Toromont Industries Ltd: Case Study
Business Description
Toromont Industries Ltd. was founded in 1961 by eight private investors in Canada. The company’s stock was listed on the Toronto Stock Exchange in 1968. Toromont Industries Ltd. owns and operates through two business segments which are: The Equipment Group and CIMCO Refrigeration. The Equipment Group serves an estimated $5 billion markets and owns one of the world’s largest CAT dealerships in terms of revenue and geographic territory, which comprises of 36 branches in Canada. The dealerships sell Caterpillar products and specialize in industrial machines. Toromont Industries Ltd. also owns Battlefield- The CAT Rental Store which specializes in mobile equipment rental and compact equipment. There are 37 CAT Rental Stores. …show more content…
The group also owns Toromont Energy which is a utility company and develop distributed generation and operates high-efficiency small scale power plants. The other business; CIMCO Refrigeration is Canada’s largest supplier of industrial and recreational compression equipment also providing design, engineering, installation of industrial and recreational refrigeration applications.
CIMCO Refrigeration operates 23 locations in Canada and the United States. Toromont employs approximately 4000 people in over 110 locations. The company is hoping to achieve an 18% after tax return on opening shareholders’ equity over a business cycle. Additionally as a performance objective, the company aims to earn threshold pre-tax returns on invested capital in the rage of 17%-25% depending on the business. The company uses a number of growth strategies to assume the title of market leader. They have policies to expand markets, strengthen product support, have more broad product offerings, invest in resources such as employee training and development, and of course to maintain a strong financial position. Toromont Industries Ltd. have a favourable employee-shareholder culture and they have diversified business with leading brands. The company is also enjoying a stable financial condition, with revenues, net earnings, and return on shareholder’s equity increasing in the last 3 years. The company is also witnessing an increase in stock prices from October 2013 after a period of stable prices. The company has also announced an 8% increase in its regular quarterly …show more content…
dividend on February 11, 2013.
Industry Overview and Competitive Positioning
PEST Analysis
Porters 5 Forces
Bargaining Power of Suppliers:
Bargaining Power of Customers:
Threat of New Entrants:
Threat of Substitute Products:
Competitive Rivalry within an industry:
SWOT Analysis
Strengths: Distributor of a strong brand
Comprehensive product support capabilities
Weaknesses: One of the weaknesses associated with Toromont Industries Ltd. is the geographic concentration. Toromont operations are situated in a limited areas and markets, focusing on the United States and Canada. According to Toromont company profile, “the company generated 97.6%of its revenues from Canada, while generating the remaining 2.4% from other countries.” The fact that majority of Toromonts revenues come from one concentrated area can lead the company to engage in risks that are associated with dependence in one specific region.
Opportunities: Growing equipment rental business in the US and Canada.
Positive outlook of the US mining equipment market
As the market declined in 2009 it has recovered well in the current years and is producing growth.
Threats: The major threat that is faced by Toromont is the increased competitive pressures. As Toromont focuses on one primary market that is highly competitive there are a large number of companies who are providing services to the same customers.Referring to the company profile some of the major competitors of Toromont are NES Holdings, United Rentals and Industrial Engines.
Another threat is the environmental regulation. This could negatively impact the business. Depending on the region where Toromont decides to provide its services, the legislations could drive the cost of products to go up. The company will also have to follow the environmental laws in place for that particular region and if the company violates any of these laws it can find itself charged with penalties or fines which could greatly affect the financials of the company.
Demand Fluctuations due to
Financial Analysis
Common-Size Financial Statements
a) Referring to In the years 2008-2009 Toromont gained all their revenues through historical segments, including while in 2010 they began gaining some revenue from the Equipment Group. In 2011 and 2012, revenues were flowing mainly from Equipment group while a small portion was coming from CIMCO with a slight overall increase in 2012 compared to the previous year.
b)
c) In a lot of respects, Toromont can be viewed as a profitable company. All profitability ratios in the FactSet database point to this conclusion, as they are all positive (FactSet, 2013). These include gross margin percentage, operating margin percentage, net margin, and ROE/DuPont Ratio (FactSet, 2013). Toromont has never reported a loss in profitability in the last 5 years and all profitability ratios are trending upwards (except for net revenue, which decreased in 2011 due to the split of Enerflex) (FactSet, 2013). When margins are compared to other companies in the industry, Toromont either are very close to the average or exceed competitors margins in 2012. Toromont exceeds industry margin averages in EBIT and Net Margin for example (FactSet, 2013). In terms of earning per share, EPS is with industry averages. Overall, Toromont is in a stable and profitable position.
