Hammond Manufacturing Company Limited
Annual Report 2015

Plain-text annual report

Quality Products. Service Excellence. 2015 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 2015 Annual Report 4 5 Report to Shareholders Management Discussion and Analysis 18 Management’s Responsibility for Financial Reporting 19 20 21 22 23 24 59 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 2015 3 REPORT TO SHAREHOLDERS Dear fellow shareholders, employees, and stakeholders: The following MD&A and financial report describes the results from a very busy year. Aided by supportive exchange rates, our financial performance was gratifying. What the numbers don’t fully show however, is the engagement of our associates throughout the year. With the support of provincial and federal governments, plus our bankers at HSBC, we assembled financing for our largest capital plan ever. After months of planning and building, we are now preparing to expand our electronic metal and contractor enclosure businesses into a purpose-built 119,000 sq. ft. building. This operation will include state-of-the-art painting and fabricating lines, moreover, as soon as these lines are out the door, we will start retooling our 190,000 sq. ft. existing Guelph facility. We will have leaner product flows, added equipment, automation, and a focus on productivity and continuous improvement. We will not have time for a break! Our electronic metal business is poised to grow, our stainless steel focused factory will be ready for growth, and we will have room for new processes and layouts. As well, we have expanded our UK footprint to 30,000 sq. ft., settled into an expanded distribution centre and added numerous products and tools to our product lines. We are excited! 2016 and 2017 will continue to challenge us with lots to do. We assure you that our focus will continue to be on conservative financial management and success in long term markets. I cannot promise consistent quarters with all this activity but the strategic direction is soundly forward. I can say though that our company has never been more energized and engaged. Sincerely, Robert F. Hammond Chairman & CEO ANNUAL MEETING The meeting of the Shareholders will be held on May 2, 2016 at Cutten Fields 190 College Avenue East, Guelph, Ontario Commencing at 10:00 a.m. www.hammondmfg.com Annual Report 2015 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, 2015. This discussion should be read in conjunction with the Company’s consolidated financial statements for the year ended December 31, 2015 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 4, 2016. 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 2015 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 a line of small cases for sale through the Hammond Manufacturing Company’s sales channels and also manages sourcing of die cast and plastic enclosures. OPERATIONS A large part of our results have been impacted by significant changes to foreign exchange rates. Close to 50% of our sales are made in US dollars. We saw the US dollar open 2014 at $1.00 USD to $1.064 CDN and close 2014 at $1.00 USD to $1.16 CDN and then continue to strengthen through 2015 and close at $1.00 USD to $1.384 CDN. QUARTERLY INFORMATION HAMMOND MANUFACTURING COMPANY LIMITED Summary of Quarterly Financial Information (In thousands of Canadian dollars except earnings per share) Q1 Q2 Q3 Q4 2015 Year-to-date Total Net product sales $30,516 $28,993 $29,941 $27,714 $117,164 Income from operating activities Net income for the period Earnings per share - Basic & diluted 1,907 828 $0.07 1,307 1,636 1,775 937 705 1,080 $0.09 $0.06 $0.09 6,625 3,550 $0.31 Q1 Q2 Q3 Q4 2014 Year-to-date Total Net product sales $24,753 $26,215 $25,899 $28,405 $105,272 Income from operating activities Net income for the period Earnings per share - Basic & diluted 1,355 755 $0.07 1,579 1,149 $0.10 1,442 749 $0.06 1,543 984 $0.09 5,919 3,637 $0.32 Note: Interim consolidated financial information has not been reviewed by an auditor. www.hammondmfg.com Annual Report 2015 6 MANAGEMENT DISCUSSION AND ANALYSIS FOURTH QUARTER RESULTS NET PRODUCT SALES Our markets declined in the fourth quarter compared to the previous quarter and last year’s fourth quarter. Softness in the US manufacturing sector and oil markets restrained bookings. We did have some upside from foreign exchange but the net impact was a decline in sales. Net product sales, for the three months ended December 31, 2015 were $27,714,000, a decrease of 7.4% from net product sales of $29,941,000 in the third quarter of 2015. Our Canadian sales decreased 6.9% quarter over quarter while our US net product sales in US dollars were down 9.8% quarter over quarter and up 7.7% when measured in Canadian dollars. Our International sales were down 11.0% quarter over quarter. Net product sales for the current quarter were down 2.4% compared to net product sales of $28,405,000 for the three months ended December 31, 2014. Foreign exchange provided a lift of $2,205,000 and accounts for 8.0% of this increase. This leaves us with a drop in sales activity of 10.4%. Net product sales activity for 2015 fourth quarter compared to 2014 fourth quarter net product sales with the foreign exchange impact removed saw our US and Canadian markets down 11.4% and 12.9% respectively while our international sales were down 9.0%. GROSS PROFIT Gross profit for the fourth quarter of 2015 was 33.1% of net sales compared to 31.3% in the third quarter of 2015. Gross profits of 33.1% are up from the fourth quarter 2014 level of 30.5%. The impact of foreign exchange is providing the opportunity for aggressive pricing trying to capture more market share. SELLING AND DISTRIBUTION, GENERAL AND ADMINISTRATIVE, RESEARCH AND DEVELOPMENT (“R&D”) EXPENSES AND NET LOSS ON SALE OF PROPERTY, PLANT AND EQUIPMENT Fourth quarter selling and distribution, general and administration and R&D expenses of $7,409,000 were 26.7% of net sales for the three months ended December 31, 2015, compared with spending of $7,865,000 in the previous quarter that was 26.3% of net sales and $7,118,000 which was 25.1% of net sales in the fourth quarter of 2014. Approximately 55% to 60% of the spend has a Canadian dollar base currency with the remainder made up of US dollars (approx. 35%), British pounds (approx. 8%) and Australian dollars (approx. 1%). Foreign exchange accounts for approximately $390,000 of the year over year quarterly spend increase. Selling and distribution spending of $6,212,000 was down 4.6% over the prior quarter and up 3.2% over the fourth quarter of 2014. Year over year foreign exchange impact increased spending levels by $350,000. With the foreign exchange impact removed spend levels where actually down as a function of decreased sales levels. General and administrative expenses of $1,132,000 were down this quarter from the previous quarter’s spending of $1,297,000 and up from the fourth quarter of 2014 spending of $1,041,000. Compared to the fourth quarter of 2014 foreign exchange accounts for $40,000 of the increase with the remaining $51,000 coming for general cost increases. Research and development spend of $65,000 was up over 2014 level of $51,000. www.hammondmfg.com Annual Report 2015 7 MANAGEMENT DISCUSSION AND ANALYSIS INCOME FROM OPERATING ACTIVITIES Income from operating activities of $1,775,000 (6.4% of net sales) is up from the prior quarter of $1,636,000 (5.5% of net sales) and up from the 2014 fourth quarter amount of $1,543,000 (5.4% of net sales). INTEREST Fourth quarter interest expense of $126,000 was up 29.9% from the third quarter expense of $97,000 and up $55,000 or 77.4% from the comparable period of the prior year. Our external debt has grown significantly in the last half of 2015 as we embark on our expansion project. External debt has risen from $12,750,000 at the start of the fourth quarter to $17,443,000 at the end of the quarter. FOREIGN EXCHANGE TRANSACTIONAL IMPACT During the fourth quarter of 2015, the Company recognized a loss on transactional foreign exchange of $302,000 compared to a loss of $300,000 in the three months ended December 31, 2014. In the fourth quarter of 2015 the US dollar opened at an exchange of $1.00 USD to $1.316 CDN and closed at $1.00 USD to $1.384 CDN. Most of our transactional exposure is in accounts payable and the impact of foreign exchange movement in this direction creates transactional losses. Most of this loss can be attributed to Intercompany balances and is offset with a translational gain reported in the other comprehensive income of the income statement. INCOME TAX EXPENSE Net income tax expense in the fourth quarter was $341,000 which was 24.0% of income before tax. NET INCOME FOR THE PERIOD Income for the fourth quarter ended December 31, 2015 was $1,080,000 (3.9% of net product sales) this is up from $705,000 (2.4% return on net product sales) in the previous quarter and up from the fourth quarter 2014 of $984,000 (3.5% return on net product sales). FOREIGN EXCHANGE TRANSLATION OF FOREIGN OPERATIONS The translation adjustment