Toromont Industries Ltd.
TSX : TIH

Toromont Industries Ltd.

July 26, 2005 10:09 ET

Toromont Announces Results For The Second Quarter Of 2005

TORONTO, ONTARIO--(CCNMatthews - July 26, 2005) - Toromont Industries Ltd. (TSX:TIH) today reported net earnings for the second quarter of $18.4 million (29 cents per share) compared to $18.7 million (30 cents per share) in the prior year.



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

Revenues $ 401.3 $ 411.4 (2%) $ 711.3 $ 687.9 3%
Operating income $ 31.7 $ 32.4 (2%) $ 45.5 $ 45.6 --
Net earnings $ 18.4 $ 18.7 (1%) $ 25.8 $ 25.2 2%
Earnings per share $ 0.29 $ 0.30 (3%) $ 0.41 $ 0.40 2%
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Hugo T. Sorensen, President and Chief Executive Officer commented, "We are pleased with financial performance to date. Both the Equipment Group and Compression are enjoying strong demand, as conditions remain favourable in both sectors. Equipment Group profitability set new highs through June 30, and we are entering into the second half with record backlogs. Consolidated results for the three and six months reflect our completion basis of revenue recognition and hence, do not portray the substantially stronger activity levels in the Compression Group, where bookings and backlogs are the highest in Toromont's history. We expect to see increased revenues and earnings in the second half, as Compression projects are completed."

Highlights:

- The Equipment Group delivered another excellent quarter, as a 6% increase in revenues and a 24% increase in operating income produced record results through June 30. Both rental and product support businesses reported double-digit growth. Gross margins on machine sales and rentals improved year over year. Operating income increased to 7.0% of revenues year-to-date (5.9% in 2004), on increased volumes, improvements in gross margin and lower relative expense levels.

- Bookings in the Caterpillar dealership remained active.

- Compression Group activity was very strong overall. To-date bookings were up substantially from June 2004 and backlogs were 72% higher than the mid-year record levels last year. Natural gas compression continues to be very strong as a significant increase in bookings in the quarter pushed backlogs 150% higher than prior year. Industrial and recreational backlogs were 24% higher than a year ago.

- Lower Compression Group revenues and earnings for the quarter and first half reflect timing of revenue recognition on process and industrial refrigeration project completions, partially offset by continued growth in product support activities. Excluding a $20 million international process project completed in 2004, revenues were down 2% in the quarter and were up 1% for the first six months. Operating income decreased 32% in the quarter (33% year-to-date) on the lower volumes and higher expenses attributable to the US acquisition in late 2004, additional international market coverage, expansion of retrofit and gas compression service activities in Canada and entry into the natural gas compression package market in the southwestern United States.

- Higher working capital was attributable to increased inventories to respond to stronger demand and longer lead times for delivery of Caterpillar product and primary components and parts used in the Compression Group.

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

- The regular quarterly cash dividend was increased by 23% effective with the April 1, 2005 payment, representing the 16th consecutive annual increase. The quarterly dividend now stands at 8 cents per share.

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 July 26, 2005. All tabular amounts in the following discussion are in thousands of dollars unless otherwise noted. Additional information respecting Toromont, including its annual information form, is available on SEDAR at www.sedar.com.



Operating results
-----------------

Three months ended Six months ended
$ thousands, June 30 June 30
except 2005 2004 % 2005 2004 %
share amounts change change
---------------------------------------------------------------------
Revenues $ 401,344 $ 411,357 (2%) $ 711,327 $ 687,889 3%
Cost of goods
sold 318,336 331,070 (4%) 564,618 551,034 2%
---------------------------------------------------------------------
Gross profit 83,008 80,287 3% 146,709 136,855 7%
Selling and
administrative
expenses 51,329 47,860 7% 101,236 91,290 11%
---------------------------------------------------------------------
Operating income 31,679 32,427 (2%) 45,473 45,565 (0%)
Interest expense 3,181 3,012 6% 6,165 6,202 (1%)
Interest and
investment
income (475) (386) 23% (955) (764) 25%
---------------------------------------------------------------------
Income before
income taxes 28,973 29,801 (3%) 40,263 40,127 0%
Income taxes 10,563 11,122 (5%) 14,465 14,946 (3%)
---------------------------------------------------------------------
Net earnings $ 18,410 $ 18,679 (1%) $ 25,798 $ 25,181 2%
---------------------------------------------------------------------
---------------------------------------------------------------------

Earnings per
share - Basic $ 0.29 $ 0.30 (3%) $ 0.41 $ 0.40 2%
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Revenues of $401 million in the quarter were 2% lower than the prior year, as increased revenues from stronger rental and product support activities in the Equipment and Compression Groups were offset by fewer Compression Group project completions. A $20 million international process compression project completed in the second quarter of 2004 affect the comparability of results relative to last year. The strengthening of the Canadian dollar relative to the US currency reduced revenues by $18 million in the quarter ($33 million year-to-date). Excluding these two items, revenues were up 7% in the quarter.

