includes 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. For more information on the Board of Directors, please refer to the Management Information Circular dated February 28, 2020, prepared in connection with the Corporation’s 2020 Annual Meeting of Shareholders and available on our website at toromont.com. 16 Toromont Annual Report 2019 Corporate Governance L to R: Sharon L. Hodgson, James W. Gill, Robert M. Franklin, Scott J. Medhurst, Robert M. Ogilvie, Cathryn E. Cranston, Jeffrey S. Chisholm, Richard G. Roy, Katherine A. Rethy, Peter J. Blake, Wayne S. Hill. Committee Structure and Mandates The Audit Committee Committees of the Board are an integral part of the Company’s governance structure. Three committees have been established with a view toward allocating expertise and resources to particular areas, and to enhance the quality of discussion at Board meetings. The committees facilitate Board decision-making by providing recommendations to the Board on matters within their respective responsibilities. All committees are comprised solely of Directors who are independent of management. A summary of the responsibilities of the committees follows. Principal duties include oversight responsibility for ﬁnancial statements and related disclosures, reports to shareholders and other related communications, establishment of appropriate ﬁnancial policies, the integrity of accounting systems and internal controls, legal compliance on ethics programs established by management, the approval of all audit and non-audit services provided by the independent auditors and consultation with the auditors independent of management and overseeing the work of the auditors and the Internal Audit department. The Nominating and Corporate Governance Committee The Human Resources and Compensation Committee Principal responsibilities are reviewing and making recommendations as to all matters relating to effective corporate governance. The committee is responsible for assessing effectiveness of the Board, its size and composition, its committees, Director compensation, the Board’s relationship to management, and individual performance and contribution of its Directors. The committee is responsible for identiﬁcation and recruitment of new Directors and new Director orientation. 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. 17 Toromont Annual Report 2019 Corporate Governance 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 Business Development Advisor 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 Equipment Rentals in 2001. He is a graduate of Toromont’s Management Trainee Program. Mr. Casson retired as President of Battleﬁeld Equipment Rentals in September 2019. 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. Jennifer J. Cochrane Vice President, Finance Paul R. Jewer Executive Vice President 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. 18 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. Mr. Jewer stepped down as Chief Financial Officer as of March 1, 2020, as part of his planned retirement. 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 joined Toromont in 1999 and was appointed President of CIMCO in 2015. 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 19 Management’s Discussion and Analysis This Management’s Discussion and Analysis (“MD&A”) comments on the operations, performance and ﬁ nancial condition of Toromont Industries Ltd. (“Toromont” or the “Company”) as at and for the year ended December 31, 2019, compared to the preceding year. This MD&A should be read in conjunction with the audited consolidated ﬁ nancial statements and related notes for the year ended December 31, 2019. The consolidated ﬁ nancial 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 11, 2020. Additional information is contained in the Company’s ﬁ lings with Canadian securities regulators, including the Company’s 2019 Annual Report and 2020 Annual Information Form. These ﬁ lings are available on SEDAR at sedar.com and on the Company’s website at toromont.com. Advisory of distribution or original equipment to Toromont or that Toromont currently Information in this MD&A that is not a manufacturer agreements; equipment believes are not material could also historical fact is “forward-looking product acceptance and availability of cause actual results or events to diff er information”. Words such as “plans”, supply; increased competition; credit of materially from those expressed or “intends”, “outlook”, “expects”, third parties; additional costs associated implied by statements containing forward- “anticipates”, “estimates”, “believes”, with warranties and maintenance contracts; looking information. “likely”, “should”, “could”, “will”, “may” and changes in interest rates; the availability of Readers are cautioned not to place similar expressions are intended to identify ﬁ nancing; potential environmental liabilities undue reliance on statements containing statements containing forward-looking of the acquired businesses and changes to forward-looking information, which reﬂ ect information. Forward-looking information environmental regulation; failure to attract Toromont’s expectations only as of the in this MD&A reﬂ ects current estimates, and retain key employees; damage to the date of this MD&A, and not to use such beliefs, and assumptions, which are based reputation of Caterpillar, product quality information for anything other than their on Toromont’s perception of historical and product safety risks which could expose intended purpose. Toromont disclaims any trends, current conditions and expected Toromont to product liability claims and obligation to update or revise any forward- future developments, as well as other negative publicity; new, or changes to looking information, whether as a result of factors management believes are current, federal and provincial laws, rules new information, future events or appropriate in the circumstances. and regulations including changes in otherwise, except as required by law. Toromont’s estimates, beliefs and infrastructure spending; and any assumptions are inherently subject to requirement of Toromont to make signiﬁ cant business, economic, contributions to its registered funded competitive and other uncertainties and deﬁ ned beneﬁ t pension plans, post- contingencies regarding future events and employment beneﬁ ts plan or the multi- as such, are subject to change. Toromont employer pension plan obligations in can give no assurance that such estimates, excess of those currently contemplated. beliefs and assumptions will prove to be Readers are cautioned that the foregoing correct. This MD&A also contains forward- list of factors is not exhaustive. looking statements about the recently Any of the above mentioned risks and acquired businesses. uncertainties could cause or contribute to Numerous risks and uncertainties could actual results that are materially diff erent cause the actual results to diff er materially from those expressed or implied in the from the estimates, beliefs and assumptions forward-looking information and expressed or implied in the forward-looking statements included in this MD&A. For a statements, including, but not limited to: further description of certain risks and business cycles, including general economic uncertainties and other factors that could conditions in the countries in which cause or contribute to actual results that Toromont operates; commodity price are materially diff erent, see the risks and changes, including changes in the price of uncertainties set out in the “Risks and Risk precious and base metals; changes in Management” and “Outlook” sections foreign exchange rates, including the herein. Other factors, risks and Cdn$/US$ exchange rate; the termination uncertainties not presently known 20 Corporate Proﬁle and Business Segmentation As at December 31, 2019, Toromont employed over 6,500 people in more than 150 locations across Canada and the United States. Toromont is listed on the Toronto Stock Exchange under the symbol TIH. Toromont has two reportable operating segments: the Equipment Group and CIMCO. The Equipment Group includes Toromont Cat, one of the world’s larger Caterpillar dealerships, Battleﬁeld – The Cat Rental Store, an industry-leading rental operation, SITECH, providing Trimble technology products and services, AgWest, an agricultural equipment and solutions dealer representing AGCO, CLAAS and other manufacturers’ products. The Company is the exclusive Caterpillar dealer for a contiguous geographical territory in Canada that covers Manitoba, Ontario, Quebec, Newfoundland, New Brunswick, Nova Scotia, Prince Edward Island and most of Nunavut. Additionally, the Company is the MaK engine dealer for the Eastern Seaboard of the United States, from Maine to Virginia. Performance in the Equipment Group is driven by activity in several industries: road building and other infrastructure-related activities; mining; residential and commercial construction; power generation; aggregates; waste management; steel; forestry; and agriculture. Signiﬁcant activities include the sale, rental and service of mobile equipment for Caterpillar and other manufacturers; sale, rental and service of engines used in a variety of applications including industrial, commercial, marine, on-highway trucks and power generation; and sale of complementary and related products, parts and service. CIMCO is a market leader in the design, engineering, fabrication, installation and after-sale support of refrigeration systems in industrial and recreational markets. Results of CIMCO are inﬂuenced by conditions in the primary market segments served: beverage and food processing; cold storage; food distribution; mining; and recreational ice rinks. CIMCO offers systems designed to optimize energy usage through proprietary products such as ECO CHILL®. CIMCO has manufacturing facilities in Canada and the United States and sells its products and services globally. Primary Objective and Major Strategies The primary objective of the Company is to build shareholder value through sustainable and proﬁtable growth, supported by a strong ﬁnancial foundation. To guide its activities in pursuit of this objective, Toromont works toward speciﬁc, long-term ﬁnancial goals (see section heading “Key Performance Measures” in this MD&A) and each of its operating groups consistently employs the following broad strategies: Expand Markets Toromont serves diverse markets that offer signiﬁcant long-term potential for proﬁtable expansion. Each operating group strives to achieve or maintain leading positions in markets served. Incremental revenues are derived from improved coverage, market share gains and geographic expansion. Expansion of the installed base of equipment provides the foundation for product support growth and leverages the ﬁxed costs associated with the Company’s infrastructure. Strengthen Product Support Toromont’s parts and service business is a signiﬁcant contributor to overall proﬁtability and serves to stabilize results through economic downturns. Product support activities also represent opportunities to develop closer relationships with customers and differentiate the Company’s product and service offering. The ability to consistently meet or exceed customers’ expectations for service efficiency and quality is critical, as after-market support is an integral part of the customer’s decision-making process when purchasing equipment. Broaden Product Offerings Toromont delivers specialized capital equipment to a diverse range of customers and industries. Collectively, hundreds of thousands of different parts are offered through the Company’s distribution channels. The Company expands its customer base through selectively extending product lines and capabilities. In support of this strategy, Toromont represents product lines that are considered leading and generally best-in- class from suppliers and business partners who continually expand and develop their offerings. Strong relationships with suppliers and business partners are critical in achieving growth objectives. Invest in Resources The combined knowledge and experience of Toromont’s people is a key competitive advantage. Growth is dependent on attracting, retaining and developing employees with values that are consistent with Toromont’s. A highly principled culture, share ownership and proﬁtability-based incentive programs result in a close alignment of employee and shareholder interests. By investing in employee training and development, the capabilities and productivity of employees continually improve to better serve shareholders, customers and business partners. Toromont’s information technology represents another competitive differentiator in the marketplace. The Company’s selective investments in technology, inclusive of e-commerce initiatives, strengthen customer service capabilities, generate new opportunities for growth, drive efficiency and increase returns to shareholders. Maintain a Strong Financial Position A strong, well-capitalized balance sheet creates stability and ﬁnancial ﬂexibility, and has contributed to the Company’s long-term track record of proﬁtable growth. It is also fundamental to the Company’s future success. 21 Consolidated Annual Operating Results ($ thousands, except per share amounts) 2019 2018 $ Change % Change Revenues Cost of goods sold $ 3,678,705 2,772,583 $ 3,504,236 2,640,835 $ 174,469 131,748 Gross proﬁt (1) Selling and administrative expenses Operating income (1) Interest expense Interest and investment income Income before income taxes Income taxes 906,122 493,627 412,495 27,707 (9,752) 394,540 107,740 863,401 493,827 369,574 30,643 (8,918) 347,849 95,865 42,721 (200) 42,921 (2,936) (834) 46,691 11,875 Net earnings $ 286,800 $ 251,984 $ 34,816 Basic earnings per share $ 3.52 $ 3.10 $ 0.42 5% 5% 5% — 12% (10%) 9% 13% 12% 14% 14% 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% 13.4% 11.2% 27.3% 22.9% 21.4% (1) Described in the sections titled “Additional GAAP Measures and Non-GAAP Measures.” 24.6% 14.1% 10.5% 27.6% 21.7% 22.3% The Company delivered solid results in the Revenues increased $174.5 million or year with double-digit growth in operating 5% for the year with a 6% growth in the income in both the Equipment Group and Equipment Group and a 2% decline at CIMCO. CIMCO. Within the Equipment Group, the Product support across the enterprise grew core dealership business saw signiﬁcant 10% with similar increases in both Groups. growth in key performance metrics, largely Gross proﬁt margin was unchanged at reﬂective of continued success in business 24.6% versus last year. The Equipment integration and market penetration. Group reported lower margins on continued The rental services business was unable to competitive pressures and lower ﬂeet fully absorb the past two years’ signiﬁcant utilization. Margins at CIMCO were higher rate of ﬂeet expansion, expectedly leading to on broad-based improved execution. Both reduced proﬁtability on higher depreciation Groups beneﬁtted from a favorable sales and branch expansion costs. The agricultural mix of higher product support revenues equipment business created a $4.9 million to total revenues which in total were up to drag on operating income year-over-year, 42.1% in 2019 compared to 40.1% in 2018. as ongoing adverse market conditions led Selling and administrative expenses were to a revaluation of inventory late in the year, largely unchanged year-over-year despite the on top of weak equipment sales. CIMCO 5% increase in revenues. Mark-to-market generated improved proﬁtability year-over- adjustments on Deferred Share Units (“DSUs”) year on improved project execution and an increased expenses $6.7 million year-over- inventory write-down recorded in the prior year reﬂective of the 30% increase in share year that was not repeated. Even with the price. A post-employment beneﬁt plan headwinds, the strength of the Equipment curtailment gain of $5.0 million was recorded Group and CIMCO led net earnings to in the ﬁrst quarter of 2019, and is further increase 14% versus a year ago on a 5% increase in revenues. described in note 19 of the notes to the consolidated ﬁnancial statements. All other compensation expenses were lower than a year ago on the alignment of beneﬁt programs, partially offset by increased headcount and annual wage increases. Information technology expenses increased $3.3 million primarily on system enhancement and upgrades. Allowance for doubtful accounts were $4.3 million lower on improved collections and accounts receivable aging proﬁle. Certain other expenses categories such as customer allowances, travel, insurance and training were higher in support of the growth and continued integration efforts across the territories. Operating income increased $42.9 million reﬂecting the higher revenues and lower expense levels. Both Groups reported strong improvements. Operating income margin increased 70 basis points (“bps”) to 11.2%. Interest expense decreased $2.9 million on lower average debt balances. Interest income increased $0.8 million, mainly as a result of interest income earned on equipment on rent with a purchase option (“RPO”) and investment income resulting from higher average cash balances held throughout the year. 22 The effective income tax rate for 2019 Earnings per share (“EPS”) tracked the $21.0 million in 2018, included actuarial was 27.3% compared to 27.6% in 2018. increase, up $0.42 or 14% to $3.52. gains on deﬁned beneﬁt pension and other The decrease is substantially due to the Other comprehensive loss of $24.9 million post-employment beneﬁt plans and a net continued phase in of corporate tax rate in 2019 arose on actuarial losses on deﬁned gain on cash ﬂow hedges. reductions in Quebec. beneﬁt pension and other post-employment Net earnings in 2019 of $286.8 million beneﬁt plans and a net loss on cash ﬂow were up $34.8 million or 14% from 2018. hedges. Other comprehensive income of Business Segment Annual Operating Results The accounting policies of the segments are the same as those of the consolidated entity. Management evaluates overall business segment performance based on revenue growth, operating income relative to revenues and return on capital employed. Corporate expenses are allocated based on each segment’s revenue. Interest expense and interest and investment income are not allocated. EQUIPMENT GROUP ($ 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 2019 2018 $ Change % Change $ 1,195,646 328,539 418,818 1,943,003 1,390,340 10,607 $ 1,190,000 306,575 389,572 1,886,147 1,264,295 10,645 $ 5,646 21,964 29,246 56,856 126,045 (38) $ 3,343,950 $ 3,161,087 $ 182,863 $ 384,077 $ 348,876 $ 35,201 $ 153,390 54,130 $ 125,148 37,546 $ 28,242 16,584 — 7% 8% 3% 10% — 6% 10% 23% 44% 28% Total $ 207,520 $ 162,694 $ 44,826 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 41.6% 11.5% 90.9% 19.0% 40.0% 11.0% 90.2% 21.4% The Equipment Group performed well on the strength of results at the core dealership business, partially offset by performance in the rental services business (with expected challenges associated with absorbing the increased ﬂeet investment) and weakness in the agricultural sector leading to inventory write-downs and reduced proﬁtability. Total equipment sales (new and used) increased $27.6 million or 2%. Construction markets increased $82.0 million or 9%. In Quebec and Ontario, construction markets were strong with good activity levels and increased market penetration while deliveries into Atlantic Canada were lower on certain project activity in the prior year which did not repeat. Power systems sales were up $2.6 million or 1%. Sales into mining markets were down $37.2 million or 19% against a tough prior year comparator, which included large deliveries. Material handling and agriculture markets were also softer compared to the prior year. Rental revenues increased $29.2 million or 8% versus last year, mainly on higher utilization and larger ﬂeets. Rental rates have increased marginally relative to 2018. Heavy equipment rentals were down 7% across all regions, except for Quebec which reported growth on the larger ﬂeet. Power rentals were unchanged from the prior year. Light equipment rentals increased 9% with all regions reporting growth on good market penetration based on the strategic focus on growing and diversifying the ﬂeet to 23 address demand signals year round and across the wider market base. Rental revenues from equipment on rent with a purchase option (“RPO”) were up 27% on a larger average ﬂeet versus 2018. At December 31, 2019, the RPO ﬂeet across the business was up $7.9 million from a year ago to $82.5 million. Product support revenues increased $126.0 million or 10% with similar increases in both parts and service across all markets. The growing installed base of equipment in the ﬁeld and customer activity levels resulted in good growth. Product support revenues also beneﬁtted from good rebuild