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Toromont Announces Record Results for 2007
(Market Wire Via Thomson Dialog NewsEdge) TORONTO, ONTARIO, February 4 / MARKET WIRE/ --
Toromont Industries Ltd. (TSX: TIH) today reported record financial results for 2007 representing the fifth consecutive year of growth. Revenues and net earnings were higher compared to the same periods of 2006. Net earnings for the quarter were $39.3 million or $0.61 per share, up 7% from $36.9 million or $0.58 per share reported in the fourth quarter of 2006. For the year, net earnings were $122.3 million or $1.89 per share, up 23% from 2006. Record mobile equipment sales and rentals together with solid project execution and very strong growth of the US compression business were the primary contributors to the higher earnings. Full year results for 2007 included a $0.20 per share gain on sale of property recorded in the second quarter.
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$ millions, Three months ended Twelve months ended
except December 31 December 31
per -----------------------------------------------------------
share amounts 2007 2006 % change 2007 2006 % change
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Revenues $ 540.7 $ 495.8 9% $ 1,903.0 $ 1,764.8 8%
Operating
income $ 62.1 $ 59.7 4% $ 180.8 $ 166.4 9%
Net earnings $ 39.3 $ 36.9 7% $ 122.3 $ 99.4 23%
Earnings per
share basic $ 0.61 $ 0.58 5% $ 1.89 $ 1.56 21%
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"We are pleased with our results, particularly in light of the record highs set in 2006. Revenues have increased annually over the past ten years and net earnings have been higher in nine of the last ten years. The Equipment Group exceeded expectations in the fourth quarter, setting a new December record for sales of new equipment. The Compression Group also exceeded expectations in the fourth quarter on excellent project execution in all operations and continued business growth in the United States," stated Robert M. Ogilvie, Chairman and Chief Executive Officer of Toromont Industries Ltd. "The Equipment Group delivered exceptional results, with solid growth in both revenues and operating income driven by strong demand in the mining, infrastructure and marine industries. Product support activity was particularly strong in the last quarter after a slower start to the year. Rental operations through Battlefield - The CAT Rental Store have shown consistent growth in revenues since inception in 1996, adding another 16% in 2007. The Compression Group reported a 3% reduction in operating income, but we are nonetheless very pleased with the overall results given softness in Canadian natural gas markets. In Canada, management has done an excellent job of optimizing facilities, controlling costs and executing projects; while current market conditions are tough, we believe the long-term fundamentals remain sound. US natural gas operations have seen terrific growth in 2007 in light of our expanded presence in this market, improved project execution and underlying market strength. Industrial and recreational refrigeration reported significantly improved results in 2007, aided by higher activity and cost control."
Highlights:
- Equipment Group revenues were up 9% in the fourth quarter of 2007 versus the same period of 2006 on 17% growth in new machine and engine sales, a 14% increase in rentals and an 11% increase in product support. Operating income in the quarter increased 18% over the same period last year on the higher revenues and improved gross margins.
- For the year, Equipment Group revenues were up 11% over 2006 while operating income was up 18%. Revenue growth was driven by a 20% increase in new machine and engine sales and rental revenues. Growth in operating income, up 18%, reflects higher revenues and improved gross margins.
- Equipment Group bookings in the fourth quarter were down 25% from the record levels seen in the comparable period last year, which had included several large mining orders. For the year, bookings were approximately the same level as 2006. Backlogs were also comparable to the record levels reported at the end of last year.
- Compression Group revenues were up 9% in the quarter compared to the same period last year on 9% growth in package sales and an 11% growth in product support revenues. Operating income for the quarter was down 10% on lower operating margins in the Canadian natural gas compression market due to reduced activity levels, partially offset by increased activity levels in US operations and improved project execution in natural gas operations.
- For the year, Compression Group revenues were up 4% on an 11% increase in product support revenues and a 2% increase in package sales. Operating income for the year was down 3% on lower operating margins in Canada, partially offset by improvements in US natural gas operations and refrigeration operations.
- Compression Group bookings were 81% higher in the fourth quarter of 2007 versus the relatively weak activity levels in the fourth quarter of 2006, with strong increases in bookings in US natural gas compression systems, process compression systems and Canadian industrial refrigeration systems. Bookings for the full year 2007 were 10% higher. Backlogs set a new high for this time of year and were up 32% over 2006.
