Toromont Industries Ltd.
TSX : TIH

Toromont Industries Ltd.

November 01, 2005 10:49 ET

Toromont Announces Higher Third Quarter Results

TORONTO, ONTARIO--(CCNMatthews - Nov. 1, 2005) - Toromont Industries Ltd. (TSX:TIH) today reported net earnings for the third quarter of $24.2 million (38 cents per share), up 30% from $18.6 million (29 cents per share) in the prior year. Net earnings for the nine months ended September 30, 2005 were $50.0 million (79 cents per share), a 14% increase from $43.8 million (69 cents per share) a year ago. The Equipment and Compression Groups both reported record results for the quarter.



---------------------------------------------------------------------
Three months Nine months
ended September 30 ended September 30
---------------------------------------------------------------------
$ millions, except % %
per share amounts 2005 2004 change 2005 2004 change
---------------------------------------------------------------------

Revenues $ 423.0 $ 368.1 15% $ 1,114.1 $ 1,031.5 8%
Operating income $ 39.1 $ 31.5 24% $ 84.7 $ 76.8 10%
Net earnings $ 24.2 $ 18.6 30% $ 50.0 $ 43.8 14%
Earnings per share $ 0.38 $ 0.29 31% $ 0.79 $ 0.69 14%
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"Market conditions across most operations remain favourable," commented Hugo T. Sorensen, President and Chief Executive Officer. "Demand across most of our businesses has been brisk. In the natural gas compression segment, unprecedented activity continues to challenge product supply lines and manpower availability. As expected, revenues and earnings in the Compression Group have improved in the quarter and are now more reflective of the market activity in this segment. The Equipment Group continues to perform well, particularly in the higher margin rental and product support businesses. Availability of Caterpillar product has improved somewhat, but overall remains at extended delivery dates."

Third Quarter Highlights:

- Operating income increased 24% on a 15% increase in revenues and lower relative expense growth.

- Compression Group revenues were 32% higher at $192 million. Package sales were up 35% on increased deliveries of process and natural gas compression packages. Product support revenues were up 21%. Operating income increased 52% on the higher volumes and lower relative expense growth.

- Equipment Group revenues were up 4% to $231 million on strong rental and product support activity. Operating income increased 9% on the increased mix of rental and after market activities.

- Compression Group activity was very strong overall. Bookings for the nine months ended September 30 were up 44% from a year ago. Order in-take in the first nine months of 2005 has exceeded that for the full year 2004. Backlogs continued to be at record levels and were 72% higher than at this time last year, driven mainly by gas compression activity.

- Bookings in the Caterpillar dealership were comparable to the prior year on an exchange-adjusted basis. Backlogs continue at record levels for this time of year, partially due to the tight supply of Caterpillar product.

- Working capital increased 54% from last year primarily due to increased inventory levels carried to respond to stronger product demand and the longer lead times for Caterpillar product and for primary components used in the Compression Group.

- The assets of the Ontario Sterling Division were sold effective August 31, 2005. Sale proceeds were $18.9 million and an after tax gain of $745,000 (one cent per share) was included in third quarter results.

- The normal course issuer bid was renewed, allowing the purchase of up to 3,167,284 common shares during the 12-month period commencing August 31, 2005. No shares have been purchased to-date in 2005.

- Subsequent to quarter-end, $125 million of senior unsecured debentures were issued. These debentures bear a coupon rate of 4.92%, and mature on October 13, 2015. The net proceeds were used to reduce outstanding borrowings on bank credit facilities.

- On October 31, Paul R. Jewer was appointed Vice President Finance and Chief Financial Officer, replacing Wayne S. Hill in the CFO role. Mr. Hill will remain as Executive Vice-President of the Company.

MANAGEMENT'S DISCUSSION AND ANALYSIS

This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements accompanying this report and with the annual audited consolidated financial statements and management's discussion and analysis contained in the annual report for Toromont Industries Ltd. for the year ended December 31, 2004. The date of this discussion and analysis is November 1, 2005. All tabular amounts in the following discussion are in thousands of dollars unless otherwise noted. Additional information about Toromont, including the Annual Information Form, is available on SEDAR at www.sedar.com.