For the first six months, revenues were up 3% to $711 million (11% excluding the two above mentioned items), fueled by higher revenues in the Equipment Group (increased new machine sales, rentals and product support business). Compression Group revenues were down 6% (up 1% excluding the large 2004 project) as lower project completions offset higher product support business.

Gross profit increased 3% in the quarter and 7% year-to-date, largely on higher margins in the Equipment Group offset by lower revenues in Compression. Gross profit margin for the first six months was 20.6%, up from 19.9% last year on improvements in the Equipment Group. Compression margins were comparable to last year.

Selling and administrative expenses increased $3.5 million (7%) in the quarter and $9.9 million (11%) through June on compensation increases initiated at the beginning of the year and higher sales activity in the Equipment Group. Salaries and benefits were up $1.5 million in the quarter ($4.4 million for the first six months), reflecting compensation adjustments and increased headcount. Additional expenses at companies acquired in late 2004 were $0.9 million in the quarter and $1.8 million year-to-date. As reported in the first quarter, higher expenses also reflect new market activities within the Canadian and US natural gas compression segment and expanded international activities ($0.7 million in the quarter, $2 million year-to-date). Selling and administrative expenses as a percentage of revenue were 14.2% for the first six months compared to 13.3% in 2004.

Operating income was down 2% in the quarter as improvements in gross margin were offset by higher selling and administrative expenses. For the first six months, operating income was unchanged from the prior year as volume and gross margin improvements offset the expense increases. Operating margin was 6.4%, down 0.2% from the prior year, due to lower Compression project completions and higher expense levels.

Interest expense increased 6% in the quarter on higher average debt balances used to fund higher investments in working capital. In particular, Equipment and Compression Group inventories have been increased to respond to stronger demand and tight product availability. For the first six months, interest expense was down 1% on lower effective interest rates, partly offset by higher average debt balances. The reduced current year interest rate reflects a higher component of floating rate debt that bears a relatively lower interest rate. Interest income was higher than last year due to higher interest on rental conversions.

The effective income tax rate for the quarter was 36.5% compared to 34.6% in the first quarter of 2005 and 35.8% for the full year 2004. The effective rate increased as a larger percentage of earnings were reported in higher tax jurisdictions.



Equipment Group
----------------

Three months ended Six months ended
June 30 June 30
2005 2004 % 2005 2004 %
$ thousands change change
---------------------------------------------------------------------
Equipment sales
and rentals
New $ 116,533 $ 115,711 1% $ 187,125 $ 173,432 8%
Used 32,175 34,912 (8%) 55,568 55,403 0%
Rental 30,939 24,305 27% 51,834 40,547 28%
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Total equipment
sales and
rentals 179,647 174,928 3% 294,527 269,382 9%
Power generation 3,212 2,856 12% 6,280 5,988 5%
Product support 68,348 60,050 14% 136,218 120,082 13%
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Total revenues $ 251,207 $ 237,834 6% $ 437,025 $ 395,452 11%
---------------------------------------------------------------------
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Operating income $ 21,158 $ 17,056 24% $ 30,690 $ 23,350 31%
% of revenues 8.4% 7.2% 7.0% 5.9%
---------------------------------------------------------------------
---------------------------------------------------------------------


The Equipment Group delivered exemplary results as we continue through an extended cycle. New equipment supply remains tight with significantly longer delivery schedules for certain models. New machine sales increased 1% in the quarter and 8% for the first half. Revenue increases in both periods resulted primarily from higher unit volumes and price increases in US dollar terms, partly offset by the stronger Canadian dollar. Industrial, lift and agriculture segments reported higher revenues for the quarter and year-to-date. Tractor recorded lower revenues in the second quarter compared to last year, however, revenues through six months were higher. Growth was seen across several market segments, most notably general and heavy construction, industrial and paving. New booking activity maintained backlogs at record levels.