activity and a growing technician base. Power generation revenues were $10.6 million in 2019 and 2018. Gross proﬁt margin decreased 40 bps versus last year. Equipment margins declined slightly year-over-year on competitive pricing pressures combined with softness in certain market segments. Rental margins decreased modestly on lower ﬂeet utilization, reﬂecting the time required to absorb the recent increased investment in the ﬂeets. The largest component of cost of sales on rentals is depreciation, which, at Toromont, is straight-line, regardless of utilization levels. Product support margins were lower, a result of a higher portion of parts to service volumes. The overall sales mix of product support revenues to total revenues had a favourable impact of 50 bps on margins. Selling and administrative expenses decreased $2.8 million or 1%, due to the previously noted post-employment beneﬁt curtailment gain and a $4.4 million reduction in the allowance for doubtful accounts resulting from good collection activity. All other expenses increased $6.6 million or 1%. Higher compensation costs and information technology costs in support of growth and integration were partially offset by reductions in other areas. Operating income was up $35.2 million or 10% and was 50 bps higher as a percentage of revenues (11.5% versus 11.0% last year). Capital expenditures, net of dispositions, increased $44.8 million, largely due to investments in new facilities and service vehicles to increase efficiencies and accommodate growth and continued investments to expand the rental ﬂeets across all territories. Net rental ﬂeet additions increased $28.2 million to $153.4 million while other capital expenditures increased $16.6 million. Bookings and Backlogs ($ millions) 2019 2018 $ Change % Change Bookings – year ended December 31 Backlogs – as at December 31 $ $ 1,468.2 272.3 $ $ 1,536.7 341.8 $ $ (68.5) (69.5) (4%) (20%) Bookings decreased $68.5 million or 4%. Backlogs decreased $69.5 million or 20% Bookings and backlogs can vary Higher construction orders (+12%) were more than offset by lower mining (41%), power systems (27%), material handling lift truck (23%) and agriculture orders (18%). to $272.3 million. At December 31, 2019, the total backlog related to power systems (42%), construction (33%), mining (11%), agriculture (7%) and lift trucks (7%), most of which is expected to be delivered in 2020. signiﬁcantly from period to period on large project activities, especially in mining and power systems, the timing of orders and deliveries and the availability of equipment from either inventory or suppliers. CIMCO ($ thousands) Package sales Product support Total revenues Operating income Capital expenditures (net) 2019 2018 $ Change % Change $ 177,974 156,781 $ 202,367 140,782 $ 334,755 $ 343,149 $ $ 28,418 2,335 $ $ 20,698 2,452 $ $ $ $ (24,393) 15,999 (8,394) 7,720 (117) (12%) 11% (2%) 37% (5%) 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 46.8% 8.5% 9.1% 75.9% 41.0% 6.0% 9.8% 64.1% 24 CIMCO results for 2018 included a $6.0 million write-down of inventory stemming from a review of work-in-process costing and aging. Excluding this item in the comparator, results in 2019 improved despite the lower revenues, on better project execution. The translation of ﬁnancial results at the US operations did not have a signiﬁcant impact on results year-over-year. In Canada, package revenues were down $9.2 million or 6%, reﬂecting lower sales into industrial markets (down $20.3 million or 17%), partially offset by higher recreational revenues (up $11.1 million or 27%). In the US, package revenues decreased $15.2 million or 36% as lower sales into industrial markets (down $19.4 million or 69%) were partially offset by higher recreational revenues (up $4.2 million or 30%). Product support revenues increased $16.0 million or 11% versus last year on growth in both Canada (up 10%) and the US (up 16%). The increased installed base continues to provide a solid growth platform as product support revenues have increased every year since 2009. Hiring of technicians continues in order to address demand signals. Gross proﬁt margin improved 190 basis points after excluding the aforementioned inventory write-down on improved project execution and a favourable sales mix of higher product support revenues to total revenues. Selling and administrative expenses increased $2.6 million versus last year, largely on higher compensation costs. Most other expense categories were unchanged or lower as expense management remains critical to mitigating margin pressures broadly. Operating income was up by $7.7 million or 37% in 2019 reﬂecting the one-time charge last year not repeated and improved project gross proﬁt margins. Capital expenditures, net of dispositions, were down $0.1 million or 5% to $2.3 million with the majority of expenditures in 2019 related to information technology infrastructure enhancements and upgrades ($1.2 million), additional service vehicles ($0.7 million), and machinery and equipment ($0.2 million). Bookings and Backlogs ($ millions) Bookings – year ended December 31 Backlogs – as at December 31 2019 193.6 122.5 $ $ 2018 184.7 112.7 $ $ $ Change % Change $ $ 8.9 9.8 5% 9% Bookings of $193.6 million were up $8.9 million or 5%, with higher recreational orders (+15%) offsetting lower industrial orders (2%). In Canada, both market segments were up, while in the US, higher recreational orders served to offset lower industrial orders. Backlogs of $122.5 million were higher by $9.8 million or 9% versus last year. Industrial backlogs were in line with last year with an increase in Canada offsetting a decrease in the US. Recreational backlogs were up 25% on higher levels in the US (+75%). The backlog levels provide a good base entering 2020, with substantially all expected to be realized as revenue in 2020. Consolidated Financial Condition The Company’s strong ﬁnancial position continued. At December 31, 2019, the ratio of net debt to total capitalization decreased to 15% versus 18% at December 31, 2018. Non-cash Working Capital The Company’s investment in non-cash working capital was $463.7 million at December 31, 2019. The major components, along with the changes from December 31, 2018, are identiﬁed in the following table. ($ thousands) 2019 2018 $ Change % Change Accounts receivable Inventories Other current assets Accounts payable and accrued liabilities Provisions Income taxes receivable (payable) Derivative ﬁnancial instruments Dividends payable Deferred revenues and contract liabilities $ 525,052 912,186 12,063 (797,807) (23,680) 9,275 (10,366) (22,139) (140,898) $ 522,462 873,507 9,932 (916,300) (24,382) (28,368) 27,624 (18,737) (136,244) $ 2,590 38,679 2,131 118,493 702 37,643 (37,990) (3,402) (4,654) Total non-cash working capital $ 463,686 $ 309,494 $ 154,192 — 4% 21% (13%) (3%) nm nm 18% 3% 50% 25 Accounts receivable were largely unchanged from last year. Trade accounts receivable were down slightly on improved collections within the Equipment Group. Other receivables, largely credits and claims from suppliers increased on timing of payment. Days sales outstanding (“DSOs”) was 43 days, unchanged from last year. Inventories increased $38.7 million or 4% with increases in both Groups: • Equipment Group inventories were $37.3 million or 4% higher with increases in equipment (up $22.2 million or 4%) and parts (up $15.9 million or 7%). The higher inventory levels were mainly attributable to improved availability from suppliers, positioning for better penetration in the expanded territories, transitional terms from suppliers, and on higher RPO levels. Service work-in-process was down $0.8 million or 1% with improvement in invoicing cycle and timing of project completion. • CIMCO inventories were up $1.3 million or 6% on higher work-in-process levels and parts. Other current assets include prepaid expenses, which vary year-over-year on the timing of payments and the realization of expense. Accounts payable and accrued liabilities decreased $118.5 million or 13% on the timing of inventory purchases. Certain transitional terms provided in conjunction with the 2017 acquisition are expected to end mid-year 2020, at which time accounts payable will begin to revert to more normal levels. The adoption of IFRS 16 – Leases in the current year resulted in the recognition of current lease liabilities of $9.7 million at December 31, 2019 (refer to note 6 of the notes to the consolidated ﬁnancial statements). Income taxes receivable (payable) reﬂects the difference between tax installments and current income tax expense. Derivative ﬁnancial instruments represent the fair value of foreign exchange contracts. Fluctuations in the value of the Canadian dollar have led to a cumulative net loss of $10.4 million as at December 31, 2019. This is not expected to affect net earnings as the unrealized losses will offset future gains on the related hedged items. Higher dividends payable year-over-year reﬂect the higher dividend rate. Early in 2019, the quarterly dividend rate was increased from $0.23 per share to $0.27 per share, a 17.4% increase. Deferred revenues and contract liabilities represent billings to customers in excess of revenue recognized. • In the Equipment Group, these balances arise mainly due to progress billings from the sale of power and energy systems, product support maintenance contracts, sales of equipment with residual value guarantees and customer deposits for machinery to be delivered in the future. In 2019, these increased $1.3 million or 1% largely related to progress billings and customer deposits for deliveries in 2020. • At CIMCO, these balances arise on progress billings from the sale of refrigeration packages and were up $3.4 million or 17%, reﬂecting activity levels, and customers’ construction needs. 2.3 million options to purchase common shares were outstanding, of which 0.9 million were exercisable. 2. An Employee Share Purchase Plan whereby employees can purchase shares by way of payroll deductions. Under the terms of this plan, which is designed to incentivize long-term share ownership, eligible employees may purchase common shares of the Company in the open market at the then-current market price. The Company pays a portion of the purchase price, matching contributions at a rate of $1 for every $3 contributed, to a maximum of 2.5% of an employee’s base salary per annum. Company contributions prior to 2019 vested to the employee immediately, while contributions in 2019 onwards will vest in ﬁve years from date of contribution. Company contributions amounting to $2.7 million in 2019 (2018 – $2.4 million) were charged to selling and administrative expense when paid. Approximately 33% (2018 – 32%) of employees participate in the plan, which is administered by an independent third party. Goodwill and Intangibles The Company performs impairment tests on its goodwill and intangibles with indeﬁnite lives on an annual basis or as warranted by events or circumstances. The assessment entails estimating the fair value of operations to which the goodwill and intangibles relate using the present value of expected discounted future cash ﬂows. This assessment affirmed goodwill and intangibles values as at December 31, 2019 as outlined in note 7 of the notes to the consolidated ﬁnancial statements. Employee Share Ownership The Company employs a variety of stock-based compensation plans to align employees’ interests with corporate objectives. 1. An Executive Stock Option Plan for its senior employees. Stock options have a 10-year life, vest 20% per year on each anniversary date of the grant and are exercisable at the designated common share price, which is ﬁxed at prevailing market prices at the date the option is granted. At December 31, 2019, 3. A deferred share unit (“DSU”) plan for executives, certain senior managers and non-employee directors, whereby they may elect, on an annual basis, to receive all or a portion of their performance incentive bonus (in the case of employees) or fees (in the case of directors) in DSUs. Non-employee directors also receive a portion of their compensation in DSUs. A DSU is a notional unit that reﬂects the market value of a single Toromont common share and generally vests immediately. DSUs will be redeemed on cessation of employment or directorship. DSUs have dividend equivalent rights, which are expensed as earned. The Company records the cost of the DSU plan as compensation expense in selling and administrative expenses. As at December 31, 2019, 388,547 DSUs were outstanding with a total value of $27.4 million (2018 – 358,151 units at a value of $19.0 million). The liability for DSUs is included in accounts payable and accrued liabilities on the consolidated statements of ﬁnancial position. 26 Employee Future Beneﬁts The Company sponsors pension arrangements for substantially all of its employees. These include: • Deﬁned contribution plans, which cover the largest segment of employees, including all newly hired employees; • Deﬁned beneﬁt plans, which are largely associated with acquired businesses; • 401(k) matched savings plans for employees in the US; and • Other post-employment beneﬁt plans for certain grandfathered employees in the acquired businesses. Certain unionized employees do not participate in Company-sponsored plans, and contributions are made to their retirement programs in accordance with the respective collective bargaining agreements. Deﬁned Contribution Plans In the case of deﬁned contribution plans, regular contributions are made to the individual employee accounts, which are administered by a plan trustee in accordance with the plan documents. At December 31, 2019, approximately 3,900 employees participated in Company- sponsored deﬁned contribution plans. Deﬁned Beneﬁt Plans The Company sponsors deﬁned beneﬁt pension plans, which provide pension and other post-retirement beneﬁts for approximately 1,700 qualifying employees. All plans are administered by a separate Fund that is legally separate from the Company, with the exception of the Executive Plan described below. The funded status of these plans changed by $21.4 million (an increase in the accrued pension liability) during 2019. The Executive Plan is a supplemental plan and is solely the obligation of the Company. All members of the plan are retired. The Company is not obligated to fund the plan but is obligated to pay beneﬁts under the terms of the plan as they come due. The Company has posted letters of credit to secure the obligations under this plan, which were $16.1 million as at December 31, 2019. A key assumption in pension accounting is the discount rate. This rate is set with regard to the yield on high-quality corporate bonds of similar average duration to the cash ﬂow liabilities of the plans. Yields are volatile and can deviate signiﬁcantly from period to period. Legal and Other Contingencies Due to the size, complexity and nature of the Company’s operations, various legal matters are pending. Exposure to these claims is mitigated through levels of insurance coverage considered appropriate by management and by active management of these matters. In the opinion of management, none of these matters will have a material effect on the Company’s consolidated ﬁnancial position or results of operations. Normal Course Issuer Bid (“NCIB”) Toromont believes that, from time to time, the purchase of its common shares at prevailing market prices may be a worthwhile investment and in the best interests of both Toromont and its shareholders. As such, the normal course issuer bid with the TSX was renewed in 2019. This issuer bid allows the Company to purchase up to approximately 7.0 million of its common shares, representing 10.0% of common shares in the public ﬂoat, in the twelve-month period ending August 30, 2020. 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. No shares were purchased and cancelled under the NCIB program in 2019. In 2018 common shares of 237,952 were purchased and cancelled for $12.8 million (average cost of $53.83 per share, including transaction costs). Outstanding Share Data As at the date of this MD&A, the Company had 82,012,448 common shares and 2,329,705 share options outstanding. Dividends Toromont pays a quarterly dividend on its outstanding common shares and has historically targeted a dividend rate that approximates 30-40% of trailing earnings from continuing operations. During 2019, the Company declared dividends of $1.08 per common share, $0.27 per quarter (2018 – $0.92 per common share or $0.23 per quarter). Considering the Company’s solid ﬁnancial position and positive long-term outlook, the Board of Directors announced an increase to the quarterly dividend to 31 cents per share effective with the dividend payable on April 2, 2020. This represents a 14.8% increase in Toromont’s regular quarterly cash dividend. The Company has paid dividends every year since going public in 1968 and this represents the 31st consecutive year it has announced an increase. Liquidity and Capital Resources Sources of Liquidity Toromont’s debt portfolio is unsecured, to partially fund the acquisition was repaid Toromont’s liquidity requirements can be met unsubordinated and ranks on par with in full during 2018. Standby letters of credit through a variety of sources, including cash each other. utilized $33.1 million of the revolving facility generated from operations, long- and short- The Company maintains a $500.0 (2018 – $29.9 million). term borrowings and the issuance of common million revolving credit facility, maturing in The Company’s credit arrangements shares. Borrowings are obtained through a October 2022. No amounts were drawn on include covenants, restrictions and events variety of senior debentures, notes payable this facility at December 31, 2019 and 2018. of default usually present in arrangements and committed long-term credit facilities. A $250.0 million term facility drawn in 2017 of this nature, including requirements to 27 meet certain ﬁnancial tests periodically The Company expects that continued payments through the next 12 months, and and restrictions on additional indebtedness cash ﬂows from operations in 2020, together that the Company’s credit ratings provide and encumbrances. The Company was in with currently available cash on hand and reasonable access to capital markets to compliance with all covenants at December 31, credit facilities, will be more than sufficient facilitate future debt issuance. 