Toromont Industries Ltd.
TSX : TIH

Toromont Industries Ltd.

November 01, 2006 07:00 ET

Toromont Announces Financial Results for the Third Quarter of 2006

TORONTO, ONTARIO--(CCNMatthews - Nov. 1, 2006) - Toromont Industries Ltd. (TSX:TIH) today reported financial results for the third quarter of 2006. Revenues and net earnings were higher compared to the same period of 2005. Net earnings were $25.9 million or $0.41 per share, up 5% from $24.7 million or $0.39 per share reported in the third quarter of 2005, which was also very strong. Earnings in the third quarter last year included the equivalent of one cent per share from the sale of Ontario Sterling. For the first nine months of 2006, net earnings were $62.5 million or $0.98 per share, up 21% from the comparable period in 2005. The Equipment and the Compression Groups reported higher operating results through September, with increases in both revenues and operating income over the prior year.



---------------------------------------------------------------------------
Three months ended September 30 Nine months ended September 30
----------------------------------------------------------------
$ millions,
except per
share
amounts 2006 2005 % change 2006 2005 % change
---------------------------------------------------------------------------

Revenues $ 456.0 $ 427.9 7% $ 1,269.0 $ 1,124.3 13%
Operating income $ 43.2 $ 39.8 9% $ 106.7 $ 87.3 22%
Net earnings $ 25.9 $ 24.7 5% $ 62.5 $ 51.7 21%
Earnings per
share $ 0.41 $ 0.39 5% $ 0.98 $ 0.82 20%
---------------------------------------------------------------------------


"We are pleased with the performance of our Company," stated Robert M. Ogilvie, Chairman and Chief Executive Officer of Toromont Industries Ltd. "In the first half of the year we saw strong growth in both operating groups. In the third quarter, growth moderated as a result of lower natural gas and other commodity prices, and softening residential construction in Ontario. However, without considering the $100 million pipeline order, compression backlogs remain ahead of last year and equipment backlogs are near record levels."

Developments in the Quarter:

- Equipment Group revenues were up 7% in the quarter over last year on strong sales of new tractors. Operating income for the third quarter increased 1% from that reported in the same period of the prior year as improved gross margins were largely offset by higher selling and administrative expenses.

- Bookings and backlogs at the Caterpillar dealership were strong and exceeded previous records for the third quarter.

- Revenues in the Compression Group were up 6% in the quarter over the comparable period last year. Operating income for the third quarter was 18% higher than that reported in the prior year on higher gross margins and lower relative selling and administrative expenses.

- Compression Group bookings were lower in the third quarter than for the same period last year, reflecting recent softness in natural gas prices. Backlogs continued at record levels for this time of year.

- The expansion of facilities in Houston, Texas is substantially complete and construction in Casper, Wyoming should be completed in early 2007. Approximately 40,000 sq. ft. is being added to each location to double their production capacities.

- Robert M. Ogilvie, Chairman of the Board of Directors and the CEO of Toromont from 1987 to 2002, was appointed Chief Executive Officer following the resignation of the former President and Chief Executive Officer. Mr. Wayne S. Hill, a Director of Toromont and a senior executive of the Company from 1985 to mid-2006 when he retired, was appointed Executive Vice President.

"We expect to report another year of solid financial performance at Toromont. We anticipate continued softness in the Ontario residential construction markets, however infrastructure spending, mine development and other sectors should continue to be strong for the Equipment Group," continued Mr. Ogilvie. "The Compression Group has excellent backlogs and significant booking activity, particularly in the United States and for larger horsepower units. Toromont has a history of performance at a high level for all stakeholders, resulting from consistent application of long-term strategies and a proven business model and philosophy. The Board of Directors, the senior management team and our 4,600 employees are committed to continuing our disciplined approach to managing our businesses."

Quarterly Conference Call and Webcast

Interested parties are invited to join our quarterly conference call with investment analysts, in listen-only mode, on Wednesday, November 1, 2006 at 8:00 a.m. (EST). The call may be accessed by telephone at 1-888-789-0150 (toll free) or 416-695-5259 (Toronto area). A replay of the conference call will be available until Wednesday, November 15, 2006 by calling 1-888-509-0081 or 416-695-5275 and quoting passcode 633960.

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 over 4,600 people in more than 115 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 of financial results for the fiscal quarter and nine months ended September 30, 2006

Management's Discussion and Analysis, or MD&A, provides a review of significant developments in the Company's financial performance for the fiscal quarter and nine months ended September 30, 2006, compared with the prior year. It also discusses factors that could affect future performance. This MD&A, dated October 31, 2006, should be read in conjunction with the attached unaudited consolidated financial statements for the quarter and nine-month periods ended September 30, 2006, the annual MD&A contained in the 2005 Annual Report and the audited annual consolidated financial statements of the Company for the year ended December 31, 2005.

Responsibility of Management and the Board of Directors

Management is responsible for the information disclosed in this MD&A and the accompanying unaudited interim consolidated financial statements and has in place the appropriate information systems, procedures and controls to ensure that information used internally by management and disclosed externally is materially complete and reliable. In addition, the Company's Audit Committee, on behalf of the Board of Directors, provides an oversight role with respect to all public financial disclosures made by the Company, and have reviewed and approved this MD&A and the accompanying unaudited interim consolidated financial statements.

The Company's independent auditor has performed a review of the financial statements for the quarter and nine-month periods ended September 30, 2006 in accordance with standards established by the Canadian Institute of Chartered Accountants for a review of interim financial statements by an entity's auditor. A similar review of the interim financial statements for the period ended September 30, 2005 was not performed.

Forward Looking Statements

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 when read in conjunction with the annual 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.

