Quality Products. Service Excellence.
2013 Annual Report
QUALITY PRODUCTS.
SERVICE EXCELLENCE.
We have a broad product offering:
To serve our customers in multiple markets and industries.
We promise ten day back order recovery on standard product:
We work hard to provide you with your required product in a prompt time line.
Value Added Services (Modifications, Assembly and Drop Shipment):
To go above and beyond our competition and provide our customers with the exact solution required.
OUR VALUES:
We are dedicated to our customers:
To provide quality products and service that create value to our customers.
We are responsible to our shareholders:
To provide an adequate return on their investment over the long term.
We are committed to our employees:
To provide competitive pay, open and frank communication and a safe work environment.
We recognize the importance of our suppliers:
To assist us in our ability to serve our customers.
Visit us online at www.hammondmfg.com
Hammond Manufacturing Company Limited
2013 Annual Report
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Report to Shareholders
Management Discussion and Analysis
16 Management’s Responsibility for Financial Reporting
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Independent Auditors’ Report
Consolidated Statements of Financial Position
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Corporate Directory
www.hammondmfg.com
Annual Report 2013 3
REPORT TO SHAREHOLDERS
Dear fellow shareholders, employees, and stakeholders:
Over the years, in strong and not-so-strong economies, we have managed for the long-term benefit of
all our stakeholders. It takes the combined success of shareholders, suppliers, customers and
employees, to create success.
For our shareholders, the analysis on the following pages describes how we continue to manage
carefully and build enterprise value over the long-term.
For our suppliers, we recognize the importance of quality and value. Our international relationships are
strategic compliments to our products.
For our customers, wherever in the world, we know that we need to earn your support with quality
products, solid value, and outstanding service.
And for our associates, we offer a culture that values continuous improvement from employee
involvement. We strive to provide a culture with family values of fairness and openness. We provide
an opportunity to learn and grow as part of an engaged team.
I am proud of our continuing progress and appreciate the contribution from all.
Sincerely,
Robert F. Hammond
Chairman & CEO
ANNUAL MEETING
The meeting of the Shareholders will be held on
April 28, 2014 at the Holiday Inn,
601 Scottsdale Drive, Guelph, Ontario
Commencing at 10:00 a.m.
www.hammondmfg.com
Annual Report 2013 4
MANAGEMENT DISCUSSION AND ANALYSIS
This management discussion and analysis (MD&A) comments on the consolidated financial condition
and results of operations of Hammond Manufacturing Company Limited (“HMCL” or “the Company”) for
the year ended December 31, 2013. This discussion should be read in conjunction with the Company’s
consolidated financial statements for the year ended December 31, 2013 and related notes. Additional
information about the Company can be found on its website, www.hammfg.com, or through the SEDAR
website at www.sedar.com which includes the Company’s Annual Information Form. The information
contained herein is dated as of March 28, 2014.
The annual consolidated financial statements have been prepared in accordance with International
Financial Reporting Standards (IFRS).
All amounts in this report are in Canadian dollars unless otherwise stated.
Advisory–Certain information in this MD&A is forward-looking and is subject to important risks and
uncertainties. The results or events predicted in this information may differ from actual results or
events. Forward-looking statements are often, but not always, identified by the use of words such as
“anticipate”, “plan”, “estimate”, “expect”, “may”, “project”, “predict”, “potential”, “could”, “might”, “should”
and other similar expressions. The Company believes the expectations reflected in forward-looking
statements are reasonable but no assurance can be given that these expectations will prove to be
correct. These forward-looking statements speak only to the date of this MD&A. The Company
disclaims any intention or obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise, except as required pursuant to applicable
securities laws.
www.hammondmfg.com
Annual Report 2013 5
MANAGEMENT DISCUSSION AND ANALYSIS
COMPANY PROFILE
Hammond Manufacturing Company Limited manufactures electronic and electrical enclosures, outlet
strips and electronic transformers that are used by manufacturers of a wide range of electronic and
electrical products. Products are sold both Original Equipment Manufacturer-direct (OEM) and through
a global network of distributors and agents.
Facilities are situated in Canada, the United States of America (US), the United Kingdom (UK), Taiwan
and Australia, with agents and distributors located worldwide. The Company also maintains a 40%
ownership share of RITEC Enclosures Inc. (RITEC) located in Taiwan. RITEC produces plastic and die
cast enclosures for sale through the Company sales network and its own existing market channels.
OPERATIONS
FOURTH QUARTER RESULTS
NET PRODUCT SALES
Net product sales, for the three months ended December 31, 2013 were $22,969,000, an increase of
2.1% from net product sales of $22,489,000 in the third quarter of 2013. Our US market net product
sales were down 5.8% quarter over quarter while all our other geographical markets saw increases.
Canada was up 6.2%, Europe was up 17.6% and Australia / Asia was up 4.8%. Net product sales for
the current quarter were up 6.6% compared to net product sales of $21,556,000 for the three months
ended December 31, 2012. Relative to the fourth quarter of 2012, foreign exchange played a large
factor. Fourth quarter net product sales in 2013 compared to 2012 fourth quarter net product sales
were up 6.6%. Half of this increase can be attributed to positive foreign exchange impacts. Market
activity for 2013 fourth quarter net product sales compared to 2012 fourth quarter net product sales
with the foreign exchange impact removed saw our US market flat while Canada was up 1.6%, Europe
was up 30.8% and Australia / Asia was up 15.6%. This was largely driven by volume.
GROSS PROFIT
Gross profit for the fourth quarter of 2013 was 30.2% of net sales compared to 28.0% in the third
quarter of 2013. Gross profits of 30.2% are up 2.5% from the fourth quarter 2012 level of 27.7%. The
impact of foreign exchange is the primary cause of improved margins compared to last year.
SELLING, DISTRIBUTION, GENERAL AND ADMINISTRATIVE, RESEARCH AND
DEVELOPMENT (“R&D”) EXPENSES AND NET LOSS (GAIN) ON SALE OF PROPERTY,
PLANT AND EQUIPMENT
Fourth quarter selling and distribution, general and administration and R&D expenses of $6,087,000
were 26.5% of net sales for the three months ended December 31, 2013, compared with an expense
of $5,562,000 in the previous quarter that was 24.7% of net sales and $5,566,000 which was 25.8% of
net sales in the fourth quarter of 2012. Selling and distribution expenses of $4,904,000 were up 10%
over the prior quarter and up 11.8% over the fourth quarter of 2012. Freight and courier expenses
account for over 25% of this increase with warehousing costs accounting for another 30% of the
increase. We do have some overlapping additional warehouse space as we settle into our new
warehousing location. The addition to our sales force along with special initiative sales programs
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Annual Report 2013 6
MANAGEMENT DISCUSSION AND ANALYSIS
accounts for another 30% of the increase. General and administrative expenses were up this quarter
as the company has increased its accrual for bad debts in this quarter by $150,000 in light of one of our
distributors having significant financial difficulties. Management feels it is likely that all of their
outstanding debt will be uncollectible as a result.
INCOME FROM OPERATING ACTIVITIES
Income from operating activities of $857,000 (3.7% of net sales) is up from the prior quarter of
$744,000 (3.3% of net sales) and up from the 2012 fourth quarter amount of $407,000 (1.8% of net
sales).
INTEREST
Fourth quarter interest expense of $100,000 was down 3.8% from the third quarter expense of
$104,000 and down 13.8% from the comparable period of the prior year of $116,000 as we continue to
reduce our external interest bearing debt.
FOREIGN EXCHANGE TRANSACTIONAL IMPACT
During the fourth quarter of 2013, the Company recognized a loss on transactional foreign exchange of
$10,000 compared to a gain of $78,000 in the three months ended December 31, 2012. In the fourth
quarter the US dollar opened at an exchange of $1.00 USD to $1.03 CDN and closed at $1.00 USD to
$1.0636 CDN. Most of our transactional exposure is in accounts payable and the impact of foreign
exchange movement in this direction creates transactional losses.
INCOME TAX EXPENSE
In the first three quarters of this year we had utilized an estimated combined tax rate for 2013 of 36%
which was based on last year’s actual combined rate. The actual combined rate for 2013 is 26.4% with
the year to date adjustment being booked in the fourth quarter. The net income tax expense in the
fourth quarter of 2013 was $3,000.
NET INCOME FOR THE PERIOD
Income for the fourth quarter ended December 31, 2013 was $755,000 (3.3% of net product sales) this
is up from $385,000 (1.7% return on net product sales) in the previous quarter and up from the fourth
quarter 2012 of $264,000 (1.2% return on net product sales).
FOREIGN EXCHANGE TRANSLATION OF FOREIGN OPERATIONS
The translation adjustment for the fourth quarter of 2013 was a gain of $320,000 compared to a
translation gain of $129,000 in the fourth quarter of 2012. The translation of our US entity is the primary
driver of this impact. In the fourth quarter of 2013 the US dollar opened at an exchange of $1.00 USD
to $1.03 CDN and closed at $1.00 USD to $1.0636 CDN which created most of the gain. In the fourth
quarter of 2012 the US dollar opened at an exchange of $1.00 USD to $0.983 CDN and closed at
$1.00 USD to $0.997 CDN which created most of that quarters gain.
TOTAL COMPREHENSIVE INCOME
Comprehensive income for the fourth quarter ended December 31, 2013 was $1,075,000 (4.7% of net
product sales) up from the 3 months ended December 31, 2012 of $394,000 (1.8% of net product
sales).
www.hammondmfg.com
Annual Report 2013 7
MANAGEMENT DISCUSSION AND ANALYSIS
QUARTERLY INFORMATION
FULL YEAR RESULTS
NET PRODUCT SALES
Net product sales of $92,314,000 in 2013 were flat compared to net sales of $92,425,000 reported in
2012. After last year’s strong rebound from the recession, North American markets retracted slightly.
Net product sales were down 2.9% in Canada while the US market, in local currency, was down over
2012 by 2.3%. The stronger US dollar provided a foreign exchange pickup that offset the down turn
and provided a flat year for the US market measured in Canadian dollars. Our European and Australia /
Asian markets saw continued growth with local currency growth of 15.9% and 13.8% respectively. The
overall change in these markets inclusive of foreign exchange provided an increase in European sales
of 17.8% and an increase in Australia / Asia of 10.1%. This was largely driven by volume.
GROSS PROFIT
In 2013, gross profit was 29.1% of net product sales compared to 27.4% achieved in 2012. The
majority of the gross profit levels can be attributed to the favorable foreign exchange impact along with
improved shop efficiencies.
www.hammondmfg.com
Annual Report 2013 8
Summary of Quarterly Financial Information(In thousands of Canadian dollars except earnings per share)Year-to-dateQ1Q2Q3Q4TotalNet product sales$23,718$23,138$22,489$22,969$92,314Income from operating activities1,051 1,105 744 857 3,757 Net income for the period536 582 385 755 2,258 Earnings per share$0.05$0.05$0.03$0.07$0.20- Basic & dilutedYear-to-dateQ1Q2Q3Q4TotalNet product sales$23,714$24,367$22,788$21,556$92,425Income from operating activities803 1,020 562 407 2,792 Net income for the period520 565 313 264 1,662 Earnings per share$0.05$0.05$0.03$0.02$0.15- Basic & dilutedNote: Interim consolidated financial statements have not been reviewed by an auditor.20122013
MANAGEMENT DISCUSSION AND ANALYSIS
SELLING, DISTRIBUTION, GENERAL AND ADMINISTRATIVE, RESEARCH AND
DEVELOPMENT (“R&D”) EXPENSES AND NET LOSS (GAIN) ON SALE OF PROPERTY,
PLANT AND EQUIPMENT
Selling, distribution, general and administration, R&D expenses including the net impact of the sale of
property, plant and equipment of $23,087,000 increased $544,000, or 2.4% from 2012. Selling and
distribution expenses of $18,457,000 increased 5.4% over 2012. We continue to position ourselves for
growth and have made additions to our salesforce in the US and Canada. We also added warehouse
space in Canada to accommodate the inventory growth we saw in 2012 that was being temporarily
stored in trailers. Our general and administrative expenses fell 5.4% over 2012 as restructuring
expenses incurred in 2012 were not repeated in 2013. Research and development activity was down
over 2012 and costs dropped $134,000.
INCOME FROM OPERATING ACTIVITIES
Overall, 2013 earnings from operating activities of $3,757,000 (4.1% of net product sales) is up
compared to the 2012 earnings of $2,792,000 (3.0% of net product sales).
INTEREST
Interest expense decreased $15,000 (3.4%) from the 2012 expense level to $422,000 in 2013. Overall
external debt continues to decline.
FOREIGN EXCHANGE TRANSACTIONAL IMPACT
A $194,000 foreign exchange transactional loss was reported in 2013, compared to a transactional
gain of $240,000 in 2012. Stronger foreign currencies have helped our sales numbers but for those
items we purchase in foreign currencies our expenses have risen throughout 2013.
INCOME TAX EXPENSE
During 2013 tax expenses of $812,000 were 26.5% of income before income tax. This compares to
2012 tax expense of $941,000 which was 36.1% of income before income tax.