- Cash provided by operating activities in 2007 was significantly higher than 2006 due to higher earnings and a reduced investment in non-cash working capital. Total debt net of cash as a percentage of shareholders' equity at December 31, 2007 was 19% versus 36% reported last year.
- The Board of Directors declared the regular quarterly dividend of $0.12 per common share, paid on January 2, 2008 to shareholders of record on December 14, 2007. The Company has paid dividends every year since going public in 1968.
"Toromont has a history of performance at a high level for all stakeholders, resulting from consistent application of long-term strategies, a proven business model and a focus on asset management and progressive, profitable improvement," continued Mr. Ogilvie. "Financially, we have a strong foundation with net debt to shareholders' equity at its the lowest level since 1997. We are well positioned in each of our markets and we believe that over the longer term, our existing businesses can achieve average annual revenue growth of 10%, with increasing profitability. While the US economy is weak and Canadian GDP growth has slowed, prospects for the Equipment Group remain favourable, with strong activity expected to continue in the mining and infrastructure markets and in power systems and marine applications. Compression has record backlogs entering 2008, with significantly higher levels in both US natural gas and industrial and recreational refrigeration."
Quarterly Conference Call and Webcast
Interested parties are invited to join the quarterly conference call with investment analysts, in listen-only mode, on Monday, February 4, 2008 at 4:30 p.m. (ET). The call may be accessed by telephone at 1-866-862-3915 (toll free) or 416-641-6133 (Toronto area). A replay of the conference call will be available until Tuesday, February 18, 2007 by calling 1-800-408-3053 or 416-695-5800 and quoting passcode 3249629.
Both the live webcast and the replay of the quarterly conference call can be accessed at www.toromont.com.
About Toromont
Toromont Industries Ltd. operates through two business segments: The Equipment Group and the Compression Group. The Equipment Group includes one of the world's largest Caterpillar dealerships by revenue and geographic territory in addition to industry leading rental operations. The Compression Group is a North American leader specializing in the design, engineering, fabrication, and installation of compression systems for natural gas, coal-bed methane, fuel gas and carbon dioxide in addition to process systems and industrial and recreational refrigeration systems. Both Groups offer comprehensive product support capabilities. Toromont employs approximately 4,500 people in more than 130 locations and is listed on the Toronto Stock Exchange under the symbol TIH. This press release and more information about Toromont Industries can be found on the Web at www.toromont.com.
MANAGEMENT'S DISCUSSION AND ANALYSIS
This Management's Discussion and Analysis ("MD&A") comments on the operations, performance and financial condition of Toromont Industries Ltd. ("Toromont" or the "Company") as at and for the year ended December 31, 2007, compared to the preceding year. This MD&A should be read in conjunction with the attached unaudited consolidated financial statements and related notes for the year ended December 31, 2007.
The consolidated financial statements reported herein have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP") and are reported in Canadian dollars. The information in this MD&A is current to February 1, 2008.
Additional information is contained in the Company's filings with Canadian securities regulators, including the Company's Annual Information Form. These are available on SEDAR at www.sedar.com and on the Company's website at www.toromont.com.
ADVISORY
Certain statements contained herein constitute "forward-looking statements". Words such as "plans", "intends", "outlook", "expects", "anticipates", "estimates", "believes", "should" and similar expressions are intended to identify forward-looking statements. Forward-looking statements are based on current expectations and are influenced by management's historical experience, perception of trends and current business conditions, expected future developments and other factors which management considers appropriate. These statements entail various risks and uncertainties as more fully described in the "Risks and Uncertainties" and the "Outlook" sections of this MD&A. These risks and uncertainties could cause or contribute to actual results that are materially different from those expressed or implied. The Company disclaims any obligation or intention to update or revise any forward-looking statement, whether the result of new information, future events or otherwise.
CORPORATE PROFILE AND BUSINESS SEGMENTATION
Toromont employs approximately 4,500 people in more than 130 locations, predominately in Canada and the United States. Toromont is listed on the Toronto Stock Exchange under the symbol TIH. The Company serves its customers through two business groups.
The Equipment Group sells, rents and services a broad range of construction equipment and industrial engines. These activities generate 58% of the Company's revenues in 2007. The Equipment Group is comprised of Toromont CAT, one of the world's largest Caterpillar dealerships by revenue and geographic territory, and Battlefield - The CAT Rental Store, an industry-leading rental operation. Performance in this business segment is driven by activity in several industries: residential and commercial construction, infrastructure projects, mining, road building, aggregates, waste management, steel, forestry and agriculture. Other significant activities of the Equipment Group include sales and product support activities for Caterpillar engines used in a variety of applications including on highway trucks, industrial, commercial, marine and power generation applications.