Operating results


Three months Nine months
ended September 30 ended September 30
$ thousands, except % %
share amounts 2005 2004 change 2005 2004 change
---------------------------------------------------------------------
Revenues $422,952 $368,103 15% $1,114,097 $1,031,496 8%
Cost of goods
sold 330,751 286,927 15% 877,303 815,919 8%
---------------------------------------------------------------------
Gross profit 92,201 81,176 14% 236,794 215,577 10%
Selling and
administrative
expenses 53,139 49,665 7% 152,081 138,779 10%
---------------------------------------------------------------------
Operating income 39,062 31,511 24% 84,713 76,798 10%
Interest expense 2,883 3,052 (6%) 8,947 9,106 (2%)
Interest and
investment
income (388) (437) (11%) (1,342) (1,201) 12%
---------------------------------------------------------------------
Income before
income taxes 36,567 28,896 27% 77,108 68,893 12%
Income taxes 13,118 10,349 27% 27,689 25,245 10%
---------------------------------------------------------------------
Earnings from
continuing
operations 23,449 18,547 26% 49,419 43,648 13%
Gain on disposal
of discontinued
operations 745 - - 745 - -
Earnings from
discontinued
operations (3) 36 n/m (175) 116 n/m
---------------------------------------------------------------------
Net earnings $24,191 $18,583 30% $49,989 $43,764 14%
---------------------------------------------------------------------
---------------------------------------------------------------------

Earnings per share
- Basic $0.38 $0.29 31% $0.79 $0.69 14%
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Management concluded that the capital invested in the Ontario Sterling Division could be more effectively deployed in Toromont's other businesses. Accordingly, effective August 31, 2005, the assets of Ontario Sterling were sold for $18.9 million and an after tax gain of $745,000 (one cent per share) was included in third quarter results. The Ontario Sterling operations, previously included with those of the Equipment Group, accounted for approximately 3% of annual consolidated revenues. The accompanying consolidated financial statements have been restated to reflect Ontario Sterling as a discontinued operation. The remaining discussion and analysis has been prepared on a continuing operations basis.

Revenues were up 15% to $423 million in the quarter and 8% to $1.1 billion on a year-to-date basis. Two significant orders in 2004 totaling $34 million affect comparability of results year-over-year. Excluding these items, revenues grew 19% in the quarter and 12% for the first nine months. Revenue growth in the quarter was driven largely from Compression Group, with strong increases in process refrigeration systems and gas compression package sales. Product support continued to improve, with double-digit increases in both the Equipment and Compression Groups. The Equipment rental business also performed well with a 10% increase in the quarter (20% year-to-date) on improved asset utilization. The strengthening of the Canadian dollar relative to the US currency (up 8.6% year-to-date) continued to negatively impact reported revenues year-over-year by an estimated $25 million for the quarter, and $57 million through the first nine months.

Gross profit increased 14% in the quarter and 10% year-to-date, largely on higher sales volumes. Gross profit margin was down 0.3 points in the third quarter on a higher mix of Compression business overall. For the first nine months, gross profit margin was 21.3%, up from 20.9% last year on improvements in the Equipment Group.

Selling and administrative expenses increased $3.5 million (7%) in the quarter and $13.3 million (10%) through September on compensation increases initiated at the beginning of the year and higher sales activity. Salaries and benefits were up $3.0 million in the quarter ($7.4 million for the first nine months), reflecting aforementioned compensation adjustments and increased headcount. Additional expenses at companies acquired in late 2004 amounted to $0.6 million in the quarter and $2.4 million year-to-date. Other expense increases on a year-to-date basis included sales related expenses ($1.2 million), occupancy costs ($1.2 million), and information technology ($1.0 million). Selling and administrative expenses as a percentage of revenue were 13.7% for the first nine months compared to 13.5% in 2004.

Operating income was $39.1 million (up 24%) in the quarter on higher sales and lower relative expense levels. For the first nine months, operating income was $84.7 million (up 10%) from the last year on volume and gross margin improvements. Operating margin was 7.6%, up 0.2% as gross margin improvements in the Equipment Group were offset by weaker results from the industrial and recreational refrigeration operations.

Despite higher average debt balances, interest expense decreased 6% in the quarter and 2% for the first nine months due to lower effective interest rates. The lower interest rate in the current year reflects a higher component of floating rate debt that bears a relatively lower rate. Interest income varies due to timing of rental conversions and level of short-term investing of daily cash flows from operations.

The effective income tax rate for the quarter and first nine months was 35.9%, compared to 35.8% for the full year 2004.