NET INCOME FOR THE YEAR
Net income for the year ended December 31, 2013 was $2,258,000 (2.5% of net product sales) up
35.9% from $1,662,000 (1.8% of net product sales).
FOREIGN EXCHANGE TRANSLATION OF FOREIGN OPERATIONS
During 2013 a gain of $638,000 on translational foreign exchange was realized compared to a loss of
$137,000 in 2012. In 2013 the US dollar opened at an exchange of $1.00 USD to $0.997 CDN and
closed at $1.00 USD to $1.0636 CDN which created most of the gain. In 2012 the US dollar opened at
an exchange of $1.00 USD to $1.017 CDN and closed at $1.00 USD to $0.997 CDN which created
most of the loss.
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Annual Report 2013 9
MANAGEMENT DISCUSSION AND ANALYSIS
TOTAL COMPREHENSIVE INCOME
Comprehensive income for 2013 was $2,896,000 (3.1% of net product sales) up from 2012 of
$1,525,000 (1.6% of net product sales).
SELECTED ANNUAL INFORMATION
CAPITAL RESOURCES AND LIQUIDITY
Net cash generated from operating activities for 2013 was $3,596,000 (2012 - $2,197,000). Cash flows
from financing activities amounted to a usage of $1,890,000 (2012 – source of $434,000). Cash used
in investing activities was $1,320,000 (2012 - $2,843,000).
Trade and other receivables increased 3.0% at December 31, 2013 compared to the 2012 year-end.
Days sales outstanding (DSO) calculated on net sales was 50 days, down 2 days from 2012. The
quality of accounts receivable remains high. As noted earlier we did have to make an allowance for one
of our larger distributors who is in financial distress. This is a rare occurrence and not an industry issue.
We expect DSO to continue in the current range for 2014.
The year-end investment in inventory of $26,951,000 was an increase of 5.8% from the 2012 inventory
value of $25,464,000. Inventory turnover decreased to 2.59 from 2.78 (cost of sales divided by the
twelve month average inventory level). In order to achieve higher levels of customer satisfaction
inventory levels have been set to ensure our customer order fill rates are maintained or improved.
Trade and other payables increased by $248,000, or 2.8% over 2012 to $9,233,000.
Our total debt (long-term debt and bank indebtedness) decreased by $1,638,000 over the prior year to
$11,832,000. Our debt-to-equity ratio at year-end was approximately 0.35:1 (2012 - 0.44:1).
www.hammondmfg.com
Annual Report 2013 10
Three year financial summary:For the years ended December 31,(In thousands except per share amounts)Consolidated Statements of Comprehensive Income201320122011Net product sales92,314$ 92,425$ 85,487$ Income from operating activities3,7572,7922,921Net income for the year2,2581,6621,771Per share - basic & fully dilutednet earnings for the year$0.20$0.15$0.16Consolidated Statement of Financial Position201320122011Total assets56,115$ 54,721$ 51,913$ Total funded debt11,83213,47012,727Working capital20,41117,56116,772Net cash generated from operating activities3,5962,1971,744Dividends declared and paid226226226Shareholders' equity33,437 30,767 29,468
MANAGEMENT DISCUSSION AND ANALYSIS
The Company paid a dividend of $226,000 in April of 2013 (2012 - $226,000).
Property, plant, equipment and intangible asset additions in 2013 were $1,335,000 down from
$2,902,000 in 2012. The Company spent $215,000 (2012 - $103,000) on building and leasehold
improvements. $507,000 (2012 - $966,000) was invested toward upgrading and replacing machinery
and equipment, $153,000 (2012 - $874,000) was invested toward machinery and equipment for
capacity growth, $339,000 (2012 - $670,000) was invested in tooling, $104,000 (2012 - $207,000) was
invested in office equipment and $17,000 (2012 – $83,000) was spent on development costs.
The contractual obligations of the Company are detailed in the following table.
In addition to the contractual obligations above, the Company has current obligations of $215,000
(2012 - $348,000) against open purchase orders for outstanding capital expenditures. The Company
also has open purchase commitments with RITEC as at December 31, 2013 of $319,834 (2012 -
$416,390). These expenditures should be completed in the first half of 2014.
SHARE CAPITAL
As of March 28, 2014, 8,556,000 Class A subordinate voting shares and 2,778,300 Class B common
shares were issued and outstanding. The Company also has a management share option plan, with
no options currently outstanding.
ENVIRONMENTAL ISSUES
The Glen Ewing Property is a 50% co-tenancy with Hammond Power Solutions Inc. (HPSI) of the
vacant property located at 2 Glen Road, Georgetown. Soil contaminated by diesel oil, which is believed
to be related to site operations of prior owners, was discovered in 2000 and has been the focus of
investigations by our environmental consultant. The contamination does not result from the normal
operations of the Company. In January 2002, the adjoining property owner (whose lands were at one
time part of the same historical operation as 2 Glen Road) issued a statement of claim, claiming
damages from the Company and HPSI for the historical contamination found on its property. In August
of 2009, the adjoining property owner, the Company and HPSI (the parties) signed a settlement
outlining how the parties will work together on future management, including the remediation and
monitoring of the Substances of Interest on the Properties and the South Lands. The parties also
agreed on an approach to resolve future Ministry of the Environment (MOE) or other governmental
claims, orders, directions, prosecutions, tickets, and environmental penalties. As part of this settlement
all of the parties dropped their civil actions against each other.
The Company and HPSI, as co-tenants, have been working co-operatively with the adjacent property
owner and its environmental consultant, under the direction of the MOE, in order to evaluate the extent
of the contamination and develop an appropriate joint remediation plan for both sites. Ongoing
investigations have also indicated that both the co-tenancy’s and the adjacent owner’s sites have been
impacted by historical solvent usage. These impacts have been incorporated into the joint remediation
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Annual Report 2013 11
Contractual obligations(In thousands)Total20142015201620172018ThereafterLong-term debt974$ 195$ 195$ 195$ 195$ 194$ -$ Capital lease obligations1,042 601 70 71 75 78 147 Operating leases3,188 1,607 1,043 378 134 26 - Total contractual obligations5,204$ 2,403$ 1,308$ 644$ 404$ 298$ 147$
MANAGEMENT DISCUSSION AND ANALYSIS
plan. The Company’s share of expense for legal and consulting work for 2013 related to this property
was $136,000 (2012 - $33,000). The parties started remediation of the site in October 2009. The
Company has relied on its consultant’s best estimate for the remaining environmental remediation
costs. The Company’s remaining portion of environmental remediation costs for this site is $170,000
(2012 - $170,000) with $70,000 (2012 - $70,000) presented as a current liability in the financial
statements.
A statement of claim was issued on June 19, 2013, against the Company with respect to a property
once held by the Company. The claim alleges that contaminants originating from the property once
owned by the Company have migrated to a nearby, but not adjoining property owned by the claimants.
The amount of the claim is not fully known but includes $2,000,000 which is the estimated cost of
construction of a barrier and related expenses. At this point in time, there is no certainty that the
contaminants emanated from the property once owned by the Company. Furthermore, given the
nature of the claim, there remains significant uncertainty as to any costs to be incurred as a result of
the claim and accordingly management is unable to reasonably estimate any liability that may arise as
a result of this claim. As such, no amount has been recorded in these financial statements.
Other than the above noted sites, management is not aware of any unusual or significant
environmental issues.
CRITICAL ACCOUNTING ESTIMATES
In the preparation of the consolidated financial statements, it is necessary for management to make
some estimates and judgments that affect reported amounts in the financial statements and related
disclosure of contingencies. Management determines these estimates using historical experience,
assumptions and rationale that are believed to be reasonable in the circumstances. The Company
evaluates these on an ongoing basis in order to form the judgment for the carrying value of certain
assets and liabilities.
Specifically, the Company has assessed the property valuations related to the sites noted under
“Environmental Issues” in this MD&A and in the notes to the financial statements (note 8). Based on
this analysis, it is management’s judgment that the reported carrying values of these properties are
reasonable.
The value of goodwill related to the Company’s UK operations was reviewed by management and
tested for impairment in accordance with the guidelines set out in International Accounting Standard
36. Based on this analysis, it is management’s judgment that the reported carrying value for goodwill is
not impaired.
The environmental provision (note 12) has been established based on an analysis of cost estimates
related to expected activities required for active remediation for Glen Ewing Property. It is
management’s judgment that the reported carrying value for this provision, based on discounted cash
flows over five years, is a reasonable estimate of the Company’s share of these costs given information
available at this time, but acknowledges that this estimate is subject to future uncertainties.
Employee future health benefits (note 13) have been estimated based on eligible employees and
management’s best estimates of the utilization of these benefits on a specific employee basis. It is
management’s judgment that the reported carrying value for this provision, based on discounted cash
flows, is a reasonable estimate of the Company’s costs given information available at this time, but
acknowledges that this estimate is subject to future uncertainties.
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Annual Report 2013 12
MANAGEMENT DISCUSSION AND ANALYSIS
Inventory valuation (note 5) includes provisions for slow moving inventory using management’s
judgments based on inactivity of the specific parts. Management also reviews inventory values
compared to anticipated sales values and provides a provision for lower of cost or market.
Although these estimates, which form the basis for carrying values of reported assets, liabilities,
revenues and expenses, are based on reasonable assumptions, it should be noted that actual results
may differ from these estimates.
CONTROLS AND PROCEDURES
Disclosure controls and procedures are designed to provide reasonable assurance that all relevant
information is gathered and reported to management on a timely basis so that appropriate decisions
can be made regarding public disclosure.
The purpose of internal controls over financial reporting as defined by the Canadian Securities
Administrators is to provide reasonable assurance that:
(i)
financial statements prepared for external purposes are in accordance with the Company's
Generally Accepted Accounting Principles,
(ii) transactions are recorded as necessary to permit the preparation of financial statements, and
records are maintained in reasonable detail,
(iii) receipts and expenditures of the Company are made only in accordance with authorizations of
the Company's management and directors, and
(iv) unauthorized acquisitions, uses or dispositions of the Company's assets that could have a
material effect on the financial statements will be prevented or detected in order to prevent
material error in financial statements.
The Chief Executive Officer and the Chief Financial Officer have caused management and other
employees to design, document and evaluate our disclosure controls and procedures and our internal
controls over financial reporting. An evaluation of the design and operating effectiveness of the
disclosure controls and internal controls over financial reporting was conducted as at December 31,
2013. The design and evaluation of internal controls was completed using the framework and criteria
established in "Internal Control – Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on the evaluation, we have concluded that the
Company’s disclosure controls, procedures and our internal controls over financial reporting provide
reasonable assurance that material information relating to the Company are made known to the
Company by others, particularly during the period in which the annual filings are being prepared, that
information required to be disclosed by the Company in its annual filings, interim filings or other reports
filed or submitted by it under securities legislation is recorded, processed, summarized and reported
within the time periods specified in securities legislation, and reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with Canadian generally accepted accounting principles.
RISKS AND UNCERTAINTIES
As with most businesses, the Company is subject to a number of marketplace, industry and economic
related business risks, which could have some material impact on our operating results.
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Annual Report 2013 13
MANAGEMENT DISCUSSION AND ANALYSIS
These risks include:
• Key personnel;
• The cyclical effects, unpredictability and volatility of market driven commodity costs, raw
materials such as copper and steel pricing and supply and demand;
• A significant, unexpected change in the global demand for resources;
• The variability of the Canadian dollar versus the US dollar;
• Economic slowdown in the US and Canada;
• Rising interest rates;
• Trade restrictions;
•
Labour costs and labour relations;
• Competition; and
• Global political unrest.
The Company continuously works to minimize the negative impact of these risks and strengthen its
position through diversification of its core business, market channel expansion, geographic diversity of
its operations and business hedging strategies. There are, however, several risks that deserve
particular attention.
Key Personnel
The Company is dependent on the experience and industry knowledge of its executive officers and
other key employees to execute its business plan. If the Company were to experience a substantial
turnover in its leadership or other key employees, business results from operations and financial
condition could be materially adversely affected.
Commodity Prices
An area that has had a definite effect on the Company’s costs and earnings is the cyclical effects and
unprecedented market cost pressures of copper commodity and steel pricing in the global market. Due
to this unpredictability and volatility, particularly with copper pricing, the Company does not currently
utilize future contracts. Strategic supply line agreements and alliances are in place with our major steel
suppliers to ensure adequate supply and competitive market pricing.
Foreign Exchange
The Company’s operating results are reported in Canadian dollars. A significant portion of our sales is
denominated in US dollars. A change in the value of the Canadian dollar against the US dollar will
impact revenues and earnings. We have created a natural hedge as this is partially offset by a
corresponding change in the cost of materials purchased from the US and commodities tied to US
dollar pricing. In general, a lower value for the Canadian dollar compared to the US dollar will have a
beneficial impact on the Company’s results; or, inversely, a higher value for the Canadian dollar
compared to the US dollar will have a negative impact on the Company’s profitability. The Company
also has a US operating subsidiary and US dollar assets. The exchange rate between the Canadian
and US dollar can vary significantly from year to year. There is a corresponding positive or negative
impact to the Company’s Consolidated Statements of Comprehensive Income solely related to the
foreign exchange translation of its Consolidated Statements of Financial Position. We have partially
reduced the impact of foreign exchange fluctuations through increasing our US dollar driven
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Annual Report 2013 14
MANAGEMENT DISCUSSION AND ANALYSIS
manufacturing output. Finally, the Company periodically institutes price increases / reductions to help
offset the negative / positive impact of changes in foreign exchange and product cost increases /
decreases.