The Compression Group is a leading North American business specializing in the design, engineering, fabrication and installation of compression systems for natural gas, fuel gas and carbon dioxide, as well as process systems, and industrial and recreational refrigeration systems. These activities generated 42% of the Company's revenues in 2007. Results in the Compression Group are influenced by conditions in the primary market segments served, gas production and transportation chemical, petrochemical, food and beverage processing, cold storage, food distribution and ice rink construction.
The majority of revenues are derived in Canada, representing 77% of revenues in 2007. The Company has a solid and growing presence in the United States, generating 19% of revenues in 2007, up from 13% in 2006. Offshore markets represented 4% of revenues in 2007.
PRIMARY OBJECTIVE AND MAJOR STRATEGIES
A primary objective is to build shareholder value through sustainable and profitable growth, founded on a strong financial position. Toromont's operating groups employ the following broad strategies in pursuit of this objective:
Expanding Markets
Toromont serves a diverse and increasing number of markets that offer significant potential for profitable expansion. Each operating group strives to achieve or maintain leading positions in served markets. Incremental revenues are derived from improved coverage, market share gains and geographic expansion. Expansion of the installed base of equipment provides the foundation for future product support growth and leverages the fixed costs associated with the Company's infrastructure.
Strengthening 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.
Broadening Product Offerings
Toromont delivers specialized capital equipment to a diverse range of customers and industries. Collectively, 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, if not best-in-class offerings from suppliers that are continually expanding and complementing their products. Strong relationships with suppliers are critical in achieving growth objectives.
Investing 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. Incentive programs, a strong share ownership and highly-principled culture result in a close alignment with Company and shareholder interests. By investing in employee training and development, the capabilities and productivity of employees continually improve to better serve customers, business partners and shareholders.
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.
Strong Financial Position
A strong, well-capitalized balance sheet creates financial flexibility, has contributed to the Company's long-term track record of profitable growth and is fundamental to the Company's future success.
CONSOLIDATED RESULTS OF OPERATIONS
Twelve months ended December 31
$ thousands, except per share amounts 2007 2006 % change
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Revenues $ 1,902,980 $ 1,764,833 8%
Cost of goods sold 1,486,775 1,376,492 8%
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Gross profit 416,205 388,341 7%
Selling and administrative expenses 235,453 221,968 6%
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Operating income 180,752 166,373 9%
Interest expense 13,589 14,899 (9%)
Interest and investment income (4,258) (3,789) 12%
Gain on sale of property 15,990 - -
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Income before income taxes 187,411 155,263 21%
Income taxes 65,131 55,842 17%
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Net earnings $ 122,280 $ 99,421 23%
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Earnings per share - Basic $ 1.89 $ 1.56 21%
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Key ratios:
Gross profit as a % of revenues 21.9% 22.0%
Selling and administrative expenses as
a % of revenues 12.4% 12.6%
Operating income as a % of revenues 9.5% 9.4%
Income taxes as a % of income before
income taxes 34.8% 36.0%
Contributions from both operating groups led to year-over-year revenue growth of 8%, representing the fifteenth consecutive year of growth from continuing operations. Equipment Group revenues were 11% higher on increased machine and engine sales and strong rental activity. Compression revenues were 4% higher on a 29% increase in revenues from refrigeration packages. Natural gas compression package revenues were down 5% as strong demand in US markets was more than offset by lower activity in Canada. Product support continued to expand, with increases in both Groups.
The stronger Canadian dollar has had a dampening impact on revenues as pricing to customers typically reflects movements in the exchange rate on US sourced equipment, components and spare parts. As well, the stronger Canadian dollar negatively impacts reported revenues on the translation of the financial statements of the Compression Group's growing US operations. The Canadian dollar was 6% stronger on average in 2007 compared to the prior year. The estimated impact of the stronger Canadian dollar was a decrease in reported revenues of $73 million, $41 million in Equipment and $32 million in Compression. The impact in Compression included a $20 million decrease in revenues due to the translation of foreign subsidiaries, which also reduced net income in the Group by $1.5 million.