Equipment Group


Three months Nine months
ended September 30 ended September 30
$ thousands 2005 2004 % change 2005 2004 % change
---------------------------------------------------------------------
Equipment sales
and rentals
New $ 96,046 $ 100,864 (5%) $ 269,100 $ 255,629 5%
Used 28,149 28,730 (2%) 83,413 83,665 (0%)
Rental 38,184 34,741 10% 90,018 75,288 20%
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Total equipment
sales and
rentals 162,379 164,335 (1%) 442,531 414,582 7%
Power
generation 4,564 2,519 81% 10,844 8,507 27%
Product
support 64,144 55,829 15% 194,555 170,550 14%
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Total
revenues $ 231,087 $ 222,683 4% $ 647,930 $ 593,639 9%
---------------------------------------------------------------------
---------------------------------------------------------------------

Operating
income $ 22,183 $ 20,385 9% $ 53,051 $ 43,457 22%
% of
revenues 9.6% 9.2% 8.2% 7.3%
---------------------------------------------------------------------
---------------------------------------------------------------------


The Equipment Group delivered record third quarter results on double-digit growth in product support and rental. New tractor machine supply remains tight for certain models.

New machine sales were down 5% to $96.0 million in the quarter as an 8% increase in heavy equipment ("tractor machines') was offset by lower sales of industrial engines (third quarter 2004 included a $14 million sale of engines and generators for the Voisey's Bay mine site). In the nine-month period, new machine sales were 5% higher than 2004 representing a 9% increase in new tractor machines, offset by lower industrial product. Year-to-date growth was seen across several market segments, most notably heavy and general construction, and paving. Backlogs remained at record levels for this time of year.

Used equipment sales were down 2% for the quarter and were comparable to last year for the nine months. Sales of used equipment vary with that for new depending on customer buying preferences, exchange rate considerations and product availability. Used equipment inventories were at similar levels to this time last year.

Rental revenues were up 10% in the quarter (20% year-to-date) on improved utilization, one new location and the late 2004 acquisition of Access Rentals and Supply in Sudbury, Ontario. Same store activity was 15% higher this year through the nine-month period.

Power generation revenues from Toromont-owned plants increased $2 million (81%) in the quarter on increased operating hours, higher average electricity prices and strong summer demand. Market conditions remain unfavourable for natural gas fired co-generation plants. Toromont, along with other independent power producers, is attempting to negotiate supply contracts with the Province of Ontario. While the government has endorsed the role of co-generation in providing a reliable supply of electricity, it is not yet possible to determine the final outcome of these negotiations. Discussions with the Ontario government continue, with a view to finalizing arrangements by early 2006.

Product support activity continued to benefit from strong customer demand for service (largely from increased construction activity) and the growth in the installed base of Caterpillar equipment. Product support revenues increased 15% in the quarter (14% year-to-date), with excellent growth reported in both parts and service.

Operating income increased 9% in the quarter (22% year-to-date) on higher volumes and gross margins and lower relative expense levels. Operating income as a percentage of revenues improved to 8.2% for the first nine months compared with 7.3% in 2004. This represents a record level of profitability for the Equipment Group at this time of year. Improvements were attributable to higher gross margins on machine sales and product support business and lower expenses relative to sales.



Compression Group


Three months Nine months
ended September 30 ended September 30
% %
$ thousands 2005 2004 change 2005 2004 change
---------------------------------------------------------------------
Package sales
and rentals $ 150,312 $ 111,147 35% $ 357,903 $ 344,007 4%
Product
support 41,553 34,273 21% 108,264 93,850 15%
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Total
revenues $ 191,865 $ 145,420 32% $ 466,167 $ 437,857 6%
---------------------------------------------------------------------
---------------------------------------------------------------------

Operating
income $ 16,879 $ 11,126 52% $ 31,662 $ 33,341 (5%)
% of
revenues 8.8% 7.7% 6.8% 7.6%
---------------------------------------------------------------------
---------------------------------------------------------------------


Compression revenues rebounded on increased deliveries in the quarter. Package sales were up 35% in the quarter and 4% year-to-date. The process segment continues to benefit from increased market activity, as evidenced by record bookings and backlogs and a 70% increase in work-in-process levels. Momentum within the natural gas/coal-bed methane compression segment continued, with bookings up substantially and backlogs up threefold from this time last year.