Interest Rates
Bank indebtedness makes up close to 83% of the company debt financing. The rates for this financing
are low but variable. The company is cognizant that a rise in interest rates will negatively impact the
financial results of the Company. The Company continuously reviews this strategy of hedging this risk
by fixing interest rates on part of its total debt.
North American Economy
We believe the North American economy has stabilized and we will see marginal sales growth in 2014.
Our efforts over the next 12 months will be on projects that will reduce our costs and improve our
manufacturing flexibility. We believe that being nimble as an organization will become even more
important in order to respond quickly to both unexpected opportunities as well as challenges. We also
believe that our growing access to a variety of markets both global and domestic through our OEM and
distributor channels will help the Company expand market share during an economic recovery.
OUTLOOK FACTORS FOR 2014
In 2013 we saw our larger markets stagnate. Our current market intelligence expects low market
growth in 2014. A stronger US dollar will provide us the opportunity to competitively price our products
and stimulate market share growth. The Company continues with the objective of sales growth and
increased market share but will weigh this against achieving acceptable margins.
Capital spending will continue to be focused on high impact projects as accommodated by cash flows.
Our primary focus continues to be on productivity and margin improvement.
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Annual Report 2013 15
MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING
The consolidated financial statements are the responsibility of the management of Hammond
Manufacturing Company Limited. These statements have been prepared in accordance with
International Financial Reporting Standards, using management’s best estimates and judgments,
where appropriate.
Management is responsible for the reliability and integrity of the consolidated financial statements, the
notes to the consolidated financial statements and other financial information contained in the report.
In the preparation of these statements, estimates are sometimes necessary because a precise
determination of certain assets and liabilities is dependent on future events. Management believes
such estimates have been based on careful judgment and have been properly reflected in the
accompanying consolidated financial statements.
Management is responsible for the maintenance of a system of internal controls designed to provide
reasonable assurance that the assets are safeguarded and that accounting systems provide timely,
accurate and reliable financial information.
The Board of Directors is responsible for ensuring that management fulfills its responsibilities for
financial reporting and internal control. The Board of Directors is assisted in exercising its
responsibilities through the Audit Committee of the Board, which is composed of three non-
management directors. The Audit Committee meets periodically with management and the auditors to
satisfy itself that management’s responsibilities are properly discharged, to review the consolidated
financial statements and to recommend approval of the consolidated financial statements to the Board
of Directors.
KPMG LLP, the independent auditors appointed by the shareholders, has audited the Company’s
consolidated financial statements in accordance with Canadian generally accepted auditing standards
and their report follows. The independent auditors have full and unrestricted access to the Audit
Committee to discuss their audit and related findings as to the integrity of the financial reporting
process.
R.F. Hammond
A. Stirling
Chairman & CEO
Secretary & CFO
Guelph, Ontario
March 28, 2014
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Annual Report 2013 16
INDEPENDENT AUDITORS’ REPORT
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Annual Report 2013 17
HAMMOND MANUFACTURING COMPANY LIMITED
The notes on pages 22 to 56 are an integral part of these consolidated financial statements.
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Annual Report 2013 18
Consolidated Statements of Financial Position(in thousands of Canadian dollars)As at December 31,Note20132012AssetsCurrent assets:Cash774$ 416$ Trade and other receivables4 & 2411,943 11,598 Inventories5 26,951 25,464 Prepaid expenses886 882 Total current assets40,554 38,360 Non-current assetsProperty, plant and equipment 6 13,868 14,749 Intangible assets and goodwill7 384 368 Investment property8 1,044 1,044 Equity investment9 265 200 Total non-current assets15,561 16,361 Total assets56,115$ 54,721$ LiabilitiesCurrent liabilities:Bank indebtedness10 9,816$ 10,833$ Trade and other payables11 & 249,233 8,985 Income taxes payable59 37 Provisions12 135 120 Employee future benefits13 104 101 Current portion of long-term debt10 796 723 Total current liabilities20,143 20,799 Non-current liabilitiesEmployee future benefits13 342 354 Long-term debt 10 1,220 1,914 Provisions12 100 100 Deferred tax liabilities14 873 787 Total non-current liabilities2,535 3,155 Total liabilities22,678 23,954 Equity:Share capital15 10,249 10,249 Contributed surplus290 290 Accumulated other comprehensive gain (loss)281 (357) Retained earnings22,617 20,585 Total equity33,437 30,767 Commitments16 & 17Contingency18 Subsequent event27 Total liabilities and equity56,115$ 54,721$
HAMMOND MANUFACTURING COMPANY LIMITED
The notes on pages 22 to 56 are an integral part of these consolidated financial statements.
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Annual Report 2013 19
Consolidated Statements of Comprehensive Income(in thousands of Canadian dollars, except earnings per share)For the Years Ended December 31,Note20132012Net product sales$ 92,314$ 92,425Cost of sales65,470 67,090 Gross profit26,844 25,335 Selling and distribution18,457 17,505 General and administrative4,408 4,662 Research and development227 361 Net loss (gain) on sale of property, plant and equipment(5) 15 Income from operating activities3,757 2,792 Interest expense 10(422) (437) Foreign exchange gain (loss)(194) 240 Net finance costs(616) (197) Share of profit of equity accounted investees 965 41 Share of expenses from investment property8(136) (33) Income before income tax3,070 2,603 Income tax expense19812 941 Net income for the year2,258 1,662 Other comprehensive income (loss):638 (137) Other comprehensive income (loss) for the year, net of income tax638 (137) Total comprehensive income for the year$ 2,896$ 1,525Earnings per shareBasic earnings per share20$ 0.20$ 0.15Diluted earnings per share20$ 0.20$ 0.15Foreign currency translation differences for foreign operations
HAMMOND MANUFACTURING COMPANY LIMITED
The notes on pages 22 to 56 are an integral part of these consolidated financial statements.
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Annual Report 2013 20
Consolidated Statements of Changes in EquityFor the years December 31, 2013 and December 31, 2012(in thousands of Canadian dollars) Share CapitalContributed SurplusAOCI**Retained earningsTotal equity Balance at January 1, 201210,249$ 290$ (220)$ 19,149$ 29,468$ Total comprehensive income for year: Net income for the year- - - 1,662 1,662 Other comprehensive loss: Foreign currency translation differences- - (137) - (137) Total comprehensive income (loss) for the year- - (137) 1,662 1,525 Transactions with owners, recorded directly in equityDividends to equity holders (note 15)- - - (226) (226) Balance at December 31, 201210,249$ 290$ (357)$ 20,585$ 30,767$ Balance at January 1, 201310,249$ 290$ (357)$ 20,585$ 30,767$ Total comprehensive income for year: Net income for the year- - - 2,258 2,258 Other comprehensive income: Foreign currency translation differences- - 638 - 638 Total comprehensive income for the year- - 638 2,258 2,896 Transactions with owners, recorded directly in equity:Dividends to equity holders (note 15)- - - (226) (226) Balance at December 31, 201310,249$ 290$ 281$ 22,617$ 33,437$ ** Accumulated other comprehensive income (loss)Attributable to equity holders of the Company
HAMMOND MANUFACTURING COMPANY LIMITED
The notes on pages 22 to 56 are an integral part of these consolidated financial statements.
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Annual Report 2013 21
Consolidated Statements of Cash Flows(in thousands of Canadian dollars)For the years ended December 31,20132012Cash flows from operating activitiesNet income for the year2,258$ 1,662$ Adjustments for: Depreciation of property, plant and equipment2,241 1,944 Amortization of intangible assets63 64 Interest expense422 437 Income tax expense812 941 Loss (gain) on sale of property plant and equipment (5) 15 Provisions and employee future benefits(8) 289 Equity investments(65) (23) 5,718 5,329 Change in non-cash working capital: Inventories(1,163) (2,443) Trade and other receivables32 66 Prepaid expenses9 (221) Trade and other payables 137 161 Cash generated (used) on operating activities4,733 2,892 Interest paid(422) (437) Income tax paid(715) (258) Net cash generated on operating activities3,596 2,197 Cash flows from financing activitiesBank indebtedness(1,042) 1,460 Payment of long-term debt(622) (1,368) Advances of long-term debt- 568 Payment of dividends(226) (226) Net cash from financing activities(1,890) 434 Cash flows from investing activitiesProceeds from sales of property, plant and equipment15 59 Acquisition of of property, plant and equipment(1,266) (2,819) Intangible asset additions(69) (83) Net cash used in investing activities(1,320) (2,843) Net increase (decrease) in cash386 (212) Cash at beginning of year416 633 Foreign exchange loss on cash and cash equivalents in a foreign currency(28) (5) Cash at end of year774$ 416$
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(tabular amounts (except share amounts) in thousands of Canadian dollars)
1) Reporting entity:
Hammond Manufacturing Company Limited (“HMCL” or the “Company”) is a public company
traded on the Toronto Stock Exchange under the symbol “HMM.A” and is incorporated under the
Ontario Business Corporations Act. The address of the Company’s registered office is 394
Edinburgh Road North, Guelph, Ontario. The consolidated financial statements of the Company as
at and for the year ended December 31, 2013 include the Company and its subsidiaries (together
referred to as the “Group” and individually as “Group entities”) and the Group’s interest in jointly
controlled entities. The Group primarily is involved in the design, manufacture and sale of electrical
and electronic components. Facilities are located in Canada, the US, the UK, Taiwan and Australia,
with agents and distributors located worldwide. The Company also maintains a 40% ownership
share of RITEC Enclosures Inc. (RITEC) located in Taiwan. RITEC produces plastic and die cast
enclosures for sale through the Company’s sales network and its own existing market channels.
2) Basis of preparation:
a) Statement of compliance:
These consolidated financial statements have been prepared in accordance with International
Financial Reporting Standards (IFRS).
The Board of Directors approved these consolidated financial statements on March 7, 2014.
b) Basis of measurement:
The consolidated financial statements have been prepared on the historical cost basis.
c) Functional and presentation currency:
The consolidated financial statements are presented in Canadian dollars. The functional
currency of the Group’s entities is the currency of their primary economic environment. In
individual companies, transactions in foreign currencies are recorded at the rate of exchange
at the date of the transaction. Monetary assets and liabilities in foreign currencies at the
reporting date are re-measured to the functional currency at the exchange rate at that date.
Any resulting exchange differences are taken to the statement of comprehensive income. Non-
monetary items that are measured in terms of historical cost in a foreign currency are
translated using the exchange rate at the date of the transaction. On consolidation, assets and
liabilities of Group entities reported in their functional currencies are translated into the
Canadian dollar, being the presentation currency, at the exchange rate on the reporting date.
The income and expenses of foreign operations are translated to Canadian dollars using
average exchange rates for the months during which the transactions occurred. Foreign
currency translation differences are recognized in other comprehensive income which is
included in the accumulated other comprehensive income account. The functional currency of
the Company’s subsidiary operations located in the US, UK, Taiwan and Australia are the US
dollar, the British Pound, Taiwan Dollar and the Australian Dollar respectively. The functional
currency of the Company’s Canadian operations is the Canadian Dollar.
d) Use of estimates:
The preparation of financial statements in conformity with IFRS requires management to make
estimates and assumptions that affect the application of accounting policies and the reported
amount of assets, liabilities, income and expense. Actual results may differ from these
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Annual Report 2013 22
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(tabular amounts (except share amounts) in thousands of Canadian dollars)
estimates. Revisions to accounting estimates are recognized in the period in which the
estimates are revised and in any future periods affected. Management periodically reviews its
estimates and underlying assumptions relating to the following items:
i) Amortization
Management makes estimates of the appropriate useful lives to be assigned to intangible
assets based on the individual circumstances of an acquisition. Management reviews the
appropriateness of the lives assigned and makes adjustments prospectively, where
necessary.
ii)
Impairment tests
Management makes estimates of sustainable earnings, future expected cash flows and
discount rates in the determination of the value-in-use or fair value less costs of disposal of
cash-generating units (“CGUs”).
iii) Provision against accounts receivable
Management makes estimates on the recoverability of accounts receivable balances
based on specific facts and circumstances as well as past experience of write-offs.
Changes in the economic conditions in which the Company’s customers operate and their
underlying financial stability may impact these estimates.
iv) Employee future benefits
Management estimates the discount rates, retirement age and future costs of benefits
associated with providing future employee benefits and exercises judgment to determine
how many employees will utilize these benefits.
v) Tax assets
Deferred tax assets and liabilities contain estimates about the nature and timing of future
permanent and temporary differences as well as the future tax rates that will apply to those
differences. Changes in tax laws and rates as well as changes to the expected timing of
reversals may have a significant impact on the amounts recorded for deferred tax assets
and liabilities. Management closely monitors current and potential changes to tax law and
bases its estimates on the best available information at each reporting date.
vi) Depreciation
Management estimates future residual values and the rate at which the useful lives of
property and equipment are consumed to determine appropriate depreciation charges.