for the fourth quarter of 2015 was a gain of $763,000 compared to a translation gain of $431,000 in the fourth quarter of 2014. The translation of our US entity is the primary driver of this impact. In the fourth quarter of 2015 the US dollar opened at an exchange of $1.00 USD to $1.316 CDN and closed at $1.00 USD to $1.384 CDN which created most of the gain. In the fourth quarter of 2014 the US dollar opened at an exchange of $1.00 USD to $1.116 CDN and closed at $1.00 USD to $1.16 CDN which created most of that quarter’s gain. TOTAL COMPREHENSIVE INCOME Comprehensive income for the fourth quarter ended December 31, 2015 was $1,843,000 (6.7% of net product sales) up from the 3 months ended December 31, 2014 of $1,415,000 (5.0% of net product sales). FULL YEAR RESULTS NET PRODUCT SALES Net product sales of $117,164,000 in 2015 were up 11.3% compared to net sales of $105,272,000 reported in 2014. Foreign exchange accounts for approximately $9,336,000 (8.9%) of this increase. An aggressive pricing platform has spurred our sales growth. Despite the negative impact from oil related www.hammondmfg.com Annual Report 2015 8 MANAGEMENT DISCUSSION AND ANALYSIS industries we saw year over year sales growth of 2.4%. Growth rates in our geographical local currencies were as follows; Canadian net product sales up 2.0%, USA up 3.0%, International sales were up 1.2%. GROSS PROFIT In 2015, gross profit was 31.7% of net product sales compared to 30.8% achieved in 2014. The positive impact created by favorable foreign currency positions was utilized to competitively price and increase sales volumes as well as offset cost increases. SELLING AND DISTRIBUTION, GENERAL AND ADMINISTRATIVE, RESEARCH AND DEVELOPMENT (“R&D”) EXPENSES AND NET LOSS ON SALE OF PROPERTY, PLANT AND EQUIPMENT Selling and distribution, general and administration, R&D expenses including the net impact of the sale of property, plant and equipment of $30,515,000 (26.0% of net product sales) was up $4,022,000 or 15.2% from the 2014 spend of $26,493,000 (25.2% of net product sales). Foreign exchange accounts for $1,542,000 or 5.8% of the year over year increase. Selling and distribution expenses of $25,270,000 increased 16.8% ($3,631,000) over 2014. Foreign exchange accounts for 6.4% ($1,344,000) of the increase. The remaining 10.4% ($2,287,000) of the increase is broken down as follows. Additional warehouse space accounted for $790,000 of spending as we added rent, employees and support costs for this space. Freight cost to US customers increased $344,000 as we provided incentives and pushed for expanded sales across North America. Advertising expenses were up $168,000 and commission costs were up $111,000. The addition of customer service and sales staff along with wage increases pushed these expense levels up $407,000. Our sales infrastructure is well positioned for growth. Our general and administrative expenses were up $364,000 or 7.9% over 2014 spending levels to $4,956,000. Approximately $163,000 (3.5%) of the increase can be attributed to foreign exchange while the remainder is general cost increases and the addition of a VP of Electrical Sales. In 2015 research and development spending level was up 13.3% to $289,000 over 2014 spending levels. We continue to invest in our future. INCOME FROM OPERATING ACTIVITIES Overall, 2015 earnings from operating activities of $6,625,000 (5.7% of net product sales) is up compared to 2014 earnings of $5,919,000 (5.6% of net product sales). INTEREST Interest expense of $345,000 increased $8,000 or 2.4% from the 2014 expense level of $337,000. Average external debt in 2014 was just under $10,000,000 and had declined throughout the year, closing at $7,750,000. In the first half of 2015 our average external debt was just under $9,000,000. In the second half as we launched our expansion project our external debt level rose to $17,443,000 by year end. The funding was done primarily through the use of our line which utilizes low variable interest rates. As the projects close we will fix the debt over longer term periods which will be at higher rates. www.hammondmfg.com Annual Report 2015 9 MANAGEMENT DISCUSSION AND ANALYSIS FOREIGN EXCHANGE TRANSACTIONAL IMPACT A $1,235,000 foreign exchange transactional loss was reported in 2015, compared to a transactional loss of $589,000 in 2014. Stronger foreign currencies have helped our sales numbers but for those items we purchase in foreign currencies our expenses have increased throughout 2015. Approximately $965,000 of the 2015 loss can be attributed to offsetting intercompany accounts receivable and payables, with the offset showing in translational gains in other comprehensive income. INCOME TAX EXPENSE 2015 tax expenses of $1,508,000 were 29.8% of income before income tax. This compares to 2014 tax expense of $1,337,000 which was 26.9% of income before income tax. Higher earnings by our US entity attract a higher proportionate tax rate. NET INCOME FOR THE YEAR Net income for the year ended December 31, 2015 was $3,550,000 (3.0% of net product sales) down 2.4% from the prior year net income of $3,637,000 (3.5% of net product sales). FOREIGN EXCHANGE TRANSLATION OF FOREIGN OPERATIONS During 2015 a gain of $2,436,000 on translational foreign exchange was realized compared to a gain of $921,000 in 2014. In 2015 the US dollar opened at an exchange of $1.00 USD to $1.16 CDN and closed at $1.00 USD to $1.384 CDN which created most of the gain. In 2014 the US dollar opened at an exchange of $1.00 USD to $1.064 CDN and closed at $1.00 USD to $1.16 CDN which created most of that years gain. As noted in the Foreign exchange transactional impact section earlier, $965,000 of the gain on translation is offset by a transactional loss due to intercompany transactions. TOTAL COMPREHENSIVE INCOME Comprehensive income for 2015 was $5,986,000 (5.1% of net product sales) up from 2014 of $4,558,000 (4.3% of net product sales). www.hammondmfg.com Annual Report 2015 10 MANAGEMENT DISCUSSION AND ANALYSIS SELECTED ANNUAL INFORMATION Three year financial summary: For the years ended December 31, (In thousands except per share amounts) Consolidated Statements of Comprehensive Income 2015 2014 2013 Net product sales $ 117,164 $ 105,272 $ 92,936 Income from operating activities Net income for the year Per share - basic & fully diluted net earnings for the year 6,625 3,550 5,919 3,637 3,757 2,258 $0.31 $0.32 $0.20 Consolidated Statement of Financial Position 2015 2014 2013 Total assets Total funded debt Working capital Net cash generated from operating activities Dividends declared and paid Dividends declared and not paid Dividends declared prior year and paid this year Shareholders' equity CAPITAL RESOURCES AND LIQUIDITY $ $ $ 79,394 17,443 14,415 6,680 - - 226 43,528 59,245 7,750 23,429 5,531 227 226 - 37,542 56,115 11,832 19,633 3,596 226 - - 33,437 $ $ $ Net cash generated from operating activities for 2015 was $6,680,000 (2014 - $5,531,000). Cash flows from financing activities amounted to a source of $9,462,000 (2014 – usage of $4,301,000). Cash used in investing activities was $17,126,000 (2014 - $2,018,000). Trade and other receivables increased 10.8% at December 31, 2015 compared to the 2014 year-end. We are finding more customers pushing for longer terms. We have accommodated those customers with strong credit positions and who are instrumental in growing our sales. Days sales outstanding (DSO) as at December 31, 2015 calculated on net sales was 57 days which was up from 50 days calculated as at December 31, 2014. The quality of accounts receivable remains high. We expect DSO to continue in the current range for 2016. The year-end investment in inventory of $30,599,000 was an increase of 11.1% from the 2014 inventory value of $27,542,000. Inventory turnover increased to 2.83 from 2.75 (cost of sales divided by the twelve month average inventory level). Trade and other payables increased by $5,474,000, or 46.9% over 2014 to $17,149,000. The majority of this increase can be attributed to our expansion activities which includes considerable spending on a new building and new equipment. We have banking facilities in place cover these expenditures. Our total debt (long-term debt and bank indebtedness) increased by $9,693,000 over the prior year to $17,443,000. Our debt-to-equity ratio at year-end was approximately 0.40:1 (2014 - 0.21:1). The Company paid a dividend of $226,000 in January of 2015 (2014 - $226,000). www.hammondmfg.com Annual Report 2015 11 MANAGEMENT DISCUSSION AND ANALYSIS Property, plant, equipment and intangible asset additions in 2015 were $17,126,000 up from $2,018,000 in 2014. The Company spent $9,894,000 (2014 - $421,000) on building and leasehold improvements. $446,000 (2014 - $436,000) was invested toward upgrading and replacing machinery and equipment, $5,881,000 (2014 - $777,000) was invested toward machinery and equipment for capacity growth, $822,000 (2014 - $259,000) was invested in tooling, $37,000 (2014 - $42,000) was invested in office equipment and $46,000 (2014 – $83,000) was spent