Product support revenues were up 21% in the quarter and 15% for the first nine months, with solid increases in both the process and industrial segments. Industrial product support revenues have benefited from the 2004 acquisition of Alabama-based Engineering Refrigeration Systems Inc. Increased natural gas compression activity and the growing installed base have strengthened the process product support business.

Operating income increased 52% in the quarter on higher volumes and lower relative expenses. Through September 30, operating income decreased 5% from last year due to lower profitability in the industrial and recreational operations, where higher revenues and gross margins have been more than offset by increased operating expenses, notably travel, relocation and consulting costs related to international expansion. Order activity in these markets has been good and prospects encouraging, but much of recent booking activity will not be delivered until 2006.

Liquidity and capital resources

Total assets were $1.1 billion at September 30, 2005 compared with $945 million at the end of 2004 and $928 million at September 30, 2004. Working capital increased to $388 million principally on higher paid for inventories and accounts receivable.

Accounts receivable of $296 million at September 30, 2005 were higher than both September and December 2004 on higher revenues. Days sales outstanding are at the same level as this time last year.

Inventories were $392 million at the end of the quarter, higher than at December 2004 and September 2004, on increases in both Groups. The Equipment Group continued to hold more new equipment inventory in light of demand and supply conditions. Growth in product support business resulted in a 64% increase in work-in-process over the prior year. In Compression, inventories were higher due to higher work-in-process (up 43%) coupled with accelerated purchasing to secure supply on certain major components (in particular, engines, compressors and air exchangers). We anticipate continuing to carry higher inventories across our businesses until there is an easing of the supply constraints.

Operating activities used $63 million for the quarter compared to $9 million last year. While cash flow before changes in working capital was positive and up 13% year-over-year, it was more than offset by a significant increase in working capital. For the first nine months, operating activities used $82 million, primarily due to higher paid-for inventories and higher accounts receivable on the increased sales.

Cash flow from investing activities in the quarter and year-to-date included proceeds of $19 million received on sale of Ontario Sterling. Rental equipment additions were made earlier in the year and as such, were lower in the third quarter than last year, while on a year-to-date basis were higher. Year-to-date property, plant and equipment additions of $16 million included additions to the service vehicle fleet ($5.9 million), facility renovations ($3.5 million), computer technology upgrades ($3.2 million) and land purchased for a new Battlefield - The CAT Rental Store facility in Barrie, Ontario ($1.0 million).

Cash provided by financing activities increased in both the quarter and year-to-date as borrowings under the term credit facility and other long-term debt were required to fund increases in working capital and capital asset additions. Scheduled principal payments of $19 million were made during the first nine months on senior debentures and other notes payable. Dividends of $15 million year-to-date were 23% higher than the prior year reflecting the higher payout rate. No shares were purchased under the normal course issuer bid. In 2004, the Company purchased and cancelled 1,026,500 shares for $19 million (average price of $18.44 per share).

Total debt was $300 million (66% of total shareholders' equity) at September 30, 2005 compared to $219 million (56% of total shareholders' equity) at September 30, 2004. The increase reflects the additional working capital and rental equipment purchases through the first nine months of the year. It is anticipated that this ratio will return closer to historical levels by the end of the year.

The Company amended its credit arrangements effective June 30, 2005 in order to provide more flexible financing. The amended three-year credit facility with the existing syndicate of four Canadian banks continues to be unsecured and permits drawings of up to $225 million, an increase of $50 million over the previous arrangements.

On October 13, 2005 the Company issued $125 million of senior unsecured debentures. These debentures bear a coupon rate of 4.92%, and are due on October 13, 2015. The net proceeds were used to reduce outstanding bank borrowings. This ten-year debt complements the increased bank credit facilities and provides the Company with long-term debt capital at attractive terms and rates.

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 2004 annual report and Annual Information Form.

Outlook

Equipment Group results to-date are encouraging. Market demand is good, although product availability is expected to continue to be constrained throughout the remainder of the year. Fourth quarter results, traditionally the strongest, will depend in part on the level of conversion of tractor equipment on rent with a purchase option.

Market conditions and commodity prices are expected to continue to support the current activity level in our Compression Group. A substantial amount of new business has been booked to-date and our backlogs are at record levels. Subject to project deliveries and bookings in the balance of the year, we expect another record year for Compression.

