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
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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
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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.
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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
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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
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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
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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.
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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
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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.