Hammond Manufacturing Company Limited
Annual Report 2016

Plain-text annual report

Quality Products. Service Excellence. 2016 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 2016 Annual Report 4 5 Report to Shareholders Management Discussion and Analysis 18 Management’s Responsibility for Financial Reporting 19 20 21 22 23 24 63 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 2016 3 REPORT TO SHAREHOLDERS Dear fellow shareholders, employees, and stakeholders: Over 100 years ago, an entrepreneurial machinist set up a pedal-powered lathe in a small shed. His family was growing toward an eventual nine mouths to feed and the little house beside the train tracks was cramped. It was with great hope for the future that the innovative tool for the sand casting industry took form. This drive to build a secure future was the contribution of my grandfather, Oliver Hammond and his teenage sons, my uncles, Len and Roy. Once started, even the early death of Oliver didn’t deter Grandma Lillian from continuing the mission with her sons and daughters. As the technology of electricity and radio evolved, the little lathe gave way to electronic and wireless products. The company grew as a key supplier to communications and radar manufacturers. In the 1960’s electrical enclosures and transformers broadened the product ranges. Attracted by a strong family culture, skills were broadened by a new group of capable and engaged associates and Hammond Manufacturing went from strength to strength. Our progress is still led by dedicated and engaged associates. Hammond promotes from within, stresses security and a continuous improvement culture. Hammond products have always been known for quality and the Company for service excellence. Our word is our bond. This is what Grandma Lillian taught and this is what will lead us into the future. The following annual report illustrates our long-term thinking. We have embarked on a long-term capital plan that will provide capacity for the future, even if there is a short-term cost. Sincerely, Robert F. Hammond Chairman & CEO ANNUAL MEETING The meeting of the Shareholders will be held on May 1, 2017 at Cutten Fields 190 College Avenue East, Guelph, Ontario Commencing at 10:00 a.m. www.hammondmfg.com Annual Report 2016 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, 2016. This discussion should be read in conjunction with the Company’s consolidated financial statements for the year ended December 31, 2016 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 3, 2017. 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 2016 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 directly to Original Equipment Manufacturers (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 2015 at $1.00 USD to $1.16 CDN and close 2015 at $1.00 USD to $1.384 CDN and then fall off through 2016 and close at $1.00 USD to $1.343 CDN. At these exchange levels it provides the company the opportunity to be more competitive in the US market place. This year our new facility came on line adding 119,000 square feet to our production capacity. Set up of the new facility did include moving some production from other facilities causing a drain on our resources and disruption to existing production. The move was completed and the new facility came on line for the second half of 2016. Throughout the second half of 2016 we continued to streamline the new facility and began planning the reconfiguration of our existing Edinburgh Rd. facility. With moving some production from our Edinburgh Rd. location to the new location it has given us room to reconfigure the remaining production areas to create more efficient work flows. www.hammondmfg.com Annual Report 2016 6 MANAGEMENT DISCUSSION AND ANALYSIS QUARTERLY INFORMATION HAMMOND MANUFACTURING COMPANY LIMITED Summary of Quarterly Financial Information (In thousands of Canadian dollars except earnings per share) Q1 Q2 Q3 Q4 2016 Year-to-date Total Net product sales $31,774 $28,011 $27,944 $27,995 $115,724 Income from operating activities 2,022 Net income for the period 1,725 (586) (610) 188 672 2,296 (296) (135) 684 Earnings per share - Basic & diluted $0.15 ($0.05) ($0.03) ($0.01) $0.06 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 1,907 1,307 1,636 1,775 6,625 Net income for the period 828 937 705 1,080 3,550 Earnings per share - Basic & diluted Note: Interim consolidated financial information has not