on software and development costs. In 2015 the company began construction on a new 119,000 sq. ft. facility to expand its manufacturing capabilities. The project includes the purchase or lease of supporting equipment for the new facility as well as the upgrading of its existing production facility. This project is anticipated to cost in excess of $20,000,000. The new facility is anticipated to be available by the end of the first quarter of 2016. The company has utilized its operating line to finance the majority of the construction process and the down payments of the production equipment. The company intends to utilize the following banking facilities and funding arrangements for funding as the project is completed. This will reduce the level of draw on our operating facility. The Group has established an $11,000,000 lease line to finance new equipment purchases. The Group has successfully applied for and been approved by the Canadian government program FedDev for an interest free loan up to $3,462,000 on eligible spending. As at December 31, 2015 the group had received $385,000 of this funding. The Group has successfully applied for and been approved by the Southwestern Ontario Development Fund for a grant up to $1,500,000 on eligible spending. As at December 31, 2015 the group has received $300,000 of this funding. The grant and government funding noted above are contingent on adding new jobs and retaining existing jobs at its Guelph Ontario locations. As at the time of this report the group was in compliance with this requirement and did not foresee any future compliance issues although employee levels are a function of the market conditions which can be unpredictable The contractual obligations of the Company are detailed in the following table. Contractual obligations (In thousands) Total 2016 2017 2018 2019 2020 Thereafter Long-term debt $ 4,611 $ 4,336 $ - $ - $ - $ 61 $ 214 Capital lease obligations Operating leases 571 6,296 116 1,857 123 1,466 130 1,088 202 998 790 97 Total contractual obligations $ 11,478 $ 6,309 $ 1,589 $ 1,218 $ 1,200 $ 851 $ 311 $4,336,000 of the $4,611,000 long term debt are demand loans and therefore are shown as due in 2016. The following table depicts the repayment obligation without the debt being called. Contractual obligations (In thousands) Total 2016 2017 2018 2019 2020 Thereafter Long-term debt $ 4,611 $ 360 $ 381 $ 380 $ 126 $ 197 $ 3,167 Capital lease obligations Operating leases 571 6,296 116 1,857 123 1,466 130 1,088 202 998 790 97 Total contractual obligations $ 11,478 $ 2,333 $ 1,970 $ 1,598 $ 1,326 $ 987 $ 3,264 www.hammondmfg.com Annual Report 2015 12 MANAGEMENT DISCUSSION AND ANALYSIS In addition to the contractual obligations above, the Company has current obligations of $2,236,000 (2014 - $200,000) against open purchase orders for outstanding capital expenditures. The Company also has open purchase commitments with RITEC as at December 31, 2015 of $859,000 (2014 - $587,111). These expenditures should be completed in the first half of 2016. SHARE CAPITAL As of March 4, 2016, 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 a vacant property located at 2 Glen Road, Georgetown. The soil has been contaminated by diesel oil, which is believed to be related to site operations of prior owners. The Company and HPSI, as co-tenants, have been working co-operatively with the adjacent property owner and its environmental consultant, and the Ministry of Environment to contain and remove any free flowing contaminants. The Company’s share of expense for legal and consulting work for 2015 related to this property was $85,000 (2014 - $109,000). 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 (2014 - $170,000) with $70,000 (2014 - $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. www.hammondmfg.com Annual Report 2015 13 MANAGEMENT DISCUSSION AND ANALYSIS 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 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 three 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 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. Inventory valuation 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. Internal controls over financial reporting, no matter how well designed have inherent limitations. Therefore, internal control over financial reporting determined to be effective can provide only reasonable assurance with respect to financial statement preparation and may not prevent or detect all misstatements. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. www.hammondmfg.com Annual Report 2015 14 MANAGEMENT DISCUSSION AND ANALYSIS 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, 2015. The design and evaluation of internal controls was completed using the framework and criteria established in "Internal Control – Integrated Framework” updated May 2013, 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. 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; • Rising interest rates; • Economic slowdown in the US and Canada; • 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. www.hammondmfg.com Annual Report 2015 15 MANAGEMENT DISCUSSION AND ANALYSIS 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 bit of 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 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 70% 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. There has been significant investment in infrastructure in 2015 which has been funded through the company line of credit at variable rates. As the projects close in early 2016 the debit on this investment will moved to long term with fixed interest rates. The Company continuously reviews this strategy of hedging this risk by fixing interest rates on part of its total debt. North American Economy The Canadian dollar is highly leveraged to natural resources and especially oil. We have seen a weakening of the Canadian dollar against the US dollar as oil prices have fallen. A strengthening US market place has also contributed to the strengthening US dollar. Since our costs are highly Canadian dollar based, this is providing an opportunity to price aggressively in the US market place and increase our market activity. Current outlook sees the US dollar remaining strong for some time. We will continue to react to the market conditions to grow our business. 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. www.hammondmfg.com Annual Report 2015 16 MANAGEMENT DISCUSSION AND ANALYSIS OUTLOOK FACTORS FOR 2016 Our current market expectation is to see stable growth in all our market places. 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. Our capacity expansion project which started in 2015 should come on line by the end of the first quarter of 2016. 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. www.hammondmfg.com Annual Report 2015 17 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 4, 2016 www.hammondmfg.com Annual Report 2015 18 INDEPENDENT AUDITORS’ REPORT www.hammondmfg.com Annual Report 2015 19 HAMMOND MANUFACTURING COMPANY LIMITED Consolidated Statements of Financial Position (in thousands of Canadian dollars) As at December 31, Note 2015 2014 Assets Current assets: Cash Trade and other receivables Income taxes receivable Inventories Prepaid expenses Total current assets Non-current assets Property, plant and equipment Intangible assets and goodwill Investment property Equity investment Total non-current assets Total assets Liabilities Current liabilities: Bank indebtedness Trade and other payables Income taxes payable Current portion of provisions Current portion of employee future benefits Current portion of long-term debt Total current liabilities Non-current liabilities Employee future benefits Long-term debt Provisions Deferred tax liabilities Total non-current liabilities Total liabilities Equity: Share capital Contributed surplus Accumulated other comprehensive income Retained earnings Total equity Commitments Contingency Total liabilities and equity 4 & 24 5 6 7 8 9 10 11 & 24 12 13 10 13 10 12 14 15 16 & 17 18 $ 263 16,238 185 30,599 1,179 48,464 $ 326 14,654 - 27,542 1,091 43,613 28,951 386 1,044 549 30,930 13,809 399 1,044 380 15,632 $ 79,394 $ 59,245 $ 12,261 17,149 - 125 62 4,452 34,049 $ 6,419 11,675 954 140 70 926 20,184 258 730 100 729 1,817 35,866 10,249 290 3,638 29,351 43,528 302 405 100 712 1,519 21,703 10,249 290 1,202 25,801 37,542 $ 79,394 $ 59,245 The notes on pages 24 to 58 are an integral part of these consolidated financial statements. www.hammondmfg.com Annual Report 2015 20 HAMMOND MANUFACTURING COMPANY LIMITED Consolidated Statements of Comprehensive Income (in thousands of Canadian dollars, except earnings per share) For the Years Ended December 31, Note 2015 2014 Net product sales Cost of sales Gross profit Selling and distribution General and administrative Research and development Net loss on sale of property, plant and equipment Income from operating activities Interest expense Foreign exchange loss Net finance costs Share of profit of equity accounted investees Share of expenses from