Additional information regarding the Company is contained in the Company's filings with security regulatory authorities including the Company's 2005 Annual Report and 2006 Annual Information Form, which can be accessed at www.sedar.com or on the Company's website at www.toromont.com.



Consolidated Results of Operations
----------------------------------

$ thousands, Three months ended Nine months ended
except per September 30 September 30
share % %
amounts 2006 2005 change 2006 2005 change
---------------------------------------------------------------------------
Revenues $ 455,959 $ 427,888 7% $ 1,268,990 $ 1,124,304 13%
Cost of
goods sold 356,192 334,901 6% 995,236 884,885 12%
---------------------------------------------------------------------------
Gross profit 99,767 92,987 7% 273,754 239,419 14%
Selling and
adminis-
trative
expenses 56,524 53,139 6% 167,067 152,081 10%
---------------------------------------------------------------------------
Operating
income 43,243 39,848 9% 106,687 87,338 22%
Interest
expense 3,522 2,882 22% 10,872 8,947 22%
Interest and
investment
income (664) (387) 72% (2,353) (1,342) 75%
---------------------------------------------------------------------------
Income
before
income
taxes 40,385 37,353 8% 98,168 79,733 23%
Income taxes 14,487 13,410 8% 35,638 28,637 24%
---------------------------------------------------------------------------
Earnings
from
continuing
operations 25,898 23,943 8% 62,530 51,096 22%
Gain on
disposal
of
discontinued
operations - 745 n/a - 745 n/a
Loss from
discontinued
operations - (3) n/a - (175) n/a
---------------------------------------------------------------------------
Net earnings $ 25,898 $ 24,685 5% $ 62,530 $ 51,666 21%
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Earnings per
share - basic $ 0.41 $ 0.39 5% $ 0.98 $ 0.82 20%
---------------------------------------------------------------------------


Consolidated revenues increased 7% to $456.0 million in the third quarter of 2006 versus the same period of the prior year. Compression Group revenues were higher on increased natural gas and coal-bed methane compression activity. Equipment Group revenues were higher on increased sales of new equipment. Product support activity increased in both Groups, with revenues for the third quarter up 2% in Equipment and 14% in Compression.

For the first nine months, revenues increased 13% to $1.3 billion with increases in both operating groups. Equipment Group revenues were 8% higher on increases in sales of new and used equipment, improved rental revenue and growth in product support business. Compression Group revenues were 20% higher year-over-year on favourable market conditions, particularly through the first half of the year.

The strengthening of the Canadian dollar relative to the US currency (average exchange rate increasing 7.3% in the third quarter, 8.1% year-to-date) reduced reported revenues from the comparable periods in 2005 by an estimated $28 million in the third quarter and $72 million in the first nine months.

Consolidated gross profit increased 7% in the quarter and 14% for the first nine months over the comparable periods in the prior year, in line with the higher sales levels. Gross profit margin increased to 21.9% in the third quarter compared to 21.7% in the same quarter of the prior year. For the nine months ended September 30, 2006, gross profit margin was 21.6% compared to 21.3% in the similar period of 2005.

Selling and administrative expenses increased $3.4 million or 6% in the third quarter versus the comparable period of the prior year. For the first nine months, selling and administrative expenses increased $15.0 million or 10% compared to the first nine months of the prior year. Selling and administrative expenses as a percentage of revenues were 13.2% for the first nine months of 2006 compared to 13.5% in the similar period of 2005.

On August 28, 2006, the President and Chief Executive Officer of Toromont Industries Ltd. resigned. The Company agreed to continue salary and certain benefits for a period of two years following the date of resignation. These costs were fully accrued in the third quarter. Selling and administrative expenses were adversely impacted by approximately $2.1 million, net of adjustments to accrued annual incentives and stock option costs related to unvested options, which were forfeited upon resignation.

The Company has implemented changes to its benefits programs to provide an improved defined contribution pension plan to substantially all employees. These program improvements resulted in increases to pension expense of $0.5 million in the quarter and $2.4 million in the year-to-date versus the comparable periods of 2005. Coincident with these changes, management has revised its estimate for annual performance incentive programs. This resulted in a reduction in accrued incentives in the third quarter of $3.0 million related to amounts previously accrued together with the continuing impact of reductions in the rate of accrual. It is the Company's expectation that these program changes will be substantially cost neutral.

Excluding the above items, salaries and benefits increased by $2.0 million in the quarter versus the third quarter of last year, reflecting compensation increases and increased headcount.

Other selling and administrative expenses increased $1.7 million in the quarter over the prior year. The expansion of the natural gas fabrication and service business in the United States, including the Wyoming business acquired in early 2006, increased expenses by approximately $1.3 million in the quarter. The provision for doubtful accounts receivable increased $0.8 million in the quarter in response to a slight slow-down in collections in the Equipment Group.

For the year-to-date, excluding the items previously mentioned (the accrual for the resignation of the President and CEO, higher pension expense and the adjustment to profit-sharing accruals), salaries and benefits were up $5.8 million over the similar period of last year, reflecting annual salary increases and increased headcount.

Other selling and administrative expenses increased $7.6 million on a year-to-date basis compared to 2005. The expansion of the natural gas fabrication and service business in the United States, including the Wyoming business acquired in early 2006, increased expenses by approximately $3.6 million. Other increased expenses included a higher provision for doubtful accounts receivable, up $1.2 million, and higher occupancy costs, up $0.9 million.

Operating income in the third quarter was 9% higher than that reported in the same period of 2005 on higher revenues and margins and lower relative selling and administrative expenses. On a year-to-date basis, operating income increased 22% on higher sales activity, improved margins and lower relative expense levels. Operating margin for the first nine months was 8.4%, up from 7.8% in the comparable period of 2005.