been reviewed by an auditor. $0.09 $0.07 $0.06 $0.09 $0.31 FOURTH QUARTER RESULTS NET PRODUCT SALES Net product sales, for the three months ended December 31, 2016 were $27,995,000, flat compared to net product sales of $27,944,000 in the third quarter of 2016. Net product sales for the current quarter were up 1.0% compared to net product sales of $27,714,000 for the three months ended December 31, 2015. Foreign exchange provided a lift of $417,000 and accounts for 1.5% of this increase and thus actual sales declined 0.5%. GROSS PROFIT Gross profit for the fourth quarter of 2016 was 28.2% of net sales compared to 27.2% in the third quarter of 2016. Gross profits of 28.2% are down from the fourth quarter of 2015 level of 33.1%. Relocation expenses of $213,000 (0.8% of net product sales) for the move of some equipment to our new facility were incurred and expensed this quarter. Gross profit is improving over the second and third quarters of this year as the impact of setting up the new facility subsides. The next hurdle is to increase sales to help absorb the additional fixed cost structure associated with the new facility. www.hammondmfg.com Annual Report 2016 7 MANAGEMENT DISCUSSION AND ANALYSIS 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 $7,229,000 were 25.8% of net sales for the three months ended December 31, 2016, compared with spending of $6,152,000 in the previous quarter that was 22.0% of net sales and $7,409,000 which was 26.7% of net sales in the fourth quarter of 2015.Year over year spend was down despite the impact of foreign exchange costs of $137,000. Selling and distribution spending of $5,933,000 was down 3.6% over the prior quarter and up 4.5% over the fourth quarter of 2015. With sales down year over year, certain sales incentives were not required and released reducing expense levels in this quarter. General and administrative expenses of $1,179,000 were down this quarter from the previous quarter’s spending of $1,196,000 and up from the fourth quarter of 2015 spending of $1,132,000. Research and development spend of $63,000 was level with 2015 at $65,000. A net loss of $54,000 on sale of property, plant and equipment was recognized this quarter as some assets were disposed of with the move to the new facility. INCOME FROM OPERATING ACTIVITIES Income from operating activities of $672,000 (2.4% of net sales) is up from the prior quarter of $188,000 (0.7% of net sales) and down from the 2015 fourth quarter amount of $1,775,000 (6.4% of net sales) with the difference from 2015 primarily driven by the impact of the new facility. INTEREST Fourth quarter interest expense of $245,000 was flat to the third quarter expense of $246,000 and up $126,000 or 95.2% from the comparable period of the prior year. Our external debt has grown significantly since 2015 as we embarked on our expansion project. External debt has risen from $17,443,000 at the end of the fourth quarter in 2015 to $25,186,000 at the end of this quarter. FOREIGN EXCHANGE TRANSACTIONAL IMPACT During the fourth quarter of 2016, the Company recognized a loss on transactional foreign exchange of $528,000 compared to a loss of $302,000 in the three months ended December 31, 2015. 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. While in the fourth quarter of 2016 the US dollar opened at an exchange of $1.00 USD to $1.312 CDN and closed at $1.00 USD to $1.343 CDN. Most of our transactional exposure is in accounts payable and the impact of foreign exchange movement in this direction creates transactional losses. Intercompany balance impact was $234,000 of the $528,000 in 2016. In the past the primary exposure was felt with the movement of the US dollar. With the impact of the British exit from the European Union (Brexit) we have seen the British pound drop in value and due to an intercompany receivable in GBP it generated a transactional loss in the quarter of approximately $52,000 (included in the $234,000 noted above). INCOME TAX EXPENSE Net income tax expense in the fourth quarter was $99,000 which included the final true up for the year’s activities. The group had a loss before taxes yet shows a tax expense, this is due to the www.hammondmfg.com Annual Report 2016 8 MANAGEMENT DISCUSSION AND ANALYSIS differential rates of our entities. The US entity was profitable and has a tax rate of 34% whereas the Canadian entity had a loss at a tax rate of 25%. NET LOSS FOR THE PERIOD A net loss of $135,000 (0.5% loss on net product sales) was recognized for the fourth quarter ended December 31, 2016 this improved from a net loss of $296,000 (1.1% loss on net product sales) in the previous quarter and down from the net income of $1,080,000 (3.9% return on net product sales) recognized in the fourth quarter of 2015. FOREIGN EXCHANGE TRANSLATION OF FOREIGN OPERATIONS The translation adjustment for the fourth quarter of 2016 was a gain of $322,000 compared to a translation gain of $763,000 in the fourth quarter of 2015. 