DuPont Model: Return on Equity is a widely used measure of profitability that compares the profit the company made during a period (net income) to the resources invested in the company (shareholder’s equity).
DuPont ROE (%): [Net income/sales x sales/TA] x [TA/SE]
2012
2011
2010
2009
2008
27.38
12.84
9.77
14.76
19.65
ROE is a function of efficiency, productivity and leverage:
Efficiency: the ability of a firm to control costs in relation to sales –
[Net income/sales]
2012
2011
2010
2009
2008
0.0799
0.0747
0.0431
0.0661
0.0664
Productivity: the degree to which a firm can generate sales in relationship to the assets employed – [Sales/Total Assets]
2012
2011
2010
2009
2008
1.6298
0.8685
1.2836
1.2592
1.4678
Leverage: the use of debt -
[Total Assets/Shareholder’s Equity]
2012
2011
2010
2009
2008
2.1007
1.9773
1.7642
1.7745
2.0158 Cash Flow Analysis After examining the cash flow statement, we can see that the funds from operating activities are relatively stable and the company is making cash from its operating activities. Cash flows increased in the area of other funds in 2011, but these areas are relatively unconcerning. However, from 2010 to 2012, net operating cash flow decreased from $255.7 million to $37.0 million (FactSet, 2013). This was due to a decrease in working capital. A considerable amount of inventory was purchased in 2010 and Toromont was paying its creditors very quickly. Payable turnover dropped to 2.7 days in 2011. Metrics such as days payable outstanding and days of inventory on hand also increased (FactSet, 2013). Cash flows from receivables increased but were not enough to offset the aforementioned events. In 2012, net operating cash flow dropped considerably. This was due to a negative cash flow from receivables and further decreases in accounts payable cash flow. The cash conversion cycle was stable at around 85 days. Days of inventory on hand also decreased to around 100 days (FactSet, 2013). This suggests that accounts payable outflow increased due to increased sales. Sales initially seemed to have tanked in 2011, but this is due to a split within the company (Toromont, 2011). Revenues from the remaining parts of the business increased by 14% to $1.4 billion and this increase can explain the growth of accounts payable (Toromont, 2011). The working capital cash flow decreased in 2012, but the productivity ratios all remain within acceptable values. Working capital was mainly affected by increases in accounts receivable, inventories, and accounts payable in 2010 (FactSet, 2013). Working capital will rebound if Toromont continues on their trend of lowering accounts payable. As for investing activities, a major increase was reported in 2011. This was due to an increase of $130 million from other sources (FactSet, 2013). These ‘other sources’ consisted of cash flows from the discontinued operation of Enerflex (Toromont, 2011). Capital expenditures increased from about $82 million to $114 million. Major events in financing cash flow were in 2011. In 2011, Toromont made a reduction in debt in the amount of about $290 million. This led to a cash outflow of $337 million.
Risks
Toromont Industries Ltd.
have been doing well in the recent periods after a series of instability primarily in 2010 when the company witnessed an overall decrease in every performance aspects. The economy is witnessing slow growth. A main area of concern would be the mining sector of Equipment Group, where they witnessed a 18% decline in mining revenue even though construction related markets such as road building and infstracture development have got better.So it can be analysed that the mining sector is not doing well and is witnessing a fall in revenue while the activities of Equipment Group appreciating. At the same time the high number of Equipment Group backlogs is to be taken into consideration, while the numbers are decreasing it is still high and it is stemming from the unavailability of equipment and the mining deliveries may not have been done at the right time. For CIMCO the backlogs are a major concern where it is present in both recreational and industrial areas. A major source of risk for Toromont would be its limited geographical presence and infrastructure in markets. The company operates primarily in the US and Canada where 97.6% of the revenue generated from Canada while the remaining from other countries. This is a disadvantage in today’s globalized world where geography is not a barrier anymore, so the high dependence on the home country for revenues would be more prone to risk because of geographical threats. The industry itself is facing increasing
complications as days pass. Because of the highly polluting activities of the industry there has been more environmental laws and regulations put into effect. As a result of the emphasis to ‘go green’ the company could potentially face an increase in the cost of production and a general steady decline in customers in certain areas.The company has to be highly vigilant regarding the existing and new environmental laws put into place as one slip may result in severe legal consequences and a blow to the it’s financial standings and growth. CIMCO is facing a backslash in their recreational revenue which went down 45% from last year because of a Canadian federal stimulus program, additionally things were not looking good in the US with recreational and industrial packages lower by 20%..