Interest expense increased 22% in both the quarter and the first nine months over the prior year due to the higher interest rates on the larger proportion of fixed-rate debt. Interest income increased from investing the improved daily cash flows from operations.

The effective income tax rate for the first nine months was 36.3% compared to 35.9% in the comparable period of the prior year. The higher rates in 2006 reflect the impact on future income tax assets of lower tax rates substantially enacted by the Canadian federal government and the Alberta provincial government.

Earnings from continuing operations in the third quarter were $25.9 million, up 8% from $23.9 million reported in the comparable period a year ago. Net earnings in the third quarter of 2005 included a gain on sale of discontinued operations (Ontario Sterling) of $745,000. Earnings per share for the third quarter of 2006 were $0.41, up from $0.39 reported in the comparable period last year.

Year-to-date earnings from continuing operations were $62.5 million, up from $51.1 million reported in the comparable period a year ago. Year-to-date earnings per share in 2006 were $0.98, up from $0.82 cents reported in the comparable period last year.



Results of Operations in the Equipment Group
--------------------------------------------

Three months ended Nine months ended
September 30 September 30
% %
$ thousands 2006 2005 change 2006 2005 change
---------------------------------------------------------------------------
Equipment
sales and
rentals
New $ 113,541 $ 96,046 18% $ 295,249 $ 269,100 10%
Used 25,240 28,149 (10%) 87,267 83,413 5%
Rental 40,194 38,183 5% 97,136 90,018 8%
---------------------------------------------------------------------------
Total
equipment
sales and
rentals 178,975 162,378 10% 479,652 442,531 8%
Power
generation 3,642 4,564 (20%) 11,474 10,844 6%
Product
support 65,281 64,144 2% 206,017 194,555 6%
---------------------------------------------------------------------------
Total
revenues $ 247,898 $ 231,086 7% $ 697,143 $ 647,930 8%
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Operating
income $ 22,371 $ 22,183 1% $ 61,447 $ 53,051 16%
% of
revenues 9.0% 9.6% 8.8% 8.2%
---------------------------------------------------------------------------
---------------------------------------------------------------------------


The Equipment Group delivered strong third quarter revenues, increasing 7% over the prior year and representing the seventh consecutive quarter of year-over-year revenue growth. Operating income in the quarter was up modestly from the third quarter of 2005. For the first nine months of 2006, revenues were up 8% and operating income was up 16%, both representing new records at this point in the fiscal year.

New machine sales were up 18% in the third quarter of 2006 and 10% year-to-date compared to the similar periods in 2005. Increases were driven by higher unit sales in tractor and compact construction sectors and stronger pricing, partially offset by the stronger Canadian dollar. The construction, mining and industrial markets contributed to growth in the quarter and year-to-date over 2005.

Used equipment sales were down 10% in the third quarter but were up 5% in the first nine months of 2006 compared to the similar periods in 2005. Sales of used equipment vary depending on customer buying preferences, exchange rate considerations and general product availability. Used equipment inventories were marginally lower than the comparable period last year.

Rental revenues were up 5% in the quarter and 8% through September largely due to increased same store revenues generated from a larger rental fleet. The 2006 opening of two new Battlefield - The CAT Rental Store branches in Barrie and Waterloo, Ontario also contributed to this growth.

Power generation revenues from Toromont-owned plants decreased 20% in the quarter compared to the same period of 2005. Temperatures were much more moderate than in the comparable period of 2005, resulting in reduced operating hours and lower electricity pricing. Revenues were 6% higher through the first nine months as lower operating hours were more than offset by increased revenues stemming from the agreement with the Ontario Power Authority signed earlier this year.

Product support revenues increased 2% in the quarter and 6% in the first nine months of 2006 versus the comparable periods of 2005. The stronger Canadian dollar negatively affected reported product support revenue. On a constant dollar basis, revenues increased 12% in 2006 in both the quarter and year-to-date. Product support business has benefited from recent increased customer demand for service on higher construction activity and growth in the installed base of Caterpillar equipment.

Operating income for the third quarter of 2006 was 1% higher than that reported in the same quarter last year, as higher revenues and margins were largely offset by higher expense levels. Higher expense levels primarily reflect increased compensation costs and higher bad debts expense on higher accounts receivable balances. For the nine months ended September 30, 2006, operating income was up 16% on an 8% increase in revenue and higher gross margins. Operating income as a percentage of revenues was 8.8% for the first nine months of 2006 versus 8.2% in the comparable period of 2005.

The supply of certain new equipment models has improved in the quarter, although certain models remain on managed distribution. Booking activity was brisk in the quarter and backlogs, although down slightly from those at June 30, 2006, were at record levels for this time of year.



Results of Operations in the Compression Group
----------------------------------------------

Three months ended Nine months ended
September 30 September 30
% %
$ thousands 2006 2005 change 2006 2005 change
---------------------------------------------------------------------------
Package sales
and rentals $ 160,853 $ 155,249 4% $ 444,503 $ 368,111 21%
Product support 47,208 41,553 14% 127,344 108,263 18%
---------------------------------------------------------------------------
Total revenues $ 208,061 $ 196,802 6% $ 571,847 $ 476,374 20%
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Operating income $ 20,872 $ 17,665 18% $ 45,240 $ 34,287 32%
% of revenues 10.0% 9.0% 7.9% 7.2%
---------------------------------------------------------------------------
---------------------------------------------------------------------------


The rate of growth in year-over-year package sales revenue declined in the third quarter of 2006 to 4%. Momentum within the natural gas compression market slowed in the third quarter on lower natural gas pricing. Bookings in this segment were lower in the third quarter than for the same period last year, again due to high storage levels and softness in natural gas prices, although bookings are up 16% on a year-to-date basis. Process compression systems activity was solid, with bookings up 34% in the quarter over the similar period last year and revenues up 16% year-to-date. Backlogs continued at record levels for this time of year, even before including the previously announced $100 million order for the Rockies Express Pipeline.