2019 and 2018. to fund its requirements for investments in Cash at December 31, 2019, was working capital, capital assets and dividend $365.6 million, compared to $345.5 million at December 31, 2018. Principal Components of Cash Flow Cash from operating, investing and ﬁnancing activities, as reﬂected in the Consolidated Statements of Cash Flows, is summarized in the following table: ($ 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 in cash in the year Cash, end of year 2019 2018 $ 345,434 $ 160,507 456,240 (156,820) (153,390) 146,030 (56,558) (69,173) (144) 20,155 395,281 236,050 (125,148) 506,183 2,475 (323,985) 254 184,927 $ 365,589 $ 345,434 Cash Flows from Operating Activities by $28.2 million, reﬂecting ongoing Investments in property, plant and Operating activities provided $146.0 million investment in the ﬂeets across the equipment, net of disposition proceeds, in 2019 compared to $506.2 million in 2018. expanded territories, with a focus on were $56.5 million in 2019 versus Cash generated from operations growing and optimizing to adequately $40.0 million in 2018 as follows: increased as a result of the higher net earnings generated by the business. Non-cash working capital and other address retail demand signals year round. The adoption of IFRS 16 – Leases on January 1, 2019, results in higher cash from • $25.5 million for land and buildings for new and expanded branches (2018 – $5.2 million); utilized cash in 2019. Transitional terms operating activities as lease payments (2019 – • $15.7 million for service vehicles offered by suppliers in conjunction with the $10.1 million) are presented under ﬁnancing (2018 – $18.5 million); 2017 acquisition resulted in a signiﬁcant activities (refer to note 6 of the notes to the • $7.7 million for upgrades and increase in accounts payable in 2018 as the consolidated ﬁnancial statements). enhancements to information program was fully implemented. Accounts The components and changes in technology infrastructure and furniture payable was a use of funds in 2019 as non-cash working capital are discussed in and ﬁxtures (2018 – $4.9 million); and deferred payments on inventory purchases more detail in this MD&A under the heading • $7.6 million for machinery and became due on reduced ordering levels. “Consolidated Financial Condition.” equipment (2018 – $11.4 million). Income tax installments exceeded ﬁnal amounts owing resulting in a use of cash in Cash Flows from Investing Activities Cash Flows from Financing Activities 2019. Accounts receivable and inventories increased at a lower rate than in 2018, with Investing activities utilized $56.6 million in Financing activities used $69.2 million in 2019 compared to generating $2.5 million 2019 versus $324.0 million in 2018. good focus on collections and inventory in 2018. In 2018, the $250.0 term facility drawn investment levels. In 2018, a ﬁnal adjustment payment to partially fund the acquisition in 2017 was Net rental ﬂeet additions (purchases related to the acquisition in 2017 was less proceeds of dispositions) were higher collected from the vendor. repaid. Also in 2018, the Company purchased and cancelled 237,952 common shares 28 at an average cost of $53.83 (including transaction costs) for $12.8 million. Other signiﬁcant sources and uses of cash from ﬁnancing activities included: • Dividends paid to common shareholders of $84.8 million or $1.04 per share (2018 – $71.4 million or $0.88 per share); • Cash received on exercise of share options of $26.7 million (2018 – $12.2 million); and • Principal portion of lease liability payments resulting from the adoption of IFRS 16 – Leases, on January 1, 2019 of $10.1 million (2018 – $nil). Outlook On October 27th, Toromont passed the two-year mark following the signiﬁcant acquisition in 2017. The expansion of our territories to include Quebec and the Maritimes presents a great opportunity for the long-term performance of Toromont. The focus on a measured and steady pace of integration, has already delivered tangible improvements in operating results. Effective execution of operational initiatives will be required to continue to realize on this signiﬁcant potential for a greater combined presence in key Canadian economic sectors such as mining, construction and power systems. Additionally, rental services, product support and material handling markets present signiﬁcant growth opportunities over the longer-term. Our focus continues to be on the safety of our people, customer deliverables, business integration, operational efficiencies and asset management initiatives to generate favorable long-term returns. The Equipment Group’s parts and service business continues to provide momentum driven by the larger installed base of equipment working in the ﬁeld, providing a measure of stability in a variable business environment. The Company continues to hire technicians in anticipation of an increase in demand, including the opportunity for increased equipment rebuilds and readying used iron. Broader product lines, investment in rental equipment and developing product support technologies supporting remote diagnostics and telematics are expected to contribute to longer-term growth. The long-term outlook for infrastructure projects and other construction activity remains positive across most territories. A disciplined investment in rental ﬂeets together with the inclusion of equipment lines utilized in the weaker shoulder and winter seasons, present the opportunities to grow and to stabilize seasonality. Assessment of the rental footprint is an aging process. Production at existing mine sites is generating meaningful product support opportunities and incremental equipment sales to facilitate mine expansion, although industry equipment investment has slowed in an uncertain global economic environment. Our substantially increased base of installed equipment is a good bell-weather for future product support activity. CIMCO’s increasing installed base and long-term product support levels are positive signals for future growth trends. CIMCO has a wide product offering using natural refrigerants including innovative CO2 solutions, which remains a differentiator in recreational markets. In industrial markets, CIMCO’s proven track record and strong geographical coverage provide continued growth opportunities. Market activity is tighter, reﬂecting a cautious environment in the near term, although booking activity improved in the year and quoting activity remains solid. The diversity of the markets served, expanding product offering and services, ﬁnancial strength and disciplined operating culture position the Company for continued growth in the long term. Contractual Obligations Contractual obligations are set out in the following table. Management believes that these obligations will be met comfortably through cash on hand, cash generated from operations and existing long-term ﬁnancing facilities. Payments due by year ($ thousands) Long-term debt Principal Interest Accounts payable and accrued liabilities Lease liabilities 2020 2021 2022 2023 2024 Thereafter Total $ — 24,765 $ — 24,765 $ — 24,765 $ — 24,765 $ — 24,765 $ 650,000 $ 650,000 182,399 58,574 819,946 9,694 — 7,717 — 5,701 — 4,077 — 2,490 — 1,744 819,946 31,423 $ 854,405 $ 32,482 $ 30,466 $ 28,842 $ 27,255 $ 710,318 $ 1,683,768 29 Key Performance Measures Management reviews and monitors its activities and the performance indicators it believes are critical to measuring success. Some of the key ﬁnancial performance measures are summarized in the following table. Others include, but are not limited to, measures such as market share, ﬂeet utilization, customer and employee satisfaction, and employee health and safety. Years ended December 31 2019 2018 2017 2016 2015 Expanding markets and broadening product offerings Revenue growth Revenue per employee (thousands) 5.0% $ 575 $ 49.1% 573 22.9% $ 487 $ 3.5% 533 11.2% 537 $ 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) 10.1% 60.4% 16.3% 7.6% 24.2% $ 34.8 $ 22.9% 27.4 21.7% $ 15.0 $ 21.5% 15.2 24.5% $ $ 463.7 $ 15% 18.70 $ 309.5 18% 16.35 $ $ 608.8 $ 40% 13.89 $ 388.5 -4% 11.29 13.5% 17.4% 21.4% 39.4% 21.1% 22.3% 11.6% 5.6% 19.3% 6.3% 5.9% 20.0% $ $ $ 14.0 24.3% 421.3 10% 9.95 8.5% 13.3% 21.6% (1) Deﬁned in the sections titled “Additional GAAP Measures and Non-GAAP Measures.” Measuring Toromont’s results against market segments, most notably industrial markets and Manitoba these strategies over the past ﬁve years construction and mining; agricultural markets; and, illustrates that the Company has delivered • Organic growth through increased • Recent political trade wars between consistent, steady growth. The addition rental ﬂeet size and additional branches; the USA and China which have created of the Quebec and Maritimes territories • Increased customer demand for formal uncertainty and adversely impacted in October 2017, bolstered these key product support agreements; several industries, including steel performance measures and provides • Additional product offerings over the and agriculture. a larger platform for continued growth. years from Caterpillar and other The 2018 amounts shown above include suppliers; and Changes in the Canadian/US exchange one full year of operations in the acquired • Governmental funding programs such rate also affect reported revenues as the territories, and are fully comparable to 2019. as the RinC program which provided exchange rate impacts the purchase price Results for 2017 include the two months support for recreational spending. of equipment that, in turn, is reﬂected in of operations under Toromont’s ownership, selling prices. Since 2015 there have been thereby affecting the comparability of results Over the same ﬁve-year period, revenue ﬂuctuations in the average yearly exchange versus the prior years. growth has been constrained at times by rate of Canadian dollar against the US dollar, Since 2015, revenues increased at an a number of factors including: during which time it has ranged between average annual rate of 18.4%, with product • General economic weakness and US$0.75 and US$0.78 and averaged support growing at 23.7% annually. uncertainty in speciﬁc sectors; US$0.77. Over this period, revenue growth has • Volatility in commodity prices; Toromont has generated a signiﬁcant been mainly a result of: • Competitive conditions; competitive advantage by investing in its • In 2017 and 2018, the acquisition • Inability to source equipment and parts resources, in part to increase productivity of the Hewitt Group of Companies, from suppliers to meet customer levels. We will continue this into the future which contributed $242.6 million and demand or delivery schedules; as it is a crucial element to our success in $1.3 billion to revenue respectively; • Declines in underlying market the marketplace. • Increased customer demand in certain conditions such as depressed US 30 Toromont continues to maintain a strong balance sheet. Leverage, as represented by the ratio of net debt to total capitalization was 15% at the end of 2019 versus 18% at the end of 2018. No additional debt ﬁnance was obtained in 2019, the decrease in ratio represents repayment on existing debt, as well as increased cash generation from operations. Toromont has paid dividends consistently since 1968 and has increased the dividend in each of the last 31 years. The regular quarterly dividend rate was increased 17.4% from $0.23 per share to $0.27 per share in 2019 and a further 14.8% to $0.31 per share in 2020, evidencing our commitment to delivering exceptional shareholder value. Consolidated Fourth Quarter Operating Results Three months ended December 31 ($ thousands, except per share amounts) 2019 2018 $ Change % Change Revenues Cost of goods sold $ 1,025,190 770,016 $ 966,047 722,581 $ 59,143 47,435 6% 7% 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 255,174 126,976 128,198 6,854 (3,166) 124,510 34,056 243,466 121,837 121,629 6,550 (2,488) 117,567 32,669 $ $ 90,454 1.10 $ $ 84,898 1.04 $ $ 11,708 5,139 6,569 304 (678) 6,943 1,387 5,556 0.06 5% 4% 5% 5% 27% 6% 4% 7% 6% 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 24.9% 12.4% 12.5% 27.4% 25.2% 12.6% 12.6% 27.8% Fourth quarter results reﬂect variables in Revenues grew $59.1 million or 6% on income at CIMCO. Operating income the Equipment Group similar to those growth in the Equipment Group (up 7%), while margin decreased 10 bps to 12.5%. described for the year: revenues at CIMCO were largely unchanged. Interest expense increased $0.3 million • Signiﬁcant year-over-year improvement Gross proﬁt margin decreased 30 bps in proﬁt at the dealership; to 24.9% in the quarter. The Equipment in the quarter due to ﬁnancing costs related to the adoption of IFRS 16 – Leases. • Declines in earnings from the rental Group reported lower gross margins while Interest income increased $0.7 million services business, as it works through CIMCO’s margins increased. on higher investment income resulting the absorption of signiﬁcant capital Selling and administrative expenses from higher average cash balances held investments; and increased $5.1 million or 4%. Mark-to-market throughout the year and higher interest • Challenges in agricultural equipment adjustments on DSUs increased expenses by from conversions of RPOs. markets leading to underperformance $7.4 million. Allowance for doubtful accounts The effective income tax rate for the and a charge to used equipment values was $3.1 million lower on improved fourth quarter was 27.4% compared to recognizing market conditions. collections. All other expenses increased 27.8% in 2018. The decrease is $2.6 million in support of the revenue growth. substantially due to the continued phase in In addition, CIMCO earnings improved as increased product support and reduced As a percentage of revenues, expenses were 20 bps lower than last year at 12.4%. of corporate tax rate reductions in Quebec. Net earnings in the quarter were up inventory charges were partially offset by Operating income increased $6.6 million $5.6 million or 7% to $90.5 million with reduced project activity (albeit at improved reﬂecting the higher activity levels in the basic EPS closely tracking the increase, margins on better execution). Equipment Group and increased operating up $0.06 or 6% to $1.10. 31 Business Segment Fourth Quarter Operating Results EQUIPMENT GROUP Three months ended December 31 ($ thousands) Equipment sales and rentals New Used Rentals Total equipment sales and rentals Product support Power generation Total revenues Operating income 2019 2018 $ Change % Change $ 363,660 99,589 114,729 577,978 352,243 2,910 $ 333,209 100,015 113,139 546,363 324,641 2,864 $ 933,131 $ 873,868 $ 117,728 $ 115,741 $ $ $ $ 30,451 (426) 1,590 31,615 27,602 46 59,263 1,987 9% — 1% 6% 9% 2% 7% 2% (7.9) (2%) Bookings ($ millions) $ 415.1 $ 423.0 Key ratios: Product support revenues as a % of total revenues Operating income margin Group total revenues as a % of consolidated revenues 37.7% 12.6% 91.0% 37.1% 13.2% 90.5% The Equipment Group reported good results for the fourth quarter on revenue growth. by lower power systems (down 6%) and heavy equipment rentals (down 12%). Total equipment sales (new and used) increased $30.0 million or 7%. Higher sales into construction (up 8%), mining (up 7%) and power systems (up 23%), were partially offset by lower sales into material handling (down 17%) and agricultural markets (down 32%). Rental revenues increased $1.6 million or 1%. Most rental segments reported growth, led by light equipment rentals (up 3%), equipment on rent with a purchase option (up 13%) and material handling rentals (up 4%), partially offset Product support revenues increased $27.6 million or 9% on higher parts (up 8%) and service (up 10%). Activity levels were good across most market segments. Power generation revenues were $2.9 million in 2019 and 2018. Gross margins decreased 120 bps in the quarter versus last year principally due to lower equipment margins on continued competitive pressures and a tight pricing environment. Selling and administrative expenses increased $2.4 million or 2%, largely reﬂecting higher compensation and information technology costs, offset by lower allowance for doubtful accounts. As a percentage of revenues, selling and administrative expenses were down 60 bps to 12.1%. Operating income increased $2.0 million in the quarter but was lower by 60 bps as a percentage of revenues at 12.6%, largely reﬂecting the lower equipment margins. Bookings decreased $7.9 million or 2% to $415.1 million reﬂecting lower mining, construction and agriculture orders, partially offset by higher power systems and material handling lift truck orders. CIMCO Three months ended December 31 ($ 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 32 $ $ $ $ 2019 50,780 41,279 92,059 10,470 44.4 44.8% 11.4% 9.0% 2018 $ Change % Change $ $ $ $ (151) 31 (120) 4,582 7.5 — — — 78% 20% $ $ $ $ 50,931 41,248 92,179 5,888 36.9 44.7% 6.4% 9.5% CIMCO’s results in the fourth quarter of industrial activity. In the US, revenues were as a result were up 300 bps to 14.9% as a 2018 included a $6.0 million charge for down 12% with lower industrial sales more percentage of revenues. inventory write-down described earlier. than offsetting strong recreational activity. Operating income increased $4.6 million Excluding this item, CIMCO’s results in Product support revenues were in line in the quarter as reduced inventory the fourth quarter were lower as higher with the record fourth quarter last year write-downs and improved gross margins expenses were only partially offset by as growth in the US was offset by a slight on better project execution were partially improved gross margins. Translation of decrease in Canada. offset by higher expense levels. US operations did not have a signiﬁcant Gross margins, excluding the one-time Bookings increased $7.5 million or 20% impact on results. item, increased 150 bps in the quarter on to $44.4 million on strong orders in both Package revenues were largely improved project execution, partially offset Canada and the US. Recreational orders unchanged in the quarter compared to by lower product support margins. were up in the US (59%) but down in the similar period last year. Revenues in Selling and administrative expenses Canada (46%), while industrial orders Canada were higher by 2%, with strong increased $2.7 million or 26%, mainly increased in Canada (80%) but were down recreational sales and relatively unchanged reﬂecting higher compensation costs and in the US (35%). Quarterly Results The following table summarizes unaudited quarterly consolidated ﬁnancial data for the eight most recently completed quarters. This quarterly information is unaudited but has been prepared on the same basis as the 2019 annual audited consolidated ﬁnancial statements. ($ thousands, except per share amounts) Q1 2019 Q2 2019 Q3 2019 Q4 2019 Revenues Equipment Group CIMCO Total revenues Net earnings $ 633,875 66,099 $ 895,457 82,863 $ 881,487 93,734 $ 933,131 92,059 $ 699,974 $ 978,320 $ 975,221 $ 1,025,190 $ 39,261 $ 77,398 $ 79,687 $ 90,454 Per share information: Basic earnings per share Diluted earnings per share Dividends paid per share Weighted average common shares outstanding – basic (in thousands) $ $ $ 0.48 0.48 0.23 $ $ $ 0.95 0.94 0.27 $ $ $ 0.98 0.97 0.27 $ $ $ 1.10 1.10 0.27 81,326 81,510 81,622 81,897 ($ 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 33 Interim period revenues and earnings equipment on rent with a purchase option. up. This trend can be, and has been, historically reﬂect variability from quarter This pattern is impacted by the timing of impacted somewhat by signiﬁcant to quarter due to seasonality. signiﬁcant sales to mining and other governmental funding initiatives and The Equipment Group has historically customers, resulting from the timing of signiﬁcant industrial projects. had a distinct seasonal trend in activity mine site development and access, and Historically, inventories have increased levels. Lower revenues are recorded during construction project schedules. through the year to meet the expected the ﬁrst quarter due to winter shutdowns in CIMCO has also had a distinct seasonal demand for higher deliveries in the third the construction industry. The fourth trend in results historically, due to timing of and fourth quarters of the ﬁscal year. This quarter had typically been the strongest construction activity. Lower revenues are seasonal sales trend also leads accounts due in part to the timing of customers’ recorded during the ﬁrst quarter on slower receivable to be at their highest level at capital investment decisions, delivery of construction schedules due to winter year-end. equipment from suppliers for customer- weather. Revenues increase in subsequent speciﬁc orders and conversions of quarters as construction schedules ramp Selected Annual Information ($ thousands, except per share amounts) 2019 2018 2017 Revenues Net earnings Earnings per share (“EPS”) Basic Diluted Dividends declared per share $ 3,678,705 $ 286,800 $ 3,504,236 $ 251,984 $ 2,350,162 $ 175,970 $ $ $ 3.52 3.49 1.08 $ $ $ 3.10 3.07 0.92 $ 3,234,531 $ 645,562 81.2 $ $ $ 2.22 2.20 0.76 $ 2,866,945 $ 895,747 79.1 Total assets Total long-term debt Weighted average common shares outstanding – basic (in millions) $ 3,371,337 $ 645,471 81.6 The acquisition of the Hewitt Group of 6% on good growth in both Groups, buoyed 14% in 2019 and 39% in 2018. Companies in October 2017 impacts the in part by continued product support growth. Dividends have generally increased comparability of ﬁnancial results and Net earnings increased 14% in 2019. in proportion to trailing earnings growth. performance between 2018 and 2017, Equipment Group delivered good results The quarterly dividend rate continues to with only two months of operations in 2017 on the higher revenues and a lower relative increase – in 2017 by 5.6% to $0.19 per under Toromont’s ownership. expense ratio, while CIMCO’s results share, in 2018 by 21.1% to $0.23 per share, Revenues grew 5% in 2019. Equipment improved on better project execution and in 2019 by 17.4% to $0.27 per share and in Group revenues increased 6% on growth a one-time inventory write-down in 2018 2020 by 14.8% to $0.31. The Company has in product support, total new and used which did not repeat. Net interest expense paid dividends every year since 1968. equipment sales and rentals resulting was lower in 2019 as strong cash inﬂows Total assets increased 4% in 2019 and from good market activity and increased resulted in lower net debt levels. Net 13% in 2018 on continued investments in investment in the rental ﬂeets. CIMCO earnings increased 43% in 2018. In addition the rental ﬂeets and capital assets, as well revenues were down 2% as continued to the incremental net earnings at the as higher inventory levels held generally in growth in product support activity was acquired businesses, the Equipment Group support of the expanded business territory offset by lower package sales. Revenues delivered good results, offset weaker results and volumes. grew 49% in 2018 with the acquired at CIMCO and the higher net interest expense Long-term debt was largely unchanged businesses contributing $1.3 billion in its as a result of the additional debt incurred to from 2018. In 2018, certain amounts drawn ﬁrst full year of operations, compared to partially fund the acquisition in 2017. on the term credit facility to ﬁnance the 2017 $242.6 million in 2017 for two months. EPS growth has generally tracked growth acquisition were repaid, in light of strong The legacy businesses revenues increased in net earnings, with basic EPS increasing cash balances and inﬂows. 