Toromont’s main sources of earnings are from their Equipment Group revenues as well as their CIMCO revenues. Within the Equipment Group, Toromont’s revenues were obtained from their equipment sales (new and used), rentals for their products as well as product support services provided by the company. Power generation is a service that Toromont focuses on but was not a significant contributor to their revenues as the main focus of the operation was on equipment and product support.
Used equipment sales included the sales of the used equipment itself in addition to the received equipment on trade-in and dispositions from the Company’s rental fleet. The rental services provided by Toromont included light and heavy equipment ranging from dozers, excavators, graders and trucks. Rental revenues improved in 2012 due to increased investment and improved utilization. Toromont invested $55 million net of disposals for their rental fleet, which was $20 million more than their investments in 2011. With improved market conditions in the economy paired with strong sales in existing locations lead to overall increases in revenue for Toromont.
Along with increased investments, Toromont set record numbers in 2012 with product support revenues improving by 16% in comparison to 2011. This can be attributed to the increased number of installed bases of equipment in the territories of operation in addition to greater utilization of equipment. With increased employment and addition of technicians, the service aspect of operation for Toromont was a strong driver in increased revenues and success.
CIMCO Refrigeration is a division of Toromont Industries and specializes in the engineering, design, manufacture, installation and service of industrial, process cooling and recreational refrigeration system. Some the industries that CIMCO Refrigeration provides services for includes Food and Beverage, Pharmaceutical, Automotive, Chemical and Petrochemical and Mining. Package sales and product support for these services are the primary sources of revenue for CIMCO’s operations.
Examining Toromont’s data over the past 5 years, it has been a profitable company. In 2008, the global recession interrupted and disrupted the growth of the company; however, profitability as well as the assets of the company have remained strong. Since the economic recession in 2008, revenues for the company have increased at an average annual rate of 4.1% and product support revenue which has been a strong driver in the profitability of the business have averaged an even better 6.9% growth on an annual basis. This has been aided by the increase in customer demand in specific market segment such as mining, increased product offerings and services spearheaded by Caterpillar and several acquisitions within the Equipment Group’s operations for rental products and services.
Bibliography
Sources:
www.toromont.com www.theglobeandmail.com www.ic.gc.ca
Toromont Industries Ltd. was founded in 1961 by eight private investors in Canada. The company’s stock was listed on the Toronto Stock Exchange in 1968. Toromont Industries Ltd. owns and operates through two business segments which are: The Equipment Group and CIMCO Refrigeration. The Equipment Group serves an estimated $5 billion markets and owns one of the world’s largest CAT dealerships in terms of revenue and geographic territory, which comprises of 36 branches in Canada. The dealerships sell Caterpillar products and specialize in industrial machines. Toromont Industries Ltd. also owns Battlefield- The CAT Rental Store which specializes in mobile equipment rental and compact equipment. There are 37 CAT Rental Stores. …show more content…
The group also owns Toromont Energy which is a utility company and develop distributed generation and operates high-efficiency small scale power plants. The other business; CIMCO Refrigeration is Canada’s largest supplier of industrial and recreational compression equipment also providing design, engineering, installation of industrial and recreational refrigeration applications.
CIMCO Refrigeration operates 23 locations in Canada and the United States. Toromont employs approximately 4000 people in over 110 locations. The company is hoping to achieve an 18% after tax return on opening shareholders’ equity over a business cycle. Additionally as a performance objective, the company aims to earn threshold pre-tax returns on invested capital in the rage of 17%-25% depending on the business. The company uses a number of growth strategies to assume the title of market leader. They have policies to expand markets, strengthen product support, have more broad product offerings, invest in resources such as employee training and development, and of course to maintain a strong financial position. Toromont Industries Ltd. have a favourable employee-shareholder culture and they have diversified business with leading brands. The company is also enjoying a stable financial condition, with revenues, net earnings, and return on shareholder’s equity increasing in the last 3 years. The company is also witnessing an increase in stock prices from October 2013 after a period of stable prices. The company has also announced an 8% increase in its regular quarterly …show more content…
dividend on February 11, 2013.