Product support business in both operating Groups has experienced excellent growth through the first nine months of the year and should continue to benefit from increased market activity and the larger machine population across all of our businesses.

Overall, we see positive signs for our business and look forward to another successful year in 2005.

Quarterly Conference Call and Webcast

Interested parties are invited to join our quarterly conference call with investment analysts, in listen-only mode, on Tuesday, November 1, 2005 at 5:00 p.m. (EST). The call may be accessed by telephone at 1-877-888-3490 (toll free) or 416-695-5261 (Toronto area). A replay of the conference call will be available until Tuesday, November 15, 2005 by calling 1-800-293-3630 or 416-641-2130 and quoting passcode 7070.

Both the live webcast and the replay of the quarterly conference call can be accessed at www.toromont.com.

Advisory

This document contains forward-looking statements that are subject to certain risks, uncertainties and assumptions. Should one or more of these risk factors materialize, or should assumptions prove incorrect, actual results may vary significantly from those expected.

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, 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 4,000 people in more than 100 locations. This press release and more information about Toromont Industries can be found on the Web at www.toromont.com.



TOROMONT INDUSTRIES LTD.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
$ thousands
September 30 December 31 September 30
2005 2004 2004
---------------------------------------------------------------------
Assets
Current assets
Accounts receivable $ 295,966 $ 257,459 $ 237,345
Inventories 392,493 307,276 313,463
Future income taxes 15,412 12,278 13,408
Other current assets (note 6) 13,599 10,100 8,038
---------------------------------------------------------------------
Total current assets 717,470 587,113 572,254

Property, plant and equipment 185,574 186,811 184,135
Rental equipment 121,417 110,834 112,205
Goodwill 34,800 34,800 34,350
Other assets (note 6) 23,903 25,256 25,375
---------------------------------------------------------------------
$ 1,083,164 $ 944,814 $ 928,319
---------------------------------------------------------------------
---------------------------------------------------------------------

Liabilities
Current liabilities
Accounts payable and accrued
liabilities $ 310,098 $ 314,798 $ 294,971
Current portion of long-term
debt (note 7) 14,612 20,539 18,830
Income taxes payable 5,038 13,253 6,213
---------------------------------------------------------------------
Total current liabilities 329,748 348,590 320,014

Long-term debt (note 7) 285,597 166,508 200,390
Accrued pension liability 6,346 5,860 5,317
Future income taxes 7,510 8,001 9,390

Shareholders' equity
Share capital (note 8) 105,465 102,719 101,291
Contributed surplus 6,117 4,484 3,884
Retained earnings 348,413 313,615 291,467
Currency translation adjustment (6,032) (4,963) (3,434)
---------------------------------------------------------------------
Total shareholders' equity 453,963 415,855 393,208
---------------------------------------------------------------------
$ 1,083,164 $ 944,814 $ 928,319
---------------------------------------------------------------------
---------------------------------------------------------------------

See accompanying notes



TOROMONT INDUSTRIES LTD.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
$ thousands, except share amounts
Three months Nine months
ended September 30 ended September 30
2005 2004 2005 2004
---------------------------------------------------------------------
(restated (restated
- note 2) - note 2)

Revenues $ 422,952 $ 368,103 $ 1,114,097 $ 1,031,496
Cost of goods
sold 330,751 286,927 877,303 815,919
---------------------------------------------------------------------
Gross profit 92,201 81,176 236,794 215,577
Selling and
administrative
expenses 53,139 49,665 152,081 138,779
---------------------------------------------------------------------
Operating income 39,062 31,511 84,713 76,798
Interest expense 2,883 3,052 8,947 9,106
Interest and
investment income (388) (437) (1,342) (1,201)
---------------------------------------------------------------------
Income before
income taxes 36,567 28,896 77,108 68,893
Income taxes 13,118 10,349 27,689 25,245
---------------------------------------------------------------------
Earnings from
continuing operations 23,449 18,547 49,419 43,648
Gain on disposal
of discontinued
operations (note 2) 745 - 745 -
Earnings (loss)
from discontinued
operations (note 2) (3) 36 (175) 116
---------------------------------------------------------------------
Net earnings $ 24,191 $ 18,583 $ 49,989 $ 43,764
---------------------------------------------------------------------
---------------------------------------------------------------------