investment property Income before income tax Income tax expense Net income for the year Other comprehensive income: Foreign currency translation differences for foreign operations 10 9 8 19 Other comprehensive income for the period, net of income tax Total comprehensive income for the year Earnings per share Basic earnings per share Diluted earnings per share 20 20 $ 117,164 $ 105,272 80,024 37,140 25,270 4,956 289 - 6,625 (345) (1,235) (1,580) 98 (85) 5,058 1,508 3,550 2,436 2,436 $ 5,986 $ 0.31 $ 0.31 72,860 32,412 21,639 4,592 255 7 5,919 (337) (589) (926) 90 (109) 4,974 1,337 3,637 921 921 $ 4,558 $ 0.32 $ 0.32 The notes on pages 24 to 58 are an integral part of these consolidated financial statements. www.hammondmfg.com Annual Report 2015 21 HAMMOND MANUFACTURING COMPANY LIMITED Consolidated Statements of Changes in Equity For the years December 31, 2015 and December 31, 2014 (in thousands of Canadian dollars) Attributable to equity holders of the Company Share Capital Contributed Surplus AOCI** Retained earnings Total equity Balance at January 1, 2014 $ 10,249 $ 290 $ 281 $ 22,617 $ 33,437 Total comprehensive income for year: Net income for the year Other comprehensive income: Foreign currency translation differences Total comprehensive income for the year Transactions with owners, recorded directly in equity: Dividends to equity holders - - - - - 3,637 3,637 921 921 - 921 3,637 4,558 - (453) (453) - - - Balance at December 31, 2014 $ 10,249 $ 290 $ 1,202 $ 25,801 $ 37,542 Balance at January 1, 2015 $ 10,249 $ 290 $ 1,202 $ 25,801 $ 37,542 Total comprehensive income for year: Net income for the year Other comprehensive income: Foreign currency translation differences Total comprehensive income for the year - - - - - - 3,550 3,550 2,436 2,436 - 3,550 2,436 5,986 Balance at December 31, 2015 ** Accumulated other comprehensive income $ 10,249 $ 290 $ 3,638 $ 29,351 $ 43,528 The notes on pages 24 to 58 are an integral part of these consolidated financial statements. www.hammondmfg.com Annual Report 2015 22 HAMMOND MANUFACTURING COMPANY LIMITED Condensed Consolidated Statements of Cash Flows (in thousands of Canadian dollars) For the Years Ended December 31, Cash flows from operating activities Net income for the period Adjustments for: Depreciation of property, plant and equipment Amortization of intangible assets Interest expense Income tax expense Loss on sale of property plant and equipment Provisions and employee future benefits Equity investments Change in non-cash working capital: Inventories Trade and other receivables Prepaid expenses Trade and other payables Cash generated from operating activities Interest paid Income tax paid Net cash generated from operating activities Cash flows from financing activities Bank indebtedness Payment of long-term debt Advances of long-term debt Payment of dividends Net cash generated from (used in) financing activities Cash flows from investing activities Acquisition of of property, plant and equipment Intangible asset additions Net cash used in investing activities Net decrease in cash Cash at beginning of year Foreign exchange gain on cash and cash equivalents in a foreign currency 2015 2014 $ 3,550 $ 3,637 2,101 75 345 1,508 - (52) (169) 7,358 (2,369) (513) (57) 5,285 9,704 (345) (2,679) 6,680 5,842 (121) 3,967 (226) 9,462 (17,080) (46) (17,126) (984) 326 921 2,074 75 337 1,337 7 (74) (115) 7,278 (340) (2,318) (196) 2,055 6,479 (337) (611) 5,531 (3,389) (685) - (227) (4,301) (1,935) (83) (2,018) (788) 774 340 Cash at end of year $ 263 $ 326 The notes on pages 24 to 58 are an integral part of these consolidated financial statements. www.hammondmfg.com Annual Report 2015 23 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (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, 2015 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 4, 2016. 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 www.hammondmfg.com Annual Report 2015 24 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (tabular amounts (except share amounts) in thousands of Canadian dollars) amount of assets, liabilities, income and expense. Actual results may differ from these 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. www.hammondmfg.com Annual Report 2015 25 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (tabular amounts (except share amounts) in thousands of Canadian dollars) viii) Property value Management estimates the value of the investment property to assess if 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 judgment 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. www.hammondmfg.com Annual Report 2015 26 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (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 include 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 www.hammondmfg.com Annual Report 2015 27 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (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 or unit of production 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 Buildings Office equipment Machinery and equipment Tooling general use Tooling specific part Rate 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 have been externally acquired. 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. The amortization rates based on the estimated useful lives for the current and comparative periods are as follows: Asset Computer software Development costs Rate 20% 20% Amortization methods, useful lives and residual values are reviewed at each financial year-end and adjusted, if appropriate. 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 www.hammondmfg.com Annual Report 2015 28 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (tabular amounts (except share amounts) in thousands of Canadian dollars) 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 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. 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 www.hammondmfg.com Annual Report 2015 29 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (tabular amounts (except share amounts) in thousands of Canadian dollars) 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 accounts represent the Group’s estimate 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. 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. www.hammondmfg.com Annual Report 2015 30 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (tabular amounts (except share amounts) in thousands of Canadian dollars) 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. level. All individually significant receivables are assessed The Group considers evidence of impairment for receivables at both a specific asset and collective 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. 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 www.hammondmfg.com Annual Report 2015 31 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (tabular amounts (except share amounts) in thousands of Canadian dollars) 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. 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 completed its annual impairment test at December 31, 2015 and December 31, 2014, and concluded there was no impairment. 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 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. www.hammondmfg.com Annual Report 2015 32 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (tabular amounts (except share amounts) in thousands of Canadian dollars) 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 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. www.hammondmfg.com Annual Report 2015 33 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (tabular amounts (except share amounts) in thousands of Canadian dollars) r) Government Grants: Grants from the government are recognized at their fair value where there is a reasonable assurance that the grant will be received and the Company will comply with all attached conditions. Government grants in respect of capital expenditures are credited to the carrying amount of the related asset and are released to income over the expected useful lives of the relevant assets. Government grants which are not associated with an asset are credited to income so as to net them against the expense to which they relate. s) New standards and interpretations not yet adopted: International Accounting Standards Board has The following Standards, Interpretations and amendments to Standards that are not yet effective and while considered relevant to the Group have not yet been adopted by the Group. issued the Business combination accounting for interests in a joint operation: On May 6, 2014, the IASB issued amendments to IFRS 11, Accounting for Acquisitions of Interests in Joint Operations (Amendments to IFRS 11). The amendments require business combination accounting to be applied to acquisitions of interests in a joint operation that constitute a business. The Company intends to adopt the amendments to IFRS 11 in its financial statements for the annual period beginning on January 1, 