Product support revenues were up 14% in the quarter and 18% in the nine months ended September 30, 2006 versus the comparable periods of 2005. Increased natural gas compression activity experienced over the last twelve months, new service branches and the growing base of installed equipment have strengthened the product support business.

Operating income in the quarter was 18% higher than that reported in the same period of 2005, on increased revenues and lower expenses. For the first nine months of 2006, operating income increased 32% on higher compression and process activity and lower relative expense levels.

Results from the CIMCO operations for the first nine months of 2006 were in line with that reported for the same period last year and better than last year for the quarter. Slow-downs in market activity in the United States and international markets have negatively impacted both bookings and revenue. Product support revenues increased 9% in the quarter and 10% year-to-date compared to the same periods last year.

Consolidated Financial Position

Total assets were $1.2 billion at September 30, 2006, up 8% from the end of 2005. Non-cash working capital was $444.0 million, $83.7 million higher than at December 31, 2005, principally due to increased inventories.

Inventories were $476.9 million at September 30, 2006, up $97.1 million from December 2005. The Equipment Group machine inventory levels have been higher in fiscal 2006 versus 2005 levels due to continuing supplier restrictions for certain high demand products. This has affected inventories in both the Equipment and Compression Groups, as larger inventories are built to ensure continuity of supply in a tight market. Supply restrictions have eased for a number of equipment models in recent months, but not for compression components. In Compression, inventories also increased as a result of purchasing to secure supply of certain major components for longer lead time projects such as the $100 million Rex Pipeline contract as well as the seasonal build up of stock units held in anticipation of future sales activity.

Total debt net of cash of $249.3 million represented 47% of total shareholders' equity at September 30, 2006 compared to $203.4 million representing 42% of total shareholders' equity at December 31, 2005.

On October 31, 2006, the Company had 63,969,599 shares outstanding.

Liquidity and Capital Resources

Toromont obtains short-term financing through a combination of cash from operating activities and committed long-term credit facilities. Combined unsecured credit facilities amounted to $247 million at September 30, 2006, of which $193 million was unutilized.

Management expects that the Company's available credit facilities, together with cash flows from operations, are more than sufficient to fund its cash flow requirements including operations, debt-servicing obligations, capital expenditures and dividends to its shareholders.

Operating activities used $21.3 million in the quarter compared to $62.8 million in the same period last year. The decrease in funds used resulted from lower investments in non-cash working capital in the current period.

For the first nine months, operating activities provided $32.9 million compared to a use of $82.7 million in the same period last year. Increased cash flow year-to-date was a result of increased deposits received on orders, lower relative increases in accounts receivable and inventories, and higher cash earnings.

Capital expenditures were $9.1 million higher in the third quarter of 2006 compared to the similar period of 2005. Investments in rental equipment increased $2.4 million in the Equipment Group. Facilities expansion underway in the Compression Group accounted for $4.6 million in capital expenditures in the quarter.

In the first nine months of 2006, capital expenditures were $23.4 million higher on a $16.3 million increase in rental equipment and $6.2 million in expenditures related to the Houston facilities expansion.

Investing activities in 2006 included $5.5 million for the acquisition in Casper, Wyoming. Results in the prior year included $18.9 million in proceeds on the sale of the Ontario Sterling Division.

The Company paid dividends of $6.4 million in the third quarter and $17.9 million through September. The increases reflect the higher dividend rate per share in 2006.

Outlook

Management expects to report another year of solid financial performance at Toromont. The balance in the Company's products and markets, combined with increased after-market support activity, provides a strong operating foundation and a platform for continued growth.

The economic outlook for Canada, while positive, has softened in the last quarter. A stronger Canadian dollar, higher interest rates, a softening housing market and continued weakness in forestry is offset by increased activity in the commercial construction and mining sectors and increased investment in public infrastructure. These factors impact market conditions for the Caterpillar dealership and Battlefield - The CAT Rental Store.

Backlogs in the Compression Group continued at record levels through September, however order bookings and inquiries have slowed in recent months. The recent weakness in natural gas prices has dampened demand for natural gas compression and could result in continued lower rates of year-over-year growth in fourth quarter revenues in this segment. Market forecasts for the longer-term continue to be positive given declining reservoir pressures and international expansion of gas infrastructure. The process compression sector continues to grow and provides some balance to the volatility in the natural gas segment.

Prime product supply constraints in the Equipment Group have eased in recent months. Inventory levels are expected to decline across most businesses, although they are expected to continue to be higher than historical levels.

Risks and risk management

There were no material changes to the operating and financial risk assessment and related risk management strategies as described in the Company's 2005 Annual Report and 2006 Annual Information Form.

Critical accounting policies and estimates

In the 2005 annual MD&A there is a full discussion and description of the Company's critical accounting policies. The preparation of the Company's consolidated financial statements in conformity with Canadian GAAP requires management to make estimates and assumptions that affect amounts reported in the consolidated financial statements and accompanying notes. These are fully described in the 2005 annual MD&A.

In 2005, the Company changed its accounting policy to reflect revenues generated from the assembly and manufacture of projects using the percentage-of-completion approach of accounting for performance of production-type contracts. The results for the first three quarters of 2005 were previously reported using the completed contract method of accounting. These results have been restated. For a description of the change in accounting policies, readers should refer to Note 2 of the audited consolidated financial statements for 2005 and related MD&A contained in the 2005 Annual Report.