34 Risks and Risk Management In the normal course of business, Toromont is exposed to risks that may potentially impact its ﬁnancial results in any or all of its business segments. The Company and each operating segment employ risk management strategies with a view to mitigating these risks on a cost-effective basis. Business Cycle Expenditures on capital goods have historically been cyclical, reﬂecting a variety of factors including interest rates, foreign exchange rates, consumer and business conﬁdence, commodity prices, corporate proﬁts, credit conditions and the availability of capital to ﬁnance purchases. Toromont’s customers are typically affected, to varying degrees, by these factors and trends in the general business cycle within their respective markets. As a result, Toromont’s ﬁnancial performance is affected by the impact of such business cycles on the Company’s customer base. 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 Inc. under a dealership agreement that dates back to 1993. As is customary in distribution arrangements of this type, the agreement with Caterpillar Inc. can be terminated by either party upon 90 days’ notice. In the event Caterpillar Inc. terminates, it must repurchase substantially all inventories of new equipment and parts at cost. Toromont has maintained an excellent relationship with Caterpillar Inc. since inception and management expects this will continue going forward. Toromont is dependent on the continued market acceptance of Caterpillar Inc.’s products. It is believed that Caterpillar Inc. 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 Inc. will be able to maintain its reputation and market position in the future. Any resulting decrease in the demand for Caterpillar Inc. products could have a material adverse impact on the Company’s business, results of operations and future prospects. Toromont is also dependent on Caterpillar Inc. for timely supply of equipment and parts. From time to time during periods of intense demand, Caterpillar Inc. 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 Inc. 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 expected 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, 35 food and beverage, and governmental agencies. Management does not believe that any single customer represents signiﬁcant credit risk. These customers are based predominately in Canada. The credit risk associated with derivative ﬁnancial instruments arises from the possibility that the counterparties may default on their obligations. In order to minimize this risk, the Company enters into derivative transactions only with highly rated ﬁnancial institutions. Warranties and Maintenance Contracts Warranties are provided for most of the equipment sold, typically for a one-year period following sale. The warranty claim risk is generally shared jointly with the equipment manufacturer. Accordingly, liability is generally limited to the service component of the warranty claim, while the manufacturer is responsible for providing the required parts. The Company also enters into long-term maintenance and repair contracts, whereby it is obligated to maintain equipment for its customers. The length of these contracts varies generally from two to ﬁve years. The contracts are typically ﬁxed price on either machine hours or cost per hour, with provisions for inﬂationary and exchange adjustments. Due to the long-term nature of these contracts, there is a risk that maintenance costs may exceed the estimate, thereby resulting in a loss on the contract. These contracts are closely monitored for early warning signs of cost overruns. In addition, the manufacturer may, in certain circumstances, share in the cost overruns if proﬁtability falls below a certain threshold. Foreign Exchange The Company transacts business in multiple currencies, the most signiﬁcant of which are the Canadian dollar and the US dollar. As a result, the Company has foreign currency exposure with respect to items denominated in foreign currencies. The rate of exchange between the Canadian and US dollar has an impact on revenue trends. The Canadian dollar averaged US$0.75 and US$0.77, in 2019 and 2018, respectively. 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, 2019, the Company’s outstanding debt of $650.0 million was entirely ﬁxed-rate and matures between 2025 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 does not intend to settle or reﬁnance any existing ﬁxed-rate debt before maturity. The Company’s revolving credit facility of $500.0 million is 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, 2019, no amounts were drawn on this facility while standby letters of credit utilized $33.1 million. 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 36 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. 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. The Company has discussed the development, selection, and application of its key accounting policies, and the critical accounting estimates and assumptions they involve, with the Audit Committee. 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, 2019, the Company adopted IFRS 16 – Leases, the interpretation of IFRIC 23 – Uncertainty over Income Tax Treatments, and amendments to IAS 19 – Employee Beneﬁts. The impact upon adoption are described in full in note 1 of the notes to the consolidated ﬁnancial statements. Pending Accounting Changes A number of amendments to standards have been issued but are not yet effective for the ﬁnancial year ending December 31, 2019, and accordingly, have not been applied. The Company reviewed these amendments and concluded that there would be no impact on adoption given their nature and applicability. 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, 2019. 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, 2019, 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, 2019. There have been no changes in the design of the Company’s internal control over ﬁnancial reporting during 2019 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 37 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. 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 $ 2019 90,454 6,854 (3,166) 34,056 $ 2018 84,898 6,550 (2,488) 32,669 2019 2018 $ 286,800 27,707 (9,752) 107,740 $ 251,984 30,643 (8,918) 95,865 Operating income $ 128,198 $ 121,629 $ 412,495 $ 369,574 Net Debt to Total Capitalization and Net Debt to Total Equity Net debt to total capitalization and net debt to total 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 38 2019 2018 $ 645,471 — 365,589 $ 644,540 1,022 345,434 $ 279,882 $ 300,128 1,533,891 1,327,679 $ 1,813,773 $ 1,627,807 15% 0.18:1 18% 0.23:1 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 2019 2018 $ 1,824,254 994,979 $ 1,779,100 1,125,194 $ 829,275 $ 653,906 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 2019 2018 $ 1,824,254 365,589 $ 1,779,100 345,434 1,458,665 1,433,666 994,979 — 994,979 1,125,194 1,022 1,124,172 $ 463,686 $ 309,494 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 2019 2018 $ 82,012 70.59 $ 81,226 54.26 $ 5,789,258 $ 4,407,344 $ 645,471 — 365,589 $ 644,540 1,022 345,434 $ 279,882 $ 300,128 Total enterprise value $ 6,069,140 $ 4,707,472 39 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 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 ordered by customers for future deliveries. Management uses order backlog as a measure of projecting future equipment deliveries. There are no directly comparable IFRS measures for order bookings or backlog. Return on Capital Employed (“ROCE”) ROCE is utilized to assess both current operating performance and prospective investments. The 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 Adjusted net earnings Average capital employed Return on capital employed Return on Equity (“ROE”) 2019 2018 $ 286,800 27,707 (9,752) 4,283 107,740 $ 251,984 30,643 (8,918) 3,461 95,865 $ 416,778 $ 373,035 $ 1,823,420 $ 1,720,921 22.9% 21.7% 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 2019 2018 $ 286,800 $ 251,984 $ 1,338,468 $ 1,130,947 21.4% 22.3% 40 Management’s Report to the Shareholders The preparation and presentation of assurance that transactions are appropriately determining that management fulﬁlls its the 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 as external auditors to discuss internal statements reﬂect amounts which must, of 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, where an independent professional opinion. Their statements and Management’s Discussion 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 11, 2020 Toronto, Canada 41 Independent Auditor’s Report To the Shareholders of Toromont Industries Ltd. We have audited the consolidated ﬁnancial statements of Toromont Industries Ltd. and its subsidiaries (the Group), which comprise the consolidated statements of ﬁnancial position as at December 31, 2019 and 2018, the consolidated income statements, the consolidated statements of comprehensive income, consolidated statements of changes in equity and consolidated statements of cash ﬂows for the years then ended, and notes to the consolidated ﬁnancial statements, including a summary of signiﬁcant accounting policies. In our opinion, the accompanying consolidated ﬁnancial statements present fairly, in all material respects the consolidated ﬁnancial position of the Group as at December 31, 2019 and 2018, and its consolidated ﬁnancial performance and its consolidated cash ﬂows for the years then ended in accordance with International Financial Reporting Standards (“IFRS”). Basis for Opinion We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those 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 in accordance with the ethical requirements that are relevant to our audit of the consolidated ﬁnancial statements in Canada, and we have fulﬁlled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Other Information Management is responsible for the other information which comprises: • Management’s Discussion & Analysis • The information other than the consolidated ﬁnancial statements and our auditor’s report thereon, in the Annual Report Our opinion on the consolidated ﬁnancial intends to liquidate the Group or to cease statements does not cover the other operations, or has no realistic alternative information and we do not express any but to do so. form of assurance conclusion thereon. Those charged with governance are In connection with our audit of the responsible for overseeing the Group’s consolidated ﬁnancial statements, our ﬁnancial reporting process. responsibility is to read the other information, and in doing so, consider Auditor’s Responsibilities for the Audit of whether the other information is materially the Consolidated Financial Statements inconsistent with the consolidated ﬁnancial Our objectives are to obtain reasonable statements or our knowledge obtained in assurance about whether the consolidated the audit or otherwise appears to be ﬁnancial statements as a whole are free materially misstated. from material misstatement, whether due We obtained Management’s Discussion to fraud or error, and to issue an auditor’s & Analysis prior to the date of this auditor’s report that includes our opinion. Reasonable report. If, based on the work we have assurance is a high level of assurance, but is performed, we conclude that there is a not a guarantee that an audit conducted in material misstatement of this other accordance with Canadian generally information, we are required to report that accepted auditing standards will always fact in this auditor’s report. We have detect a material misstatement when it exists. nothing to report in this regard. Misstatements can arise from fraud or error 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 auditor’s report. If based on the work we will be expected to inﬂuence the economic perform on this other information, we decisions of users taken on the basis of conclude there is a material misstatement of these consolidated ﬁnancial statements. other information, we are required to report As part of an audit in accordance with 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: Consolidated Financial Statements • Identify and assess the risks of material Management is responsible for the misstatement of the consolidated preparation and fair presentation of the ﬁnancial statements, whether due to consolidated ﬁnancial statements in fraud or error, design and perform audit accordance with IFRS, and for such internal procedures responsive to those risks, control as management determines is and obtain audit evidence that is necessary to enable the preparation of sufficient and appropriate to provide a consolidated ﬁnancial statements that are basis for our opinion. The risk of not free from material misstatement, whether detecting a material misstatement due to fraud or error. resulting from fraud is higher than for In preparing the consolidated ﬁnancial one resulting from error, as fraud may statements, management is responsible involve collusion, forgery, intentional for assessing the Group’s ability to omissions, misrepresentations, or the continue as a going concern, disclosing, as override of internal control. applicable, matters related to going • Obtain an understanding of internal concern and using the going concern basis control relevant to the audit in order to of accounting unless management either design audit procedures that are 42 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 • Evaluate the appropriateness of auditor’s report. However, future events We communicate with those charged with accounting policies used and the or conditions may cause the Group to governance regarding, among other matters, reasonableness of accounting cease to continue as a going concern. the planned scope and timing of the audit estimates and related disclosures made • Evaluate the overall presentation, and signiﬁcant audit ﬁndings, including any by management. structure, and content of the signiﬁcant deﬁciencies in internal control • Conclude on the appropriateness of consolidated ﬁnancial statements, that we identify during 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 11, 2020 Toronto, Canada 43 Consolidated Statements of Financial Position Note 2019 2018 3 4 12 5 5 6 15 7 6,18 8 9 10 12 9 6 10 19 15 11 $ 365,589 525,052 912,186 9,364 — 12,063 $ 345,434 522,462 873,507 118 27,647 9,932 1,824,254 1,779,100 428,527 592,403 42,105 1,217 482,831 412,776 541,530 13,206 1,610 486,309 $ 3,371,337 $ 3,234,531 $ 819,946 23,680 140,898 — 10,366 89 $ 935,037 24,382 136,244 1,022 23 28,486 994,979 1,125,194 16,407 21,734 645,471 125,705 33,150 17,247 — 644,540 104,342 15,529 1,837,446 1,906,852 490,047 13,088 1,031,097 (341) 457,800 12,879 851,049 5,951 1,533,891 1,327,679 $ 3,371,337 $ 3,234,531 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 lease liabilities Long-term debt Post-employment obligations Deferred tax liabilities Total liabilities Shareholders’ equity Share capital Contributed surplus Retained earnings Accumulated other comprehensive (loss) income Shareholders’ equity Total liabilities and shareholders’ equity Commitments – see note 22 See accompanying notes Approved by the Board: Robert M. Ogilvie Director 44 Wayne S. Hill Director Consolidated Income Statements Years ended December 31 ($ thousands, except share amounts) Note 2019 2018 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 $ 3,678,705 2,772,583 $ 3,504,236 2,640,835 906,122 493,627 412,495 27,707 (9,752) 394,540 107,740 863,401 493,827 369,574 30,643 (8,918) 347,849 95,865 $ 286,800 $ 251,984 $ $ 3.52 3.49 $ $ 3.10 3.07 81,590,392 82,076,248 81,231,282 81,975,310 14 14 15 16 16 16 16 45 Consolidated Statements of Comprehensive Income Years ended December 31 ($ thousands) Net earnings Other comprehensive (loss) income, net of income taxes: Items that may be reclassiﬁed subsequently to net earnings: 2019 2018 $ 286,800 $ 251,984 Foreign currency translation adjustments (481) 789 Unrealized (losses) gains on derivatives designated as cash ﬂow hedges Income tax recovery (expense) Unrealized (losses) gains on cash ﬂow hedges, net of income taxes Realized losses (gains) on derivatives designated as cash ﬂow hedges Income tax (recovery) expense Realized losses (gains) on cash ﬂow hedges, net of income taxes Items that will not be reclassiﬁed subsequently to net earnings: Actuarial and other (losses) gains Income tax recovery (expense) Actuarial and other (losses) gains, net of income taxes Other comprehensive (loss) income Total comprehensive income See accompanying notes (12,232) 3,180 (9,052) 4,380 (1,139) 3,241 (25,252) 6,692 (18,560) 8,239 (2,144) 6,095 (1,528) 398 (1,130) 20,652 (5,413) 15,239 (24,852) 20,993 $ 261,948 $ 272,977 46 Consolidated Statements of Cash Flows Years ended December 31 ($ thousands) Note 2019 2018 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 5,6,7,10 21 $ 286,800 $ 251,984 162,962 5,730 (3,889) 26,757 — (22,120) 456,240 (156,820) (212,176) 58,786 141,535 5,101 3,659 7,171 821 (14,990) 395,281 236,050 (149,650) 24,502 Cash provided by operating activities 146,030 506,183 Investing activities Additions to property, plant and equipment Proceeds on disposal of property, plant and equipment (Increase) decrease in other assets Cash (used in) provided by investing activities Financing activities Repayment of term credit facility Repayment of senior debentures Dividends paid Cash received on exercise of stock options Shares purchased for cancellation Payment of lease liabilities Cash used in ﬁnancing activities Effect of currency translation on cash balances Increase in cash Cash, at beginning of year Cash, at end of year Supplemental cash ﬂow information (note 21) See accompanying notes 11 11 (57,202) 737 (93) (56,558) — (1,022) (84,790) 26,726 — (10,087) (69,173) (144) 20,155 345,434 (49,504) 9,506 42,473 2,475 (250,000) (1,941) (71,434) 12,198 (12,808) — (323,985) 254 184,927 160,507 $ 365,589 $ 345,434 47 Consolidated Statements of Changes in Equity ($ thousands, except share numbers) Number Share Capital Accumulated Other Comprehensive Income (Loss) Contributed Surplus Amount Foreign Currency Retained Translation Cash Flow Hedges Earnings Adjustments Total Total At January 1, 2018 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 514,516 — 14,710 — (2,512) 5,101 Effect of stock compensation plans 514,516 14,710 2,589 — — — Shares purchased for cancellation Dividends declared (237,952) — (1,337) — — — (11,471) (74,516) — — — — — — — — — — — — — — — 12,198 5,101 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 Net earnings Other comprehensive loss Total comprehensive income (loss) — — — — — — — — 286,800 (18,560) — (481) — (5,811) — (6,292) 286,800 (24,852) — 268,240 (481) (5,811) (6,292) 261,948 Exercise of stock options Stock-based compensation expense 786,065 — 32,247 — (5,521) 5,730 Effect of stock compensation plans 786,065 32,247 209 — — — Dividends declared — — — (88,192) — — — — — — — — — — — — 26,726 5,730 32,456 (88,192) At December 31, 2019 82,012,448 $ 490,047 $ 13,088 $ 1,031,097 $ 2,219 $ (2,560) $ (341) $ 1,533,891 See accompanying notes 48 Notes to the Consolidated Financial Statements December 31, 2019 ($ thousands, except where otherwise indicated) 1. Description of Business and Signiﬁcant Accounting Policies Corporate Information Toromont Industries Ltd. (the “Company” or “Toromont”) is a limited company incorporated and domiciled in Canada whose shares are publicly traded on the Toronto Stock Exchange under the symbol TIH. The registered office is located at 3131 Highway 7 West, Concord, Ontario, Canada. The Company operates through two business segments: the Equipment Group and CIMCO. The Equipment Group includes one of the larger Caterpillar dealerships by revenue and geographic territory – spanning the Canadian provinces of Newfoundland & Labrador, Nova Scotia, New Brunswick, Prince Edward Island, Québec, Ontario and Manitoba, in addition to most of the territory of Nunavut. The Equipment Group includes industry leading rental operations, a complementary material handling business and an agricultural equipment business. CIMCO is a market leader in the design, engineering, fabrication and installation of industrial and recreational refrigeration systems. Both segments offer comprehensive product support capabilities. Toromont employs over 6,500 people in more than 150 locations. Statement of Compliance These consolidated ﬁnancial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”). These consolidated ﬁnancial statements were authorized for issue by the Audit Committee of the Board of Directors on February 11, 2020. Basis of Preparation These consolidated ﬁnancial statements were prepared on a historical cost basis, except for derivative instruments that have been measured at fair value. The consolidated ﬁnancial statements are presented in Canadian dollars and all values are rounded to the nearest thousand, except where otherwise indicated. Basis of Consolidation The consolidated ﬁnancial statements include the accounts of the Company and its wholly owned subsidiaries. Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Company obtains control, and continue to be consolidated until the date that such control ceases. The ﬁnancial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies. All intra-group balances, income and expenses and unrealized gains and losses resulting from intra-group transactions are eliminated in full upon consolidation. Business Combinations and Goodwill When determining the nature of an acquisition, as either a business combination or an asset acquisition, management deﬁnes a business as “an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs or other economic beneﬁts directly to investors or other owners, members or participants.” An integrated set of activities and assets requires two essential elements – inputs and processes applied to those inputs, which together are or will be used to create outputs. However, a business need not include all of the inputs or processes that the seller used in operating that business if the Company is capable of acquiring the business and continuing to produce outputs, for example, by integrating the business with their own inputs and processes. If the transaction does not meet the criteria of a business, it is accounted for as an asset acquisition. Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of consideration transferred, measured at acquisition date fair value. Acquisition costs are expensed as incurred. Goodwill is initially measured at cost, being the excess of the cost of the business combination over the Company’s share in the net fair value of the acquiree’s identiﬁable assets, liabilities and contingent liabilities. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the consolidated income statement. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Company’s cash-generating units (“CGUs”) that are expected to beneﬁt from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units. Where goodwill forms part of a CGU and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative fair values of the operation disposed of and the portion of the CGU retained. 49 Cash and Cash Equivalents Cash consists of petty cash and demand deposits. Cash equivalents, when applicable, consist of short-term deposits with an original maturity of three months or less. Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale. Accounts Receivable Trade accounts receivable are amounts due from customers for merchandise sold or services performed in the ordinary course of business. If collection is expected in one year or less (or in the normal operating cycle of the business, if longer), they are classiﬁed as current assets. If not, they are presented as non-current assets. Trade accounts receivable are recognized initially at amounts due, net of impairment for estimated expected credit loss (allowance for doubtful accounts). The expense relating to expected credit loss is included within selling and administrative expenses in the consolidated income statements. Unbilled receivables represent contract assets related to the Company’s rights to consideration for work completed but not billed as at the reporting date on the sale of power and energy systems and refrigeration packages. These are transferred to receivables when the entitlement to payment becomes unconditional. Inventories Inventories are valued at the lower of cost and net realizable value. Cost of equipment, repair and distribution parts and direct materials include purchase cost and costs incurred in bringing each product to its present location and condition. Serialized inventory is determined on a speciﬁc-item basis. Non-serialized inventory is determined based on a weighted average actual cost. Cost of work-in-process includes cost of direct materials, labour and an allocation of manufacturing overheads, excluding borrowing costs, based on normal operating capacity. Cost of work-in-process (contracts) are costs speciﬁcally chargeable to customers that are deferred in inventories and are probable of recovery. Cost of inventories includes the transfer of gains and losses on qualifying cash ﬂow hedges, recognized in other comprehensive income (loss), in respect of the purchase of inventory. Property, Plant and Equipment Property, plant and equipment are recorded at cost, net of accumulated depreciation and accumulated impairment losses, if any. Depreciation is recognized principally on a straight-line basis over the estimated useful lives of the assets. Estimated useful lives range from 20 to 30 years for buildings, 3 to 10 years for equipment and 20 years for power generation assets. Leasehold improvements are amortized on a straight-line basis over the term of the lease. Land is not depreciated. The assets’ residual values, useful lives and methods of depreciation are reviewed at each ﬁnancial year-end and adjusted prospectively, if appropriate. Rental Equipment Rental equipment is recorded at cost, net of accumulated depreciation and any impairment losses. Cost is determined on a speciﬁc-item basis. Rental equipment is depreciated to its estimated residual value over its estimated useful life on a straight- line basis, which ranges from 1 to 10 years. The assets’ residual values, useful lives and methods of depreciation are reviewed at each ﬁnancial year-end and adjusted prospectively, if appropriate. Intangible Assets Intangible assets acquired separately are measured on initial recognition at cost. Intangible assets acquired as part of a business acquisition are initially recorded at the acquisition date fair value. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and accumulated impairment losses, as applicable. Intangible assets with a ﬁnite useful life are amortized over their estimated useful lives and are assessed for impairment whenever there is an indication that the intangible assets may be impaired. The amortization period and the amortization method for intangible assets with ﬁnite useful lives are reviewed at least at the end of each reporting period. 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, straight-line Intangible assets with indeﬁnite useful lives are not amortized, but are tested for impairment annually or when indicators of impairment are present. Distribution networks are considered to have an indeﬁnite life based on the terms of the distribution rights contracts. The assessment of indeﬁnite life is reviewed annually to determine whether the indeﬁnite life continues to be supportable. Provisions Provisions are recognized when the Company has a present obligation, legal or constructive, as a result of a past event, it is probable that an outﬂow of resources embodying economic beneﬁts will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Provisions for warranty costs are recognized when the product is sold or service provided. Initial recognition is based on historical experience. Financial Instruments Financial assets and liabilities are recognized when the entity becomes a party to the contractual provisions of the instrument. The Company determines the classiﬁcation of its ﬁnancial assets and liabilities at initial recognition or when reclassiﬁed on the consolidated statements of ﬁnancial position. Financial assets and liabilities are classiﬁed in the following measurement categories: (i) amortized cost; (ii) fair value through other comprehensive income (loss); or (iii) fair value through proﬁt usually, or loss (“FVTPL”). Initially, all ﬁnancial assets and liabilities are recognized at fair value. Regular-way trades of ﬁnancial assets and liabilities are recognized on the trade date. Transaction costs are expensed as incurred, except for loans and receivables and loans and borrowings, in which case transaction costs are included in the initial cost. 50 Financial Assets Subsequent measurement of ﬁnancial assets depends on the classiﬁcation. The Company has made the following classiﬁcations: • Cash is classiﬁed as held for trading and as such is measured at fair value, with changes in fair value being included in proﬁt or loss. • Accounts receivable are classiﬁed as loans and receivables and are recorded at amortized cost using the effective interest rate method, less provisions for doubtful accounts. The Company assesses, as at each consolidated statement of ﬁnancial position date, whether there is any objective evidence that a ﬁnancial asset or a group of ﬁnancial assets is impaired. Financial Liabilities All ﬁnancial liabilities are subsequently measured at amortized cost using the effective interest rate method or at FVTPL. Financial liabilities are classiﬁed as FVTPL when the ﬁnancial liability is: (i) contingent consideration of an acquirer in a business combination; (ii) held for trading; or (iii) it is designated as FVTPL. For ﬁnancial liabilities that are designated as FVTPL, the amount of change in the fair value of the ﬁnancial liability that is attributable to changes in the credit risk of that liability is recognized in other comprehensive income (loss) (“OCI”), unless the recognition of the effects of changes in the liability’s credit risk in OCI would create or enlarge an accounting mismatch in the consolidated income statements. The remaining amount of change in the fair value of liability is recognized in the consolidated income statements. Changes in fair value attributable to a ﬁnancial liability’s credit risk that are recognized in OCI are not subsequently reclassiﬁed to the consolidated income statements; instead, they are transferred to retained earnings upon derecognition of the ﬁnancial liability. Financial liabilities that are not: (i) contingent consideration of an acquirer in a business combination; (ii) held for trading; or (iii) are designated as FVTPL, are subsequently measured at amortized cost using the effective interest rate method. Derivatives Derivative assets and liabilities are classiﬁed as held for trading and are measured at fair value with changes in fair value being included in proﬁt or loss, unless they are designated as hedging instruments, in which case changes in fair value are included in OCI. Fair Value of Financial Instruments The Company uses the following hierarchy for determining and disclosing the fair value of ﬁnancial instruments by valuation technique: • Level 1 – unadjusted quoted prices in active markets for identical assets or liabilities. • Level 2 – other techniques for which all inputs that have a signiﬁcant effect on the recorded fair value are observable, either directly or indirectly. • Level 3 – techniques that use inputs that have a signiﬁcant effect on the recorded fair value that are not based on observable market data. Impairment of Financial Assets Financial assets classiﬁed as amortized cost are assessed for impairment at the end of each reporting period and a loss allowance is measured by estimating the lifetime expected credit losses. Certain categories of ﬁnancial assets, such as trade receivables, that are considered not to be impaired individually are also assessed for impairment on a collective basis. A ﬁnancial asset is considered in default when contractual payments are 90 days past due. A ﬁnancial asset may also be considered to be in default if internal or external information indicates that the Company is unlikely to receive the outstanding contractual amounts in full before taking into account any credit enhancements held. A ﬁnancial asset is written off when there is no reasonable expectation of recovering the contractual cash ﬂows. Derivative Financial Instruments and Hedge Accounting Derivative ﬁnancial arrangements are used to hedge exposure to ﬂuctuations in exchange rates. Such derivative ﬁnancial instruments are initially recognized at fair value on the date on which a derivative contract is entered into and are subsequently measured at fair value. Derivatives are carried as ﬁnancial assets when the fair value is positive and as ﬁnancial liabilities when the fair value is negative. At inception, the Company designates and documents the hedge relationship, including identiﬁcation of the transaction and the risk management objectives and strategy for undertaking the hedge. The Company also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash ﬂows of hedged items. The Company has designated certain derivatives as cash ﬂow hedges. These are hedges of ﬁrm commitments and highly probable forecast transactions. The effective portion of changes in the fair value of derivatives that are designated as a cash ﬂow hedge is recognized in OCI. The gain or loss relating to the ineffective portion is recognized immediately in the consolidated income statements. Additionally: • If a hedge of a forecast transaction subsequently results in the recognition of a non-ﬁnancial asset, the associated gains or losses that were recognized in OCI are included in the initial cost or other carrying amount of the asset; • For cash ﬂow hedges other than those identiﬁed above, amounts accumulated in OCI are recycled to the consolidated income statements in the period when the hedged item will affect earnings (for instance, when the forecast sale that is hedged takes place); • When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss in OCI remains in OCI and is recognized when the forecast transaction is ultimately recognized in the consolidated income statements; and • When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in OCI is immediately recognized in the consolidated income statements. Impairment of Non-ﬁnancial Assets The Company assesses whether goodwill or intangible assets with indeﬁnite lives may be impaired annually during the fourth quarter, or when indicators of impairment 51 are present. For the purpose of impairment carrying amount of the asset does not exceed design, manufacture, installation and testing, goodwill arising from acquisitions is its recoverable amount, nor exceed the commissioning of longer-term projects allocated to each of the Company’s CGUs carrying amount that would have been under the customer’s control and can or group of CGUs expected to beneﬁt from determined, net of depreciation, had no span from three months to one year. the acquisition. The level at which goodwill impairment loss been recognized for the asset Revenue is recognized progressively is allocated represents the lowest level at in prior years. Such reversal is recognized based on the percentage-of-completion which goodwill is monitored for internal in the consolidated income statements. method. This method is normally management purposes, and is not higher measured by reference to costs incurred than an operating segment. Intangible assets Revenue From Contracts With Customers to date as a percentage of the total with indeﬁnite lives that do not have separate Revenue from contracts with customers is estimated costs as outlined in the identiﬁable cash ﬂows are also allocated to recognized when control of the goods or contract. Payment terms are usually CGUs or a group of CGUs. Any potential services is transferred to the customer at an based on set milestones outlined in the impairment of goodwill or intangible assets amount that reﬂects the consideration to contract. Periodically: (i) amounts are is identiﬁed by comparing the recoverable which the Company expects to be entitled in received in advance of the associated amount of a CGU or a group of CGUs to its carrying value. The recoverable amount is the higher of its fair value less costs to sell exchange for those goods or services. • Sale of Equipment – Revenue is recognized when control of the contract work being performed – these amounts are recorded as deferred revenues and contract liabilities; and and its value-in-use. If the recoverable equipment has been transferred to the (ii) revenue is recognized without issuing amount is less than the carrying amount, customer. This usually occurs when the an invoice – this entitlement to then the impairment loss is allocated ﬁrst to equipment is delivered or picked-up by consideration is recognized as unbilled reduce the carrying amount of any goodwill the customer. The transaction price is receivables. Any foreseeable losses and then to the other assets pro-rata on the documented on the sales invoice and on such projects are recognized basis of the carrying amount of each asset. agreed to by the customer. Payment is immediately in proﬁt or loss as identiﬁed. In determining fair value less costs to sell, generally due at the time of delivery, as • Equipment Rentals – Revenue is recent market transactions are taken into such, a receivable is recognized as the accounted for in accordance with IFRS account, if available. In assessing value-in- consideration is unconditional and only 16. Revenue is recognized on a straight- use, the estimated future cash ﬂows are the passage of time is required before line basis over the term of the discounted to their present value using a payment is due. In certain situations, agreement. Payment terms are pre-tax discount rate that reﬂects current control transfers to the customer generally 30 days from invoicing. market assessments of the time value of through a bill and hold arrangement money and the risks speciﬁc to the asset. when the following criteria are met: • Product Support Services – Revenue from product support services includes the Impairment losses are recognized in the (i) there is a substantive reason for sale of parts and performance of service consolidated income statements. the arrangement; (ii) the equipment work on equipment. For the sale of parts, The Company bases its impairment is separately identiﬁed as belonging revenue is recognized when the part is calculation on detailed three-year budgets to the customer; (iii) Toromont is no shipped or picked-up by the customer. and extrapolated long-term growth rate for longer able to use the equipment or For the servicing of equipment, revenue periods beyond the third year. direct it to another customer; and on both the labour and parts used in For non-ﬁnancial assets other than goodwill (iv) the equipment is currently ready performing the work is recognized when and intangible assets with indeﬁnite lives, an assessment is made at each reporting for physical transfer to the customer. • Sale of Equipment With a Guaranteed date whether there is any indication of impairment, or that previously recognized impairment losses may no longer exist or Residual Value or Repurchase Commitment – The sale of equipment for which the Company has provided a the job is completed. Payment terms are generally 30 days from invoicing. • Long-term Maintenance Contracts – Long-term maintenance contracts generally range from one to ﬁve years may have decreased. If such indication guarantee to repurchase the equipment and are customer-speciﬁc. These exists, the Company estimates the asset’s at a predetermined residual value and contracts are sold either separately or recoverable amount. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds date is accounted for as an operating lease in accordance with IFRS 16 – Leases (“IFRS 16”). Revenue is therefore bundled together with the sale of equipment to a customer. These arrangements cover a range of services its recoverable amount. A previously recognized over the period extending from regular maintenance to major recognized impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable to the date of the residual guarantee. • Sale of Systems – The Company sells systems, including power and energy amount since the last impairment loss was facilities and industrial and recreational recognized. The reversal is limited so that the refrigeration systems, which involve the repairs. The Company has concluded that these are two separate performance obligations as each of the promises to transfer equipment and provide services is capable of being distinct and 52 separately identiﬁable. If the sales are bundled, the Company allocates a portion of the transaction price based on the relative stand-alone selling price to each performance obligation. Customers are invoiced on a periodic basis reﬂecting the terms of the agreement, generally based on machine hours, with payment terms of 30 days from invoicing. These amounts are recognized as deferred revenues and contract liabilities. 