2016. The Company does not expect the amendments to have a material impact on the financial statements. IFRS 9 Financial instruments: On July 24, 2014 the IASB issued the complete IFRS 9 (IFRS 9 (2014)). The mandatory effective date of IFRS 9 is for annual periods beginning on or after January 1, 2018 and must be applied retrospectively with some exemptions. The restatement of prior periods is not required and is only permitted if information is available without the use of hindsight. IFRS 9 (2014) introduces new requirements for the classification and measurement of financial assets. Under IFRS 9 (2014), financial assets are classified and measured based on the business model in which they are held and the characteristics of their contractual cash flows. The standard introduces additional changes relating to financial liabilities. It also amends the impairment model by introducing a new ‘expected credit loss’ model for calculating impairment. IFRS 9 (2014) also includes a new general hedge accounting standard which aligns hedge accounting more closely with risk management. This new standard does not fundamentally change the types of hedging relationships or the requirement to measure and recognize ineffectiveness; however it will provide more hedging strategies that are used for risk management to qualify for hedge accounting and introduce more judgment to assess the effectiveness of a hedging relationship. Special transitional requirements have been set for the application of the new general hedging model. The Company intends to adopt IFRS 9 (2014) in its financial statements for the annual period beginning on January 1, 2018. The extent of the impact of adoption of the standard has not yet been determined. IFRS 15 Revenue from contracts with customers: On May 28, 2014 the IASB issued IFRS 15, Revenue from Contracts with Customers. The new standard is effective for annual periods beginning on or after January 1, 2018. IFRS 15 www.hammondmfg.com Annual Report 2015 34 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (tabular amounts (except share amounts) in thousands of Canadian dollars) will replace IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13 Customer Loyalty Programs, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfer of Assets from Customers and SIC 31 Revenue – Barter Transactions Involving Advertising Services. The standard contains a single model that applies to contracts with customers and two approaches to recognizing revenue: at a point in time or over time. The model features a contract-based five-step analysis of transactions to determine whether, how much and when revenue is recognized. New estimates and judgmental thresholds have been introduced, which may affect the amount and/or timing of revenue recognized. The new standard applies to contracts with customers and is effective for the fiscal years beginning on or after January 1, 2018. It does not apply to insurance contracts, financial instruments or lease contracts. The extent of the impact of adoption of this standard has not yet been determined. IFRS 16 Leases On January 13, 2016 the IASB issued IFRS 16 Leases. The new standard is effective for annual periods beginning on or after January 1, 2019. Earlier application is permitted for entities that apply IFRS 15 Revenue from Contracts with Customers at or before the date of initial adoption of IFRS 16. IFRS 16 will replace IAS 17 Leases. This standard introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities from all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee is required to recognize a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. This standard substantially carries forward the lessor accounting requirements of IAS 17, while requiring enhanced disclosures to be provided by lessors. Other areas of the lease accounting model have been impacted, including the definition of a lease. Transitional provisions have been provided. The Company intends to adopt IFRA 16 in its financial statements for the annual period beginning on January 1, 2019. The extent of the impact of adoption of the standard has not yet been determined. Transfer of assets between an investor and its associate or joint venture: On September 11, 2014 the IASB issued Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28). The amendments apply prospectively for annual periods beginning on or after January 1, 2016, however, on December 17, 2015 the IASB decided to defer the effective date for these amendments indefinitely. Early adoption is still permitted. The amendments address an acknowledged inconsistency between the requirements in IFRS 10 and those in IAS 28 (2011), in dealing with the sale or contribution of assets between an investor and its associate or joint venture (JV). Specifically, under the existing consolidation standard the parent recognizes the full gain on the loss of control, whereas under the existing guidance on associates and JVs the parent recognizes the gain only to the extent of unrelated investors’ interests in the associate or JV. The main consequence of the amendments is that a full gain/loss is recognized when the assets transferred meet the definition of a ‘business’ under IFRS 3 Business Combinations. A partial gain/loss is recognized when the assets transferred do not meet the definition of a business, even if these assets are housed in a subsidiary. The Company does not intend to early adopt these amendments in its financial statements for the annual period beginning on January 1, 2016, as the effective date for these amendments has been deferred indefinitely. www.hammondmfg.com Annual Report 2015 35 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (tabular amounts (except share amounts) in thousands of Canadian dollars) Annual improvements to IFRS (2012 – 2014) cycle: On September 25, 2014 the IASB issued narrow-scope amendments to a total of four standards as part of its annual improvements process. The amendments will apply for annual periods beginning on or after January 1, 2016. Earlier application is permitted, in which case, the related consequential amendments to other IFRSs would also apply. Each of the amendments has its own specific transition requirements. Amendments were made to clarify the following in their respective standards: • • • • Changes in method for disposal under IFRS 5 Non-current Assets Held for Sale and Discontinued Operations; ‘Continuing condensed Disclosures; involvement’ interim for servicing contracts and offsetting disclosures financial statements under IFRS 7 Financial in Instruments: Discount rate in a regional market sharing the same currency under IAS 19 Employee Benefits; Disclosure of information ‘elsewhere in the interim financial report’ under IAS 34 Interim Financial Reporting; The Company intends to adopt these amendments in its financial statements for the annual period beginning on January 1, 2016. The Company does not expect the amendments to have a material impact on the financial statements. Disclosure initiative: Amendments to IAS 1: On December 18, 2014 the IASB issued amendments to IAS 1 Presentation of Financial Statements as part of its major initiative to improve presentation and disclosure in financial reports (the “Disclosure Initiative”). The amendments are effective for annual periods beginning on or after January 1, 2016. Early adoption is permitted. These amendments will not require any significant change to current practice, but should facilitate improved financial statement disclosures. The Company intends to adopt these amendments in its financial statements for the annual period beginning on January 1, 2016. The Company does not expect the amendments to have a material impact on the financial statements. 