Selected quarterly information
------------------------------

$ thousands,
except per 2004 (1) 2005
share amounts Q3 Q4 Q1 Q2 Q3 Q4
--------- --------- --------- --------- --------- ---------

Revenues $ 368,103 $ 403,260 $ 306,289 $ 390,127 $ 427,888 $ 475,488
Net earnings -
continuing
operations 18,547 26,492 8,250 18,903 23,943 27,296
Net earnings 18,583 26,754 8,177 18,804 24,685 27,296

Earnings per
share -
continuing
operations
- Basic 0.29 0.41 0.13 0.30 0.38 0.43
- Diluted 0.29 0.40 0.13 0.29 0.37 0.43

Earnings per
share
- Basic 0.29 0.42 0.13 0.30 0.39 0.43
- Diluted 0.29 0.41 0.13 0.29 0.38 0.43

Dividends
per share 0.065 0.065 0.080 0.080 0.080 0.080



$ thousands, except per share 2006
amounts Q1 Q2 Q3
--------- --------- ---------

Revenues $ 369,428 $ 443,603 $ 455,959
Net earnings -
continuing operations 11,722 24,910 25,898
Net earnings 11,722 24,910 25,898

Earnings per share -
continuing operations
- Basic 0.18 0.39 0.41
- Diluted 0.18 0.38 0.40

Earnings per share
- Basic 0.18 0.39 0.41
- Diluted 0.18 0.38 0.40

Dividends per share 0.100 0.100 0.100

(1) Results for 2004 were determined using the completed contract method
of accounting for long-term contracts while 2005 and 2006 results use
the percentage-of-completion method.


Interim period revenues and earnings historically reflect seasonality in both the Equipment and Compression Groups. Within the Equipment Group, the first quarter is typically the softest due to winter shutdowns in the construction industry while the fourth quarter has consistently been the strongest quarter due to higher conversions at the Caterpillar dealership of equipment on rent with a purchase option. Within the Compression Group, the fourth quarter tends to be the strongest due to higher activity levels resulting from well-site access and drilling patterns. The second and third quarter impacts of seasonality in both Groups are relatively neutral.



TOROMONT INDUSTRIES LTD.
CONSOLIDATED BALANCE SHEETS
(Unaudited)

September 30 December 31
($ thousands) 2006 2005
---------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 1,998 $ 50,716
Accounts receivable 340,077 337,381
Inventories 476,929 379,819
Income taxes receivable 789 -
Future income taxes 25,769 18,501
Other current assets 9,479 7,742
---------------------------------------------------------------------------
Total current assets 855,041 794,159

Property, plant and equipment 179,497 168,253
Rental equipment 139,441 115,154
Goodwill 34,800 34,800
Future income taxes - 1,126
Other assets (note 8) 26,645 30,480
---------------------------------------------------------------------------
Total assets $ 1,235,424 $ 1,143,972
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Liabilities
Current liabilities
Accounts payable and accrued liabilities
(note 9) $ 383,448 $ 357,714
Current portion of long-term debt (note 10) 25,595 12,828
Income taxes payable - 12,627
---------------------------------------------------------------------------
Total current liabilities 409,043 383,169

Deferred revenues 65,747 31,709
Long-term debt (note 10) 225,724 241,265
Accrued pension liability 6,046 6,017
Future income taxes 74 -

Shareholders' equity
Share capital (note 11) 112,001 107,348
Contributed surplus (note 12) 7,088 6,692
Retained earnings 417,359 373,993
Currency translation adjustment (7,658) (6,221)
---------------------------------------------------------------------------
Total shareholders' equity 528,790 481,812
---------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,235,424 $ 1,143,972
---------------------------------------------------------------------------
---------------------------------------------------------------------------

See accompanying notes



TOROMONT INDUSTRIES LTD.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)

$ thousands, except share
and per share amounts
Three months ended Nine months ended
September 30 September 30
2006 2005 2006 2005
---------------------------------------------------------------------------

Revenues $ 455,959 $ 427,888 $ 1,268,990 $ 1,124,304
Cost of goods sold 356,192 334,901 995,236 884,885
---------------------------------------------------------------------------
Gross profit 99,767 92,987 273,754 239,419
Selling and
administrative expenses 56,524 53,139 167,067 152,081
---------------------------------------------------------------------------
Operating income 43,243 39,848 106,687 87,338
Interest expense 3,522 2,882 10,872 8,947
Interest and investment
income (664) (387) (2,353) (1,342)
---------------------------------------------------------------------------
Income before income
taxes 40,385 37,353 98,168 79,733
Income taxes 14,487 13,410 35,638 28,637
---------------------------------------------------------------------------
Earnings from
continuing operations 25,898 23,943 62,530 51,096
Gain on disposal of
discontinued operations - 745 - 745
Loss from discontinued
operations (note 3) - (3) - (175)
---------------------------------------------------------------------------
Net earnings $ 25,898 $ 24,685 $ 62,530 $ 51,666
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Earnings per share (note 5)
Basic $ 0.41 $ 0.39 $ 0.98 $ 0.82
Diluted $ 0.40 $ 0.38 $ 0.96 $ 0.80

Weighted average number
of shares outstanding
Basic 63,938,222 63,362,723 63,814,484 63,262,988
Diluted 64,837,308 64,736,242 64,823,445 64,496,539

See accompanying notes



TOROMONT INDUSTRIES LTD.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(Unaudited)
$ thousands

Three months ended Nine months ended
September 30 September 30
2006 2005 2006 2005
---------------------------------------------------------------------------