Basic earnings
per share (note 3)
Continuing operations $ 0.37 $ 0.29 $ 0.78 $ 0.69
Discontinued operations 0.01 - 0.01 -
---------------------------------------------------------------------
$ 0.38 $ 0.29 $ 0.79 $ 0.69
---------------------------------------------------------------------
---------------------------------------------------------------------

Diluted earnings
per share (note 3)
Continuing operations $ 0.37 $ 0.29 $ 0.77 $ 0.68
Discontinued operations 0.01 - 0.01 -
---------------------------------------------------------------------
$ 0.38 $ 0.29 $ 0.78 $ 0.68
---------------------------------------------------------------------
---------------------------------------------------------------------

Weighted average
number of shares
outstanding 63,362,723 63,404,291 63,262,988 63,621,347
---------------------------------------------------------------------
---------------------------------------------------------------------

End of period
number of shares
outstanding
(note 8) 63,389,536 62,934,386 63,389,536 62,934,386
---------------------------------------------------------------------
---------------------------------------------------------------------

See accompanying notes



TOROMONT INDUSTRIES LTD.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(Unaudited)
$ thousands
Three months Nine months
ended September 30 ended September 30
2005 2004 2005 2004
---------------------------------------------------------------------

Retained earnings,
beginning of
period $ 329,293 $ 288,988 $ 313,615 $ 277,361
Net earnings 24,191 18,583 49,989 43,764
Dividends (5,071) (4,106) (15,191) (12,394)
Shares purchased
for cancellation - (11,998) - (17,264)
---------------------------------------------------------------------
Retained earnings,
end of period $ 348,413 $ 291,467 $ 348,413 $ 291,467
---------------------------------------------------------------------
---------------------------------------------------------------------

See accompanying notes



TOROMONT INDUSTRIES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
$ thousands
Three months ended Nine months ended
September 30 September 30
2005 2004 2005 2004
---------------------------------------------------------------------

Operating activities
Net earnings $ 24,191 $ 18,583 $ 49,989 $ 43,764
Items not requiring
cash and cash
equivalents
Depreciation 12,256 10,978 34,036 30,721
Stock-based
compensation 606 544 1,760 1,583
Accrued pension
liability 35 366 486 310
Future income taxes (2,637) (753) (3,625) (1,094)
Gain on sale of
rental equipment
and property, plant,
and equipment (1,711) (1,508) (5,773) (5,024)
Gain on disposal
of discontinued
operations (745) - (745) -
---------------------------------------------------------------------
31,995 28,210 76,128 70,260

Change in non-cash
working capital and
other
Accounts receivable (37,113) (25,540) (45,269) (15,607)
Inventories (13,614) 2,107 (96,965) (50,336)
Accounts payable and
accrued liabilities (49,515) (13,007) (3,812) 21,404
Other 5,456 (295) (11,773) (12,096)
---------------------------------------------------------------------
Cash (used in)/
provided by operating
activities (62,791) (8,525) (81,691) 13,625
---------------------------------------------------------------------

Investing activities
Additions to rental
equipment (10,017) (13,068) (40,611) (32,854)
Additions to
property, plant and
equipment (3,564) (7,500) (16,009) (17,814)
Decrease/(increase)
in other assets 72 353 (47) 1,277
Sale of rental
equipment 6,417 3,291 18,487 17,300
Sale of property,
plant and equipment 86 4,004 348 4,543
Disposal of
discontinued
operations (note 2) 18,933 - 18,933 -
---------------------------------------------------------------------
Cash provided
by/(used in)
investing activities 11,927 (12,920) (18,899) (27,548)
---------------------------------------------------------------------

Financing activities
Increase in term
credit borrowings 52,237 43,199 118,690 51,429
Issue of other
long-term debt 8,640 2,779 13,121 5,501
Repayment of other
long-term debt (5,327) (7,553) (18,649) (14,700)
Dividends (5,071) (4,106) (15,191) (12,394)
Shares issued on
exercise of options 385 256 2,619 2,994
Shares purchased for
cancellation - (13,130) - (18,907)
---------------------------------------------------------------------
Cash provided by
financing activities 50,864 21,445 100,590 13,923
---------------------------------------------------------------------
---------------------------------------------------------------------

Change in cash and
cash equivalents - - - -
Cash and cash
equivalents at
beginning of period - - - -
---------------------------------------------------------------------
Cash and cash
equivalents at end
of period $ - $ - $ - $ -
---------------------------------------------------------------------
---------------------------------------------------------------------

Supplemental cash
flow information
Interest paid $ 4,729 $ 5,022 $ 10,997 $ 11,069
Income taxes paid $ 9,959 $ 8,297 $ 40,163 $ 33,923

See accompanying notes


TOROMONT INDUSTRIES LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
($ 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 2004 audited financial statements. These 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 consolidated financial statements for the year ended December 31, 2004.