4) Trade and other receivables: Trade receivables Employee receivables Other receivables Allowance for doubtful accounts Trade and other receivables December 31, 2015 December 31, 2014 $ 15,150 11 1,223 16,384 (146) $ 16,238 $ 14,130 13 633 14,776 (122) $ 14,654 The Company’s exposure to credit and currency risks, and impairment losses related to trade and other receivables is disclosed in note 24. www.hammondmfg.com Annual Report 2015 36 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (tabular amounts (except share amounts) in thousands of Canadian dollars) 5) Inventories: December 31, 2015 December 31, 2014 Raw materials and work-in-process Finished goods $ 8,533 22,066 $ 7,928 19,614 Inventories $ 30,599 $ 27,542 Inventories carried at fair value less cost to sell $ 1,012 $ 1,001 In 2015, raw materials, consumables and changes in finished goods and work in progress recognized as cost of sales amounted to approximately $80,024,000 (2014 - $72,860,000). In 2015, the write-down of inventories to net realizable value amounted to approximately $159,000 (2014 - $376,000). The write-down is included in cost of sales. www.hammondmfg.com Annual Report 2015 37 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (tabular amounts (except share amounts) in thousands of Canadian dollars) 6) Property plant and equipment: Cost Land and buildings Machinery and equipment Tooling Office equipment Total Balance at December 31, 2013 $ 8,829 $ 34,156 $ 8,316 $ 4,973 $ 56,274 Additions Disposals Effect of movements in exchange rates 421 (14) 2 1,213 - 123 259 (156) 121 42 (134) 17 1,935 (304) 263 Balance at December 31, 2014 $ 9,238 $ 35,492 $ 8,540 $ 4,898 $ 58,168 Additions Disposals Effect of movements in exchange rates $ 9,894 (15) 11 $ 6,327 - 294 822 $ - 353 $ 37 (36) 49 $ 17,080 (51) 707 Balance at December 31, 2015 $ 19,128 $ 42,113 $ 9,715 $ 4,948 $ 75,904 At December 31, 2015, the amount of expenditures recognized in the carrying amount in the course of its construction is $9,721,000 (2014 - $28,000) in land and buildings, $4,904,000 (2014 - $361,000) in machinery and equipment, $431,000 (2014 - $98,000) in tooling and $8,000 (2014 - $nil) in office equipment. Accumulated depreciation Land and buildings Machinery and equipment Tooling Office equipment Total Balance at December 31, 2013 $ 4,977 $ 26,506 $ 6,334 $ 4,589 $ 42,406 Depreciation for the year Disposals Effect of movements in exchange rates 177 (14) 1 1,437 - 75 306 (156) 91 154 (133) 15 2,074 (303) 182 Balance at December 31, 2014 $ 5,141 $ 28,018 $ 6,575 $ 4,625 $ 44,359 Depreciation for the year Disposals Effect of movements in exchange rates $ 180 (15) 10 $ 1,465 - 203 $ 323 - 289 $ 133 (36) 42 $ 2,101 (51) 544 Balance at December 31, 2015 $ 5,316 $ 29,686 $ 7,187 $ 4,764 $ 46,953 Carrying amounts Land and buildings Machinery and equipment Tooling Office equipment Total At December 31, 2014 $ 4,097 $ 7,474 $ 1,965 $ 273 $ 13,809 At December 31, 2015 $ 13,812 $ 12,427 $ 2,528 $ 184 $ 28,951 www.hammondmfg.com Annual Report 2015 38 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (tabular amounts (except share amounts) in thousands of Canadian dollars) 7) Intangible assets and goodwill: Cost Goodwill Computer software Development costs Total Balance at December 31, 2013 $ 117 $ 2,052 $ 159 $ 2,328 Additions Disposal Effect of movement in exchange rates - - 3 57 (43) 12 26 - - 83 (43) 15 Balance at December 31, 2014 $ 120 $ 2,078 $ 185 $ 2,383 Additions Effect of movement in exchange rates - $ 16 $ 21 14 $ 25 - $ 46 30 Balance at December 31, 2015 $ 136 $ 2,113 $ 210 $ 2,459 Amortization and impairment losses Goodwill Computer software Development costs Total Balance at December 31, 2013 $ - $ 1,860 $ 84 $ 1,944 Amortization for the year Disposal Effect of movement in exchange rates - - - 51 (41) 6 24 - - 75 (41) 6 Balance at December 31, 2014 $ - $ 1,876 $ 108 $ 1,984 Amortization for the year Effect of movement in exchange rates - $ - $ 48 14 $ 27 - $ 75 14 Balance at December 31, 2015 $ - $ 1,938 $ 135 $ 2,073 Carrying amounts Goodwill Computer software Development costs Total At December 31, 2014 $ 120 $ 202 $ 77 $ 399 At December 31, 2015 $ 136 $ 175 $ 75 $ 386 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, 2015. www.hammondmfg.com Annual Report 2015 39 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (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% based 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, 2014 and December 31, 2015, the assets, including goodwill of $136,000 (2014 – $120,000), 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. 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, 2014. 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 2015 related to the property were $85,000 (2014 - $109,000). 9) Equity investment RITEC Enclosures Inc. December 31, 2013 Equity in 2014 earnings December 31, 2014 Equity in 2015 earnings December 31, 2015 Total $ 265 115 $ 380 169 $ 549 Since 2008, the Company has had 40% ownership of RITEC. All dividends paid since taking the 40% holding in 2008 have been reinvested back to RITEC. Earnings of $169,000 (2014 – $115,000) were offset with an increase in elimination of profit held in inventory of $71,000 (2014 – $25,000). Reported share of profit of equity accounted investees is $98,000 (2014 - $90,000). www.hammondmfg.com Annual Report 2015 40 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (tabular amounts (except share amounts) in thousands of Canadian dollars) RITEC Enclosures Inc. Assets Liabilities Revenues Profit (after tax) 10) Loans and borrowings: Bank indebtedness: December 31, 2015 December 31, 2014 1,717 $ $ 2,525 1,782 3,958 422 1,169 3,428 288 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. December 31, 2015 December 31, 2014 Local currency CDN $ Local currency CDN $ Canadian entities CDN UK entity GBP Bank indebtedness $ 12,219 £ 21 $ 12,219 42 $ 12,261 $ 6,064 £ 197 $ 6,064 355 $ 6,419 Interest is payable at the rate of bank prime plus 50 basis points (2014 - bank prime plus 50 basis points). www.hammondmfg.com Annual Report 2015 41 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (tabular amounts (except share amounts) in thousands of Canadian dollars) Long-term debt: December 31, December 31, 2014 2015 Demand term loan drawn in US funds at a fixed interest rate of 6.05% through December 2018, secured by the assets of HMCL. Monthly principal installments of $15 USD. Demand term loan amortized over 25 years drawn in USD funds at a fixed interest rate of 5.30% through March 2026, secured by the assets of Hammond Manufacturing Company Inc. Monthly principal installments of $5 USD. Demand term loan amortized over 25 years drawn in CDN funds at a fixed interest rate of 5.20% through March 2026, secured by the assets of Hammond Manufacturing Company Inc. Monthly principal installments of $15 CDN. Interest free term loan of $385 through the Federal Economic Development Agency for Southern Ontario. Repayment will be over 60 equal monthly installments starting January 1, 2020. Value represents the present value of the stream of payments to repay utilizing a 5.2% discount factor. Subtotal Finance lease obligations: Secured 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. Secured by equipment, drawn in GBP Sterling at interest rate 8.8%. Monthly installments of £1 GBP until April 2019. Secured by equipment, drawn in US funds at interest rate of 4.97%. Monthly installments of $7 USD until April 2019 with a lump sum payment at that time of $114 USD. Total long-term debt Less current portion of long-term debt Non-current long-term debt $ 760 $ 849 2,076 1,500 275 4,611 - 87 - - - 849 3 - 484 479 $ 5,182 $ 1,331 4,452 926 $ 730 $ 405 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: 2016 2017 2018 2019 2020 Thereafter $ $ 4,452 123 130 202 77 198 5,182 www.hammondmfg.com Annual Report 2015 42 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (tabular amounts (except share amounts) in thousands of Canadian dollars) The following reflects the aggregate amount of principal payments required to meet the existing long-term debt obligations in each of the next five years is if the loans are not placed on demand: 2016 2017 2018 2019 2020 Thereafter $ $ 476 504 510 328 197 3,167 5,182 Interest expense is comprised as follows: December 31, 2015 December 31, 2014 Long-term debt, including capital leases Bank indebtedness $ 47 298 $ 34 303 Interest expense $ 345 $ 337 11) Trade and other payables: Trade payables Dividends payable Non-trade payables and accrued expenses December 31, 2015 December 31, 2014 $ 4,802 - 12,347 $ 17,149 $ 3,510 226 7,939 $ 11,675 The Group’s exposure to currency and liquidity risk related to trade and other payables is disclosed in note 24. 12) Provisions: Balance at December 31, 2013 Provisions made during the year Provisions used during the year Environmental Remediation $ 170 Sales Returns Total $ 65 $ 235 48 (48) 70 (65) 118 (113) Balance at December 31, 2014 $ 170 $ 70 $ 240 Provisions made during the year Provisions used during the year 65 (65) 55 (70) 120 (135) Balance at December 31, 2015 $ 170 $ 55 $ 225 Non-current Current 100 70 - 55 100 125 Balance at December 31, 2015 $ 170 $ 55 $ 225 www.hammondmfg.com Annual Report 2015 43 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (tabular amounts (except share amounts) in thousands of Canadian dollars) 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 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 Ministry of Environment is aware of the remediation and the process being used. New extraction wells scheduled for 2015 were deferred for one year which in turn has pushed the remediation plan out one year. 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, 2014 - $170,000) with $70,000 (2014 - $70,000) presented as a current provision. 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. This program was closed in 2014 and the obligation reflects the anticipated cost for those employees who exercised this option prior to closing. 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% (2014 – 3.5%) per annum health cost increase and a discount rate of 6.5% (2014 – 6.5%) were utilized to determine its present value. 