Retained earnings,
beginning of period,
as reported $ 379,339 $ 332,172 $ 373,993 $ 313,615
Change in accounting
policy (note 2) - - - 1,696
---------------------------------------------------------------------------
Retained earnings,
beginning of period,
as restated 397,857 332,172 373,993 315,311
Net earnings 25,898 24,685 62,530 51,666
Dividends (6,396) (5,071) (19,164) (15,191)
---------------------------------------------------------------------------
Retained earnings,
end of period $ 417,359 $ 351,786 $ 417,359 $ 351,786
---------------------------------------------------------------------------
---------------------------------------------------------------------------

See accompanying notes



TOROMONT INDUSTRIES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
$ thousands

Three months ended Nine months ended
September 30 September 30
2006 2005 2006 2005
---------------------------------------------------------------------------

Operating activities
Net earnings $ 25,898 $ 24,685 $ 62,530 $ 51,666
Items not requiring cash
and cash equivalents
Depreciation 12,612 12,256 34,882 34,036
Stock-based compensation (89) 606 1,161 1,760
Accrued pension liability 265 35 29 486
Future income taxes (2,103) (2,329) (6,068) (3,625)
Gain on sale of rental
equipment and property,
plant, and equipment (1,123) (1,711) (5,490) (5,773)
Gain on disposal of
discontinued operations - (745) - (745)
---------------------------------------------------------------------------
35,460 32,797 87,044 77,805

Change in non-cash
working capital and other
Accounts receivable (16,344) (39,570) (2,696) (50,092)
Inventories (17,719) (6,248) (96,952) (131,151)
Accounts payable and
accrued liabilities (26,339) (54,867) 24,405 30,613
Other 3,659 5,087 21,116 (9,845)
---------------------------------------------------------------------------
Cash (used in) provided
by operating activities (21,283) (62,801) 32,917 (82,670)
---------------------------------------------------------------------------

Investing activities
Additions to rental
equipment (12,417) (10,017) (56,929) (40,611)
Additions to property,
plant and equipment (10,249) (3,564) (23,128) (16,009)
Business acquisition
(note 4) - - (5,481) -
Sale of rental equipment 4,119 6,417 19,820 18,487
Sale of property,
plant and equipment 352 86 660 348
Decrease (increase)
in other assets 226 72 167 (47)
Disposal of discontinued
operations (note 3) - 18,933 - 18,933
---------------------------------------------------------------------------
Cash (used in) provided
by investing activities (17,969) 11,927 (64,891) (18,899)
---------------------------------------------------------------------------

Financing activities
Increase in term credit
borrowings - 52,237 - 118,690
Issue of other
long-term debt 5,032 8,640 9,801 13,121
Repayment of other
long-term debt (5,815) (5,327) (12,575) (18,649)
Dividends (6,392) (5,061) (17,858) (14,212)
Shares issued on
exercise of options 507 385 3,888 2,619
---------------------------------------------------------------------------
Cash (used in) provided
by financing activities (6,668) 50,874 (16,744) 101,569
---------------------------------------------------------------------------

Decrease in cash and
cash equivalents (45,920) - (48,718) -
Cash and cash equivalents
at beginning of period 47,918 - 50,716 -
---------------------------------------------------------------------------
Cash and cash equivalents
at end of period $ 1,998 $ - $ 1,998 $ -
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Supplemental cash flow
information
Interest paid $ 3,550 $ 4,729 $ 11,293 $ 10,997
Income taxes paid $ 15,605 $ 9,959 $ 56,973 $ 40,163

See accompanying notes



TOROMONT INDUSTRIES LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
($ thousands except where otherwise indicated)


(1) Significant accounting policies

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (GAAP) for the preparation of interim financial statements. The accounting policies used in the preparation of these unaudited interim consolidated financial statements are consistent with those used in the Company's 2005 audited annual consolidated financial statements. These unaudited interim consolidated financial statements do not include all disclosures required by GAAP for annual financial statements, and accordingly should be read in conjunction with the audited annual consolidated financial statements for the year ended December 31, 2005.

(2) Change in accounting policy

In 2005, the percentage-of-completion approach of accounting for performance of production-type contracts was adopted. Prior to 2005, the completed contract method had been used. As a result of the adoption of this policy, the Company adjusted retained earnings as at January 1, 2005 to reflect the percentage of completion of work in progress at December 31, 2004. The components of this adjustment are summarized in the following table.



---------------------------------------------------------------------------

Revenues $ 22,493
Cost of goods sold 19,860
Income taxes 937
---------------------------------------------------------------------------

Increase to retained earnings at January 1, 2005 $ 1,696
---------------------------------------------------------------------------
---------------------------------------------------------------------------


The interim consolidated financial statements previously reported in 2005 were presented using the completed contract method. These have been restated for comparative purposes to reflect percentage-of-completion method. For the three-months ended September 30, 2005, the impact of the restatement was to increase revenues by $4,936, increase cost of goods sold by $4,150, increase net earnings by $494 and increase basic earnings per share by $0.01. For the nine-months ended September 30, 2005, the impact of the restatement was to increase revenues by $10,207, increase cost of goods sold by $7,582, increase net earnings by $1,677 and increase basic earnings per share by $0.03.

(3) Discontinued operations

Effective August 31, 2005, the assets of the Ontario Sterling Division, previously included in the Equipment Group, were sold. Total proceeds on sale were $18,933 resulting in an after-tax gain of $745. Revenues from discontinued operations for the three months ended September 30, 2005 were $12,056 and loss before income taxes was $5. For the nine months ended September 30, 2005, revenues from discontinued operations were $32,238 and loss before income taxes was $283.

(4) Business acquisition

Effective January 10, 2006, the Company purchased land, plant and equipment in Casper, Wyoming for $5.5 million. There were no business acquisitions in 2005.