Estimates of residual value and useful lives are based on data and information from
various sources, including vendors, industry practice and company-specific history.
Management reviews the appropriateness of the lives assigned and makes adjustments
prospectively, where necessary.
vii) Stock options
Management makes estimates with respect to risk-free rates of return, expected volatility,
expected dividends, expected life of options, expected forfeitures and future market
conditions to calculate the fair value of stock options.
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Annual Report 2013 23
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(tabular amounts (except share amounts) in thousands of Canadian dollars)
viii) Property value
Management estimates the value of the investment property to assess if an impairment
has occurred. The estimate is made by reviewing local land prices and current sales of
similar properties as well as property tax value assessment.
ix) Environmental remediation:
Management estimates the value to complete the remediation project on the Glen Ewing
Property each year by reviewing the project status and activities still to be completed. Any
changes to the project scope are updated in the cost estimation model and any change in
the required reserve is booked in the current year.
x) Sales returns:
Management estimates the value of product that will be returned based on a historical
analysis. Any change to the estimate is recorded as a reduction of revenue in the current
period.
e) Use of judgments:
The preparation of financial statements in conformity with IFRS requires management to make
judgments that affect the application of accounting policies and the interpretation of accounting
standards. Management periodically reviews its judgments and underlying assumptions
relating to the following items:
i) Provision for claims
Judgment is exercised in deciding whether a liability for a claim meets the criteria of a
present obligation and in assessing the probability of the outflow of economic resources.
ii) Lease classification
The Company enters into leases for premises and operating equipment that may be
classified as operating or finance leases. Management exercises judgement to determine
whether substantially all the risks and rewards incidental to ownership have been
transferred to the Company.
iii) Impairment tests
Management exercises judgment to determine whether there are factors that would
indicate that an asset or a CGU is impaired. The determination of CGUs is also based on
management’s judgment and is an assessment of the smallest group of assets that
generate cash inflows independently of other assets. Factors considered include whether
an active market exists for the output produced by the asset or group of assets as well as
how management monitors and makes decisions about the Company’s operations.
iv) Intangible assets
Management exercises judgment to determine whether identifiable intangible assets were
acquired in a business combination, separate from goodwill and whether they will provide
future economic benefits to the Company.
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Annual Report 2013 24
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(tabular amounts (except share amounts) in thousands of Canadian dollars)
3) Summary of significant accounting policies:
Except for the changes explained in “new standards and interpretations adopted” below, the
accounting policies set out below have been applied consistently to all periods presented in these
consolidated financial statements. These accounting policies have been consistently applied by all
Group entities.
a) Basis of consolidation:
The consolidated financial statements include the accounts of Hammond Manufacturing
Company Limited, its wholly owned subsidiaries, Hammond Manufacturing Company Inc.,
Hammond Electronics Limited, Hammond Electronics PTY Ltd., Les Fabrications Hammond
(Quebec) Inc., Hammond Electronics Asia Inc, and its proportionate share of the Glen Ewing
Property, an unincorporated co-tenancy (50%). All significant intercompany balances and
transactions have been eliminated on consolidation. The consolidated financial statements
include the investment in RITEC, which are accounted for using the equity method.
b) Revenue recognition:
The Company recognizes revenue on product sales and services at the time the products are
shipped or services rendered to customers, when the customer takes ownership and assumes
risk of loss, collection of the relevant receivable is probable, persuasive evidence of an
arrangement exists and the sales price is fixed or determinable. A provision for sales returns is
recognized when the underlying products or services are sold. The provision is based on
historical returns data and a weighting of all possible outcomes against their associated
probabilities.
c)
Inventories:
Inventories are valued at the lower of cost, determined on a first-in, first-out basis and net
realizable value, and includes expenditures incurred in acquiring the inventories, production or
conversion costs and other costs incurred in bringing them to their existing location and
condition. In the case of manufactured inventories and work in progress, costs include an
appropriate share of production overheads based on normal operating capacity. Net realizable
value is the estimated selling price in the ordinary course of business, less the estimated costs
of completion and selling expenses. When circumstances that previously gave rise to an
inventory write down no longer exist, the previous impairment is reversed.
d)
Investment property:
Investment property is property held either to earn rental income or for capital appreciation or
for both, but not for sale in the ordinary course of business, use in the production or supply of
goods or services or for administrative purposes. The Group measures its investment property,
being the land held by Glen Ewing Property, at historical cost.
e) Property, plant and equipment:
Property, plant and equipment are shown in the statements of financial position at their
historical cost. Cost includes expenditure that is directly attributable to the acquisition of the
asset. The cost of self-constructed assets includes the cost of materials and direct labour, any
other costs directly attributable to bringing the assets to a working condition for their intended
use, the costs of dismantling and removing the items and restoring the site on which they are
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Annual Report 2013 25
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(tabular amounts (except share amounts) in thousands of Canadian dollars)
located, and borrowing costs on qualifying assets. Purchased software that is integral to the
functionality of the related equipment is capitalized as part of that equipment. When parts of an
item of property, plant and equipment have different useful lives, they are accounted for as
separate items (major components) of property, plant and equipment. Depreciation is provided
on components that have homogenous useful lives by using the straight-line method so as to
depreciate the initial cost down to the residual value over the estimated useful lives.
The depreciation rates based on the estimated useful lives for the current and comparative
periods are as follows:
Asset
Rate
Buildings
Office equipment
Machinery and equipment
Tooling general use
Tooling specific part
2.5% – 5%
10% - 25%
10% - 25%
10% - 25%
Based on anticipated life output
Machinery and equipment under capital lease is initially recorded at the present value of
minimum lease payments at the inception of the lease and amortized over the shorter of the
lease term and their useful lives.
Depreciation methods, useful lives and residual values are reviewed at each financial year-end
and adjusted, if appropriate.
f)
Intangible assets other than goodwill:
Intangible assets are stated at cost less accumulated amortization. Intangible assets with a
finite life are amortized using the straight-line method at rates calculated to amortize the cost of
these assets over their estimated useful lives.
Amortization rates are as follows:
Asset
Computer software
Development costs
Rate
20%
20%
g)
Investments measured using equity method:
The Company uses the equity method as a basis of accounting for investments in companies
over which it exercises significant influence or joint control. Under the equity method, the
Company records these investments initially at cost and the carrying values are adjusted
thereafter to include the Company's pro rata share of post-acquisition earnings of the
investees, computed by the consolidation method. The adjustments are included in the
determination of net income by the Company, and the investment accounts of the Company
are also increased or decreased to reflect the Company's share of capital transactions
(including amounts recognized in other comprehensive income). Profit distributions received
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Annual Report 2013 26
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(tabular amounts (except share amounts) in thousands of Canadian dollars)
from investees reduce the carrying values of the investments. Unrealized intercompany gains
or losses are eliminated.
The Company’s determination of significant influence is based on consideration of voting
interest in the investees along with other indicators such as representation on the board of
directors, participation in policy-making processes, material intercompany transactions,
interchange of managerial personnel or provision of technical information. The Company uses
the equity method to account for its 40% interest in RITEC.
h)
Income taxes:
The Company uses the asset and liability method of accounting for income taxes. Under the
asset and liability method, deferred income tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted or substantively enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the date of enactment or substantive
enactment. A deferred tax asset is recognized for unused tax losses, tax credits and deductible
temporary differences, to the extent that it is probable that future taxable profits will be
available against which they can be utilized. Deferred tax assets are reviewed at each reporting
date and are reduced to the extent that it is no longer probable that the related tax benefit will
be realized.
i) Goodwill:
Acquisitions on or after January 1, 2010, are accounted for using the acquisition method
required by IFRS 3. Goodwill is the residual amount that results when the purchase price of an
acquired business exceeds the sum of the amount allocated to the identifiable assets acquired,
less liabilities assumed based on their fair values. Goodwill is allocated as of the date of the
business combination to the Company’s cash generating units that are expected to benefit
from the synergies of the business combination. As part of its transition to IFRS, the Company
elected to restate only those business combinations that occurred on or after January 1, 2010.
In respect of acquisitions prior to January 1, 2010, goodwill represents the amounts recognized
under previous Canadian GAAP.
Goodwill is tested for impairment at least annually and upon the occurrence of an indication of
impairment. The impairment tests are performed at the cash generating unit (CGU) level. The
Group defines it CGUs based on the way it monitors and derives economic benefits from the
acquired goodwill and intangibles. The impairment tests are performed by comparing the
carrying value of the assets of these CGUs with the greater of its value in use and its fair value
less costs to sell. The value in use is based on their future projected cash flows discounted to
the present value at an appropriate pre-tax discount rate. Usually, the cash flows correspond to
estimates made by Group management in financial and strategic business plans covering a
period of five years. They are then projected beyond five years using a steady or declining
growth rate given that the Group businesses are of a long-term nature. The discount rate used
approximates the Company’s weighted average cost of capital. The business risk is included in
the determination of the cash flows. Both the cash flows and the discount rates exclude
inflation. An impairment loss in respect of goodwill is never subsequently reversed. The Group
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Annual Report 2013 27
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(tabular amounts (except share amounts) in thousands of Canadian dollars)
completed its annual impairment test at December 31, 2013 and December 31, 2012, and
concluded there was no impairment.
j) Provisions:
Provisions may include liabilities of uncertain timing or amounts that arise from environmental,
litigation, commercial or other risks. Provisions are recognized when a legal or constructive
obligation exists stemming from a past event and when the future cash outflows can be reliably
estimated. Provisions are determined by discounting the expected future cash flows at a pre-
tax rate that reflects the current market assessments of the time value of money and the risks
specific to the liability. Environmental provisions consider the present value of the anticipated
clean-up costs.
k) Earnings per share:
Basic earnings per share are computed by dividing net earnings by the weighted average
shares outstanding during the reporting period. Diluted earnings per share are computed
similar to basic earnings per share except that the weighted average shares outstanding are
increased to include additional shares from the assumed exercise of stock options, if dilutive.
The number of additional shares is calculated by assuming that outstanding stock options were
exercised and that the proceeds from such exercises were used to acquire shares of common
stock at the average market price during the reporting period.
l) Financial instruments:
The Company aggregates its financial instruments into classes based on their nature and
characteristics. The Group has classified its financial instruments as follows:
• Cash is classified as loans and receivables
• Trade and other receivables are classified as loans and receivables
• Bank indebtedness, trade and other payables and long-term debt are classified as
other liabilities.
m) Financial assets and financial liabilities:
All financial assets and financial liabilities are initially recognized at fair value plus directly
attributable transaction costs, unless the transaction costs relate to financial instruments
classified as fair value through profit and loss, in which case they are expensed immediately.
Subsequent measurement is determined based on initial classification.
The Group uses trade date accounting for regular-way purchases and sales of financial assets.
i) Loans and receivables:
Loans and receivables are non-derivative financial assets with fixed or determinable
payments that are not quoted in an active market. This category includes cash, trade and
other receivables. Subsequent to initial measurement, loans and receivables are carried at
amortized cost using the effective interest rate method less appropriate allowances for
doubtful receivables. Allowance for doubtful receivables represent the Group’s estimates
of losses that could arise from the failure or inability of customers to make payments when
due. Loans and receivables are further classified as current and non-current depending
whether these will be realized within twelve months after the balance sheet date or beyond.
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Annual Report 2013 28
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(tabular amounts (except share amounts) in thousands of Canadian dollars)
ii) Other liabilities:
This category includes bank indebtedness, accounts payable and accrued liabilities and
long-term debt. Subsequent to initial measurement, other liabilities are carried at amortized
cost using the effective interest rate method.
n)
Impairment:
i) Financial assets:
A financial asset not carried at fair value through profit or loss is assessed at each
reporting date to determine whether there is objective evidence that it is impaired. A
financial asset is impaired if objective evidence indicates that a loss event has occurred
after the initial recognition of the asset, and that the loss event had a negative effect on the
estimated future cash flows of that asset that can be estimated reliably.
Objective evidence that financial assets are impaired can include default or delinquency by
a debtor, restructuring of an amount due to the Group on terms that the Group would not
consider otherwise, indications that a debtor or issuer will enter bankruptcy, or the
disappearance of an active market for a security. In addition, for an investment in an equity
security, a significant or prolonged decline in its fair value below its cost is objective
evidence of impairment.
The Group considers evidence of impairment for receivables at both a specific asset and
collective level. All individually significant receivables are assessed for specific impairment.
All individually significant receivables found not to be specifically impaired are then
collectively assessed for any impairment that has been incurred but not yet identified.
Receivables that are not individually significant are collectively assessed for impairment by
grouping together receivables with similar risk characteristics.
In assessing collective impairment the Group uses historical trends of the probability of
default, timing of recoveries and the amount of loss incurred, adjusted for management’s
judgment as to whether current economic and credit conditions are such that the actual
losses are likely to be greater or less than suggested by historical trends.
An impairment loss in respect of a financial asset measured at amortized cost is calculated
as the difference between its carrying amount and the present value of the estimated
future cash flows discounted at the asset’s original effective interest rate. Losses are
recognized in profit or loss and reflected in an allowance account against receivables.