Gross profit increased 7% on the 8% increase in revenues, partially offset by a 0.1 percentage point decrease in gross profit margins. Gross profit margin in 2007 was 21.9%, compared to 22.0% reported in 2006. Gross profit margins in the Compression Group were slightly lower in 2007. This was due to lower margins in Canadian natural gas compression operations on lower revenues, partially offset by stronger margins in the US natural gas operations on improved job execution and higher volumes. Equipment Group gross profit margins were at similar levels as in the prior year.
Selling and administrative expenses increased $13.5 million or 6% in 2007 versus the prior year. Compensation costs were $9.7 million higher due to increased profit sharing related to earnings growth and scheduled annual salary increases. Sales-related expenses such as freight, service costs and marketing were up approximately $1.5 million on the increased volumes. Selling and administrative expenses as a percentage of revenues were 12.4% for 2007 compared to 12.6% in 2006.
Operating income in 2007 was up 9% over the prior year on higher revenues and a lower relative expense level. Operating income as a percentage of revenue improved to 9.5% from 9.4% in 2006.
Interest expense was 9% lower in 2007 than in the prior year. Average debt balances in 2007 were lower than those reported in 2006 as cash flow from operating and other activities has been strong.
Interest income was 12% higher in 2007 than in the prior year. Interest income varies with the level of short-term investing of daily cash flows from operations. The Company had higher cash balances in 2007 as a result of improved cash flow from operations. In addition, interest rates were marginally higher in 2007 than 2006.
During the second quarter of 2007, a 60-acre parcel of land in the Region of Halton was sold for net proceeds of $17.6 million. The resulting gain was $16.0 million, $12.9 million after tax, or $0.20 basic earnings per share.
The effective income tax rate for the year was 34.8% compared to 36.0% for 2006. The 2007 rate was lower due to the lower rate on the capital gain from the sale of property in the second quarter. Excluding this item, the effective income tax rate for 2007 was 36.2%, marginally higher than in 2006 due to the impact of lower future tax rates on future income tax assets.
Net earnings in 2007 were $122.3 million, up 23% from 2006. Basic earnings per share for 2007 were $1.89 compared with $1.56 in 2006, an increase of 21%. Excluding the gain on sale of property in 2007, net earnings in 2007 were $109.3 million or $1.69 basic per share, up 10% and 8% respectively.
Comprehensive income for the year was $110.8 million, comprised of net earnings of $122.3 million and other comprehensive loss of $11.5 million. The other comprehensive loss arose primarily on translation of self-sustaining foreign operations and a decline in fair value of cash flow hedges. Foreign exchange contracts reduce volatility by fixing landed costs related to specific customer orders and establish 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.
BUSINESS SEGMENT 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 and operating income relative to revenues. Corporate expenses are allocated based on each segment's operating income. Interest expense and interest and investment income are not allocated.
Results of Operations in the Equipment Group
Twelve months ended December 31
$ thousands 2007 2006 % change
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Equipment sales and rentals
New $ 528,406 $ 441,398 20%
Used 129,989 125,352 4%
Rental 147,427 133,610 10%
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Total equipment sales and rentals 805,822 700,360 15%
Power generation 11,328 15,473 (27%)
Product support 281,186 272,036 3%
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Total revenues $ 1,098,336 $ 987,869 11%
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Operating income $ 108,267 $ 91,485 18%
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Capital expenditures $ 77,658 $ 79,695 (3%)
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Key ratios:
Product support revenues as a % of
total revenues 25.6% 27.5%
Group total revenues as a % of
consolidated revenues 57.7% 56.0%
Operating income as a % of revenues 9.9% 9.3%
The Equipment Group delivered record revenues and operating income on excellent growth across many markets.
New machine sales were up 20% in the year on higher unit sales, modestly higher prices and improved mix of larger units. The markets contributing to this growth included mining and heavy construction industries, prime and back-up electrical power systems, and engines for marine applications.
Used equipment sales were up 4% in the year. Sales of used equipment vary depending on customer buying preferences, exchange rate considerations and product availability.
Rental revenues were up 10% over 2006, largely due to modest market share gains and an expanded rental fleet. Revenues generated by stores open for more than one year were 8.1% higher this year versus the prior year on improved utilization. Two new locations, in Timmins and Concord, Ontario also contributed to increased rental revenues.
Power generation revenues from Toromont-owned plants declined 27% in the year over the prior year, reflecting the disposition of power generation assets located near Trenton, Ontario in mid 2007. On a comparable basis, power generation revenues were up 18% over 2006, reflecting increased operating hours and higher average prices for electricity.