The acquisition was accounted for using the purchase method. The fair value of net assets acquired was as follows:



---------------------------------------------------------------------------

Non-cash working capital $ 135
Property, plant and equipment 5,346
---------------------------------------------------------------------------

Purchase price $ 5,481
---------------------------------------------------------------------------
---------------------------------------------------------------------------


(5) Earnings per share

Basic earnings per share is calculated by dividing the net earnings available to common shareholders by the weighted average number of common shares outstanding. Diluted earnings per share is calculated to reflect the effect of exercising outstanding stock options applying the treasury stock method.



Three months ended Nine months ended
September 30 September 30
2006 2005 2006 2005
---------------------------------------------------------------------------

Net earnings available to
common shareholders $ 25,898 $ 24,685 $ 62,530 $ 51,666
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Weighted average common
shares outstanding 63,938,222 63,362,723 63,814,484 63,262,988
Dilutive effect of
stock option conversion 899,086 1,373,519 1,008,961 1,233,551

---------------------------------------------------------------------------
Diluted weighted
average common
shares outstanding 64,837,308 64,736,242 64,823,445 64,496,539
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Basic earnings per
share $ 0.41 $ 0.39 $ 0.98 $ 0.82
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Diluted earnings
per share $ 0.40 $ 0.38 $ 0.96 $ 0.80
---------------------------------------------------------------------------
---------------------------------------------------------------------------


(6) Stock based compensation

The Company maintains a stock option program for certain employees. Under the plan, up to 6,096,000 options may be granted for subsequent exercise in exchange for common shares. Stock options have a seven-year term, vest 20% cumulatively on each anniversary date of the grant and are exercisable at the designated common share price, which is fixed at prevailing market prices of the common shares at the date the option is granted.



The following table is a reconciliation of outstanding options:

Nine months ended September 30
2006 2005
---------------------------------------------------------------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Options Price Options Price
---------------------------------------------------------------------------

Options outstanding,
beginning of period 2,689,795 $ 12.72 2,849,170 $ 10.47
Granted 370,380 24.58 391,375 21.93
Exercised (344,663) 11.10 (306,950) 8.09
Forfeited (283,155) 17.98 (28,400) 15.10
---------------------------------------------------------------------------

Options outstanding,
end of period 2,432,357 $ 14.15 2,905,195 $ 12.22
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Options exercisable,
end of period 1,338,801 $ 10.70 1,447,276 $ 9.18
---------------------------------------------------------------------------
---------------------------------------------------------------------------

The following table summarizes stock options outstanding and exercisable
at September 30, 2006:


Options Outstanding Options Exercisable
Weighted Weighted Weighted
Range of Average Average Average
Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Life (years) Price Outstanding Price
---------------------------------------------------------------------------

$7.29 - $8.04 549,938 0.9 $ 7.75 549,938 $ 7.75
$10.27 - $10.71 851,659 2.8 10.66 562,939 10.66
$16.59 - $24.58 1,030,760 5.2 20.44 225,924 17.99
---------------------------------------------------------------------------

Total 2,432,357 3.4 $ 14.15 1,338,801 $ 10.70
---------------------------------------------------------------------------
---------------------------------------------------------------------------


The Company determines the cost of all stock options granted using the fair value method. The cost is amortized over the vesting periods.

The fair value of options granted during the period was determined at the time of grant using the following:



Nine months ended September 30
2006 2005
---------------------------------------------------------------------------
Weighted average fair value price per option $6.51 $6.97
Expected life of options (years) 5.78 5.75
Expected stock price volatility 25.0% 25.0%
Expected dividend yield 1.6% 1.5%
Risk-free interest rate 4.1% 3.5%
---------------------------------------------------------------------------


The Company offers a deferred share unit (DSU) plan to non-employee directors. A DSU is a notional unit that reflects the market value of a single common share of Toromont. Each director may elect to take all or a portion of his board retainer and meeting fees in DSUs. Each DSU fully vests upon award. The DSUs will be redeemed for cash upon a director leaving the board. The redemption amount will be based upon the average of the high and low trading prices of the common shares on the TSX for the five trading days preceding the redemption date. The program commenced in 2006 and as at September 30, 2006, the total DSUs held by participating directors was 2,407.

(7) Employee future benefits

The Company sponsors pension arrangements for substantially all of its employees, primarily through defined contribution plans in Canada and a 401(k) matched savings plan in the United States. Certain unionized employees do not participate in company-sponsored plans and contributions are made to these retirement programs in accordance with respective collective bargaining agreements. 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 document. The cost of pension benefits for defined contribution plans are expensed as the contributions are paid.

Approximately 7% of participating employees are included in defined benefit plans. Pension benefit obligations under the defined benefit plans are determined periodically by independent actuaries and are accounted for using the accrued benefit method using a measurement date of December 31.



The net pension expense recorded for the periods are presented below.

Three months ended Nine months ended
September 30 September 30
2006 2005 2006 2005
---------------------------------------------------------------------------
Defined benefit plans $ 555 $ 915 $ 1,665 $ 2,244
Defined contribution plans 2,143 1,607 6,375 4,012
401(k) matched savings
plans 162 93 480 312
---------------------------------------------------------------------------

Net pension expense $ 2,860 $ 2,615 $ 8,520 $ 6,568
---------------------------------------------------------------------------
---------------------------------------------------------------------------


(8) Other assets

Other assets includes $26,187 (December 31, 2005 - $29,855), representing equipment sold directly to customers or to third-party lessors for which the Company has provided a guarantee to repurchase at a predetermined residual value and date. In accordance with GAAP, such transactions that involve a repurchase undertaking by the Company are accounted for as operating leases wherein revenue is recognized over the period extending to the date of the residual guarantee.