Interest on the impaired asset continues to be recognized through the unwinding of the
discount. When a subsequent event causes the amount of impairment loss to decrease,
the decrease in impairment loss is reversed through profit or loss.
ii) Non-financial assets:
The carrying amounts of the Group’s non-financial assets are reviewed at each reporting
date to determine whether there is any indication of impairment. If any such indication
exists, then the asset’s recoverable amount is estimated. For goodwill, and intangible
assets that have indefinite useful lives or that are not yet available for use, the recoverable
amount is estimated each year at the same time.
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Annual Report 2013 29
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(tabular amounts (except share amounts) in thousands of Canadian dollars)
The recoverable amount of an asset or CGU is the greater of its value in use and its fair
value less costs to sell. In assessing value in use, the estimated future cash flows are
discounted to their present value using a pre-tax discount rate that reflects current market
assessments of the time value of money and the risks specific to the asset. For the
purpose of impairment testing, assets that cannot be tested individually are grouped
together into the smallest group of assets that generates cash inflows from continuing use
that are largely independent of the cash inflows of other assets or groups of assets. For
the purposes of goodwill impairment testing, goodwill acquired in a business combination
is allocated to the CGU, or the group of CGUs, that is expected to benefit from the
synergies of the combination. This allocation is subject to an operating segment ceiling test
and reflects the lowest level at which that goodwill is monitored for internal reporting
purposes.
The Group’s corporate assets do not generate separate cash inflows. If there is an
indication that a corporate asset may be impaired, then the recoverable amount is
determined for the CGU to which the corporate asset is allocated.
An impairment loss is recognized if the carrying amount of an asset or its CGU exceeds its
estimated recoverable amount. Impairment losses are recognized in profit or loss.
Impairment losses recognized in respect of CGUs are allocated first to reduce the carrying
amount of any goodwill allocated to the units, and then to reduce the carrying amounts of
the other assets in the unit (group of units) on a pro rata basis.
An impairment loss in respect of goodwill is not reversed. In respect of other assets,
impairment losses recognized in prior periods are assessed at each reporting date for any
indications that the loss has decreased or no longer exists. An impairment loss is reversed
if there has been a change in the estimates used to determine the recoverable amount. An
impairment loss is reversed only to the extent that the asset’s carrying amount does not
exceed the carrying amount that would have been determined, net of depreciation or
amortization, if no impairment loss had been recognized.
Goodwill that forms part of the carrying amount of an investment in an associate is not
recognized separately, and therefore is not tested for impairment separately. Instead, the
entire amount of the investment in an associate is tested for impairment as a single asset
when there is objective evidence that the investment in an associate may be impaired.
o) Employee Benefits:
i) Defined contribution plans:
A defined contribution plan is a post-employment benefit plan under which an entity pays
fixed contributions into a separate entity and will have no legal or constructive obligation to
pay further amounts. Obligations for contributions to defined contribution pension plans are
recognized as an employee benefit expense in the periods during which services are
rendered by the employees. Prepaid contributions are recognized as an asset to the extent
that a cash refund or a reduction in future payments is available.
ii) Other long-term employee benefits:
The Group’s net obligation in respect of long-term employee benefits, other than pension
plans, is the amount of future benefit that employees have earned in return for their service
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Annual Report 2013 30
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(tabular amounts (except share amounts) in thousands of Canadian dollars)
in the current and prior periods; that benefit is discounted to determine its present value
and the fair value of any related assets is deducted. Any actuarial gains and losses are
recognized in profit or loss in the period in which they arise.
iii) Termination benefits:
Termination benefits are recognized as an expense when the Group is committed
demonstrably, without realistic possibility of withdrawal, to a formal detailed plan to either
terminate employment before the normal retirement date, or to provide termination benefits
as a result of an offer made to encourage voluntary redundancy. Termination benefits for
voluntary redundancies are recognized as an expense if the Group has made an offer of
voluntary redundancy, it is probable that the offer will be accepted, and the number of
acceptances can be estimated reliably. If benefits are payable more than 12 months after
the reporting period, then they are discounted to their present value.
iv) Short-term employee benefits:
Short-term employee benefit obligations are measured on an undiscounted basis and are
expensed as the related service is provided. A liability is recognized for the amount
expected to be paid under short-term cash bonus or profit-sharing plans if the Group has a
present legal or constructive obligation to pay this amount as a result of past service
provided by the employee, and the obligation can be estimated reliably.
v) Share-based payment transactions:
The grant date fair value of share-based payment awards granted to employees is
recognized as an employee expense, with a corresponding increase in contributed surplus
in equity, over the period that the employees unconditionally become entitled to the
awards. The amount recognized as an expense is adjusted to reflect the number of awards
for which the related service and non-market vesting conditions are expected to be met,
such that the amount ultimately recognized as an expense is based on the number of
awards that do meet the related service and non-market performance conditions at the
vesting date. For share-based payment awards with non-vesting conditions, the grant date
fair value of the share-based payment is measured to reflect such conditions and there is
no true up for differences between expected and actual outcomes. Share-based payment
arrangements in which the Group receives goods or services as consideration for its own
equity instruments are accounted for as equity-settled share-based payment transactions,
regardless of how the equity instruments are obtained by the Group.
p) Segment reporting:
The continuing operations of the Company are in one operating segment, electrical and
electronic components.
q) Finance costs:
Finance costs consist of interest on borrowings and finance leases.
r) New standards and interpretations adopted:
IFRS 10 - Consolidation - requires an entity to consolidate an investee when it is exposed, or
has rights, to variable returns from its involvement with the investee and has the ability to affect
those returns through its power over the investee. Under existing IFRS, consolidation is
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Annual Report 2013 31
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(tabular amounts (except share amounts) in thousands of Canadian dollars)
required when an entity has the power to govern the financial and operating policies of an entity
so as to obtain benefits from its activities. IFRS 10 replaces SIC-12 Consolidation—Special
Purpose Entities and parts of IAS 27 Consolidated and Separate Financial Statements. The
Company assessed its consolidated conclusions on January 1, 2013 and determined that the
adoption of IFRS 10 did not result in any change in the consolidation status of any of its
subsidiaries.
IFRS 11 - Joint arrangements – effective for interim and annual financial statements relating to
fiscal years beginning on or after January 1, 2013, IFRS 11 requires a venturer to classify its
interest in a joint arrangement as a joint venture or joint operation. Joint ventures will be
accounted for using the equity method of accounting whereas for a joint operation the venture
will recognize its share of the assets, liabilities, revenue and expenses of the joint operation.
Under existing IFRS, entities have the choice to proportionately consolidate or equity account
for interests in joint ventures. IFRS 11 supersedes IAS 31, Interests in Joint Ventures, and
SIC-13, Jointly Controlled Entities Non-monetary Contributions by Venturers. The adoption of
IFRS 11 did not have an impact on the Company.
IFRS 12 - Disclosure of interests in other entities - establishes disclosure requirements for
interests in other entities, such as joint arrangements, associates, special purpose vehicles
and off balance sheet vehicles. The standard carries forward existing disclosures and also
introduces significant additional disclosure requirements that address the nature of, and risks
associated with, an entity’s interests in other entities. This standard is effective for annual
periods beginning on or after January 1, 2013. The adoption of IFRS 12 did not have an impact
on the Company.
IFRS 13 - Fair value measurement - is a comprehensive standard for fair value measurement
and disclosure requirements for use across all IFRSs. The new standard clarifies that fair value
is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. It also establishes
disclosures about fair value measurement. Under existing IFRS, guidance on measuring and
disclosing fair value is dispersed among the specific standards requiring fair value
measurements and in many cases does not reflect a clear measurement basis or consistent
disclosures. IFRS 13 is effective for annual periods beginning on or after January 1, 2013. The
adoption of IFRS 13 did not require any adjustments to the valuation techniques used by the
Company to measure fair value and did not result in any measurement adjustments as at
January 1, 2013.
("IASB")
issued Recoverable Amount Disclosures
Amendments to IAS 36 - Recoverable Amount Disclosures for Non-Financial Assets - The
Company has decided to adopt early the amendment to IAS 36, Recoverable Amount
Disclosures for Non-Financial Assets. In May 2013, the International Accounting Standards
Board
for Non-Financial Assets
(Amendments to IAS 36). The IASB has issued amendments to reverse the unintended
requirement in IFRS 13, Fair Value Measurement, to disclose the recoverable amount of every
CGU to which significant goodwill or indefinite-lived intangible assets have been allocated.
Under the amendments, recoverable amount is required to be disclosed only when an
impairment loss has been recognized or reversed. The amendments impact certain disclosure
requirements only and the amendments did not have a material impact on the consolidated
financial statements.
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Annual Report 2013 32
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(tabular amounts (except share amounts) in thousands of Canadian dollars)
s) New standards and interpretations not yet adopted:
The International Accounting Standards Board ("IASB") and International Financial Reporting
Interpretations Committee ("IFRIC") issued the following standards that have not been applied
in preparing these Consolidated Financial Statements as their effective dates fall within annual
periods beginning subsequent to the current reporting period.
The Company has not assessed the impact that the new and amended standards will have on
its consolidated financial statements.
IFRS 9 Financial Instruments ("IFRS 9 (2009)"), was issued in November 2009 and introduces
new requirements for the classification and measurement of financial assets. Under IFRS 9
(2009), financial assets are classified and measured based on the business model in which
they are held and the characteristics of their contractual cash flows, resulting in two primary
measurement categories for financial assets, amortized cost and fair value through profit and
loss. IFRS 9 (2010) introduces additional changes related to financial liabilities. IFRS 9 (2013)
introduces a more principles-based general hedging model that aligns hedge accounting more
closely with risk management. The IASB currently has an active project to make limited
amendments to the classification and measurement requirements of IFRS 9 that proposes to
introduce another measurement category, fair value through other comprehensive income for
financial assets that are held for both the collection of cash flows and for sale, and add new
requirements to address the impairment of financial assets and macro hedge accounting.
With the release of IFRS 9 (2013), the mandatory effective date for IFRS 9 of January 1, 2015
has been removed. A new mandatory effective date will be determined once the limited
amendments to the classification and measurement requirements and the impairment
requirements for IFRS 9 are finalized, although early adoption is permitted. Where an entity
adopts IFRS 9, it will also have an accounting policy choice to defer application of the general
hedge accounting model until the standard resulting from the IASB's project on macro hedge
accounting is effective.
The Company does not intend to adopt IFRS 9 at this time but continues to monitor the
individual phases of this IASB project. The extent of the impact of adoption of IFRS 9 has not
yet been determined.
Amendments to IAS 32, Offsetting Financial Assets and Liabilities, clarify that an entity
currently has a legally enforceable right to set-off if that right is:
•
•
not contingent on a future event; and
enforceable both in the normal course of business and in the event of default,
insolvency or bankruptcy of the entity and all counterparties.
The amendments to IAS 32 also clarify when a settlement mechanism provides for net
settlement or gross settlement that is equivalent to net settlement. The Company intends to
adopt the amendments to IAS 32 in its consolidated financial statements for the annual period
beginning January 1, 2014. The Company does not expect the amendments to have a material
impact on the consolidated financial statements.
In December 2013, the IASB published annual Improvements to IFRS. These amendments
were made to clarify the following in their respective standards:
• Definition of "vesting condition" in IFRS 2, Share-based payment;
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Annual Report 2013 33
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(tabular amounts (except share amounts) in thousands of Canadian dollars)
• Classification and measurement of contingent consideration; and scope exclusion for
the formation of joint arrangements in IFRS 3, Business Combinations;
• Disclosures on the aggregation of operating segments in IFRS 8, Operating segments;
• Measurement of short-term receivables and payables; and scope of portfolio exception
in IFRS 13, Fair Value Measurement;
• Restatement of accumulated depreciation (amortization) on revaluation in IAS 16,
Property, Plant and Equipment and IAS 38, Intangible Assets;
• Definition of "related party" in IAS 24, Related Party Disclosures; and Inter-relationship
of IFRS 3 and IAS 40 in IAS 40, Investment Property.
Special transitional requirements have been set for amendments to IFRS 2, IAS 16, IAS 38
and IAS 40.
The Company intends to adopt these amendments in its consolidated financial statements for
the annual period beginning January 1, 2014. The Company does not expect the amendments
to have a material impact on the consolidated financial statements.
4) Trade and other receivables:
The Group’s exposure to credit and currency risks, and impairment losses related to trade and
other receivables is disclosed in note 24.
5)
Inventories:
In 2013, raw materials, consumables and changes in finished goods and work in progress
recognized as cost of sales amounted to approximately $65,470,000 (2012 - $67,090,000). In
2013, the write-down of inventories to net realizable value amounted to approximately $547,000
(2012 - $84,000). The write-down is included in cost of sales.