Used equipment sales were down 8% for the quarter and were comparable to last year for the first six months. Used equipment sales vary with that for new equipment 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 27% in the quarter (28% year-to-date) on same store improvements inclusive of improved utilization, one new location and the late 2004 acquisition of Access Rentals and Supply in Sudbury, Ontario.

Power generation revenues from Toromont-owned plants increased 12% in the quarter on higher average electricity prices due to 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 within the province, 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 the end of the year.

Product support activity continued to benefit from brisk construction activity and the growth in the installed base of Caterpillar equipment. Product support revenues increased 14% in the quarter (13% year-to-date) despite an unfavourable impact of a stronger Canadian dollar. Product support revenues have almost doubled over the last five years.

Operating income increased 24% in the quarter on higher volumes and gross margins, partially offset by higher expenses. Operating income as a percentage of revenues improved to 7.0% for the year compared with 5.9% in 2004. This represents a record level of first half profitability for the Equipment Group. Improvements were attributable to higher gross margins on machine sales, rentals and product support business and lower expenses relative to sales.



Compression Group
------------------

Three months ended Six months ended
June 30 June 30
2005 2004 % 2005 2004 %
$ thousands change change
---------------------------------------------------------------------
Package sales
and rentals $ 113,460 $ 141,369 (20%) $ 207,591 $ 232,860 (11%)
Product support 36,677 32,154 14% 66,711 59,577 12%
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Total revenues $ 150,137 $ 173,523 (13%) $ 274,302 $ 292,437 (6%)
---------------------------------------------------------------------
---------------------------------------------------------------------

Operating
income $ 10,521 $ 15,371 (32%) $ 14,783 $ 22,215 (33%)
% of revenues 7.0% 8.9% 5.4% 7.6%
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The Compression business is characterized by a relatively smaller number of large projects which, coupled with the completed project method of accounting, can result in significant swings in revenues and profits on a quarterly basis, as was the situation through June 30, 2005.

Package sales decreased by 20% in the quarter and 11% year-to-date. Excluding the previously mentioned $20 million international project in 2004, package revenues were down 7% and 3% respectively, due primarily to the status of project completions. At quarter-end, Compression Group work-in-process was 62% higher than at this time last year. Booking activity increased significantly in the quarter and backlogs were at record levels for this time of year (up 72%). Momentum within the natural gas and coal-bed methane compression segment continued, with bookings up substantially and backlogs 150% higher than this time last year.

Product support revenues were up 14% in the quarter and 12% for the first six 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 declined year-over-year on lower volumes and expense increases mentioned earlier, notably expansion of retrofit and service activities, US natural gas compression initiatives and international market development. Gross margins were consistent with the prior year.

Liquidity and capital resources

Total assets were $1.05 billion at June 30, 2005 compared with $945 million at the end of 2004 and $900 million at June 30, 2004. Working capital increased to $310 million principally on higher paid for inventories and accounts receivable.

Accounts receivable of $266 million at June 30, 2005 were higher than at December 2004 and June 2004, on the higher revenues and a higher proportion of sales occurring in the latter part of the quarter.

Inventories were $391 million at the end of the quarter, higher than at December 2004 and June 2004, on increases in both groups. The Equipment Group held more new equipment inventory in light of high demand and tight supply conditions. Growth in product support business resulted in a doubling of work-in-process over the prior year. In the Compression Group, inventory levels were higher due to higher work-in-process (up 62%) coupled with accelerated purchasing to secure supply on certain major components (in particular, engines and compressors). We anticipate continuing to carry higher inventories across our businesses until there is an easing of the supply constraints.

Operating activities provided $28 million for the quarter compared to $44 million last year. Cash flow before changes in working capital was up 6% year-over-year. There was a modest increase in working capital levels during the second quarter of 2005, while in 2004, working capital reductions provided $17 million in cash. For the first six months, operating activities used $19 million, primarily due to higher inventory levels required to support customer demand under more difficult availability conditions. In 2004, investments in working capital were considerably lower.

Cash used in investing activities was $17 million, up $11 million from the prior year. Investments in rental equipment have been accelerated due to favourable market conditions and, to a certain extent, equipment supply constraints. For the first six months, investing activities used $31 million compared to $15 million last year. Investments in rental equipment increased $11 million and additions to property, plant and equipment were $2 million higher. Investments in property, plant and equipment of $12 million year-to-date included additions to our service vehicle fleet ($4.5 million), facility renovations ($3.5 million), computer technology upgrades ($3 million) and land purchased in Barrie, Ontario ($1 million) for a new Battlefield - The CAT Rental Store branch.