Product support revenues were 3% higher than the prior year on increases in both parts and service. Product support revenues benefited from higher parts sales to construction and mining customers, particularly during the last quarter of the year. Partially offsetting this has been lower service work in on-highway truck engines due to softness in the transportation sector. A continuing strike by hourly staff in Newfoundland commencing in August 2007 has also negatively impacted revenues by approximately $2 million. Service work in process at December 31, 2007 was approximately 15% higher than at the end of 2006.
Operating income increased 18% over the prior year, on the 11% increase in revenues. Selling and administrative expenses as a percentage of revenues were lower in 2007 than in the prior year. Gross margins were at similar levels to 2006 as improved price realization offset the impact of a lower proportion of product support activities. Operating income increased to 9.9% of revenues compared with 9.3% in the prior year - a record level of profitability for the Equipment Group.
Booking activity in 2007 was comparable to the record activity reported in 2006. Demand continued to be strong for new equipment, particularly for the larger models used in mining and infrastructure markets and for marine and power applications.
Backlogs at December 31, 2007 were comparable to the records set last year on significant orders received from customers in the mining and marine industries.
Capital expenditures in the Equipment Group totaled $77.7 million in 2007, of which approximately 78% were for replacement and expansion of the rental fleet. Other capital expenditures included investments for both new and existing branches as well as service and delivery vehicles.
Results of Operations in the Compression Group
Twelve months ended December 31
$ thousands 2007 2006 % change
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Package sales and rentals
Package sales $ 594,029 $ 584,297 2%
Rentals 19,236 20,158 (5%)
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Total package sales and rentals 613,265 604,455 1%
Product support 191,379 172,509 11%
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Total revenues $ 804,644 $ 776,964 4%
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Operating income $ 72,484 $ 74,888 (3%)
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Capital expenditures $ 19,450 $ 22,749 (15%)
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Key ratios:
Product support revenues as a % of
total revenues 23.8% 22.2%
Group total revenues as a % of
consolidated revenues 42.3% 44.0%
Operating income as a % of revenues 9.0% 9.6%
Revenue growth within the Compression Group reflects varied market conditions. The net impact of these conditions has been marginally positive in 2007.
- The Canadian natural gas industry slowed significantly from the very active market conditions seen through 2005. High levels of gas in storage have kept prices low. A higher cost structure in Canada together with the strengthening Canadian dollar has resulted in cost disadvantages for Canadian natural gas producers. As a result, drilling in Canada has declined and the demand for compression equipment is down substantially from the peak seen in 2005.
- Conditions within the US natural gas compression market have been favourable and the Company's participation in this market has increased through investment in facilities and people. More than $25 million has been invested in US compression facilities and the workforce has more than doubled since the end of 2005.
- Activity within the US and international refrigeration markets, both industrial and recreational was higher in 2007.
Package sales revenues were up 2% from the prior year on a 29% increase in recreational and industrial refrigeration revenues. Revenues from natural gas compression packages were down 5% as higher revenues generated from U.S. natural gas compression operations were more than offset by declines in the Canadian natural gas market.
Rental revenues were $0.9 million or 5% lower in 2007 than in 2006. The marginal decrease was due to lower fleet utilization in Canada.
Product support revenues were up 11% in the year, with a 14% increase in the natural gas sector and a 6% increase in industrial refrigeration. New service branches and the growing installed base continue to strengthen Compression product support activities. Gains were reported in both Canadian and US service businesses.
Operating income for the Compression Group decreased 3% in the year on a 4% increase in revenues. Substantial growth in US natural gas operations and improved performance in industrial and recreational refrigeration were more than offset by declines in Canadian natural gas compression. Gross margins were down slightly over the prior year on lower margins in Canadian natural gas product support, which were dampened due to continuing soft market conditions. Gross margins on natural gas compression equipment were relatively consistent with the prior year as lower margins in Canada on reduced volumes were largely offset by gains in the US on higher volumes, better project execution and project mix. General and administrative expenses were held at the same relative level as in 2006, as higher spending to expand the U.S. operations was largely offset by lower spending in Canada. Operating income in the Industrial and Recreational sector substantially improved year over year on higher revenues and lower relative selling and administrative expenses. Operating income decreased to 9.0% of revenues for the year compared with 9.6% in the prior year.