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Annual Report 2013 34
December 31, 2013December 31, 2012Trade receivables$ 11,798$ 10,998Employee receivables14 12 Other receivables469 767 12,281 11,777 Allowance for doubtful accounts(338) (179) Trade and other receivables$ 11,943$ 11,598December 31, 2013December 31, 2012Raw materials and work-in-process$ 6,895$ 6,977Finished goods20,056 18,487 Inventories$ 26,951$ 25,464Inventories carried at fair value less cost to sell$ 1,078$ 920
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(tabular amounts (except share amounts) in thousands of Canadian dollars)
6) Property plant and equipment:
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Annual Report 2013 35
Cost Land and buildings Machinery and equipment Tooling Office equipment Total Balance at December 31, 20118,386$ 32,256$ 8,444$ 4,871$ 53,957$ Additions103 1,847 667 203 2,820 Disposals- (520) (439) (58) (1,017) Effect of movements in exchange rates- (3) - 2 (1) Balance at December 31, 20128,489$ 33,580$ 8,672$ 5,018$ 55,759$ Reclass119$ -$ -$ (119)$ -$ Additions215 661 339 51 1,266 Disposals- (178) (927) - (1,105) Effect of movements in exchange rates6 93 232 23 354 Balance at December 31, 20138,829$ 34,156$ 8,316$ 4,973$ 56,274$ Accumulated depreciation Land and buildings Machinery and equipment Tooling Office equipment Total Balance at December 31, 20114,573$ 24,317$ 6,745$ 4,369$ 40,004$ Depreciation for the year187 1,305 309 143 1,944 Disposals- (447) (439) (58) (944) Effect of movements in exchange rates- 9 (6) 3 6 Balance at December 31, 20124,760$ 25,184$ 6,609$ 4,457$ 41,010$ Reclass27$ 17$ (17)$ (27)$ -$ Depreciation for the year186 1,442 471 142 2,241 Disposals- (178) (917) - (1,095) Effect of movements in exchange rates4 50 179 17 250 Balance at December 31, 20134,977$ 26,515$ 6,325$ 4,589$ 42,406$ Carrying amounts Land and buildings Machinery and equipment Tooling Office equipment Total At December 31, 20123,729$ 8,396$ 2,063$ 561$ 14,749$ At December 31, 20133,852$ 7,641$ 1,991$ 384$ 13,868$
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(tabular amounts (except share amounts) in thousands of Canadian dollars)
7)
Intangible assets and goodwill:
All the intangible assets have been externally acquired.
Impairment testing for cash-generating units:
The Company has defined its cash generating units as each individual legal entity, due to the fact
that each location is largely independent of the other entities and each is ultimately responsible for
sales generated in their markets. The Company monitors the performance of each legal entity
through the use of profitability analysis based on the most recent business plan in place as of
December 31, 2013.
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Annual Report 2013 36
CostGoodwillComputer softwareDevelopment costsTotalBalance at December 31, 2011105$ 2,053$ 104$ 2,262$ Additions- 45 38 83 Disposal- (69) - (69) Effect of movement in exchange rates2 (1) - 1 Balance at December 31, 2012107$ 2,028$ 142$ 2,277$ Additions-$ 52$ 17$ 69$ Disposal- (32) - (32) Effect of movement in exchange rates10 4 - 14 Balance at December 31, 2013117$ 2,052$ 159$ 2,328$ Amortization and impairment lossesGoodwillComputer softwareDevelopment costs Total Balance at December 31, 2011-$ 1,876$ 40$ 1,916$ Amortization for the year- 43 21 64 Disposal- (69) - (69) Effect of movement in exchange rates- (2) - (2) Balance at December 31, 2012-$ 1,848$ 61$ 1,909$ Amortization for the year-$ 40$ 23$ 63$ Disposal- (32) - (32) Effect of movement in exchange rates- 4 - 4 Balance at December 31, 2013-$ 1,860$ 84$ 1,944$ Carrying amountsGoodwillComputer software Development costs Total At December 31, 2012107$ 180$ 81$ 368$ At December 31, 2013117$ 192$ 75$ 384$
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(tabular amounts (except share amounts) in thousands of Canadian dollars)
Impairment testing for cash-generating units containing goodwill:
The Company performed an impairment test on the goodwill of its UK entity using the value in use
method, under which a five year present value cash flow projection was completed using the
Hammond Electronics Limited weighted average pre-tax cost of capital of 6.5%. The cash flow
model also incorporated growth rates in the range of 3% – 5% depending on the market location
and the facility’s operating history. This was then compared to the carrying value of the facility’s
assets, including goodwill, to determine if there was impairment. Effective December 31, 2012 and
December 31, 2013, the assets, including goodwill of $117,000 (2012 – $107,000), of the
Company’s wholly owned subsidiary, Hammond Electronics Limited, were tested and no
impairment was found.
8)
Investment property:
The Group has a 50% ownership of a property in Georgetown, Ontario (referred to as the Glen
Ewing Property). It is a vacant plot of land and currently under environmental remediation. The
property value represents the actual historical cost of the property from the mid 1990’s.
Management has reviewed the property and local market conditions as well as the environmental
condition of the property in estimating the property’s fair value. Management estimates its interest
in the property’s fair market value to be approximately $1,250,000. This estimate is unchanged
from December 31, 2012. No independent valuation has been performed. The property is
currently vacant and no income is being derived from it. The Company’s direct operating expenses
in 2013 related to the property were $136,000 (2012 - $33,000).
9) Equity investment
Since 2008 the Company has had 40% ownership of RITEC Enclosures Inc. All dividends paid
since taking the 40% holding in 2008 have been loaned back to RITEC Enclosures Inc. as an
interest free shareholder loan.
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Annual Report 2013 37
TotalDecember 31, 2011$ 177Equity in earnings41Dividend received(18) December 31, 2012$ 200Equity in earnings65December 31, 2013$ 265RITEC Enclosures Inc. 40% Ownership
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(tabular amounts (except share amounts) in thousands of Canadian dollars)
10) Loans and borrowings:
Bank indebtedness:
Bank indebtedness is due on demand and secured by inventories, a general assignment of trade
receivables and a charge on specific assets of the Company. The Company has established
operating lines for the entities in Canada, the US and the UK. The following chart depicts the
amount utilized in each of the entities’ lines of credit.
Interest is payable at the rate of bank prime plus 50 basis points (2012 - bank prime plus 50 basis
points).
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Annual Report 2013 38
RITEC Enclosures Inc.December 31, 2013December 31, 2012Assets1,712$ $ 1,180Liabilities1,158 778 Revenues3,036 2,623 Profit (after tax)163$ $ 103Local currencyCDN $Local currencyCDN $Canadian entitiesCDN9,767$ 9,767$ CDN9,510$ 9,510$ US entityUSD-$ - USD1,000$ 998UK entityGBP£ 2849GBP £ 202 325Bank indebtedness9,816$ 10,833$ December 31, 2013December 31, 2012
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(tabular amounts (except share amounts) in thousands of Canadian dollars)
Long-term debt:
The aggregate amount of principal payments required to meet the existing long-term debt
obligations in each of the next five years is as follows:
2014
2015
2016
2017
2018
Thereafter
$
796
265
266
269
273
147
$
2,016
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Annual Report 2013 39
December 31, 2013December 31, 2012PortiondrawninCanadianfundsatvariableinterestratesbasedonthebank’sprimelendingrate,maturedin2010throughSeptember2013.Monthlyprincipleinstallmentof$12inJanuary2013andtheninstallments of $3 to September 2013.-$ $ 37- 37973 1,094 973 1,131 Secured by equipment in Canadian funds at an interest rate of 6.175%. Monthly installments of $23 maturing March 2014 with a lump sum payment of $365.405649Secured by equipment, drawn in GBP Sterling at interest rates between 7.53% to 8.8%. Monthly installments of £1 GBP until Dec 2013 and then monthly installments of £0.5 GBP until May 2015.932Secured by equipment, drawn in US funds at interest rates from 4.97% to 6.75%. Monthly installments of $23 USD until April 2014, then monthly installments of $15 USD until November 2014 followed by monthly installments of $7 USD until April 2019 with a lump sum payment at this time of $114 USD.6298251,0431,506Total long-term debt2,016 2,637 Less current portion of long-term debt796723Non-current long-term debt$ 1,220$ 1,914SubtotalFinance lease obligations:Term loans, secured by a debenture on the Company's land and buildings together with a floating charge over all other assets of the Company:Term loan drawn in US funds at a fixed interest rate of 6.05% through December 2018, secured by the assets of Hammond Manufacturing Company Limited. Monthly installments of principle and interest at $15 USD.
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(tabular amounts (except share amounts) in thousands of Canadian dollars)
Interest expense is comprised as follows:
Long-term debt, including capital leases
Bank indebtedness
Interest expense
11) Trade and other payables:
December 31, 2013
December 31, 2012
$ 83
339
$ 422
$ 103
334
$ 437
The Group’s exposure to currency and liquidity risk related to trade and other payables is disclosed
in note 24.
12) Provisions:
The provision for environmental remediation is based on the estimated costs to setup and extract
contamination from the Glen Ewing Property. The anticipated costs are based on an external
consultant’s remediation plan, discounted for expected timing of expenditures. There are
approximately three years remaining in the clean-up plan. The Glen Ewing Property is owned
equally as a co-tenant with Hammond Power Solutions Incorporated (HPSI) and any expenses or
liabilities in respect of the property have been agreed to be shared equally. The contamination did
not result from the normal operations of the Company. The parties have cooperatively developed a
remediation action plan and began remediation in October 2009. The MOE is aware of the
remediation and the process being used. The Company is satisfied that their consultants have
provided the best estimate available for the Company’s remaining portion of the environmental
remediation costs for this site of $170,000 (December 31, 2012 - $170,000) with $70,000 (2012 -
$70,000) presented as a current provision.
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Annual Report 2013 40
December 31, 2013December 31, 2012Trade payables$ 3,406$ 4,294Non-trade payables and accrued expenses5,827 4,691 $ 9,233$ 8,985Environmental RemediationSales ReturnsTotalBalance at December 31, 2011$ 250$ 60$ 310Provisions made during the year- 50 50 Provisions used during the year(80) (60) (140) Balance at December 31, 2012$ 170$ 50$ 220Provisions made during the year90 65 155 Provisions used during the year(90) (50) (140) Balance at December 31, 2013$ 170$ 65$ 235Non-current100 - 100 Current70 65 135 Balance at December 31, 2013$ 170$ 65$ 235
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(tabular amounts (except share amounts) in thousands of Canadian dollars)
The provision for sales returns is based on estimates from historical returns of product. The
provision reflects the estimated profit margin of the anticipated returns.
13) Employee future benefits:
The Company’s net obligation in respect of its current and long-term employee benefits is
calculated by estimating the amount of future benefit that employees have earned in return for their
service in the current and prior periods. The terms of the agreements do not require the Company
to fund these obligations as they accumulate. The Company has accounted for these post-
employment benefits as defined benefit plans. The benefit plans are broken into two categories:
a) Benefit for post-employment health benefits:
If an employee meets the set criteria and retires between the age of 60 and 65, their health
plan will continue until age 65.
b) Disability health coverage:
This benefit is for employees who are off work due to a covered disability. Health coverage will
continue until they are off disability or reach the age of 65, whichever occurs first.
In determining both the post-employment health benefit and the disability health coverage
liabilities a 3.5% (2012 – 3.5%) per annum health cost increase and a discount rate of 6.0% (2012
– 6.0%) were utilized to determine its present value. The discount rate used approximated the
Company`s weighted average cost of capital.
Assumed healthcare cost trend rates affect the amounts recognized in profit and loss. A 1%
change in assumed healthcare cost trend rates would increase (decrease) the aggregate service
and interest costs by $26,000 (2012 - $25,000) respectively. Changes in assumptions resulted in
nominal gains/losses which have been included in general and administrative expense.
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Annual Report 2013 41
December 31, 2013December 31, 2012Post employment health benefits$ 146$ 170Employee health benefits while on disability300 285 Total employee future benefits$ 446$ 455
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(tabular amounts (except share amounts) in thousands of Canadian dollars)
Employee future benefits - continued:
14) Deferred tax assets and liabilities:
Unrecognized deferred tax liabilities:
At December 31, 2013, temporary differences of $9,097,381 (2012 - $7,821,641) related to
investments in subsidiaries were not recognized because the Company controls whether the
liability will be incurred and it is satisfied that it will not be incurred in the foreseeable future.
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Annual Report 2013 42
Post employment health benefitsEmployee health benefits while on disabilityTotalBalance at December 31, 2011$ 59$ 107$ 166Provisions made during the year139 217 356 Provisions used during the year(28) (39) (67) Balance at December 31, 2012$ 170$ 285$ 455Provisions made during the year- 38 38 Provisions used during the year(24) (23) (47) Balance at December 31, 2013$ 146$ 300$ 446Non-current80 262 342 Current66 38 104 Balance at December 31, 2013$ 146$ 300$ 446
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(tabular amounts (except share amounts) in thousands of Canadian dollars)
Recognized deferred tax liabilities:
Deferred tax assets and liabilities are attributable to the following:
15) Share capital:
a) Authorized:
Unlimited number of Class A subordinate voting shares.
Unlimited number of Class B common shares with four votes per share, convertible into Class
A subordinate voting shares on a one-for-one basis. Annual dividends on the Class B common
shares may not exceed the annual dividends on the Class A subordinate voting shares.