Industry Overview and Competitive Positioning
PEST Analysis
Porters 5 Forces
Bargaining Power of Suppliers:
Bargaining Power of Customers:
Threat of New Entrants:
Threat of Substitute Products:
Competitive Rivalry within an industry:
SWOT Analysis
Strengths: Distributor of a strong brand
Comprehensive product support capabilities
Weaknesses: One of the weaknesses associated with Toromont Industries Ltd. is the geographic concentration. Toromont operations are situated in a limited areas and markets, focusing on the United States and Canada. According to Toromont company profile, “the company generated 97.6%of its revenues from Canada, while generating the remaining 2.4% from other countries.” The fact that majority of Toromonts revenues come from one concentrated area can lead the company to engage in risks that are associated with dependence in one specific region.
Opportunities: Growing equipment rental business in the US and Canada.
Positive outlook of the US mining equipment market
As the market declined in 2009 it has recovered well in the current years and is producing growth.
Threats: The major threat that is faced by Toromont is the increased competitive pressures. As Toromont focuses on one primary market that is highly competitive there are a large number of companies who are providing services to the same customers.Referring to the company profile some of the major competitors of Toromont are NES Holdings, United Rentals and Industrial Engines.
Another threat is the environmental regulation. This could negatively impact the business. Depending on the region where Toromont decides to provide its services, the legislations could drive the cost of products to go up. The company will also have to follow the environmental laws in place for that particular region and if the company violates any of these laws it can find itself charged with penalties or fines which could greatly affect the financials of the company.
Demand Fluctuations due to
Financial Analysis
Common-Size Financial Statements
a) Referring to In the years 2008-2009 Toromont gained all their revenues through historical segments, including while in 2010 they began gaining some revenue from the Equipment Group. In 2011 and 2012, revenues were flowing mainly from Equipment group while a small portion was coming from CIMCO with a slight overall increase in 2012 compared to the previous year.
b)
c) In a lot of respects, Toromont can be viewed as a profitable company. All profitability ratios in the FactSet database point to this conclusion, as they are all positive (FactSet, 2013). These include gross margin percentage, operating margin percentage, net margin, and ROE/DuPont Ratio (FactSet, 2013). Toromont has never reported a loss in profitability in the last 5 years and all profitability ratios are trending upwards (except for net revenue, which decreased in 2011 due to the split of Enerflex) (FactSet, 2013). When margins are compared to other companies in the industry, Toromont either are very close to the average or exceed competitors margins in 2012. Toromont exceeds industry margin averages in EBIT and Net Margin for example (FactSet, 2013). In terms of earning per share, EPS is with industry averages. Overall, Toromont is in a stable and profitable position.
DuPont Model: Return on Equity is a widely used measure of profitability that compares the profit the company made during a period (net income) to the resources invested in the company (shareholder’s equity).
DuPont ROE (%): [Net income/sales x sales/TA] x [TA/SE]
2012
2011
2010
2009
2008
27.38
12.84
9.77
14.76
19.65
ROE is a function of efficiency, productivity and leverage:
Efficiency: the ability of a firm to control costs in relation to sales –
[Net income/sales]
2012
2011
2010
2009
2008
0.0799
0.0747
0.0431
0.0661
0.0664
Productivity: the degree to which a firm can generate sales in relationship to the assets employed – [Sales/Total Assets]
2012
2011
2010
2009
2008
1.6298
0.8685
1.2836
1.2592
1.4678
Leverage: the use of debt -
[Total Assets/Shareholder’s Equity]
2012
2011
2010
2009
2008
2.1007
1.9773
1.7642
1.7745
2.0158 Cash Flow Analysis After examining the cash flow statement, we can see that the funds from operating activities are relatively stable and the company is making cash from its operating activities. Cash flows increased in the area of other funds in 2011, but these areas are relatively unconcerning. However, from 2010 to 2012, net operating cash flow decreased from $255.7 million to $37.0 million (FactSet, 2013). This was due to a decrease in working capital. A considerable amount of inventory was purchased in 2010 and Toromont was paying its creditors very quickly. Payable turnover dropped to 2.7 days in 2011. Metrics such as days payable outstanding and days of inventory on hand also increased (FactSet, 2013). Cash flows from receivables increased but were not enough to offset the aforementioned events. In 2012, net operating cash flow dropped considerably. This was due to a negative cash flow from receivables and further decreases in accounts payable cash flow. The cash conversion cycle was stable at around 85 days. Days of inventory on hand also decreased to around 100 days (FactSet, 2013). This suggests that accounts payable outflow increased due to increased sales. Sales initially seemed to have tanked in 2011, but this is due to a split within the company (Toromont, 2011). Revenues from the remaining parts of the business increased by 14% to $1.4 billion and this increase can explain the growth of accounts payable (Toromont, 2011). The working capital cash flow decreased in 2012, but the productivity ratios all remain within acceptable values. Working capital was mainly affected by increases in accounts receivable, inventories, and accounts payable in 2010 (FactSet, 2013). Working capital will rebound if Toromont continues on their trend of lowering accounts payable. As for investing activities, a major increase was reported in 2011. This was due to an increase of $130 million from other sources (FactSet, 2013). These ‘other sources’ consisted of cash flows from the discontinued operation of Enerflex (Toromont, 2011). Capital expenditures increased from about $82 million to $114 million. Major events in financing cash flow were in 2011. In 2011, Toromont made a reduction in debt in the amount of about $290 million. This led to a cash outflow of $337 million.