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. • Extended Warranty – Extended warranty may be purchased by a customer at time of purchase of a machine to provide additional warranty coverage beyond the initial one-year standard warranty covered by the supplier. Extended warranty generally covers speciﬁed components for a term from three to ﬁve years. Extended warranty is normally invoiced at time of purchase and payment is expected at time of invoicing. These billings are included in deferred revenues and contract liabilities. The Company recognizes revenue for extended warranty as work is performed under the extended warranty contract using standard rates. • Power Generation – The Company owns and operates power generation plants that sell electricity and thermal power. Revenue is recognized monthly based on set rates as power is consumed. Payment is due within 30 days of invoicing. Consideration is given whether there are other promises in a contract with a customer that are separate performance obligations to which a portion of the transaction price needs to be allocated. In determining the transaction price for the sale of equipment, variable consideration, the existence of signiﬁcant ﬁnancing components, non-cash consideration, and consideration payable to the customer (if any) are considered. Leases commencement date is used in the present The Company assesses at contract value calculation. After the commencement inception whether a contract is, or contains, date, the amount of lease liabilities is a lease; that is, if the contract conveys reduced by the lease payments made. the right to control the use of an identiﬁed In addition, the carrying amount of lease asset for a period of time in exchange liabilities is remeasured if there is a for consideration. Toromont as Lessee A single recognition and measurement approach is applied for all leases, except for modiﬁcation, a change in the lease term, a change in the in-substance ﬁxed lease payments or a change in the assessment to purchase the underlying asset. short-term leases and leases of low-value Short-Term Leases and Leases assets. Right-of-use assets representing of Low-Value Assets the right to use the underlying assets and The short-term lease recognition lease liabilities representing lease exemption is applied to leases that have payments are recognized. a lease term of 12 months or less from the Right-of-use Assets commencement date and do not contain a purchase option. It also applies the Right-of-use assets are recognized at the recognition exemption for leases that are commencement date of the lease (i.e., the considered of low value. Lease payments date the underlying asset is available for on short-term leases and leases of low-value use) and are measured at cost, less any assets are recognized as an expense on a accumulated depreciation and impairment straight-line basis over the lease term. losses. The cost of right-of-use assets includes the amount of lease liabilities recognized, initial direct costs incurred, Toromont as Lessor Leases in which the Company does not and lease payments made at or before the transfer substantially all the risks and commencement date, less any lease rewards incidental to ownership of an asset incentives received. Unless the Company is are classiﬁed as operating leases. Rental reasonably certain to obtain ownership of income arising is recognized on a straight- the leased asset at the end of the lease line basis over the lease terms and is term, the recognized right-of-use assets included in the consolidated income are depreciated on a straight-line basis over statement. Initial direct costs incurred in the shorter of its estimated useful life and negotiating and arranging an operating lease the lease term, which ranges from three to are added to the carrying amount off the ﬁve years for vehicles and 1 to 15 years for leased asset and recognized over the lease properties. Right-of-use assets are subject term on the same basis as rental income. to impairment. Foreign Currency Translation Lease Liabilities The functional and presentation currency At the commencement date of the lease, of the Company is the Canadian dollar. lease liabilities are recognized and Each of the Company’s subsidiaries measured at the present value of lease determines its functional currency. payments to be made over the lease term. Transactions in foreign currencies are The lease payments include ﬁxed payments initially recorded at the functional currency less any lease incentives receivable, rate prevailing as at the date of the variable lease payments that depend on transaction or at the average rate for an index or a rate, and amounts expected the period when this is a reasonable to be paid under residual value guarantees. approximation. Monetary assets and The interest rate implicit in the lease is liabilities denominated in foreign currencies used, if readily determinable, to calculate are retranslated at the functional currency the present value of lease payments. If spot rate of exchange as at the reporting not readily determinable, the Company’s date. All differences are taken directly to incremental borrowing rate at the lease proﬁt or loss. Non-monetary items that are 53 measured in terms of historical cost in the Company is required to pay in amount that the Company considers a foreign currency are translated using accordance with the terms of the plans. probable to be realized. the exchange rates as at the dates of the For deﬁned beneﬁt pension plans and Current and deferred income taxes, initial transactions. other post-employment beneﬁt plans, relating to items recognized directly in The assets and liabilities of foreign the expense is determined separately for shareholders’ equity, are also recognized operations (having a functional currency each plan using the following policies: directly in shareholders’ equity. other than the Canadian dollar) are • The cost of future beneﬁts earned by translated into Canadian dollars at the rate employees is actuarially determined Borrowing Costs of exchange prevailing at the consolidated using the projected unit credit method Borrowing costs directly attributable to the statement of ﬁnancial position dates and prorated on length of service and acquisition, construction or production of the consolidated income statements are management’s best estimate an asset that necessarily takes a translated at the average exchange rate assumptions using a measurement for the period. The exchange differences date of December 31; substantial period of time to get ready for its intended use or sale are capitalized as arising on translation are recognized in • Net interest is calculated by applying part of the cost of the respective asset. accumulated other comprehensive income the discount rate to the net deﬁned All other borrowing costs are expensed (loss) in shareholders’ equity. On disposal of beneﬁt liability or asset; in the period they occur. a foreign operation, the deferred cumulative • Past service costs from plan amount recognized in equity is recognized amendments are recognized Standards Adopted in 2019 in the consolidated income statements. immediately in net earnings to the extent The following standard and interpretation to that the beneﬁts have vested; otherwise, standards were adopted on January 1, 2019. Share-based Payment Transactions they are amortized on a straight-line The Company maintains both equity- basis over the vesting period; and settled and cash-settled share-based • Actuarial gains and losses arising from compensation plans under which the experience adjustments and changes Company receives services from in actuarial assumptions are recognized employees, including senior executives in retained earnings and included and directors, as consideration for equity in the consolidated statements of instruments of the Company. comprehensive income in the period For equity-settled plans, expense is in which they occur. based on the fair value of the awards granted determined using the Black-Scholes Income Taxes a) Leases IFRS 16 – Leases (“IFRS 16”), supersedes IAS 17 – Leases (“IAS 17”), IFRIC 4 – Determining Whether an Arrangement Contains a Lease (“IFRIC 4”), SIC 15 – Operating Leases – Incentives and SIC 27 – Evaluating the Substance of Transactions Involving the Legal Form of a Lease. The standard sets out the principles for the recognition, measurement, presentation option pricing model and the best estimate Current income tax assets and liabilities are and disclosure of leases and requires of the number of equity instruments that measured at the amount expected to be lessees to account for most leases under will ultimately vest. For awards with graded recovered from or paid to taxation authorities. a single on–balance sheet model. vesting, each tranche is considered to be a Deferred income taxes are provided for, Lessor accounting is substantially separate grant based on its respective vesting using the liability method on temporary unchanged from IAS 17. Lessors will period. The fair value of each tranche is differences between the tax bases of assets continue to classify leases as either determined separately on the date of the and liabilities and their carrying amounts operating or ﬁnance leases using similar grant and is recognized as stock-based for ﬁnancial reporting purposes at the principles as in IAS 17. Therefore, IFRS 16 compensation expense, net of forfeiture reporting date. Deferred tax assets and did not have an impact for leases where estimate, over its respective vesting period. liabilities are measured using enacted or Toromont is the lessor. For cash-settled plans, the expense substantively enacted income tax rates IFRS 16 was applied using the modiﬁed is determined based on the fair value expected to apply to taxable income in the retrospective approach. Accordingly, the of the liability incurred at each award date. years in which those temporary differences comparative information presented for 2018 The fair value of the liability is measured are expected to be recovered or settled. has not been restated. The lease liabilities by applying quoted market prices. Changes The effect on deferred tax assets and were recorded as the present value of the in fair value are recognized in the liabilities of a change in income tax rates is remaining lease payments discounted at consolidated income statements in selling recognized in the consolidated income the Company’s incremental borrowing rate and administrative expenses. statements in the period that includes the as at the date of application. The right-of-use date of substantive enactment. The assets were recorded at an amount equal to Employee Future Beneﬁts Company assesses recoverability of the lease liabilities, adjusted for any prepaid For deﬁned contribution plans, the pension deferred tax assets based on the or accrued lease payments. expense recorded in the consolidated income Company’s estimates and assumptions. The practical expedient was used on statement is the amount of the contributions Deferred tax assets are recorded at an transition allowing the standard to be 54 applied only to contracts that were • Whether an entity considers uncertain of the period after the plan amendment, previously identiﬁed as leases under IAS 17 tax treatments separately; curtailment or settlement, using the and IFRIC 4 at the date of initial application. • The assumptions an entity makes about actuarial assumptions used to remeasure The recognition exemptions were also the examination of tax treatments by the net deﬁned beneﬁt liability (asset) elected for lease contracts that, at the taxation authorities; reﬂecting the beneﬁts offered under the commencement date, have a lease term of • How an entity determines taxable proﬁt plan and the plan assets after that event. 12 months or less and do not contain a (tax loss), tax bases, unused tax losses, An entity is also required to determine the purchase option (“short-term leases”), and unused tax credits and tax rates; and net interest for the remainder of the period lease contracts for which the underlying • How an entity considers changes in after the plan amendment, curtailment or asset is of low value (“low-value assets”). facts and circumstances. settlement using the net deﬁned beneﬁt liability (asset) reﬂecting the beneﬁts Impact on the Consolidated Financial An entity has to determine whether to offered under the plan and the plan assets Statements on Transition consider each uncertain tax treatment after that event, and the discount rate used On transition to IFRS 16 at January 1, 2019, separately or together with one or more to remeasure that net deﬁned beneﬁt right-of-use assets and lease liabilities of other uncertain tax treatments. The liability (asset). $33.8 million were recognized, respectively approach that better predicts the resolution The adoption of these amendments (refer to note 6 herein). There was no of the uncertainty needs to be followed. did not have an impact on the consolidated impact on retained earnings. The adoption of this interpretation did ﬁnancial statements. Lease liabilities for leases that were not have an impact on the consolidated previously classiﬁed as operating leases were ﬁnancial statements. discounted using the incremental borrowing rate (“IBR”) at January 1, 2019. The weighted average rate applied was 2.9%. Income Taxes b) The interpretation contained in IFRIC 23 – Uncertainty over Income Tax Treatment, addresses the accounting for income taxes c) Employee Beneﬁts The amendments to IAS 19 – Employee Beneﬁts, address the accounting when a plan amendment, curtailment or settlement Amendments Issued but Not Effective A number of amendments to standards have been issued but are not yet effective for the ﬁnancial year ending December 31, 2019, and accordingly, have not been applied in preparing these consolidated occurs during a reporting period. The ﬁnancial statements. The Company amendments specify that when a plan reviewed these amendments and concluded amendment, curtailment or settlement that there would be no impact on adoption when tax treatments involve uncertainty occurs during the annual reporting period, given their nature and applicability. that affects the application of IAS 12 – Income Taxes, speciﬁcally: an entity is required to determine the current service cost for the remainder 2. Signiﬁcant Accounting Estimates and Assumptions The preparation of the Company’s required. Management reviews its estimates obligation. The selection of the method to consolidated ﬁnancial statements in and judgments on an ongoing basis. measure progress towards completion conformity with IFRS requires In the process of applying the requires judgment and is based on the nature management to make judgments, Company’s accounting policies, of the products and services to be provided. estimates and assumptions that affect the management has made the following The percentage-of-completion method is reported amounts of revenue, expenses, judgments, estimates and assumptions used as the measure of progress for these assets and liabilities, and the disclosure of that have the most signiﬁcant effect on the contracts as it best depicts the transfer of contingent liabilities at the end of the amounts recognized in the consolidated assets to the customer, which occurs as reporting period. However, uncertainty ﬁnancial statements. about these assumptions and estimates costs are incurred on the contracts. Under the percentage-of-completion method, could result in outcomes that require a Sale of Power and Energy Systems the extent of progress towards completion material adjustment to the carrying and Refrigeration Packages is measured based on the ratio of costs amount of the asset or liability affected in Revenue is recognized over time for the sale incurred to date to the total estimated costs future periods. of power and energy systems and of completion of the performance obligation. In making estimates and judgments, refrigeration packages. Because of the Revenue is recorded proportionally as costs management relies on external information control transferring over time, revenue is are incurred. Costs to fulﬁll include labour, and observable conditions where possible, recognized based on the extent of progress materials and subcontractors’ costs, other supplemented by internal analysis as towards completion of the performance direct costs, and an allocation of indirect costs. 55 This method requires management to internal management purposes. The Separate from the fair value calculation, make a number of estimates and impairment calculations require the use of the Company is required to estimate the assumptions about the expected estimates related to the future operating expected forfeiture rate of equity-settled proﬁtability of the contract. These factors results and cash generating ability of the share-based payments. are routinely reviewed as part of the project assets. The key assumptions used to management process. determine the recoverable amount for the Post-employment Beneﬁt Plans different groups of CGUs, including a The Company has deﬁned beneﬁt pension Long-term Maintenance Contracts sensitivity analysis, are disclosed and plans and other post-employment beneﬁt These contracts typically have ﬁxed prices further explained in note 7. based on either machine hours or cost per hour, with provisions for inﬂationary and Income Taxes plans that provide certain beneﬁts to its employees. Actuarial valuations of these plans are based on assumptions, which include exchange adjustments. Revenue is Estimates and judgments are made for discount rates, retail price inﬂation, mortality recognized as work is performed under the uncertainties that exist with respect to the rates, employee turnover and salary contract based on standard or contract interpretation of complex tax regulations, escalation rates. Judgment is exercised rates. Revenue from maintenance services changes in tax laws, and the amount and in setting these assumptions. These is recognized over time, using an input timing of future taxable income. assumptions impact the measurement of method to measure progress towards complete satisfaction of the service. Inventories the net employee beneﬁt obligation, funding levels, the net beneﬁt cost and the actuarial Management makes a number of Management is required to make an gains and losses recognized in OCI. estimates and assumptions surrounding assessment of the net realizable value of machine usage, machine performance, future parts and labour pricing, manufacturers’ inventory at each reporting period. These estimates are determined on the basis of age, Leases The lease term is determined as the warranty coverage and other detailed factors. stock levels, current market prices, current non-cancellable term of the lease, together These factors are routinely reviewed as economic trends and past experience in with any periods covered by an option to part of the project management process. the measurement of net realizable value. extend the lease if it is reasonably certain to be exercised. Property, Plant and Equipment Allowance for Doubtful Accounts The Company applies judgement in and Rental Equipment The Company makes estimates for evaluating whether it is reasonably certain Depreciation is calculated based on the allowances that represent its estimate to exercise the option to renew. All relevant estimated useful lives of the assets and of potential losses in respect of trade factors that create an economic incentive estimated residual values. Depreciation receivables. The main components of this for it to exercise the renewal are considered. expense is sensitive to the estimated allowance are a speciﬁc loss component After the commencement date, the lease service lives and residual values determined that relates to individually signiﬁcant term is reassessed if there is a signiﬁcant for each type of asset. Actual lives and exposures, and a collective loss component event or change in circumstances that is residual values may vary depending on a established for groups of similar assets in within the Company’s control and affects number of factors including technological respect of losses that may have been its ability to exercise (or not to exercise) innovation, product life cycles and physical incurred but not yet speciﬁcally identiﬁed. the option to renew. condition of the asset, prospective use, The Company cannot readily determine and maintenance programs. Share-based Compensation the interest rate implicit in the lease, therefore, The option pricing model used to determine it uses its IBR to measure lease liabilities. Impairment of Non-ﬁnancial Assets the fair value of share-based payments The IBR is a rate of interest that the Company Judgment is used in identifying an requires various estimates relating to would have to pay to borrow funds, over a appropriate discount rate and growth rate volatility, interest rates, dividend yields and similar term and with similar security, in for the calculations required in assessing expected life of the options granted. Fair order to obtain an asset of similar value to potential impairment of non-ﬁnancial value inputs are subject to market factors the right-of-use asset in a similar economic assets. Judgment is also used in identifying as well as internal estimates. The Company environment. The Company estimates the the CGUs to which the intangible assets considers historic trends together with any IBR using observable market interest rates should be allocated, and the CGU or group new information to determine the best and adjusts for entity-speciﬁc estimates, of CGUs at which goodwill is monitored for estimate of fair value at the date of grant. such as credit rating. 