Financing activities used $11 million cash in the quarter compared to $39 million in the prior year. Borrowings under the bank term credit facility were reduced, as cash provided by operating activities exceeded cash used in investing activities and dividends. For the first six months, financing activities provided $50 million for working capital increases, rental equipment and property, plant and equipment purchases. Scheduled principal payments of $13 million were made on senior debentures and other notes payable. Dividends of $10 million were $2 million higher than the prior year reflecting the higher payout rate. No shares were purchased under the normal course issuer bid during the first six months of 2005. In 2004, the Company purchased and cancelled 319,000 shares for $5.8 million (average price of $18.06 per share).

Total debt was $245 million (56% of total shareholders' equity) at June 30, 2005 compared to $181 million (46% of total shareholders' equity) at June 30, 2004. The increase reflects the additional investments in working capital and rental equipment through the first six months of the year. We anticipate that this ratio will return 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 for working capital requirements and anticipated future growth. 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.

Risks and risk management

There were no material changes to the Company's operating and financial risk assessment and related risk management strategies as described in the Company's 2004 annual report and Annual Information Form.

Outlook

Product support business in both operating groups has experienced excellent growth through the first half of the year and should continue to benefit from increased market activity and the larger installed base of equipment across all of our businesses.

The Equipment Group has delivered very strong results to date. Product availability is expected to continue to be constrained throughout the remainder of the year.

The Compression Group has booked a substantial amount of business through the first half and our backlogs are higher. Market conditions and commodity prices are expected to continue to support the current activity level in our facilities. Subject to project completions and bookings in the balance of the year, this should lead to another record year for Compression.

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, July 26, 2005 at 1:30 p.m. (EDT). 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 Sunday, August 7, 2005 by calling 1-800-293-3630 or 416-641-2130 and quoting passcode 4231.

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 110 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
June 30 December 31 June 30
2005 2004 2004
---------------------------------------------------------------------
Assets
Current assets
Accounts receivable $ 265,615 $ 257,459 $ 211,805
Inventories 390,627 307,276 315,570
Income taxes receivable 1,902 - -
Future income taxes 12,826 12,278 13,146
Other current assets (note 5) 12,947 10,100 10,739
---------------------------------------------------------------------
Total current assets 683,917 587,113 551,260

Property, plant and equipment 188,179 186,811 185,193
Rental equipment 122,455 110,834 107,343
Goodwill 34,800 34,800 34,350
Other assets (note 5) 25,098 25,256 22,133
---------------------------------------------------------------------
$ 1,054,449 $ 944,814 $ 900,279
---------------------------------------------------------------------
---------------------------------------------------------------------

Liabilities
Current liabilities
Accounts payable and accrued
liabilities $ 360,501 $ 314,798 $ 307,978
Current portion of long-term
debt (note 6) 13,023 20,539 18,469
Income taxes payable - 13,253 3,993
---------------------------------------------------------------------
Total current liabilities 373,524 348,590 330,440

Long-term debt (note 6) 231,636 166,508 162,326
Accrued pension liability 6,311 5,860 4,951
Future income taxes 7,561 8,001 9,881

Shareholders' equity
Share capital (note 7) 105,061 102,719 102,140
Contributed surplus 5,530 4,484 3,366
Retained earnings 329,293 313,615 288,988
Currency translation adjustment (4,467) (4,963) (1,813)
---------------------------------------------------------------------
Total shareholders' equity 435,417 415,855 392,681
---------------------------------------------------------------------
$ 1,054,449 $ 944,814 $ 900,279
---------------------------------------------------------------------
---------------------------------------------------------------------

See accompanying notes


TOROMONT INDUSTRIES LTD.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
$ thousands, except share amounts

Three months Six months
ended June 30 ended June 30
2005 2004 2005 2004
---------------------------------------------------------------------

Revenues $ 401,344 $ 411,357 $ 711,327 $ 687,889
Cost of goods sold 318,336 331,070 564,618 551,034
---------------------------------------------------------------------
Gross profit 83,008 80,287 146,709 136,855
Selling and administrative
expenses 51,329 47,860 101,236 91,290
---------------------------------------------------------------------
Operating income 31,679 32,427 45,473 45,565
Interest expense 3,181 3,012 6,165 6,202
Interest and investment
income (475) (386) (955) (764)
---------------------------------------------------------------------
Income before income taxes 28,973 29,801 40,263 40,127
Income taxes 10,563 11,122 14,465 14,946
---------------------------------------------------------------------
Net earnings $ 18,410 $ 18,679 $ 25,798 $ 25,181
---------------------------------------------------------------------
---------------------------------------------------------------------