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 2016 the US dollar opened at an exchange of $1.00 USD to $1.312 CDN and closed at $1.00 USD to $1.343 CDN which created most of that quarter’s gain. As noted earlier the British pound has been impacted by Brexit. The impact from the drop in the value of the British pound in this quarter was a loss of $32,000 while the on the US dollar impact provided a gain of $362,000. TOTAL COMPREHENSIVE INCOME Comprehensive income for the fourth quarter ended December 31, 2016 was $187,000 (0.7% of net product sales) down from the 3 months ended December 31, 2015 of $1,843,000 (6.7% of net product sales). FULL YEAR RESULTS NET PRODUCT SALES Net product sales of $115,724,000 in 2016 were down 1.2% compared to net sales of $117,164,000 reported in 2015. Foreign exchange accounts provided approximately $1,575,000 (1.3%) upside so sales were actually down 2.5% or $3,015,000 in constant dollars. For the most part our markets were flat. The primary cause of the decrease in sales was from the drop off in solar related sales. Our sales have dropped around $5,000,000 year over year in this area as our key customer in the utility solar area saw their sales decline. GROSS PROFIT In 2016, gross profit was $32,810,000 or 28.4% of net product sales compared to $37,140,000 or 31.7% achieved in 2015. The new facility infrastructure cost added a little over $1,500,000 for about 7.5 months of operation. Production inefficiencies associated with the move also created a drag on gross profit levels. The group has seen production efficiencies improve in the last quarter and it will continue to be one of our main focuses in 2017. 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 $30,514,000 (26.4% of net product sales) was flat compared to the 2015 spend of $30,515,000 (26.0% of net product sales). Foreign exchange added approximately www.hammondmfg.com Annual Report 2016 9 MANAGEMENT DISCUSSION AND ANALYSIS $270,000 to the cost base in 2016 so spend was actually down slightly compared to 2015 as a reflection of the lower sales levels. Selling and distribution expenses of $25,226,000 decreased 0.2% ($44,000) compared to 2015. Foreign exchange added $281,000 to the cost base in 2016. Our general and administrative expenses were down $21,000 or 0.4% compared to 2015 spending levels of $4,935,000. In this case foreign exchange decreased the cost base by $12,000 as there was a heavier weighting of British pound impact. In 2016 the research and development spending level was up 3.5% to $299,000 over 2015 spending levels. We continue to invest in our future. A net loss of $54,000 on sale of property, plant and equipment was recognized this quarter as some assets were disposed with the move to the new facility. INCOME FROM OPERATING ACTIVITIES Overall, 2016 earnings from operating activities of $2,296,000 (2.0% of net product sales) is down compared to 2015 earnings of $6,625,000 (5.7% of net product sales). INTEREST Interest expense of $864,000 increased $519,000 or 250.7% from the 2015 expense level of $345,000. Average external debt has been increasing over 2015 and 2016 as the group invested in our new facility. External debt at the end of 2014 was $7,750,000 and rose to $17,443,000 by the end of 2015 and end 2016 is at $25,186,000. FOREIGN EXCHANGE TRANSACTIONAL IMPACT A $212,000 foreign exchange transactional loss was reported in 2016, compared to a transactional loss of $1,235,000 in 2015. Primarily driven by the impact of the US dollar, this year the fluctuation in exchange rates were not as significant as in prior years. INCOME TAX EXPENSE 2016 tax expenses of $540,000 were 44.1% of income before income tax. This compares to a 2015 tax expense of $1,508,000 which was 29.8% of income before income tax. Earnings by our US entity at a tax rate of 34% are not offset by the loss of the Canadian entity at a tax rate of 25%. NET INCOME FOR THE YEAR Net income for the year ended December 31, 2016 was $684,000 (0.6% of net product sales) down 2.4% from the prior year net income of $3,550,000 (3.0% of net product sales). FOREIGN EXCHANGE TRANSLATION OF FOREIGN OPERATIONS During 2016 a loss of $722,000 on translational foreign exchange was realized compared to a gain of $2,436,000 in 2015. 