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 $22,000 (2014 - $26,000). Changes in assumptions resulted in nominal gains/losses which have been included in general and administrative expense. www.hammondmfg.com Annual Report 2015 44 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (tabular amounts (except share amounts) in thousands of Canadian dollars) Post employment health benefits December 31, 2015 December 31, 2014 $ 72 $ 40 Employee health benefits while on disability 280 300 Total employee future benefits $ 320 $ 372 Post employment health benefits Balance at December 31, 2013 $ 146 Employee health benefits while on disability $ 300 Provisions made during the year Provisions used during the year (55) (19) 57 (57) Total $ 446 2 (76) Balance at December 31, 2014 $ 72 $ 300 $ 372 Provisions made during the year Provisions used during the year - (32) 42 (62) 42 (94) Balance at December 31, 2015 $ 40 $ 280 $ 320 Non-current Current 28 12 230 50 258 62 Balance at December 31, 2015 $ 40 $ 280 $ 320 14) Deferred tax assets and liabilities: Unrecognized deferred tax liabilities: At December 31, 2015, temporary differences of $15,461,000 (2014 - $11,319,000) 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. www.hammondmfg.com Annual Report 2015 45 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (tabular amounts (except share amounts) in thousands of Canadian dollars) Recognized deferred tax liabilities: Deferred tax assets and liabilities are attributable to the following: Deferred Tax Assets Intangible assets Investment property Inventories Loans and borrowings Provisions Total Deferred Tax Assets Deferred Tax Liabilities Property, plant and equipment Total Deferred Tax Liabilities Net tax liabilities 15) Share capital: a) Authorized: December 31, 2015 December 31, 2014 $ 30 $ 32 8 8 508 479 140 144 107 86 793 749 (1,522) (1,461) (1,522) (1,461) $ (729) $ (712) 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: December 31, 2015 December 31, 2014 8,556,000 Class A shares (2014 - 8,556,000) 2,778,300 Class B shares (2014 - 2,778,300) $ 10,242 7 $ 10,242 7 $ 10,249 $ 10,249 No shares were issued in 2015 or in 2014. www.hammondmfg.com Annual Report 2015 46 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (tabular amounts (except share amounts) in thousands of Canadian dollars) c) Dividends: The following dividends were declared and paid by the Company: No special cash dividends of Class A subordinate voting share were declared in 2015 (2014 - $0.04 per class A subordinate voting share) and no special cash dividends of Class B common share were declared in 2015 (2014 - $0.04 per class B common share). Special cash dividends of $0.02 per Class A subordinate voting share (2014 - $0.02) and special cash dividends of $0.02 per Class B common share (2014 - $0.02) were paid in 2015. Total dividends declared were $nil (2014 - $453,000). Total dividends paid were $226,000 (2014 - $227,000). 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: Less than 1 year Between 1 and 5 years Total minimum payments December 31, 2015 $ 1,857 4,439 $ 6,296 December 31, 2014 $ 1,605 3,372 $ 4,977 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, 2015, an amount of $1,775,000 was recognized as an expense in profit or loss in respect of operating leases (2014 - $1,683,000). 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 $2,236,000 (2014 - $200,000). These expenditures should be completed in the first half of 2015. 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. There were no significant developments to this claim in 2015. www.hammondmfg.com Annual Report 2015 47 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (tabular amounts (except share amounts) in thousands of Canadian dollars) 19) Income tax expense: Current tax expense: Current period Adjustment for prior periods December 31, 2015 December 31, 2014 $ 1,544 $ 1,464 (53) 41 1,491 1,505 Deferred tax expense: Origination and reversal of temporary differences 17 (168) Total income tax expense $ 1,508 $ 1,337 Net income for the year Total income tax expense Income before income tax 2015 2015 2014 2014 $ 3,550 1,508 $ 5,058 $ 3,637 1,337 $ 4,974 Income tax using the Company’s domestic tax rate 38.00% 1,922 38.00% 1,890 Reduced rate for active business and manufacturing and processing (5.99%) (303) (7.34%) (365) Effect of tax rates in foreign jurisdictions (2.23%) (113) (1.33%) (66) Reduction in tax rate Non-deductible expenses Other 20) Earnings per share: 0.00% - 0.00% - 1.05% 53 0.46% 23 (1.01%) (51) 29.81% $ 1,508 (2.92%) (145) 26.88% $ 1,337 The computations for basic and diluted earnings per share are as follows: December 31, 2015 December 31, 2014 Net income for the year $ 3,550 $ 3,637 Average number of common shares outstanding: Basic and Diluted Earnings per share: Basic Diluted 11,334,300 11,334,300 $ 0.31 0.31 $ 0.32 0.32 No share options to purchase common shares were outstanding as at December 31, 2015 or December 31, 2014. www.hammondmfg.com Annual Report 2015 48 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (tabular amounts (except share amounts) in thousands of Canadian dollars) 21) Personnel expenses: For years ended December 31, Wages and salaries Health benefit plans Canadian Pension Plan (CPP) and EI remittances Contributions to defined contribution plans For years ended December 31, Cost of sales Selling and distribution General and administrative Research and development 22) Management share option plan: 2015 $ 35,922 732 1,036 5,392 $ 43,082 2015 $ 30,974 8,969 2,950 189 $ 43,082 2014 $ 31,360 667 902 4,551 $ 37,480 2014 $ 27,003 7,619 2,693 165 $ 37,480 As at December 31, 2015, the Company has a stock-based compensation plan, which is described below. No options were granted through December 31, 2015 or in 2014 and no stock options were outstanding as of January 1, 2014, 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. www.hammondmfg.com Annual Report 2015 49 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (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: Assets carried at amortized cost Cash Trade and other receivables Income taxes recievable Liabilities carried at amortized cost Bank indebtedness Trade and other payables Income taxes payable Term loans Finance lease obligations December 31, 2015 Carrying amount Market value December 31, 2014 Carrying amount Market value $ 263 16,238 185 $ 16,686 $ 12,261 17,149 - 4,611 571 $ 34,592 $ 263 16,238 185 $ 16,686 $ 12,261 17,149 - 4,628 581 $ 34,619 $ 326 14,654 - $ 14,980 $ 6,419 11,675 954 849 482 $ 20,379 $ 326 14,654 - $ 14,980 $ 6,419 11,675 954 866 482 $ 20,396 Interest rates used to discount estimated cash flows, when applicable, are based on bank indication rates for similar type arrangements. Bank Indication Interest Rates December 31, 2015 December 31, 2014 Nonsecured variable interest rates Fixed rates 1 to 2 year secured 3 to 4 year secured 5 year secured 10 year secured From 2.7% 3.7% 4.0% 4.3% 4.8% To 3.7% 4.7% 5.0% 5.3% 5.8% From 3.0% 4.0% 4.3% 4.5% 5.0% To 4.0% 5.0% 5.3% 5.5% 6.0% Rates fluctuate depending on currency and jurisdiction. 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 • • • foreign currency risk interest rate 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. www.hammondmfg.com Annual Report 2015 50 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (tabular amounts (except share amounts) in thousands of Canadian dollars) Risk management framework: The Board of Directors has overall responsibility for the oversight of the Group’s risk the Group’s risk management management policies. framework. The Board for monitoring is responsible 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. www.hammondmfg.com Annual Report 2015 51 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (tabular amounts (except share amounts) in thousands of Canadian dollars) The Group establishes an allowance for doubtful accounts that represents its estimate of losses that could arise from the failure or inability of customers to make payments when due. The main component 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 allowance is determined based on historical data of payment statistics for similar financial assets. 