(2) Discontinued operations

Ontario Sterling is a Sterling Truck franchise in the Greater Toronto Area selling and servicing medium and heavy duty Class 5 to Class 8 trucks. Management concluded that the capital invested in the Ontario Sterling Division could be more effectively deployed in Toromont's other businesses. Accordingly, effective August 31, 2005, the assets of Ontario Sterling, previously included in the Equipment Group, were sold. Total proceeds on sale were $18,933 consisting of $17,707 for working capital and $1,226 for other, including capital assets. The after-tax gain on the sale of these operations was $745.



Earnings from discontinued operations include the following:


---------------------------------------------------------------------
Three months ended Nine months ended
September 30 September 30
2005 2004 2005 2004
---------------------------------------------------------------------
Revenues $ 12,056 $ 12,580 $ 32,238 $ 37,076
Income before income taxes $ (5) $ 58 $ (283) $ 188
---------------------------------------------------------------------


(3) Diluted earnings per share

---------------------------------------------------------------------
Three months ended Nine months ended
September 30 September 30
2005 2004 2005 2004
---------------------------------------------------------------------

Net earnings available to
common shareholders $ 24,191 $ 18,583 $ 49,989 $ 43,764
---------------------------------------------------------------------
---------------------------------------------------------------------

Weighted-average
common shares
outstanding 63,362,723 63,404,291 63,262,988 63,621,347
Dilutive effect
of stock option
conversions 1,373,519 1,343,524 1,233,551 1,244,205
---------------------------------------------------------------------
Weighted-average
diluted common
shares
outstanding 64,736,242 64,747,815 64,496,539 64,865,552
---------------------------------------------------------------------
---------------------------------------------------------------------

Basic earnings
per share - $ $ 0.38 $ 0.29 $ 0.79 $ 0.69
Dilutive effect
of stock option
conversion - $ - - 0.01 0.01
---------------------------------------------------------------------
Diluted earnings
per share - $ $ 0.38 $ 0.29 $ 0.78 $ 0.68
---------------------------------------------------------------------
---------------------------------------------------------------------


(4) Stock based compensation

The Company determines the cost of all stock options granted since January 1, 2002 using the fair value method. This method of accounting uses the Black-Scholes option pricing model to determine the fair value of stock options granted and the amount is amortized over the period in which the related employee services are rendered.

The fair value of the options granted has been estimated on the date of grant with the following assumptions used for grants during the nine-month period ending September 30, 2005: 391,375 options at an average price of $21.93 (2004 - 565,340 options at $16.59); risk-free rate of 3.5 percent (2004 - 3.6 percent); dividend yield of 1.5 percent (2004 - 1.6 percent); expected life of 5.75 years (2004 - 5.6 years); and volatility of 25 percent (2004 - 25 percent). The weighted average fair value of options granted in the nine-month period is $2,573 (2004 - $2,758).

(5) 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 employees' individual 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 Nine months
ended September 30 ended September 30
2005 2004 2005 2004
---------------------------------------------------------------------

Defined benefit expense $ 915 $ 940 $ 2,244 $ 1,938
Defined contribution plans 1,607 1,447 4,012 3,384
401(k) matched savings plans 93 92 312 286
---------------------------------------------------------------------

Net pension expense $ 2,615 $ 2,479 $ 6,568 $ 5,608
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---------------------------------------------------------------------


(6) Other assets

Other current assets and other long-term assets include $7,307 (December 31, 2004 - $5,210; September 30, 2004 - $2,976) and $22,013 (December 31, 2004 - $23,413; September 30, 2004 - $23,551) respectively, representing equipment sold either 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 the event the customer decides not to retain the equipment or, in the case of a lease, not to purchase the equipment at the end of the lease term. In accordance with Canadian generally accepted accounting principles, such transactions that involve a repurchase undertaking or other contingent obligations similar to the guarantee of lease residuals, are accounted for as operating leases wherein revenue is recognized over the period extending to the date of the residual guarantee.