Compression booking activity for the year was up 10%. The US natural gas and process markets were up 38%, while the corresponding Canadian markets were down 28%. Industrial and recreational bookings were up 26%, led by gains in the industrial sector. End-of-year backlogs were 32% higher than last year.
Capital expenditures in the Compression Group totaled $19.4 million in 2007. Approximately 50% of capital expenditures were for natural gas compression package rental fleet in Canada in response to specific demand. Investments to the Company's rental fleet are made only when demand exists for rental units. Other capital expenditures included investments for the expansion of manufacturing facilities in Casper, Wyoming. Investments in 2006 were directed at expansion in Houston, Texas.
CONSOLIDATED FINANCIAL CONDITION
The Company has maintained a strong financial position. At December 31, 2007, the ratio of total debt, net of cash, to equity was 0.19:1 compared to 0.36:1 in the prior year. Total assets were $1.4 billion at December 31, 2007 compared with $1.3 billion at the end of 2006.
Working Capital
The Company's investment in non-cash working capital decreased to $363.3 million at December 31, 2007. The major components, along with the changes from December 31, 2006 are identified in the following table.
December 31 December 31 Increase
2007 2006 (Decrease)
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Accounts receivable $ 339,381 $ 341,470 $ (2,089)
Inventories 444,858 461,672 (16,814)
Other current assets 27,607 7,753 19,854
Accounts payable and accrued
liabilities (267,999) (301,131) 33,132
Deferred revenue (160,678) (90,596) (70,082)
Dividends payable (7,792) (6,431) (1,361)
Derivative financial instruments (3,575) - (3,575)
Other (8,457) (1,113) (7,344)
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Total non-cash working capital $ 363,345 $ 411,624 $ (48,279)
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Accounts receivable were 1% lower than last year. Accounts receivable in the Equipment Group were up 13% on higher revenues in the fourth quarter. Accounts receivable in the Compression Group were down 12% on higher advance deposits received and improved collections.
Inventories were 4% lower than at December 2006. Equipment Group inventory was down 12% over that reported at this time last year on strong new machine sales in the fourth quarter. Compression Group inventory was up 7% on a 9% decrease in inventories in Canada and a 75% increase in the expanded US compression operations.
Other current assets increased on deposits made for equipment ordered relating to a significant project and scheduled for delivery through 2008.
Accounts payable and accrued liabilities were 11% lower than December 2006 due to reduced key supplier payables.
Deferred revenues have increased $70.1 million or 77% from December 2006. The Compression Group uses progress billings as a method of funding working capital requirements on long-term contracts. Progress billings collected in 2006 on certain long-term contracts scheduled for delivery in 2008 are now classified as current.
Derivative financial instruments, namely foreign exchange contracts and an interest rate swap, are recorded on the balance sheet beginning January 1, 2007. Given the recent volatility in the Canadian/US dollar exchange rate, the Company's hedging practices have led to a cumulative opportunity cost of approximately $3.6 million as at December 31, 2007. This is not expected to affect net income, as the unrealized losses will offset future gains on hedged items.
Other Balance Sheet Items
The Company performs impairment tests on its goodwill balances on an annual basis or as warranted by events or circumstances. The assessment of goodwill entails estimating the fair value of operations to which the goodwill relates using the present value of expected discounted future cash flows. This assessment affirmed goodwill values as at December 31, 2007.
Due to the size, complexity and nature of the Company's operations, various legal matters are pending. 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
The normal course issuer bid with the Toronto Stock Exchange was renewed in 2007. The issuer bid allows the Company to purchase up to approximately 3.2 million of its common shares, representing approximately 5% of shares issued and outstanding, in the year ending August 30, 2008. 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. 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. The Company did not purchase any shares under the normal course issuer bid in either 2006 or 2007.
Outstanding Share Data
As at the date of this MD&A, the Company had 64,949,897 common shares and 1,836,959 share options outstanding.
Dividends
Toromont pays a quarterly dividend on its outstanding common shares and has historically targeted a dividend rate that approximates 30% of trailing earnings from continuing operations. This practice is reviewed from time-to-time, based upon and subject to the Corporation's earnings, financial requirements and general economic circumstances. During 2007, the Company declared dividends of $0.48 per common share.
LIQUIDITY AND CAPITAL RESOURCES
Sources of Liquidity
Toromont's liquidity requirements can be met through a variety of sources, including cash generated from operations, long and short-term borrowings and the issuance of common shares. Borrowings are obtained through a variety of senior debentures, notes payable and committed long-term credit facilities.