Earnings per share (note 2)
Basic $ 0.29 $ 0.30 $ 0.41 $ 0.40
Diluted $ 0.29 $ 0.29 $ 0.40 $ 0.39

Weighted average number
of shares outstanding 63,266,015 63,763,287 63,212,293 63,730,399
---------------------------------------------------------------------
---------------------------------------------------------------------

End of period number of
shares outstanding
(note 7) 63,345,696 63,608,786 63,345,696 63,608,786
---------------------------------------------------------------------
---------------------------------------------------------------------

See accompanying notes


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

Three months Six months
ended June 30 ended June 30
2005 2004 2005 2004
---------------------------------------------------------------------

Retained earnings,
beginning of period $ 315,944 $ 279,711 $ 313,615 $ 277,361
Net earnings 18,410 18,679 25,798 25,181
Dividends (5,061) (4,136) (10,120) (8,288)
Shares purchased for
cancellation - (5,266) - (5,266)
---------------------------------------------------------------------
Retained earnings,
end of period $ 329,293 $ 288,988 $ 329,293 $ 288,988
---------------------------------------------------------------------
---------------------------------------------------------------------

See accompanying notes


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

Three months Six months
ended June 30 ended June 30
2005 2004 2005 2004
------------------------------------------
Operating activities
Net earnings $ 18,410 $ 18,679 $ 25,798 $ 25,181
Items not requiring cash
and cash equivalents
Depreciation 12,187 10,613 21,780 19,743
Stock-based compensation 591 544 1,154 1,039
Accrued pension liability 281 40 451 (56)
Future income taxes (786) (309) (988) (341)
Gain on sale of rental
equipment and property,
plant, and equipment (2,012) (2,582) (4,062) (3,516)
---------------------------------------------------------------------
28,671 26,985 44,133 42,050

Change in non-cash working
capital and other
Accounts receivable (25,549) (11,645) (8,156) 9,933
Inventories (52,113) (14,152) (83,351) (52,443)
Accounts payable and
accrued liabilities 77,562 42,427 45,703 34,411
Other (949) 821 (17,229) (11,801)
---------------------------------------------------------------------
Cash provided by/(used in)
operating activities 27,622 44,436 (18,900) 22,150
---------------------------------------------------------------------

Investing activities
Additions to rental
equipment (17,908) (13,004) (30,594) (19,786)
Additions to property,
plant and equipment (4,385) (5,474) (12,445) (10,314)
(Increase)/decrease in
other assets (168) 1,009 (119) 924
Sale of rental equipment 5,779 11,363 12,070 14,009
Sale of property, plant
and equipment 181 365 262 539
---------------------------------------------------------------------
Cash used in investing
activities (16,501) (5,741) (30,826) (14,628)
---------------------------------------------------------------------

Financing activities
(Decrease)/increase in
term credit borrowings (3,679) (29,340) 66,453 8,230
Issue of other long-term
debt - 2,722 4,481 2,722
Repayment of other
long-term debt (3,153) (2,546) (13,322) (7,147)
Dividends (5,061) (4,136) (10,120) (8,288)
Shares issued on exercise
of options 772 382 2,234 2,738
Shares purchased for
cancellation - (5,777) - (5,777)
---------------------------------------------------------------------
Cash (used in)/provided by
financing activities (11,121) (38,695) 49,726 (7,522)
---------------------------------------------------------------------

Decrease 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 $ 1,684 $ 1,456 $ 6,268 $ 6,047
Income taxes paid $ 10,802 $ 10,110 $ 30,204 $ 25,626

See accompanying notes


TOROMONT INDUSTRIES LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 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) Diluted earnings per share

---------------------------------------------------------------------
Three months Six months
ended June 30 ended June 30
2005 2004 2005 2004
---------------------------------------------------------------------

Net earnings available
to common shareholders $ 18,410 $ 18,679 $ 25,798 $ 25,181
---------------------------------------------------------------------
---------------------------------------------------------------------