Unlimited number of Class YA non-voting, redeemable, retractable shares entitled to non-
cumulative discretionary dividends. No dividends shall be declared or paid on the Class YA
shares unless the same dividend is simultaneously declared and paid on the Class YB shares.
Unlimited number of Class YB non-voting, redeemable, retractable shares entitled to non-
cumulative discretionary dividends. No dividends shall be declared or paid on the Class YB
shares unless the same dividend is simultaneously declared and paid on the Class YA shares.
b)
Issued:
No shares were issued in 2013 or in 2012.
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Annual Report 2013 43
Deferred Tax AssetsDecember 31, 2013December 31, 2012Intangible assets $ 34 $ 39 Investment property 8 9 Inventories 348 321 Loans and borrowings 185 230 Provisions 96 53 Scientific research & experimental development - 30 Tax loss carry-forwards - 26 Total Deferred Tax Assets 671 708 Deferred Tax LiabilitiesScientific research & experimental development (32) - Property, plant and equipment (1,512) (1,495)Total Deferred Tax Liabilities (1,544) (1,495)Net tax liabilities $ (873) $ (787)December 31, 2013December 31, 20128,556,000 Class A shares (2012 - 8,556,000)10,242$ 10,242$ 2,778,300 Class B shares (2012 - 2,778,300)7 7 10,249$ 10,249$
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(tabular amounts (except share amounts) in thousands of Canadian dollars)
c) Dividends:
The following dividends were declared and paid by the Company:
A special cash dividend of $0.02 per Class A subordinate voting share (2012 - $0.02) and a
special cash dividend of $0.02 per Class B common share (2012 - $0.02) were declared and
paid in 2013.
Total dividends declared and paid was $226,000 (2012 - $226,000).
16) Operating leases:
The Company is committed to payments under operating leases for equipment and buildings. The
future minimum non-cancellable operating lease rentals are payable as follows:
The Group leases a number of offices and warehouses and factory facilities under operating
leases. The leases typically run for a period of three to five years, with an option to renew the lease
after that date.
During the year ended December 31, 2013, an amount of $1,586,000 was recognized as an
expense in profit or loss in respect of operating leases (2012 - $1,445,000).
The warehouse and factory leases have been renewed over several terms as combined leases of
land and buildings. Since the land title does not pass, the rent paid to the landlord of the building is
increased to market rent at regular intervals, and the Company does not participate in the residual
value of the building, it was determined that substantially all the risks and rewards of the building
are with the landlord. As such, the Company determined that the leases are operating leases.
17) Commitments:
The Company has contractual obligations for outstanding capital expenditures of $215,000 (2012 -
$348,000). These expenditures should be completed in the first half of 2014.
18) Contingency:
A statement of claim was issued on June 19, 2013, against HMCL with respect to a property once
held by the Company. The claim alleges that contaminants originating from the property once
owned by HMCL have migrated to a nearby, but not adjoining property owned by the claimants.
The amount of the claim is not fully known but includes $2,000,000 which is the estimated cost of
construction of a barrier and related expenses. At this point in time, there is no certainty that the
contaminants emanated from the property once owned by HMCL. Furthermore, given the nature
of the claim, there remains significant uncertainty as to any costs to be incurred as a result of the
claim and accordingly management is unable to reasonably estimate any liability that may arise as
a result of this claim. As such, no amount has been recorded in these financial statements.
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Annual Report 2013 44
December 31, 2013December 31, 2012Less than 1 year$ 1,607$ 1,415Between 1 and 5 years1,581 2,200 Thereafter- - Total minimum payments$ 3,188$ 3,615
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(tabular amounts (except share amounts) in thousands of Canadian dollars)
19) Income tax expense:
20) Earnings per share:
The computations for basic and diluted earnings per share are as follows:
December 31, 2013
December 31, 2012
Net income for the year
$ 2,258
$ 1,662
Average number of common shares outstanding:
Basic and Diluted
Earnings per share:
Basic
Diluted
11,334,300
11,334,300
$ 0.20
0.20
$ 0.15
0.15
No share options to purchase common shares were outstanding as at December 31, 2013 or
December 31, 2012
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Annual Report 2013 45
Income tax expenseDecember 31, 2013December 31, 2012Current tax expense:Current period $ 727 $ 557 Adjustment for prior periods 14 13 741 570 Deferred tax expense: Origination and reversal of temporary differences 71 371 71 371 Total income tax expense $ 812 $ 941 2013201320122012Net income for the year $ 2,258 $ 1,662 Total income tax expense 812 941 Profit excluding income tax $ 3,070 $ 2,603 Income tax using the Company’s domestic tax rate38.00% 1,167 38.00% 989 Reduced rate for active business and manufacturing and processing(8.99%) (276)(6.38%) (166)Effect of tax rates in foreign jurisdictions(1.40%) (43)(3.00%) (78)Reduction in tax rate(1.21%) (37)1.38% 36 Non-deductible expenses0.62% 19 0.58% 15 Other(0.59%) (18)5.57% 145 26.44% $ 812 36.15% $ 941
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(tabular amounts (except share amounts) in thousands of Canadian dollars)
21) Personnel expenses:
22) Management share option plan:
As at December 31, 2013, the Company has a stock-based compensation plan, which is described
below. No options were granted through December 31, 2013 or in 2012 and no stock options were
outstanding as of January 1 2012, and, accordingly, no stock-based compensation expense has
been incurred in either year.
In 1986, the Company established the management share option plan providing for the granting to
directors, officers and key employees of the Company options to purchase the Class A subordinate
voting shares of the Company. A maximum number of 540,000 Class A subordinate voting shares
are issuable under the plan. The exercise price for purchasing Class A subordinate voting shares
may not be less than the market price of the Class A subordinate voting shares at the date the
option is granted.
23) Determination of fair values:
The carrying values of the Group’s financial assets and liabilities, consisting of cash, trade and
other accounts receivables, bank indebtedness, trade and other accounts payables approximate
their fair values due to the relatively short periods to maturity of the instruments. The carrying value
of term loans, and finance leases with fixed interest rates are comparable to their fair market value
since the interest rates approximate market rates.
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Annual Report 2013 46
For years ended December 31,20132012Wages and Salaries $ 28,628 $ 29,447Health benefit plans721803Canadian Pension Plan (CPP) and EI remittances872915Contributions to defined contribution plans4,3574,604 $ 34,578 $ 35,769For years ended December 31,20132012Cost of sales $ 24,754 $ 26,303Selling and distribution6,9916,525General and administrative2,6772,724Research and development expenses156217 $ 34,578 $ 35,769
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(tabular amounts (except share amounts) in thousands of Canadian dollars)
The market values of financial assets and liabilities together with the carrying amounts shown in
the statements of financial position are as follows:
Interest rates used to discount estimated cash flows, when applicable are based on bank indication
rates for similar type arrangements.
24) Financial instruments and risk management:
Overview
The Group has exposure to the following risks from its use of financial instruments:
•
•
credit risk
liquidity risk
• market risk
•
operational risk.
This note presents information about the Group’s exposure to each of the above risks, the
Group’s objectives, policies and processes for measuring and managing risk, and the Group’s
management of capital. Further quantitative disclosures are included throughout these
consolidated financial statements.
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Annual Report 2013 47
Carrying amountMarket valueCarrying amountMarket valueAssets carried at amortized costCash$ 774$ 774$ 416$ 416Trade and other receivables11,94311,94311,59811,598$ 12,717$ 12,717$ 12,014$ 12,014Liabilities carried at amortized costBank indebtedness$ 9,816$ 9,816$ 10,833$ 10,833Trade and other payables9,2339,2338,9858,985Income taxes payable59593737Term loans9739911,1311,108Finance lease obligations1,0431,0421,5061,482$ 21,124$ 21,141$ 22,492$ 22,445December 31, 2013December 31, 2012Bank Indication Interest RatesFromToFromToNonsecured variable interest rates2.5%3.5%2.5%3.5%Fixed rates 1 to 2 year secured3.5%4.5%3.5%4.5% 3 to 4 year secured4.5%5.5%4.5%5.5% 5 year secured5.5%6.5%5.5%6.5% 6 year secured6.5%7.5%6.5%7.5%Rates fluctuate depending on currency and jurisdiction.December 31, 2013December 31, 2012
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(tabular amounts (except share amounts) in thousands of Canadian dollars)
Risk management framework:
The Board of Directors has overall responsibility for the establishment and oversight of the
Group’s risk management framework. The Board is responsible for developing and monitoring
the Group’s risk management policies.
The Group’s risk management policies are established to identify and analyze the risks faced
by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to
limits. Risk management policies and systems are reviewed regularly to reflect changes in
market conditions and the Group’s activities. The Group, through its training and management
standards and procedures, aims to develop a disciplined and constructive control environment
in which all employees understand their roles and obligations.
The Group’s Audit Committee oversees how management monitors compliance with the
Group’s risk management policies and procedures, and reviews the adequacy of the risk
management framework in relation to the risks faced by the Group. The Group’s Audit
Committee is assisted in its oversight role by the corporate finance group. The corporate
finance group undertakes both regular and ad hoc reviews of risk management controls and
procedures, the results of which are reported to the Audit Committee.
Credit risk:
Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial
instrument fails to meet its contractual obligations, and arises principally from the Group’s
receivables from customers. The carrying amount of financial assets represents the maximum
credit risk exposure.
Trade and other receivables
The Group’s exposure to credit risk is influenced mainly by the individual characteristics of
each customer. However, management also considers the demographics of the Group’s
customer base, including the default risk of the industry and country in which customers
operate, as these factors may have an influence on credit risk.
The Group has established a credit policy under which each new customer is analyzed
individually for creditworthiness before the Group’s standard payment and delivery terms and
conditions are offered. The Group’s review includes external ratings, when available, and in
some cases bank references. Purchase limits are established for each customer, which
represents the maximum open amount without requiring approval from management.
Customers that fail to meet the Group’s benchmark creditworthiness may transact with the
Group only on a prepayment basis.
In monitoring customer credit risk, customers are grouped according to their credit
characteristics, including whether they are an individual or legal entity, whether they are a
wholesale, retail or end-user customer, geographic location, industry, aging profile, maturity
and existence of previous financial difficulties. Trade and other receivables relate mainly to the
Group’s wholesale customers. Customers that are graded as “high risk” are placed on a
restricted customer list and monitored by the accounts receivable department, and future sales
are made on a prepayment basis.
The Group does not require collateral in respect of trade and other receivables.
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Annual Report 2013 48
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(tabular amounts (except share amounts) in thousands of Canadian dollars)
The Group establishes an allowance for impairment that represents its estimate of incurred
losses in respect of trade and other receivables. The main components of this allowance are a
specific loss component that relates to individually significant exposures, and a collective loss
component established for groups of similar assets in respect of losses that have been
incurred but not yet identified. The collective loss allowance is determined based on historical
data of payment statistics for similar financial assets.
Credit risk arises from the possibility that the entities to which the Company sells products may
experience difficulty and be unable to fulfill their obligations. The Company is exposed to
financial risk that arises from the credit quality of the entities to which it sells products and
services. The Company sells to a variety of companies in a number of different industries and
geographic areas. As a result, the requirement for an industry specific or geographic reserve
is minimal.
The carrying amount of financial assets represents the maximum credit exposure which was
as follows at the reporting date:
The maximum exposure to credit risk for loans and receivables at the reporting date by
geographic region was:
The following table reflects the net details of trade receivables as at December 31, 2013 and
December 31, 2012:
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Annual Report 2013 49
December 31, 2013December 31, 2012Loans and receivables:Cash$ 774$ 416Trade and other receivables11,94311,598$ 12,717$ 12,014December 31, 2013December 31, 2012Loans and receivables:Canada$ 8,009$ 7,711United States3,4973,332United Kingdom1,079848Australia132123$ 12,717$ 12,014GrossImpairmentCarrying ValueGrossImpairmentCarrying ValueAging of trade receivables:1 – 30 days$ 5,723$ 90$ 5,633$ 5,429-$ $ 5,42931 – 60 days4,197614,1364,132- 4,13261 – 90 days1,253- 1,2531,073- 1,073Over 90 days625187438364179185Trade receivables$ 11,798$ 338$ 11,460$ 10,998$ 179$ 10,819December 31, 2013December 31, 2012
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(tabular amounts (except share amounts) in thousands of Canadian dollars)
The following table provides the roll forward of the allowance for doubtful accounts:
Liquidity risk:
Liquidity risk is the risk that the Group will encounter difficulty in meeting the obligations
associated with its financial liabilities that are settled by delivering cash or another financial
asset. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will
always have sufficient liquidity to meet its liabilities when due, under both normal and stressed
conditions, without incurring unacceptable losses or risking damage to the Group’s reputation.
The Group uses planning tools to identify future cash flow requirements.
The Group has established a $17,744,000 overdraft facility that is secured against inventory
and accounts receivable. If drawn upon, interest would be payable at the rate of bank prime
plus 50 basis points (2012 - bank prime plus 50 basis points). The Company had available
unused credit facilities in the amount of $8,739,000 at December 31, 2013 (2012 - $7,148,000)
to meet fluctuations in working capital requirements.