At December 31, 2007, $214.3 million or 93% of long-term debt carried interest at fixed rates. This debt matures at various dates through to 2019 with a current weighted average interest rate of 5.6%. The remaining $16.0 million or 7% of long-term debt carried interest at variable rates, ranging from 1.36% - 7.75%, with maturities through 2010.
Combined unsecured credit facilities amounted to $245 million at year-end, with $20 million maturing in 2009 and the balance maturing in 2011. At December 31, 2007, $182.8 million of the credit facilities were unutilized.
The Company expects that continued cash flows from operations in 2008, together with cash and cash equivalents on hand and currently available credit facilities, will be more than sufficient to fund its requirements for investments in working capital, capital assets and dividend payments.
Principal Components of Cash Flow
Cash from operating, investing and financing activities, as reflected in the Consolidated Statements of Cash Flows, are summarized in the following table:
Twelve months ended December 31
($ thousands) 2007 2006 $ Variance
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Cash provided by operating activities $ 176,811 $ 95,477 $ 81,334
Cash used in investing activities (74,615) (81,171) 6,556
Cash used in financing activities (56,696) (7,008) (49,688)
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Change in cash and cash equivalents $ 45,500 $ 7,298 $ 38,202
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Cash Flows from Operating Activities
Operating activities provided a record $176.8 million in the year compared to $95.5 million in 2006. Net earnings, adjusted for items not requiring cash, were up $14.6 million or 10.6%, reflecting higher revenues, improved operating margins and lower net interest expense. Non-cash working capital and other provided $24.6 million in 2007 compared to using $42.1 million in 2006. The components and changes in working capital are discussed in more detail in this MD&A under the heading "Financial Condition".
Cash Flows from Investing Activities
Investing activities used $74.6 million in the year compared to $81.1 million in 2006. Investing activities for the 2007 included net proceeds of $17.6 million on the sale of property.
Net additions to the rental fleet (additions less proceeds on disposal) in 2007 were $42.7 million, up 5% from the prior year. Approximately 80% of the investments in 2007 were attributable to the Equipment Group.
Gross investment in property, plant and equipment was $26.4 million and were $9.5 million lower than in the prior year. Significant investments in 2007 included the following:
- $5.5 million to complete the expansion of the compression facilities in Casper, Wyoming;
- $6.8 million for additions to the service vehicle fleet, primarily for the Equipment Group;
- $6.5 million for facilities renovations and expansion in the Equipment Group; and
- $3.0 million for computer technology upgrades.
During 2007, a rental operation in Timmins, Ontario was purchased for net cash of $3.1 million.
Cash Flows from Financing Activities
Financing activities used $56.7 million in 2007. The significant financing activities are as follows:
- Dividends paid to common shareholders in 2007 totaled $29.7 million, an increase of 23% over 2006 reflecting the higher dividend rate and more common shares outstanding.
- The outstanding balance of 8.17% senior debentures issued in 2004 matured in the year.
- Cash received on exercise of share options totaled $6.4 million.
OUTLOOK
Financially, Toromont has a strong foundation. Net debt to shareholders' equity is at the lowest level since 1997. Toromont is well positioned in each of its markets and each business segment has good growth prospects. Over the longer term, it is expected that the existing businesses can achieve average annual revenue growth of 10%, with increasing profitability.
The Equipment Group has an excellent order backlog entering 2008. Continued growth in the parts and service business is expected, driven by the larger installed base of equipment in the field. Growth in other important core markets, including mining and infrastructure and in power systems applications is expected to continue to counter prospects of weaker residential construction and forestry activity. We also expect to benefit from broader market participation as Caterpillar introduces additional lines in coming years.
Market fundamentals for natural gas for the longer term continue to be positive given declining reservoir pressures and future supply needs. Backlogs entering 2008 are at record levels, driven by increased natural gas activity in the US, largely from pipeline business. The US gas market is expected to continue to be strong and Toromont's participation will increase in light of the Company's expanded presence. It is expected that the Canadian natural gas compression market will continue to be weak in the near term.
While the US economy is weak and Canadian GDP growth has slowed, solid backlogs and industry and market diversification provide management with reasonable optimism for continued success for Toromont Industries Ltd. in 2008.