Weighted-average
common shares
outstanding 63,266,015 63,763,287 63,212,293 63,730,399
Dilutive effect of
stock option
conversions 1,295,942 1,339,114 1,188,247 1,211,593
---------------------------------------------------------------------
Weighted-average
diluted common
shares
outstanding 64,561,957 65,102,401 64,400,540 64,941,992
---------------------------------------------------------------------
---------------------------------------------------------------------

Basic earnings per
share - $ $ 0.29 $ 0.30 $ 0.41 $ 0.40
Dilutive effect of
stock option
conversion - $ - 0.01 0.01 0.01
---------------------------------------------------------------------
Diluted earnings per
share - $ $ 0.29 $ 0.29 $ 0.40 $ 0.39
---------------------------------------------------------------------
---------------------------------------------------------------------

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


(3) 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 six-month period ending June 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 six-month period is $2,573 (2004 - $2,758).

(4) 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 Six months
ended June 30 ended June 30
2005 2004 2005 2004
---------------------------------------------------------------------

Defined benefit expense $ 699 $ 458 $ 1,329 $ 998
Defined contribution plans 1,714 1,216 2,405 1,937
401(k) matched savings plans 99 93 219 194
---------------------------------------------------------------------

Net pension expense $ 2,512 $ 1,767 $ 3,953 $ 3,129
---------------------------------------------------------------------
---------------------------------------------------------------------

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


(5) Other assets

Other current assets and other long-term assets include $7,219 (December 31, 2004 - $5,210; June 30, 2004 - $2,379) and $23,136 (December 31, 2004 - $23,413; June 30, 2004 - $19,956) 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.



(6) Bank indebtedness and long-term debt

---------------------------------------------------------------------
June 30 December 31 June 30
2005 2004 2004
---------------------------------------------------------------------

Drawn on bank term facility(a) $ 136,554 $ 70,101 $ 58,741
Senior debentures 94,235 97,175 100,000
Notes payable 13,870 19,771 22,054
---------------------------------------------------------------------
Total long-term debt 244,659 187,047 180,795

Less current portion 13,023 20,539 18,469
---------------------------------------------------------------------

$ 231,636 $ 166,508 $ 162,326
---------------------------------------------------------------------
---------------------------------------------------------------------

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


(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.



(7) Share capital

---------------------------------------------------------------------
Six months ended Six months ended
June 30, 2005 June 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 263,110 2,342 365,440 2,866
Purchase of shares for
cancellation - - (319,900) (511)
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Balance, end of period 63,345,696 $ 105,061 63,608,786 $ 102,140
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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.



(8) Segmented financial information

---------------------------------------------------------------------
Equipment Group Compression Group Consolidated
Three
months
ended
June 30 2005 2004 2005 2004 2005 2004
---------------------------------------------------------------------

Revenues $251,207 $ 237,834 $ 150,137 $ 173,523 $ 401,344 $ 411,357
---------------------------------------------------------------------
---------------------------------------------------------------------

Operating
Income $ 21,158 $ 17,056 $ 10,521 $ 15,371 $ 31,679 $ 32,427
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---------------------------------------------------------------------

Operating
income as
a % of
revenues 8.4% 7.2% 7.0% 8.9% 7.9% 7.9%
---------------------------------------------------------------------
---------------------------------------------------------------------

Six months
ended
June 30

Revenues $437,025 $ 395,452 $ 274,302 $ 292,437 $ 711,327 $ 687,889
---------------------------------------------------------------------
---------------------------------------------------------------------

Operating
Income $ 30,690 $ 23,350 $ 14,783 $ 22,215 $ 45,473 $ 45,565
---------------------------------------------------------------------
---------------------------------------------------------------------

Operating
income as
a % of
revenues 7.0% 5.9% 5.4% 7.6% 6.4% 6.6%
---------------------------------------------------------------------
---------------------------------------------------------------------

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


Selected balance sheet information:

---------------------------------------------------------------------
Equipment Group Compression Group Consolidated
as at
June 30 2005 2004 2005 2004 2005 2004
---------------------------------------------------------------------
Goodwill $ 13,000 $ 13,000 $ 21,800 $ 21,350 $ 34,800 $ 34,350
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---------------------------------------------------------------------

Identifiable
assets $720,250 $ 636,633 $ 324,473 $ 255,231 $ 1,044,723 $ 891,864
-----------------------------------------------
-----------------------------------------------
Corporate
assets 9,726 8,415
----------------------
Total assets $ 1,054,449 $ 900,279
----------------------
----------------------

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(9) 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.

(10) 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 and Chief Financial Officer
    (416) 667-5776