56 3. Accounts Receivable Trade receivables Less: Allowance for doubtful accounts Trade receivables, net Unbilled receivables Other receivables The aging of gross trade receivables was as follows: Current to 90 days Over 90 days Trade receivables The movement in the Company’s allowance for doubtful accounts was as follows: Balance, January 1 Provisions and revisions, net Balance, December 31 The movement in the Company’s unbilled receivables was 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) 2019 2018 $ 491,683 (19,941) $ 495,615 (19,484) 471,742 26,844 26,466 476,131 28,738 17,593 $ 525,052 $ 522,462 2019 2018 $ 458,332 33,351 $ 465,183 30,432 $ 491,683 $ 495,615 2019 2018 $ 19,484 457 $ 10,573 8,911 $ 19,941 $ 19,484 2019 2018 $ 28,738 (27,523) 25,629 $ 18,886 (14,512) 24,364 $ 26,844 $ 28,738 2019 2018 $ 571,134 253,077 5,057 69,915 13,003 $ 548,934 237,843 3,931 71,560 11,239 $ 912,186 $ 873,507 The amount of inventory recognized as an expense in cost of goods sold (accounted for other than by the percentage-of-completion method) during 2019 was $2.2 billion (2018 – $2.1 billion). Cost of goods sold included inventory write-downs pertaining to obsolescence and aging, together with recoveries of past write-downs upon disposition and during 2019 amounted to $1.4 million. A net reversal of write-downs of $4.8 million was recorded in 2018. 57 5. Property, Plant and Equipment and Rental Equipment Land Buildings Equipment Power Generation Property, Plant and Equipment Rental Equipment Cost January 1, 2019 Additions Disposals Currency translation effects $ 129,699 $ 285,795 $ 216,679 $ 7,304 (411) (135) 30,791 (8,047) (289) 18,071 (61) (8) 39,054 $ 671,227 56,252 (8,519) (432) 86 — — $ 836,035 196,011 (91,338) — December 31, 2019 $ 147,701 $ 292,553 $ 239,134 $ 39,140 $ 718,528 $ 940,708 Accumulated depreciation January 1, 2019 Depreciation expense Depreciation of disposals Currency translation effects $ — $ — — — 89,655 $ 137,646 $ 12,796 (290) (21) 25,344 (7,697) (195) 31,150 $ 258,451 39,753 (7,987) (216) 1,613 — — $ 294,505 108,265 (54,465) — December 31, 2019 $ — $ 102,140 $ 155,098 $ 32,763 $ 290,001 $ 348,305 Net book value – December 31, 2019 $ 147,701 $ 190,413 $ 84,036 $ 6,377 $ 428,527 $ 592,403 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 expense 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 During 2019, depreciation expense of $125.7 million was charged to cost of goods sold (2018 – $112.6 million) and $22.4 million was charged to selling and administrative expenses (2018 – $22.6 million). Property, plant and equipment as at December 31, 2019 included $5.2 million related to a property that is available-for-sale. Operating income from rental operations for the year ended December 31, 2019, was $53.3 million (2018 – $50.2 million). 58 6. Other Assets and Lease Liabilities Right-of-use assets Equipment sold with guaranteed residual values Other Other assets Right-of-use Assets and Lease Liabilities Activity within right-of-use assets and lease liabilities during the year was as follows: 2019 2018 $ 30,975 8,325 2,805 $ — 10,493 2,713 $ 42,105 $ 13,206 January 1, 2019 Additions Depreciation expense Payments December 31, 2019 Right-of-use Assets Properties Vehicles Total Lease Liabilities $ 18,025 2,279 (4,649) — $ 15,740 5,466 (5,886) — $ 33,765 7,745 (10,535) — $ 33,765 7,745 — (10,087) $ 15,655 $ 15,320 $ 30,975 $ 31,423 The current portion of lease liabilities as at December 31, 2019 of $9.7 million is included in accounts payable and accrued liabilities on the consolidated statement of ﬁnancial position. The operating lease commitments as at December 31, 2018 included short-term and low-value leases, which are not included in the lease liabilities as at January 1, 2019 as shown above under IFRS 16. The following amounts were recognized in the consolidated income statement during the year: Depreciation expense of right-of-use assets Interest expense on lease liabilities Expense relating to short-term leases and leases of low-value assets Cash outﬂows for leases in 2019 were $10.1 million. The future cash outﬂows relating to leases are disclosed in note 22. 2019 $ 10,535 991 223 $ 11,749 59 7. Goodwill and Intangible Assets Patents and Customer Licenses Order Backlog ERP System Relationships Customer Distribution Networks Goodwill Total Cost January 1, 2018 December 31, 2018 December 31, 2019 Accumulated amortization January 1, 2018 Amortization expense December 31, 2018 Amortization expense December 31, 2019 Net book value – December 31, 2018 December 31, 2019 $ $ $ $ $ $ $ $ 500 $ 8,691 $ 5,000 $ 15,137 $ 371,551 $ 93,780 $ 494,659 500 $ 8,691 $ 5,000 $ 15,137 $ 371,551 $ 93,780 $ 494,659 500 $ 8,691 $ 5,000 $ 15,137 $ 371,551 $ 93,780 $ 494,659 147 $ 29 2,122 $ 2,520 333 $ 307 $ 1,000 1,892 176 $ 4,642 $ 30 556 1,333 $ 1,000 2,199 $ 1,892 206 $ 5,198 $ 2,333 $ 4,091 $ — $ — — $ — — $ — $ — — $ — 2,909 5,441 8,350 3,478 — $ 11,828 324 $ 4,049 $ 3,667 $ 12,938 $ 371,551 $ 93,780 $ 486,309 294 $ 3,493 $ 2,667 $ 11,046 $ 371,551 $ 93,780 $ 482,831 Impairment Testing of Goodwill and Intangible Assets with Indeﬁnite Lives The carrying amount of goodwill and distribution networks has been allocated to the following CGUs and/or group of CGUs: Equipment Group Toromont Quebec/Maritimes Toromont Cat dealership Battleﬁeld Equipment Rentals CIMCO Goodwill Distribution Networks 2019 2018 2019 2018 $ $ 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 calculation using cash ﬂow projections from from 6.3% – 7.4% (2018: 5.9% – 6.3%). As a impairment test of goodwill and intangible ﬁnancial budgets approved by senior result of the analysis, management assets as at December 31, 2019. The test for management covering a three-year period. determined there was no impairment of impairment is to compare the recoverable Cash ﬂows beyond the three-year period goodwill or indeﬁnite-lived intangible assets. amount of the CGU or group of CGUs to their were extrapolated using a 1.7% growth rate, carrying value. Goodwill is tested at the which represents the expected growth in the Key Assumptions to Value-in-Use group of CGUs that represent the lowest level Canadian economy. The discount rate Calculations and Sensitivity Analysis within the entity at which goodwill is applied to each CGU or group of CGUs to The calculation of value-in-use is most monitored for internal management determine value-in-use, is a pre-tax rate that sensitive to the following assumptions: purposes that is not larger than an operating reﬂects an optimal debt-to-equity ratio and • Discount rates; and segment. Intangible assets are assessed for considers the risk-free rate, market equity • Growth rate to extrapolate cash ﬂows impairment at the CGU level to which they risk premium, size premium and the risks beyond the budget period. are allocated. The recoverable amounts have speciﬁc to each asset or CGU’s cash ﬂow been determined based on a value-in-use projections. The pre-tax discount rate ranged 60 Discount rates represent the current into account both debt and equity. Growth rate estimates are based on market assessment of the risks speciﬁc The cost of equity is derived from the published data, historical experiences and to each CGU, taking into consideration the expected return on investment by the management’s best estimate. time value of money and individual risks Company’s shareholders. The cost of debt Management believes that within of the underlying assets that have not been is based on the interest-bearing borrowings reasonably possible changes to any of incorporated in the cash ﬂow estimates. the Company is obliged to service. the above key assumptions, recoverable The discount rate is derived from the CGU’s Segment-speciﬁc risk is incorporated amounts exceed carrying values. weighted average cost of capital, taking by applying different debt to equity ratios. 8. Provisions Activities related to provisions were as follows: Balance, January 1, 2018 New provisions Charges against provisions Balance, December 31, 2018 New provisions Charges against provisions $ $ Warranty 13,231 24,563 (24,010) 13,784 22,332 (22,999) $ $ Other 9,205 1,915 (522) 10,598 1,626 (1,661) $ $ Total 22,436 26,478 (24,532) 24,382 23,958 (24,660) Balance, December 31, 2019 $ 13,117 $ 10,563 $ 23,680 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 and 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, 2019, the Company recognized as revenue, $133.9 million (2018 – $137.1 million) of the deferred revenues and contract liabilities balance as at January 1, 2019. Management expects that 90% of the transaction price allocated to unsatisﬁed performance obligations as at December 31, 2019 will be recognized as revenue during the year ended December 31, 2020 and the remaining 10% between the years ended December 31, 2021 and 2026. 61 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 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. 2019 2018 $ — 150,000 500,000 650,000 (4,529) $ 1,022 150,000 500,000 651,022 (5,460) $ 645,471 — $ 645,562 (1,022) $ 645,471 $ 644,540 The Company has a committed revolving drawn on this facility as at December 31, nature, including requirements to meet credit facility of $500.0 million, maturing in 2019 or 2018. Standby letters of credit issued certain ﬁnancial tests periodically and October 2022. Interest is based on a ﬂoating utilized $33.1 million (2018 – $29.9 million). restrictions on additional indebtedness and rate, primarily bankers’ acceptances, plus These credit arrangements include encumbrances. applicable margins and fees based on the covenants, restrictions and events of default The Company was in compliance with all terms of the credit facility. No amounts were usually present in credit facilities of this covenants as at December 31, 2019 and 2018. Scheduled principal repayments and interest payments on long-term debt are as follows: 2020 2021 2022 2023 2024 Thereafter $ Principal — — — — — 650,000 $ Interest 24,765 24,765 24,765 24,765 24,765 58,574 $ 650,000 $ 182,399 Interest expense includes interest on debt initially incurred for a term greater than one year of $26.7 million (2018 – $30.6 million). 11. Share Capital Authorized Shareholder Rights Plan (“SRP”) set out in the plan or without approval of the The Company is authorized to issue an The SRP is designed to encourage the fair Company’s Board of Directors. Should such unlimited number of common shares (no par treatment of shareholders in connection an acquisition occur, each rights holder, other value) and preferred shares. No preferred with any takeover offer for the Company. than the acquiring person and related parties, shares were issued or outstanding for the years ended December 31, 2019 and 2018. Rights issued under the plan become exercisable when a person, and any related will have the right to purchase common shares of the Company at a 50% discount A continuity of the shares issued and parties, acquires or commences a takeover to the market price at that time. The SRP outstanding for the years ended December bid to acquire 20% or more of the expires at the end of the annual meeting of 31, 2019 and 2018, is presented in the Company’s outstanding common shares shareholders in 2021. consolidated statements of changes in equity. without complying with certain provisions 62 Normal Course Issuer Bid (“NCIB”) purchased under the bid will be cancelled. December 31, 2019, and $71.4 million The Company’s NCIB program was No shares were purchased and ($0.88 per share) for the year ended renewed in 2019. The current issuer bid cancelled in 2019. During the year ended December 31, 2018. allows the Company to purchase up to December 31, 2018, the Company Subsequent to the year ended approximately 7.0 million of its common purchased and cancelled 237,952 common December 31, 2019, the Board of Directors shares in the 12-month period ending shares for $12.8 million (average cost of approved a quarterly dividend of $0.31 August 30, 2020, representing 10% $53.83 per share, including transaction per share payable on April 2, 2020, of common shares in the public ﬂoat, costs) under its NCIB program. to shareholders on record at the close as estimated at the time of renewal. of business on March 9, 2020. The actual number of shares purchased Dividends Paid and the timing of any such purchases will The Company paid dividends of $84.8 million be determined by Toromont. All shares ($1.04 per share) for the year ended 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 (liabilities) assets: Foreign exchange forward contracts 2019 2018 $ — $ 645,471 $ 1,022 $ 644,540 $ (10,366) $ 27,624 The fair value of derivative ﬁnancial the comparable foreign exchange rate at or inputs that can be corroborated by instruments is measured using the period-end under the same conditions. The observable market data for substantially discounted value of the difference between ﬁnancial institution’s credit risk is also the full term of the asset or liability, most the contract’s value at maturity, based taken into consideration in determining fair signiﬁcantly foreign exchange spot and on the contracted foreign exchange rate and value. The valuation is determined using forward rates. the contract’s value at maturity, based on Level 2 inputs, which are observable inputs The fair value and carrying value of long-term debt was as follows: Long-term debt Fair value Carrying value 2019 2018 $ 683,092 $ 650,000 $ 655,575 $ 651,022 The fair value was determined using the market data for substantially the full term currency-denominated obligations related to discounted cash ﬂow method, a generally of the asset or liability. purchases of inventory and sales of products. accepted valuation technique. The During the years ended December 31, As at December 31, 2019, the Company was discounted factor is based on market rates 2019 and 2018, there were no transfers committed to: (i) US dollar purchase contracts for debt with similar terms and remaining between Level 1 and Level 2 fair value with a notional amount of $507.7 million at an maturities and based on Toromont’s credit measurements. risk. The Company has no plans to prepay average exchange rate of $1.3191, maturing between January 2020 and November 2020; these instruments prior to maturity. Derivative Financial Instruments and and (ii) US dollar sale contracts with a The valuation is determined using Level 2 Hedge Accounting notional amount of $3.3 million at an average inputs, that are observable inputs or inputs Foreign exchange contracts are transacted exchange rate of $1.3060, maturing between which can be corroborated by observable with ﬁnancial institutions to hedge foreign January 2020 and April 2020. 63 Management estimates that a net loss of $10.4 million (2018 – gain of $27.6 million) would be realized if the contracts were terminated on December 31, 2019. Certain of these forward contracts are designated as cash ﬂow hedges and, accordingly, an unrealized loss of $2.8 million (2018 – unrealized gain of $4.4 million) has been included in OCI. These losses will be reclassiﬁed to net earnings within the next 12 months and will offset gains recorded on the underlying hedged items, namely foreign-denominated accounts payable and accrued liabilities. 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 loss of $7.6 million (2018 – gain of $23.2 million) on these forward contracts is included in net earnings, which offsets gains recorded on the foreign-denominated items, namely accounts payable and accrued liabilities. 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 accrued liabilities and derivative ﬁnancial instruments. As at December 31, 2019, a 5% weakening (strengthening) of the Canadian dollar against the US dollar would result in a $0.3 million (decrease) increase in OCI for ﬁnancial instruments held in foreign operations, and a $1.5 million increase (decrease) in net earnings and $6.2 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, 2019 or 2018. The Company had no ﬂoating-rate debt outstanding as at December 31, 2019 or 2018. Liquidity Risk Liquidity risk is the risk that the Company may encounter difficulties in meeting obligations associated with ﬁnancial liabilities. As at December 31, 2019, the Company had unutilized lines of credit of $466.9 million (2018 – $470.1 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 2020, 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. 64 14. Interest Income and Expense The components of interest expense were as follows: Credit facilities Senior debentures Interest on lease liabilities Interest accretion on repayment of term credit facility The components of interest and investment income were as follows: Interest on conversion of rental equipment 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 $ 2019 1,495 25,221 991 — $ 2018 4,553 25,269 — 821 $ 27,707 $ 30,643 2019 4,283 5,469 9,752 $ $ 2018 3,461 5,457 8,918 $ $ 2019 2018 $ 81,731 26,009 $ 88,196 7,669 $ 107,740 $ 95,865 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 2019 26.5% 2018 26.5% $ 104,553 $ 92,180 1,525 (71) 2,291 (837) 517 (238) 1,619 (65) 2,286 (1,267) 200 912 $ 107,740 $ 95,865 27.3% 27.6% 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. 65 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 Tax loss carryforward Other Cash ﬂow hedges in OCI Post-employment obligations Deferred tax (liabilities) on non-current assets and non-current liabilities $ 2019 21,615 4,439 4,277 5,850 36,181 (73,060) (13,204) 774 1,095 900 15,381 (68,114) $ 2018 16,656 3,503 4,157 5,392 29,708 (44,139) (6,375) — 1,119 (1,141) 6,909 (43,627) Net deferred tax liabilities $ (31,933) $ (13,919) The movement in net deferred income taxes was as follows: Balance, January 1 Tax expense recognized in income Foreign exchange and others Tax recovery (expense) recognized in OCI Balance, December 31 $ 2019 (13,919) (26,009) (738) 8,733 $ 2018 411 (7,669) 498 (7,159) $ (31,933) $ (13,919) The aggregate amount of unremitted earnings in the Company’s subsidiaries was $21.7 million (2018 – $20.4 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 2019 2018 $ 286,800 $ 251,984 81,590,392 485,856 81,231,282 744,028 Diluted weighted average common shares outstanding 82,076,248 81,975,310 Earnings per share Basic Diluted $ $ 3.52 3.49 $ $ 3.10 3.07 For the calculation of diluted earnings per share for the year ended December 31, 2019, 1,030,260 (2018 – 584,250) outstanding stock options with a weighted average exercise price of $65.98 (2018 – $66.22) were considered anti-dilutive (exercise price in excess of average market price during the year) and, as such, were excluded from the calculation. 