The following are the contractual maturities of financial liabilities, including estimated interest
payments and excluding the impact of netting arrangements. It is not expected that the cash
flows included in the maturity analysis will occur significantly earlier or at materially different
amounts.
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Annual Report 2013 50
December 31, 2013December 31, 2012Allowance for doubtful accounts, beginning of year179$ 122$ Accounts provided for in the period162 111 Amounts written off during the period(3) (54) Allowance for doubtful accounts338$ 179$ Allowance for doubtful accounts as % of totaltrade accounts receivable2.9%1.6%The following table provides the net details of trade and other receivables:December 31, 2013December 31, 2012Net trade receivable11,460$ 10,819$ Employee receivables14 12 Other receivable469 767 Trade and other receivables11,943$ 11,598$
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(tabular amounts (except share amounts) in thousands of Canadian dollars)
Market risk:
Market risk is the risk that changes in market prices, such as foreign exchange rates and
interest rates will affect the Group’s income or the value of its holdings of financial instruments.
The objective of market risk management is to manage and control market risk exposures
within acceptable parameters, while optimizing the return. The Group has tried to create some
natural hedges but does not utilize hedging practices for foreign exchange.
Foreign currency risk:
The Group has a substantial number of transactions denominated in United States dollars and
is exposed to risk with respect to fluctuations in exchange rates between Canadian and United
States dollars. The Group holds smaller positions in other foreign currencies. The Group does
not use derivative instruments to reduce its exposure to foreign currency risk. As a result,
variations in foreign exchange rates could cause unanticipated fluctuations in the Group’s
operating results. The following chart depicts the foreign currency positions.
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Annual Report 2013 51
December 31, 2013 Carrying amount Contractual cash flows 2014 2015 2016 to 2017 Thereafter Non-derivative financial liabilitiesSecured bank loans $ 973 $ (1,123) $ (249) $ (236) $ (437) $ (201)Finance lease liabilities 1,043 (1,139) (634) (91) (176) (238)Trade and other payables 9,233 (9,233) (9,233) - - - Bank overdraft 9,816 (9,816) (9,816) - - - Total $ 21,065 $ (21,311) $(19,932) $ (327) $ (613) $ (439)December 31, 2012 Carrying amount Contractual cash flows 2013 2014 2015 to 2016 Thereafter Non-derivative financial liabilitiesSecured bank loans $ 1,131 $ (1,334) $ (282) $ (232) $ (432) $ (388)Finance lease liabilities 1,506 (1,668) (576) (620) (167) (305)Trade and other payables 8,985 (8,985) (8,985) - - - Bank overdraft 10,833 (10,995) (10,995) - - - Total $ 22,455 $ (22,982) $(20,838) $ (852) $ (599) $ (693)CurrencyDec 31, 2013Dec 31, 2012Dec 31, 2013Dec 31, 2012Dec 31, 2013Dec 31, 2012AustraliaAUD37 49 (5) (7) - - EuropeEURO- - (15) (101) - - New ZelandNZD24 15 - - - - TaiwaneseNTW128 150 - - - - UKGBP612 526 (354) (342) (5) (20) USAUSD3,219 3,393 (1,692) (1,679) (1,506) (1,926) Accounts ReceivableAccounts PayableLong-term Debt
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(tabular amounts (except share amounts) in thousands of Canadian dollars)
Long-term debt includes loans and capital leases denominated in foreign currencies which may
affect the amount of principal and interest payments ultimately recorded.
Sensitivity Analysis:
An average one-cent decrease of the Canadian dollar against the US dollar in 2013 would
have increased net product sales by $478,000 (2012 - $488,460) and increased income
from operations by $431,000 (2012 - $432,000). Inversely, a one cent increase in the
Canadian dollar against the US dollar in 2013 would have had the equal but opposite
effect. This analysis assumes that all other variables remain constant. As noted, the
company does deal in other currencies but the level of impact of these currencies would
not be significant.
Interest rate risk:
Interest rate risk arises from the possibility that the cash flows related to a financial instrument
would fluctuate as a result of changes in market interest rates. The Group is exposed to
financial risk that arises from the interest rate differentials between the market interest rate and
the rates on its cash, bank indebtedness, and its float rate term loans. Changes in variable
interest rates could cause unanticipated fluctuations in the Group’s operating results.
Sensitivity Analysis:
A one percent increase in the variable rates charged on our ending 2013 bank
indebtedness would increase annual interest expense by $98,000 (2012 - $105,000). This
analysis assumes that all other variables remain constant. Inversely, a one percent
decrease in the variable rates charged on our ending 2013 bank indebtedness would have
had the equal but opposite effect.
Operational risk:
Operational risk is the risk of direct or indirect loss arising from a wide variety of causes
associated with the Group’s processes, personnel, technology and infrastructure, and from
external factors other than credit, liquidity and market risks such as those arising from legal
and regulatory requirements and generally accepted standards of corporate behaviour.
Operational risks arise from all of the Group’s operations.
The Group’s objective is to manage operational risk so as to balance the avoidance of financial
losses and damage to the Group’s reputation with overall cost effectiveness and to avoid
control procedures that restrict initiative and creativity.
The primary responsibility for the development and implementation of controls to address
operational risk is assigned to senior management within each business unit. This
responsibility is supported by the development of overall Group standards for the management
of operational risk in the following areas:
•
•
•
•
requirements for appropriate segregation of duties, including the independent
authorization of transactions
requirements for the reconciliation and monitoring of transactions
compliance with regulatory and other legal requirements
documentation of controls and procedures
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Annual Report 2013 52
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(tabular amounts (except share amounts) in thousands of Canadian dollars)
•
•
•
•
•
•
requirements for the periodic assessment of operational risks faced, and the adequacy
of controls and procedures to address the risks identified
requirements for the reporting of operational losses and proposed remedial action
development of contingency plans
training and professional development
ethical and business standards
risk mitigation, including insurance when this is effective.
Compliance with Group standards is supported by a program of periodic reviews undertaken
by the corporate finance group. The results of the reviews are discussed with the management
of the business unit to which they relate, with summaries submitted to the Audit Committee and
senior management of the Group.
Capital management:
In order to manage capital, the Group regularly identifies and assesses risks that threaten the
ability to meet the Company’s capital management objectives, and determines the appropriate
strategy to mitigate these risks.
The Group’s objectives when managing capital are to:
• maintain financial flexibility in order to preserve its ability to meet financial obligations
•
deploy capital to provide an appropriate investment return to its shareholders
• maintain capital structure that allows multiple financing options to the Group should a
financing need arise.
The Group defines its capital as follows:
•
•
•
shareholders’ equity
long-term debt, including the current portion
cash and cash equivalents and short-term borrowings
• The Group is subject to externally imposed capital requirements through the covenants
of its facility arrangements with the bank. The covenants measure Debt to Total Net
Worth and Current Ratio. The Group is in compliance with its covenants at December
31, 2013 and has been in compliance with its covenants through 2012 and 2013.
• There were no changes to the Group’s approach to capital management during 2013.
• Neither the Company, nor any of its subsidiaries, is subject to externally imposed
capital requirements.
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Annual Report 2013 53
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(tabular amounts (except share amounts) in thousands of Canadian dollars)
The Group’s debt to adjusted capital ratio at the end of the reporting period was as follows:
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Annual Report 2013 54
December 31, 2013December 31, 2012Total liabilities $ 22,678 $ 23,954 Add: Current year operating leases1,6071,415Less: Cash (774) (416)Net debt $ 23,511 $ 24,953 Total equity $ 33,437 $ 30,767 Less: Investment in property (1,044) (1,044) Intangible assets and goodwill (384) (368) Equity investments (265) (200)Total net worth for bank covenant $ 31,744 $ 29,155 Net debt to total net worth ratio 0.74 0.86 Bank requirement must be less than 2.25 2.25 December 31, 2013December 31, 2012Total current assets $ 40,554 $ 38,360 Total current liabilities20,14320,799Current ratio 2.01 1.84 Bank requirement must be greater than 1.20 1.20
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(tabular amounts (except share amounts) in thousands of Canadian dollars)
25) Segment disclosures:
The continuing operations of the Company are in one operating segment, electrical and electronic
components.
The Company and its subsidiaries operate in Canada, the United States, the United Kingdom and
Australia.
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Annual Report 2013 55
Geographic SegmentsDecember 31, 2013December 31, 2012Sales:Canada:Sales to customers$ 37,585$ 39,141United States:Sales to customers45,888 45,853 All other countries:Sales to customers8,841 7,431 Net sales$ 92,314$ 92,425Non-current assets:Canada:Non-current assets$ 14,398$ 14,957United States:Non-current assets670 779 All other countries:Non-current assets493 625 TotalNon-current assets$ 15,561$ 16,361Year Ended:
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(tabular amounts (except share amounts) in thousands of Canadian dollars)
26) Related party transactions:
a) Key management includes the Company’s directors and members of the executive
management team. Compensation awarded to key management included:
b) The Company purchased $2,763,226 of product from RITEC in 2013 ($1,806,045 - 2012). The
Company sold $9,000 of product to RITEC in 2013 ($11,000 - 2012). These transactions were
made in the normal course of business and have been recorded at the exchange amounts,
being the amount agreed to by the two parties.
All outstanding trade balances with related parties are to be settled in cash within six months of
the reporting date. None of the balances are secured. Trade receivables as at December 31,
2013 were $4,572 (2012 - $5,122) while trade payables were $nil (2012 - $150,441). Trade
receivables and payables to related parties are included within Trade and other receivables
and Trade and other payables on the Consolidated Statement of Financial Position.
c) The Chairman of the Corporation, Robert Frederick Hammond, through direct and indirect
ownership of Class A and Class B voting shares effectively controls the Company.
d) Consolidated entities:
The year end for each of the entities listed in the table above is December 31.
27) Subsequent event:
On March 7, 2014 the Company declared a special cash dividend of $0.02 per Class A
Subordinate Voting Share and $0.02 per Class B Common share (not listed on the Toronto Stock
Exchange (TSX)) payable April 11, 2014, to shareholders of record at the close of business on
March 28, 2014. The ex-dividend date was March 26, 2014. Total dividend payable is $226,000
(2013 - $226,000).
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Annual Report 2013 56
December 31, 2013December 31, 2012Salaries and short-term employee benefits$ 732$ 714Years Ended:Country ofIncorporationDecember 31, 2013December 31, 2012Les Fabrications Hammond (Quebec) Inc. / Hammond Manufacturing (Quebec) Inc.Canada100 100 Hammond Electronics Pty LimitedAustralia100 100 Hammond Electronics LimitedUK100 100 Subsidiary of above: Hammond Electronics Asia LimitedRepublic of China100 100 Hammond Manufacturing Company Inc.US100 100 Subsidiaries of above: Hammond Holdings Inc.US100 100 Paulding Electrical Products, IncUS100 100 HAMMOND MANUFACTURING COMPANY LIMITED% Ownership Interest
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Annual Report 2013 57
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Annual Report 2013 58
Officers/Senior Management
Robert F. Hammond
Chairman and CEO
Cy A. Mahy
Vice-President, Human Resources
Alexander Stirling
Secretary & CFO
Ray Shatzel
Vice-President, Electronic Sales
Sheldon Butts
Canadian Sales & Marketing Manager
Ross N. Hammond
Assistant Secretary
CORPORATE DIRECTORY
Directors
Robert F. Hammond
Chairman and CEO
Marc A. Dubé *
Retired
Formerly Chairman of the Board
Ranger Metal Products Limited
(Manufacturer of Wire Products)
Edward Sehl *
Principal - Sehl Consulting
Director - Fox Seeds
Director - Guelph Municipal Holdings Inc.
Paul Quigley *
President
Quigley Group Inc.
Sheila Hammond
Registered Individual, Couple and Family Therapist
Officer and Director of Eramosa Group Ltd.
*Members of the Audit Committee and Compensation Committee
Auditors
KPMG LLP
Baker Tilly, UK
Grant Thornton, Australia
Legal Counsel
Borden Ladner Gervais
Stock Listing
Toronto Stock Exchange
Symbol: HMM.A
Bankers
HSBC
Transfer Agent and Registrar
Computershare Investor Services Inc.
Corporate Head Office
394 Edinburgh Road North
Guelph, Ontario N1H 1E5
Canada
Email:
ir@hammfg.com
Les Fabrications Hammond
(Québec) Inc.
985 Rue Bergar
Laval, Quebec H7L 4Z6
Canada
OFFICES AND LOCATIONS
Hammond Manufacturing Co. Inc.
475 Cayuga Rd.
Cheektowaga, NY 14225
USA
Hammond Electronics Ltd.
1 Onslow Close
Kingsland Business Park
Basingstoke, Hampshire
RG248QL
England
Hammond Electronics Pty. Ltd.
11-13 Port Road
Queenstown, SA 5024
Australia
Tel:
Fax:
(519) 822-2960
(519) 822-7289
Tel:
Fax:
(450) 975-1884
(450) 975-2098
Tel:
Fax:
(716) 630-7030
(716) 630-7042
Tel:
Fax:
01256 812812
01256 332249
Tel:
Fax:
61-8-8235-0744
61-8-8356-3652
© Copyright. Hammond Manufacturing Co. Ltd.