(7) Bank indebtedness and long-term debt


---------------------------------------------------------------------
September 30 December 31 September 30
2005 2004 2004
---------------------------------------------------------------------

Drawn on bank term facility (a) $ 188,791 $ 70,101 $ 101,940
Senior debentures 91,174 97,175 97,175
Notes payable 20,244 19,771 20,105
---------------------------------------------------------------------
Total long-term debt 300,209 187,047 219,220

Less current portion 14,612 20,539 18,830
---------------------------------------------------------------------

$ 285,597 $ 166,508 $ 200,390
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---------------------------------------------------------------------


(a) Effective June 30, 2005, the Company amended its credit arrangement with the existing syndicate of four Canadian banks for a new three-year term. The amended credit facility continues to be unsecured and permits drawings of up to $225 million, an increase of $50 million over the previous arrangements.



(8) Share capital

---------------------------------------------------------------------
Nine months ended Nine months ended
September 30, 2005 September 30, 2004
Number of Common Number of Common
Common Share Common Share
Shares Capital Shares Capital
---------------------------------------------------------------------

Balance, beginning
of period 63,082,586 $ 102,719 63,563,246 $ 99,785
Exercise of stock options 306,950 2,746 396,640 3,149
Purchase of shares for
cancellation - - (1,025,500) (1,643)
---------------------------------------------------------------------

Balance, end of period 63,389,536 $ 105,465 62,934,386 $ 101,291
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---------------------------------------------------------------------


On April 14, 2004, the Company effected a two-for-one stock split by way of a stock dividend. All share amounts disclosed in the consolidated financial statements have been retroactively adjusted to give effect to the stock dividend.



(9) Segmented financial information


---------------------------------------------------------------------
Equipment Group Compression Group Consolidated

Three months
ended
September 30 2005 2004 2005 2004 2005 2004
---------------------------------------------------------------------

Revenues $231,087 $222,683 $191,865 $145,420 $422,952 $368,103
---------------------------------------------------------------------
---------------------------------------------------------------------

Operating
Income $22,183 $20,385 $16,879 $11,126 $39,062 $31,511
---------------------------------------------------------------------
---------------------------------------------------------------------

Operating
income as a
% of
revenues 9.6% 9.2% 8.8% 7.7% 9.2% 8.6%
---------------------------------------------------------------------
---------------------------------------------------------------------

Nine months
ended
September 30

Revenues $647,930 $593,639 $466,167 $437,857 $1,114,097 $1,031,496
---------------------------------------------------------------------
---------------------------------------------------------------------

Operating
Income $53,051 $43,457 $31,662 $33,341 $84,713 $76,798
---------------------------------------------------------------------
---------------------------------------------------------------------

Operating
income as a
% of
revenues 8.2% 7.3% 6.8% 7.6% 7.6% 7.4%
---------------------------------------------------------------------
---------------------------------------------------------------------



Selected balance sheet information:


---------------------------------------------------------------------
Equipment Group Compression Group Consolidated

as at
September 30 2005 2004 2005 2004 2005 2004
---------------------------------------------------------------------

Goodwill $13,000 $13,000 $21,800 $21,350 $34,800 $34,350
---------------------------------------------------------------------
---------------------------------------------------------------------

Identifiable
assets $716,142 $642,626 $353,238 $274,370 $1,069,380 $916,996
--------------------------------------------------
--------------------------------------------------
Corporate assets 13,784 11,323
-------------------
Total assets $1,083,164 $928,319
-------------------
-------------------


(10) Seasonality of business

Interim period revenues and earnings historically reflect some seasonality in the Equipment Group. The first quarter is typically the weakest due to winter shutdowns in the construction industry. The fourth quarter has historically been the strongest due to conversions of equipment on rent with a purchase option. The second and third quarter impacts of seasonality are relatively neutral.

(11) Subsequent event

On October 13, 2005 the Company issued $125 million of senior unsecured debentures. These debentures bear a coupon rate of 4.92%, and are due on October 13, 2015. The net proceeds were used to reduce outstanding borrowings on existing bank credit facilities.

(12) Comparative amounts

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

Contact Information

  • Toromont Industries Ltd.
    Hugo T. Sorensen
    President and Chief Executive Officer
    (416) 667-5527
    or
    Toromont Industries Ltd.
    Wayne S. Hill
    Executive Vice President
    (416) 667-5776