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: December 31, 2015 December 31, 2014 Cash and receivables: Cash Trade and other receivables $ 263 16,238 $ 16,501 $ 326 14,654 $ 14,980 The maximum exposure to credit risk for loans and receivables at the reporting date by geographic region was: December 31, 2015 December 31, 2014 Cash and receivables: Canada United States United Kingdom Australia $ 9,018 6,156 1,235 92 $ 16,501 $ 8,728 5,037 1,053 162 $ 14,980 The following table reflects the net details of trade receivables as at December 31, 2015 and December 31, 2014: December 31, 2015 December 31, 2014 Gross Impairment Carrying Value Gross Impairment Carrying Value Aging of trade receivables: 1 – 30 days 31 – 60 days 61 – 90 days Over 90 days $ 8,441 5,165 1,247 297 - $ - - 146 $ 8,441 5,165 1,247 151 $ 7,414 4,941 1,516 259 - $ - - 122 $ 7,414 4,941 1,516 137 Trade receivables $ 15,150 $ 146 $ 15,004 $ 14,130 $ 122 $ 14,008 www.hammondmfg.com Annual Report 2015 52 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (tabular amounts (except share amounts) in thousands of Canadian dollars) The following table provides the roll forward of the allowance for doubtful accounts: Allowance for doubtful accounts, beginning of year December 31, 2015 December 31, 2014 338 $ $ 122 Accounts provided for in the year Amounts written off during the year 37 (13) 40 (256) Allowance for doubtful accounts $ 146 $ 122 Allowance for doubtful accounts as % of net trade receivable 1.0% 0.9% The following table provides the net details of trade and other receivables: Net trade receivable Employee receivables Other receivable December 31, 2015 December 31, 2014 $ 15,004 11 1,223 $ 14,008 13 633 Trade and other receivables $ 16,238 $ 14,654 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 $15,600,000 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 (2014 - bank prime plus 50 basis points). The Company had available unused credit facilities in the amount of $3,339,000 at December 31, 2015 (2014 - $9,181,000) to meet fluctuations in working capital requirements. The Group has established a $10,500,000 On Demand Real Estate Loan facility that is secured against real estate of the company. The group has currently drawn $3,600,000 against this and intends to utilize the remainder to create more room in the overdraft facility. The Group has established an $11,000,000 lease line to finance new equipment purchases. The Group has successfully applied for and been approved by the Canadian government program FedDev for an interest free loan up to $3,462,000 on eligible spending. As at December 31, 2015 the group had received $385,000 of this funding. The present value of this funding $275,000 was set up as long term debt and $110,000 which reflects the interest savings has been offset to property plant and equipment. www.hammondmfg.com Annual Report 2015 53 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (tabular amounts (except share amounts) in thousands of Canadian dollars) The Group has successfully applied for and been approved by the Southwestern Ontario Development Fund for a grant up to $1,500,000 on eligible spending. As at December 31, 2015 the group had received $300,000 of this funding which has been offset to property plant and equipment. The grant and government funding noted above are contingent on adding new jobs and retaining existing jobs at its Guelph, Ontario locations. As at December 31, 2015, the Group was in compliance with this requirement. 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. December 31, 2015 Carrying amount Contractual cash flows 2016 2017 2018 to 2019 Thereafter Non-derivative financial liabilities Term loans Finance lease liabilities Trade and other payables 17,149 12,261 Bank indebtedness $ 4,611 571 (639) (145) (145) (349) $ (4,721) $ (4,336) $ - $ - $ (385) (17,149) (17,149) (12,261) (12,261) - - - - - - - Total $ 34,592 $ (34,770) $(33,891) $ (145) $ (349) $ (385) December 31, 2014 Carrying amount Contractual cash flows 2015 2016 2017 to 2018 Thereafter Non-derivative financial liabilities Term loans Finance lease liabilities Trade and other payables 11,675 Bank indebtedness $ 849 $ (954) $ (954) 482 (550) (98) (96) (192) (164) $ - $ - $ - (11,675) (11,675) 6,419 (6,419) (6,419) - - - - - - Total $ 19,425 $ (19,598) $(19,146) $ (96) $ (192) $ (164) 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. Foreign currency risk: The Group has a substantial number of transactions denominated in US dollars and is exposed to risk with respect to fluctuations in exchange rates between Canadian and US dollars. The Group holds smaller positions in other foreign currencies. The Group does not www.hammondmfg.com Annual Report 2015 54 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (tabular amounts (except share amounts) in thousands of Canadian dollars) 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. Currency Accounts Receivable Accounts Payable Dec 31, 2015 Dec 31, 2014 Dec 31, 2015 Dec 31, 2014 Dec 31, 2015 Dec 31, 2014 Long-term Debt Australia Europe New Zealand Taiwan UK USA AUD EURO NZD TWD GBP USD 65 176 29 211 475 4,587 44 113 11 196 493 4,364 (14) (3) - (2,595) (213) (2,572) (27) (18) - (1,686) (234) (2,146) - - - - (43) (2,398) - - - - (2) (1,145) 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 2015 would have increased net product sales by $529,000 (2014 - $516,000) and increased income from operations by $562,000 (2014 - $442,000). Inversely, a one cent increase in the Canadian dollar against the US dollar in 2015 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 ending 2015 bank indebtedness would increase annual interest expense by $123,000 (2014 - $64,000). This analysis assumes that all other variables remain constant. Inversely, a one percent decrease in the variable rates charged on ending 2015 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 behavior. 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 www.hammondmfg.com Annual Report 2015 55 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (tabular amounts (except share amounts) in thousands of Canadian dollars) 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 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, Debt Service Ratio and Current Ratio. The Group is in compliance with its covenants at December 31, 2015 and has been in compliance with its covenants through 2014 and 2015. • There were no changes to the Group’s approach to capital management during 2015. • Neither the Company, nor any of its subsidiaries, is subject to externally imposed capital requirements. www.hammondmfg.com Annual Report 2015 56 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (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 US, the UK and Australia. Geographic Segments Year Ended: December 31, 2015 December 31, 2014 Net Product Sales: Canada: Sales to customers $ 42,413 $ 41,564 United States: Sales to customers All other countries: Sales to customers Net product sales Non-current assets: Canada: 63,648 11,103 53,387 10,321 $ 117,164 $ 105,272 Non-current assets $ 29,672 $ 14,594 United States: Non-current assets All other countries: Non-current assets Non-current assets Total 26) Related party transactions: 682 575 625 413 $ 30,930 $ 15,632 a) Key management includes the Company’s directors and members of the executive management team. Compensation awarded to key management included: Years Ended: December 31, 2015 December 31, 2014 Salaries and short-term employee benefits $ 697 $ 721 b) The Company purchased $3,597,000 of product from RITEC in 2015 (2014 - $3,002,000). The Company sold $12,000 of product to RITEC in 2015 (2014 - $15,000). 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, 2015 were $9,000 (2014 - $7,000) while trade payables were $158,000 (2014 - $61,000). 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. www.hammondmfg.com Annual Report 2015 57 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (tabular amounts (except share amounts) in thousands of Canadian dollars) 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: HAMMOND MANUFACTURING COMPANY LIMITED Country of % Ownership Interest Incorporation December 31, 2015 December 31, 2014 Les Fabrications Hammond (Quebec) Inc. / Hammond Manufacturing (Quebec) Inc. Canada Hammond Electronics Pty Limited Australia Hammond Electronics Limited Subsidiary of above: Hammond Electronics Asia Limited UK Republic of China Hammond Manufacturing Company Inc. US Subsidiaries of above: Hammond Holdings Inc. Paulding Electrical Products, Inc US US 100 100 100 100 100 100 100 100 100 100 100 100 100 100 The year end for each of the entities listed in the table above is December 31. 27) Correction of immaterial prior period error: During the year the Company became aware that its loan in the amount of $849,000 at December 31, 2014 has terms that enable the lender to call the loan on demand, but a portion of the loan was classified as long-term debt within non-current liabilities. The impact of the correction to classify the full amount of the loan in current liabilities has been recorded retrospectively. The effect as at December 31, 2014 has been recorded as an increase in current liabilities of $637,000 and a reduction in non-current liabilities of $637,000. www.hammondmfg.com Annual Report 2015 58 Officers/Senior Management Robert F. Hammond Chairman and CEO Alexander Stirling Secretary & CFO Ray Shatzel Vice-President, Electronic Sales 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 Paul Quigley * President Quigley Group Inc. Sheila Hammond B.A., B.Ed., M.Sc. Registered Psychotherapist Registered Marriage & Family Therapist Officer & Director, Eramosa Group Ltd. *Members of the Audit Committee and Compensation Committee Auditors KPMG LLP RSM, 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. Over 95 Years of providing Quality Products & Service Excellence. 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. 

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