Risks
Toromont Industries Ltd.
have been doing well in the recent periods after a series of instability primarily in 2010 when the company witnessed an overall decrease in every performance aspects. The economy is witnessing slow growth. A main area of concern would be the mining sector of Equipment Group, where they witnessed a 18% decline in mining revenue even though construction related markets such as road building and infstracture development have got better.So it can be analysed that the mining sector is not doing well and is witnessing a fall in revenue while the activities of Equipment Group appreciating. At the same time the high number of Equipment Group backlogs is to be taken into consideration, while the numbers are decreasing it is still high and it is stemming from the unavailability of equipment and the mining deliveries may not have been done at the right time. For CIMCO the backlogs are a major concern where it is present in both recreational and industrial areas. A major source of risk for Toromont would be its limited geographical presence and infrastructure in markets. The company operates primarily in the US and Canada where 97.6% of the revenue generated from Canada while the remaining from other countries. This is a disadvantage in today’s globalized world where geography is not a barrier anymore, so the high dependence on the home country for revenues would be more prone to risk because of geographical threats. The industry itself is facing increasing
complications as days pass. Because of the highly polluting activities of the industry there has been more environmental laws and regulations put into effect. As a result of the emphasis to ‘go green’ the company could potentially face an increase in the cost of production and a general steady decline in customers in certain areas.The company has to be highly vigilant regarding the existing and new environmental laws put into place as one slip may result in severe legal consequences and a blow to the it’s financial standings and growth. CIMCO is facing a backslash in their recreational revenue which went down 45% from last year because of a Canadian federal stimulus program, additionally things were not looking good in the US with recreational and industrial packages lower by 20%..
Toromont’s main sources of earnings are from their Equipment Group revenues as well as their CIMCO revenues. Within the Equipment Group, Toromont’s revenues were obtained from their equipment sales (new and used), rentals for their products as well as product support services provided by the company. Power generation is a service that Toromont focuses on but was not a significant contributor to their revenues as the main focus of the operation was on equipment and product support.
Used equipment sales included the sales of the used equipment itself in addition to the received equipment on trade-in and dispositions from the Company’s rental fleet. The rental services provided by Toromont included light and heavy equipment ranging from dozers, excavators, graders and trucks. Rental revenues improved in 2012 due to increased investment and improved utilization. Toromont invested $55 million net of disposals for their rental fleet, which was $20 million more than their investments in 2011. With improved market conditions in the economy paired with strong sales in existing locations lead to overall increases in revenue for Toromont.
Along with increased investments, Toromont set record numbers in 2012 with product support revenues improving by 16% in comparison to 2011. This can be attributed to the increased number of installed bases of equipment in the territories of operation in addition to greater utilization of equipment. With increased employment and addition of technicians, the service aspect of operation for Toromont was a strong driver in increased revenues and success.
CIMCO Refrigeration is a division of Toromont Industries and specializes in the engineering, design, manufacture, installation and service of industrial, process cooling and recreational refrigeration system. Some the industries that CIMCO Refrigeration provides services for includes Food and Beverage, Pharmaceutical, Automotive, Chemical and Petrochemical and Mining. Package sales and product support for these services are the primary sources of revenue for CIMCO’s operations.
Examining Toromont’s data over the past 5 years, it has been a profitable company. In 2008, the global recession interrupted and disrupted the growth of the company; however, profitability as well as the assets of the company have remained strong. Since the economic recession in 2008, revenues for the company have increased at an average annual rate of 4.1% and product support revenue which has been a strong driver in the profitability of the business have averaged an even better 6.9% growth on an annual basis. This has been aided by the increase in customer demand in specific market segment such as mining, increased product offerings and services spearheaded by Caterpillar and several acquisitions within the Equipment Group’s operations for rental products and services.
Bibliography
Sources:
www.toromont.com www.theglobeandmail.com www.ic.gc.ca