(9) Accounts payable and accrued liabilities



September 30 December 31
2006 2005
---------------------------------------------------------------------------
Accounts payable and accrued liabilities $ 270,330 $ 272,627
Dividends payable 6,395 5,090
Deferred revenues 106,723 79,997
---------------------------------------------------------------------------

Total accounts payable and accrued liabilities $ 383,448 $ 357,714
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Deferred revenue represents unearned income associated with warranty and long-term service agreements, contract advances, and any other situations where payments are received in advance of revenue recognition.

(10) Long-term debt



September 30 December 31
2006 2005
---------------------------------------------------------------------------

Drawn on bank term facility $ 30,000 $ 30,000
Senior debentures 199,673 206,174
Notes payable 21,646 17,919
---------------------------------------------------------------------------

Total long-term debt 251,319 254,093
Less current portion 25,595 12,828
---------------------------------------------------------------------------

$ 225,724 $ 241,265
---------------------------------------------------------------------------
---------------------------------------------------------------------------


The committed bank term facilities are unsecured. These facilities permit drawings of up to $247 million, with $22 million maturing in 2008 and the balance of $225 million maturing in 2011.

(11) Share capital

The changes in the common shares issued and outstanding during the period were as follows:




Nine months ended Twelve months ended
September 30, 2006 December 31, 2005
Number of Common Number of Common
Common Share Common Share
Shares Capital Shares Capital
---------------------------------------------------------------------------
Balance, beginning
of period 63,624,936 $ 107,348 63,082,586 $ 102,719
Exercise of stock options 344,663 4,653 542,350 4,629
---------------------------------------------------------------------------

Balance, end of period 63,969,599 $ 112,001 63,624,936 $ 107,348
---------------------------------------------------------------------------
---------------------------------------------------------------------------


In 2005, the Company adopted a Shareholder Rights Plan (the "Plan") which was confirmed by the Company's shareholders at the Annual and Special Meeting of Shareholders held April 20, 2006. To implement the Plan, the Board of Directors authorized the issuance of one right in respect of each common share outstanding at the close of business November 2, 2005 and one right in respect of each common share to be issued thereafter. If a person or a group acting jointly or in concert, acquires (other than pursuant to an exemption available under the Plan), beneficial ownership of 20% or more of the Company's common shares, the rights will separate from the common shares and permit the holders to purchase common shares effectively at half the prevailing market price. At any time prior to the rights becoming exercisable, the Board of Directors may waive the operations of the Plan with respect to certain events before they occur.

(12) Contributed surplus



The changes in contributed surplus were as follows:

Three months ended Nine months ended
September 30 September 30
2006 2005 2006 2005
---------------------------------------------------------------------------

Contributed surplus, beginning
of period $ 7,188 $ 5,530 $ 6,692 $ 4,484
Stock-based compensation expense
(recovery), net of forfeitures (89) 606 1,161 1,760
Value of compensation cost
associated with exercised options (11) (19) (765) (127)
---------------------------------------------------------------------------

Contributed surplus, end of period $ 7,088 $ 6,117 $ 7,088 $ 6,117
---------------------------------------------------------------------------
---------------------------------------------------------------------------



(13) Segmented financial information

Three months
ended Equipment Group Compression Group Consolidated
September
30 2006 2005 2006 2005 2006 2005
---------------------------------------------------------------------------

Revenues $ 247,898 $ 231,086 $ 208,061 $ 196,802 $ 455,959 $ 427,888
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Operating
Income $ 22,371 $ 22,183 $ 20,872 $ 17,665 $ 43,243 $ 39,848
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Operating
income as
a % of
revenues 9.0% 9.6% 10.0% 9.0% 9.5% 9.3%
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Nine
months
ended
September
30

Revenues $ 697,143 $ 647,930 $ 571,847 $ 476,374 $ 1,268,990 $ 1,124,304
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Operating
Income $ 61,447 $ 53,051 $ 45,240 $ 34,287 $ 106,687 $ 87,338
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Operating
income
as a %
of
revenues 8.8% 8.2% 7.9% 7.2% 8.4% 7.8%
---------------------------------------------------------------------------
---------------------------------------------------------------------------



Selected balance sheet information:

Equipment Group Compression Group Consolidated
September December September December September December
30 31 30 31 30 31
2006 2005 2006 2005 2006 2005
---------------------------------------------------------------------------

Goodwill $ 13,000 $ 13,000 $ 21,800 $ 21,800 $ 34,800 $ 34,800
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Identi-
fiable
assets $ 722,256 $ 660,028 $ 487,459 $ 418,192 $ 1,209,715 $ 1,078,220
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Corporate
assets 25,709 65,752
------------------------
Total assets $ 1,235,424 $ 1,143,972
------------------------
------------------------


Operating income from rental operations for the quarter ended September 30, 2006 was $8.6 million (2005 - $7.6 million). For the nine months ended September 30, 2006, operating income from rental operations was $17.2 million (2005 - $12.8 million).

(14) Seasonality of business

Interim period revenues and earnings historically reflect seasonality in both the Equipment and Compression Groups. Within the Equipment Group, the first quarter is typically the weakest due to winter shutdowns in the construction industry while the fourth quarter has consistently been the strongest quarter due to higher conversions at the Caterpillar dealership of equipment on rent with a purchase option. Within the Compression Group, the fourth quarter tends to be the strongest due to higher activity levels resulting from well-site access and drilling patterns. The second and third quarter impacts of seasonality in both Groups are relatively neutral.

(15) Comparative amounts

Certain comparative figures have been restated to conform with the current year's presentation.

Contact Information

  • Toromont Industries Ltd.
    Robert M. Ogilvie
    Chairman and Chief Executive Officer
    (416) 667-5554
    or
    Toromont Industries Ltd.
    Paul R. Jewer
    Vice President Finance and Chief Financial Officer
    (416) 667-5638
    Website: www.toromont.com