66 17. Employee Beneﬁts Expense Wages and salaries Other employment beneﬁt expenses Stock-based compensation expense Pension costs 2019 2018 $ 595,502 89,219 5,730 25,931 $ 558,759 74,094 5,101 31,033 $ 716,382 $ 668,987 18. Stock-based Compensation The Company maintains a stock option in any one calendar year shall not exceed designated common share price, which program for certain employees. Under 1.0% of the outstanding shares as of the is ﬁxed at prevailing market prices of the the plan, up to 7.0 million options may beginning of the year in which a grant is common shares at the date the option is be granted for subsequent exercise made (2019 – 812,264; 2018 – 809,498). granted. Toromont accrues compensation in exchange for common shares. It is the Stock options have a 10-year life, vest cost over the vesting period based on the Company’s policy that the aggregate 20% per year on each anniversary date of grant date fair value. number of options that may be granted the grant, and are exercisable at the A reconciliation of the outstanding options for the years ended December 31, 2019 and 2018, was as follows: 2019 2018 Number of Options Weighted Average Exercise Price Number of Options Weighted Average Exercise Price Options outstanding, January 1 Granted Exercised (1) Forfeited 2,636,070 495,200 (786,065) (15,500) Options outstanding, December 31 2,329,705 Options exercisable, December 31 896,115 $ $ $ 43.78 65.72 34.00 53.33 51.68 39.88 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 (1) The weighted average share price at date of exercise for the year ended December 31, 2019, was $67.45 (2018 – $60.49). The following table summarizes stock options outstanding and exercisable as at December 31, 2019. Range of Exercise Prices $23.40 – $26.52 $36.65 – $39.79 $53.88 – $66.22 Number 285,000 615,500 1,429,205 2,329,705 Options Outstanding Options Exercisable Weighted Average Remaining Life (years) Weighted Average Exercise Price Number Weighted Average Exercise Price 4.3 6.1 8.7 7.5 $ $ $ $ 26.65 38.36 62.60 51.68 285,000 365,260 245,855 896,115 $ $ $ $ 25.65 38.08 59.06 39.88 67 The fair value of the stock options granted during 2019 and 2018 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 $ $ 2019 11.68 65.72 5.90 21.0% 1.64% 1.40% $ $ 2018 13.31 66.22 5.90 21.0% 1.39% 2.15% Deferred Share Unit Plan The Company offers a deferred share unit elect, on an annual basis, to receive all or a discretionary DSUs. Non-employee directors portion of their performance incentive also receive a portion of their compensation (“DSU”) plan for executives and non- bonus or fees, respectively, in DSUs. In in DSUs. The liability for DSUs is recorded in employee directors, whereby they may addition, the Board of Directors may grant accounts payable and accrued liabilities. The following table summarizes information related to DSU activity: Number of DSUs Value Number of DSUs 2019 Outstanding, January 1 Units taken or taken in lieu and dividends Redemptions Fair market value adjustment 358,151 32,414 (2,018) — $ 19,005 2,114 (127) 6,400 426,279 28,733 (96,861) — $ 2018 Value 23,417 1,647 (5,716) (343) Outstanding, December 31 388,547 $ 27,392 358,151 $ 19,005 Employee Share Ownership Plan (“ESOP”) maximum of 2.5% of an employee’s base amounting to $2.7 million in 2019 (2018 – The Company offers an ESOP whereby salary per annum. Company contributions $2.4 million) were charged to selling employees who meet the eligibility criteria prior to 2019 vested to the employee and administrative expenses when paid. can purchase shares by way of payroll immediately, while contributions in 2019 The ESOP is administered by a third party. deductions. There is a Company match at onwards will vest in ﬁve years from date of the rate of $1 for every $3 contributed, to a contribution. Company contributions 19. Post-employment Obligations 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 3,900 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 68 2019 2018 $ 15,082 312 $ 13,008 305 $ 15,394 $ 13,313 Deﬁned Beneﬁt Plans c) Executive Pension Plan – The plan is a Risks The Company sponsors funded and unfunded deﬁned beneﬁt pension plans and post-employment beneﬁt plans as described below with approximately 1,700 qualifying employees. a) Quebec/Maritimes Pension Plans – The Company sponsors six plans that provide pension beneﬁts based on length of service and career average earnings, ﬁve of which are contributory. The plans are administered by the Toromont Pension Management Committee with assets held in a pension fund that is legally separate from the Company and cannot be used for any purpose other than payment of pension beneﬁts and related administrative fees. Actuarial valuations were completed for each plan at dates ranging from December 31, 2017 to December 31, 2018. The next actuarial valuation dates range from December 31, 2019 to December 31, 2021. b) Manitoba Pension Plan – This plan is a contributory plan that provides pension beneﬁts based on length of service and career average earnings. The plan is administered by the Toromont Pension Management Committee with assets held in a pension fund that is legally separate from the Company and cannot be used for any purpose other than payment of pension beneﬁts and related administrative fees. The most recent actuarial valuation was completed as at December 31, 2016, with the next valuation scheduled as at December 31, 2019. supplemental pension plan and is solely the obligation of the Company. All members of the plan are retired. The Company is not obligated to fund the plan but is obligated to pay beneﬁts under the terms of the plan as they come due. At December 31, 2019, the Company has posted letters of credit in the amount of $16.1 million to secure the obligations under this plan. The most recent actuarial valuation was completed as at December 31, 2019, with the next valuation scheduled as at December 31, 2020. Deﬁned beneﬁt pension plans and other post-employment beneﬁt plans expose the Company to risks as described below: • Investment risk – The present value of the deﬁned beneﬁt plan liability is calculated using a discount rate determined by reference to high-quality corporate bond yields; if the return on plan assets is below this rate, it will create a plan deﬁcit. Currently, the plans have a relatively balanced investment in equity securities, debt instruments and real estate assets. The Toromont Pension Management Committee reviews the d) Other Plan Assets and Obligations – asset mix and performance of the plan assets on a quarterly basis with the balanced investment strategy intention. • Interest rate risk – A decrease in the bond yields will increase the plan liability; however, this will be partially offset by higher market values of the plan’s holdings in debt instruments. • Longevity risk – An increase in the life expectancy of the plan participants will increase the plan’s liability by lengthening the period in which beneﬁts are paid. • Salary risk – The present value of the deﬁned beneﬁt plan liability is calculated by reference to the future salaries of plan participants. As such, an increase in the salary of the plan participants will increase the plan’s liability. This plan provides for certain retirees and terminated vested employees of businesses previously acquired by the Company as well as for retired participants of the deﬁned contribution plan at that time, that, in accordance with the plan provisions, had elected to receive a pension directly from the plan. The plan is administered by a fund that is legally separate from the Company. The most recent actuarial valuation was completed as at January 1, 2018 with the next valuation scheduled for January 1, 2021. e) Post-employment Beneﬁt Plans – These plans provide supplementary post-employment health and life insurance coverage to certain employees. The Company is not obligated to fund the plans but is obligated to pay beneﬁts under the terms of the plan as they come due. The most recent actuarial valuation was completed as at December 31, 2016, with the next valuation scheduled as at December 31, 2019. 69 Information about the Company’s deﬁned beneﬁt plans as at December 31, in aggregate, was as follows: Deﬁned beneﬁt obligations: Balance, January 1 Curtailment gain Current service cost Interest cost Actuarial remeasurement (gains) losses arising from: Experience adjustments Changes in ﬁnancial assumptions Beneﬁts paid Contributions by plan participants Pension Beneﬁt Plans Other Post-employment Beneﬁt Plans 2019 2018 2019 2018 $ 474,549 — 11,424 18,158 $ 493,745 — 12,973 16,511 $ (464) 65,808 (22,581) 4,356 (963) (31,315) (21,365) 4,963 $ 23,726 (5,000) 588 597 (2,121) 1,943 (1,387) — 24,858 — 875 827 39 (1,895) (978) — Balance, December 31 $ 551,250 $ 474,549 $ 18,346 $ 23,726 Plan assets: Fair value, January 1 Interest income on plan assets Return on plan assets (excluding amounts included in net interest expense) Contributions by the Company Contributions by plan participants Beneﬁts paid Fair value, December 31 Net post-employment obligations $ 393,933 15,230 $ 397,268 13,466 $ $ — — 39,914 13,039 4,356 (22,581) (13,482) 13,083 4,963 (21,365) $ 443,891 $ 393,933 $ 107,359 $ 80,616 $ $ — 1,387 — (1,387) — 18,346 $ $ — — — 978 — (978) — 23,726 The funded status of the Company’s deﬁned beneﬁt plans at December 31 was as follows: Quebec/Maritimes Plan Manioba Pension Plan Executive Pension Plan Other Plan Assets and Obligations Post-employment Beneﬁt Plans Deﬁned Beneﬁt Obligations $ 464,770 62,482 18,114 5,884 18,346 2019 2018 Plan Assets Net Post- employment Obligations Deﬁned Beneﬁt Obligations Plan Assets Net Post- employment Obligations $ 380,420 59,104 — 4,367 — $ (84,350) (3,378) (18,114) (1,517) (18,346) $ 395,818 54,975 17,575 6,181 23,726 $ 333,910 55,342 — 4,681 — $ (61,908) 367 (17,575) (1,500) (23,726) $ 569,596 $ 443,891 $ (125,705) $ 498,275 $ 393,933 $ (104,342) The signiﬁcant weighted average actuarial assumptions adopted in measuring the Company’s deﬁned beneﬁt obligations are noted below. The mortality assumption is based upon the 2014 Private Sector Canadian Pensioners’ Mortality Table, developed by the Canadian Institute of Actuaries, projected generationally using scale MI-2017. Discount rate Expected rate of salary increase 2019 3.10% 3.00% 2018 3.89% 3.00% 70 Pre-tax pension and other post-retirement beneﬁt expenses recognized in net earnings were as follows: Service cost Net interest expense Curtailment gain $ 2019 12,012 3,525 (5,000) $ 2018 13,848 3,872 — $ 10,537 $ 17,720 The Company completed the alignment of beneﬁt programs across the Equipment Group in 2019, which on the whole, led to improved beneﬁts for most employees in the acquired businesses and to increased administrative efficiencies for the Company. A single component of the comprehensive alignment led to changes in the structure and elements of certain post-employment beneﬁts plans, which resulted in a non-recurring curtailment gain of $5.0 million ($3.7 million after-tax). Pre-tax amounts recognized in OCI were as follows: Actuarial gains arising from experience adjustments Actuarial losses (gains) arising from changes in ﬁnancial assumptions Return on plan assets (excluding amounts included in net interest expense) 2019 2018 $ (2,585) 67,751 (39,914) $ (924) (33,210) 13,482 $ 25,252 $ (20,652) The Company’s pension plans actual weighted average asset allocations by asset category were as follows: Debt securities Equity securities Real estate assets Cash and cash equivalents 2019 57.2% 39.5% 3.3% — 2018 37.2% 58.5% 3.7% 0.6% 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, 2019, was $55.1 million (2018 – $nil). The Company expects to contribute $28.8 million to pension and other beneﬁt plans in 2020, inclusive of deﬁned contribution plans. The weighted average duration of the deﬁned beneﬁt plan obligations at December 31, 2019 was 17.3 years (2018 – 16.6 years). Sensitivity Analysis Signiﬁcant actuarial assumptions for the determination of the deﬁned beneﬁt obligations (“DBO”) are discount rate and 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. 71 As at December 31, 2019, the following quantitative analysis shows changes to the signiﬁcant actuarial assumptions and the corresponding impact to the DBO: Actuarial Assumption Sensitivity Increase (Decrease) in DBO Pension Beneﬁt Plans Other Post- retirement Beneﬁt Plans Total Period end discount rate Mortality 1% increase 1% decrease $ $ (81,351) 95,645 Increase of 1 year in expected lifetime of plan participants $ 11,906 $ $ $ (2,617) 2,972 $ $ (83,968) 98,617 (328) $ 11,578 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. 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%, 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 2019 2018 $ 645,471 — 365,589 $ 644,540 1,022 345,434 279,882 300,128 1,533,891 1,327,679 $ 1,813,773 $ 1,627,807 15% 0.18:1 18% 0.23:1 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, 2019 and 2018. There were no changes in the Company’s approach to capital management during the years ended December 31, 2019 and 2018. 72 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 A reconciliation of liabilities arising from ﬁnancing activities was as follows: 2019 2018 $ (2,590) (38,679) (111,068) (702) 3,814 (37,644) 30,129 (80) $ (36,392) (95,983) 364,019 1,946 (2,388) 28,164 (26,173) 2,857 $ (156,820) $ 236,050 24,811 $ $ 120,009 $ $ 9,291 1,711 $ $ $ $ 28,803 62,054 8,703 2,562 Current Portion of Long-term Debt Long-term Debt Total $ $ $ 1,941 (1,941) 1,022 1,022 (1,022) — $ 893,806 (250,000) 734 $ 644,540 — 931 $ 895,747 (251,941) 1,756 $ 645,562 (1,022) 931 — $ 645,471 $ 645,471 Balance, January 1, 2018 Cash ﬂows Other Balance, December 31, 2018 Cash ﬂows Other Balance, December 31, 2019 22. Commitments Future minimum lease payments under non-cancellable leases as at December 31, 2019, were $9.7 million within one year, $20.9 million within two and ﬁve years and $0.8 million thereafter. 23. Segmented Information The Company has two reportable and other administrative support to the Chief Financial Officer, who have been segments: the Equipment Group and segments. The accounting policies of each CIMCO, each supported by the corporate of the reportable segments are the same as identiﬁed as the Chief Operating Decision Makers (“CODMs”) in monitoring segment office. These segments are strategic the signiﬁcant accounting policies performance and allocating resources business units that offer different products described in note 1. between segments. The CODMs assess and services, and each is managed The operating segments are being segment performance based on segment separately. The corporate office provides reported based on the ﬁnancial information operating income, which is measured ﬁnance, treasury, legal, human resources provided to the Chief Executive Officer and differently than income from operations in 73 the consolidated ﬁnancial statements. No reportable segment is reliant on any Corporate overheads are allocated to the single external customer. segments based on revenue. Income taxes, interest expense, interest and investment Equipment Group income are managed at a consolidated level The Equipment Group comprises and are not allocated to the reportable operating segments. Current taxes, deferred the following: • Toromont Cat – supplies, rents and equipment to the agriculture industry. • SITECH – supplies control systems for specialized mobile equipment. • Toromont Energy – develops distributed generators and combined heat and power projects using Caterpillar engines. taxes and certain ﬁnancial assets and provides product support services for CIMCO liabilities are not allocated to the segments as specialized mobile equipment and Provides design, engineering, fabrication, they are also managed on a consolidated level. industrial engines. installation, and product support services for The aggregation of the operating segments is based on the economic • Battleﬁeld Equipment Rentals – supplies and rents specialized mobile equipment industrial and recreational refrigeration systems. 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. as well as specialty supplies and tools. • Toromont Material Handling – supplies, rents and provides product support Corporate Office The corporate office does not meet the services for material handling lift trucks. • AgWest – supplies and provides product support services for specialized mobile 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: Equipment Group CIMCO Consolidated Years ended December 31 2019 2018 2019 2018 2019 2018 Equipment/package sales Rentals Product support Power generation $ 1,524,185 418,818 1,390,340 10,607 $ 1,496,575 389,572 1,264,295 10,645 $ 177,974 — 156,781 — $ 202,367 — 140,782 — $ 1,702,159 418,818 1,547,121 10,607 $ 1,698,942 389,572 1,405,077 10,645 Total revenues $ 3,343,950 $ 3,161,087 $ 334,755 $ 343,149 $ 3,678,705 $ 3,504,236 Operating income $ 384,077 $ 348,876 $ 28,418 $ 20,698 $ 412,495 $ 369,574 Interest expense Interest and investment income Income taxes Net earnings 27,707 (9,752) 107,740 30,643 (8,918) 95,865 $ 286,800 $ 251,984 Selected consolidated statements of ﬁnancial position information: As at December 31 Identiﬁable assets Corporate assets Total assets Identiﬁable liabilities Corporate liabilities Total liabilities Equipment Group CIMCO Consolidated 2019 2018 2019 2018 2019 2018 $ 2,829,147 $ 2,755,039 $ 119,600 $ 104,498 $ 991,950 $ 1,091,029 $ 81,712 $ 71,730 $ 2,948,747 422,590 $ 2,859,537 374,994 3,371,337 $ 3,234,531 $ 1,073,662 763,784 $ 1,162,759 744,093 1,837,446 $ 1,906,852 Capital expenditures, net $ 207,520 $ 162,694 Depreciation expense $ 152,900 $ 133,323 $ $ 2,334 5,660 $ $ 2,452 $ 209,854 $ 165,146 1,836 $ 158,560 $ 135,159 74 Operations are based in Canada and the United States. The following tables summarize the ﬁnal destination of revenue 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 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 costs All other compensation 2019 2018 $ 3,581,029 95,731 1,945 $ 3,387,552 110,552 6,132 $ 3,678,705 $ 3,504,236 2019 2018 $ 1,109,961 4,749 $ 1,043,007 5,079 $ 1,114,710 $ 1,048,086 $ 2019 3,315 2,524 3,271 740 151 $ 2018 3,068 2,461 3,400 648 135 $ 10,001 $ 9,712 The remuneration of directors and key management is determined by the Human Resources Committee having regard to the performance of the individual and Company and market trends. 25. Economic Relationship The Company, through its Equipment 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 these products account for the major portion of the Equipment Group’s operations. Toromont has had a strong relationship with Caterpillar Inc. since inception in 1993. 75 Ten-Year Financial Review For the years ended December 31 ($ thousands, except ratios and share data) Operating Results Revenues Net earnings Net interest expense Capital expenditures, net Dividends declared Financial Position Working capital Capital assets Total assets Non-current portion of long-term debt Shareholders’ equity Financial Ratios Working capital Return on opening shareholders’ equity (%) 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 Price range High Low Close 2019 2018 2017(4) 2016 2015(3) 2014 2013 2012(2) 2011(1) 2010 3,678,705 3,504,236 2,350,162 1,912,040 1,846,723 1,660,390 1,593,431 1,507,173 1,381,974 1,207,028 286,800 17,955 209,854 88,192 829,275 1,020,930 3,371,337 645,471 1,533,891 1.8:1 21.4 .18:1 3.52 3.49 1.08 18.70 82,012,448 71.15 52.71 70.59 251,984 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 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 77,905,821 77,259,396 76,844,897 76,407,658 76,629,777 77,149,626 (1) On June 1, 2011, Toromont completed the spinoff of Enerﬂex. Toromont shareholders received one share of Enerﬂex for each Toromont share held. ROE for 2011 was calculated excluding earnings and equity from discontinued operations. (2) 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. (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) The Company completed the acquisition of the businesses and net operating assets of the Hewitt Group of Companies on October 27, 2017 for $1.02 billion. Long-term debt and common shares were issued on October 27, 2017, to partially fund the aforementioned acquisition. Refer to note 25 of the 2018 audited ﬁnancial statements for more information. 76 Ten-Year Financial Review For the years ended December 31 ($ thousands, except ratios and share data) Operating Results Revenues Net earnings Net interest expense Capital expenditures, net Dividends declared Financial Position Working capital Capital assets Total assets Non-current portion of long-term debt Shareholders’ equity Financial Ratios Working capital Return on opening shareholders’ equity (%) 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 Price range High Low Close 286,800 17,955 209,854 88,192 829,275 1,020,930 3,371,337 645,471 1,533,891 1.8:1 21.4 .18:1 3.52 3.49 1.08 18.70 71.15 52.71 70.59 251,984 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 82,012,448 81,226,383 80,949,819 78,398,456 (1) On June 1, 2011, Toromont completed the spinoff of Enerﬂex. Toromont shareholders received one share of Enerﬂex for each Toromont share held. ROE for 2011 was calculated (2) 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 excluding earnings and equity from discontinued operations. audited ﬁnancial statements. (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) 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. 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 for more information. 2019 2018 2017(4) 2016 2015(3) 2014 2013 2012(2) 2011(1) 2010 3,678,705 3,504,236 2,350,162 1,912,040 1,846,723 1,660,390 1,593,431 1,507,173 1,381,974 1,207,028 145,666 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 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 77 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 L8E 5M7 T: 905.577.7777 F: 905.643.6008 www.battleﬁeldequipment.ca Toromont Material Handling 425 Millway Avenue 4000 Trans-Canada Highway Concord, Ontario L4K 3V8 Pointe-Claire, Québec H9R 1B2 T: 905.669.6590 F: 416.661.1513 T: 514.426.6700 F: 514.426.6706 www.toromontmaterialhandling.com AgWest Ltd. Highway #1 West P.O. Box 432 Elie, Manitoba R0H 0H0 T: 204.353.3850 F: 877.353.2486 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 1, 2020. Visit Toromont.com for more details. 78 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 Design and Coordination: Ove Brand|Design www.ovedesign.com Editorial: Fundamental Creative Inc. c 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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