CONTRACTUAL OBLIGATIONS
Contractual obligations are set out in the following table. Management believes that these obligations will be met comfortably through cash generated from operations and existing short and long-term financing facilities.
Payments due Less than After
by Period Total 1 year 1 to 3 years 4 - 5 years 5 years
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Long-term
Debt $ 230,299 $ 26,874 $ 29,373 $ 38,169 $ 135,883
Operating
Leases 19,468 4,871 7,330 2,942 4,325
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Total $ 249,767 $ 31,745 $ 36,703 $ 41,111 $ 140,208
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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, and customer and employee satisfaction.
Years ended December 31, 2007 2006 2005 2004 2003
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Expanding Markets and
Broadening Product
Offerings
Revenue growth 7.8% 10.3% 11.5% 14.9% 20.6%
Revenue generated
outside North America
(millions) $ 75.6 $ 80.8 $ 70.0 $ 79.0 $ 55.4
Revenues, Equipment
Group to Compression
Group 58:42 56:44 57:43 57:43 63:37
Strengthening Product
Support
Product support revenue
growth 6.3% 9.2% 15.8% 10.7% 12.1%
Investing in Our
Resources
Revenue per employee
(thousands) $ 422 $ 399 $ 384 $ 381 $ 373
Investment in
information
technology (millions) $ 13.6 $ 12.7 $ 13.2 $ 11.7 $ 11.2
Return on capital
employed 24.7% 22.7% 17.8% 20.6% 18.7%
Strong Financial Position
Working capital
(millions) $ 485 $ 470 $ 411 $ 263 $ 204
Total debt, net of cash
to equity ratio .19:1 .36:1 .42:1 .45:1 .47:1
Book value
(shareholders'
equity) per share $ 10.08 $ 8.79 $ 7.57 $ 6.59 $ 5.93
Build Shareholder Value
Basic earnings per share
growth 21.2% 24.8% 12.6% 19.4% 47.6%
Dividends per share
growth 20.0% 25.0% 23.1% 23.8% 16.7%
Return on equity 21.6% 20.6% 18.9% 18.7% 17.5%
The performance measures indicate successful execution of strategies. Revenues have increased at an average annual rate of 13.0% since 2003. Product support revenues have increased at an average annual growth rate of 10.8% over the same period. Several factors have had an impact on revenue growth:
- In the last two years, revenue growth in Canadian operations has been dampened by the strengthening Canadian dollar relative to the U.S. currency, which has resulted in lower selling prices. Generally foreign exchange rate movements on underlying equipment and parts costs flow through to final pricing. Margins have not been negatively affected, as there is a corresponding impact on cost of goods sold.
- The stronger Canadian dollar has also negatively impacted reported revenues from US operations on translation of financial results for reporting purposes. The impact in 2007 was to reduce revenues by $20 million compared to 2006.
- Since mid 2006, Canadian natural gas compression markets have been significantly slower than in 2005 and early 2006. High natural gas inventories in Canada, combined with a strong Canadian dollar, uncertainty around the Alberta Royalty Review and the change in taxation rules for income trust corporations have all served to weaken fundamental in the Western Canadian Sedimentary Basin.
- Additionally, revenue growth between 2004 and 2006 was affected by supply constraints on certain equipment, resulting in some delays in deliveries to customers and lost opportunities.
Significant expenditures have been made in the area of information technology over the past five years. These investments have provided a competitive advantage in the marketplace and increase productivity levels. Revenue per employee has increased 13% since 2003.
Toromont continues to maintain a strong balance sheet. In 2007, book value (shareholders' equity) per share increased 14.7% over the prior year on strong earnings in the year. Leverage, as represented by the ratio of total debt, net of cash, to shareholders' equity, also improved over the prior year.
Toromont has a history of progressive earnings per share growth. Earnings per share have increased in nine of the past ten years and since 2003 have increased at an average annual rate of 25.1%.
Toromont has paid dividends consistently since 1968, and has increased the dividend in each of the last 18 years.
CONSOLIDATED RESULTS OF OPERATIONS FOR THE FOURTH QUARTER 2007
Three months ended December 31
$ thousands, except per share amounts 2007 2006 % change
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Revenues $ 540,659 $ 495,843 9%
Cost of goods sold 416,027 381,256 9%
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Gross profit 124,632 114,587 9%
Selling and administrative expenses 62,525 54,901 14%
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Operating income 62,107 59,686 4%
Interest expense 2,952 4,027 (27%)
Interest and i | | |
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