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 2016 the US dollar opened at an exchange of $1.00 USD to $1.384 CDN and closed at $1.00 USD to $1.343 CDN which created most of that year’s loss. As noted earlier Brexit has played a part in impacting the value of the British pound. It opened 2016 at an exchange of $1.00 GBP to $2.04 CDN and closed at $1.00 GBP to www.hammondmfg.com Annual Report 2016 10 MANAGEMENT DISCUSSION AND ANALYSIS $1.656 CDN which created a translational loss on our UK entity of $282,000 with our US entity making up the remainder of the translational loss for 2016. TOTAL COMPREHENSIVE INCOME (LOSS) Comprehensive Loss for 2016 was $38,000 (0.0% of net product sales) down from a comprehensive income of $5,986,000 (5.1% of net product sales) in 2015. SELECTED ANNUAL INFORMATION Three year financial summary: For the years ended December 31, (In thousands except per share amounts) Consolidated Statements of Comprehensive Income 2016 2015 2014 Net product sales $ 115,724 $ 117,164 $ 105,272 Income from operating activities Net income for the year Per share - basic & fully diluted net earnings for the year 2,296 684 6,625 3,550 5,919 3,637 $0.06 $0.31 $0.32 Consolidated Statement of Financial Position 2016 2015 2014 Total assets Total funded debt Working capital Net cash generated from (used in) 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 $ $ $ 82,157 25,186 19,016 (3,370) 226 - - 43,264 79,394 17,443 14,415 6,680 - - 226 43,528 59,245 7,750 23,429 5,531 227 226 - 37,542 $ $ $ Net cash used in operating activities for 2016 was $3,370,000 (net cash generated in 2015 - $6,680,000). Cash flows from financing activities amounted to a source of $7,566,000 (2015 – source of $9,462,000). Cash used in investing activities was $4,071,000 (2015 - $17,126,000). Trade and other receivables of $15,536,000 at December 31, 2016 have decreased 4.3% compared to the 2015 year-end. Lower sales and improved days sales outstanding (DSO) contributed to this decrease. DSO as at December 31, 2016 calculated on net sales was 52.5 days which was down from 57 days calculated as at December 31, 2015. The quality of accounts receivable remains high. The year-end investment in inventory of $32,873,000 was an increase of 7.4% from the 2015 inventory value of $30,599,000. Inventory turnover decreased to 2.62 from 2.83 (cost of sales divided by the twelve month average inventory level). www.hammondmfg.com Annual Report 2016 11 MANAGEMENT DISCUSSION AND ANALYSIS Trade and other payables decreased by $4,873,000, or 28.4% over 2015 to $17,149,000. The majority of this decrease can be attributed to our expansion activities. At the end of 2015 there was a large amount of payables held related to the expansion project. Our total debt (long-term debt and bank indebtedness) increased by $7,743,000 over the prior year to $25,186,000. Our debt-to-equity ratio at year-end was approximately 0.58:1 (2015 - 0.40:1). The Company paid a dividend of $226,000 in May of 2016 (2015 - $226,000). In 2016 the company completed construction on a new 119,000 sq. ft. facility to expand its manufacturing capabilities. The project included the purchase or lease of supporting equipment for the new facility as well as the upgrading of its existing production facility. Property, plant, equipment and intangible asset additions in 2016 were $4,071,000 down from $17,126,000 in 2015. The Company spent $1,021,000 (2015 - $9,894,000) on building and leasehold improvements. $124,000 (2015 - $446,000) was invested toward upgrading and replacing machinery and equipment, $2,360,000 (2015 - $5,881,000) was invested toward machinery and equipment for capacity growth, $311,000 (2015 - $822,000) was invested in tooling, $214,000 (2015 - $37,000) was invested in office equipment and $41,000 (2015 – $46,000) was spent on software and development costs. In 2016 the Group utilized $5,236,000 of its $11,000,000 lease line to finance new equipment purchases. The Group entered into a sale-leaseback transaction with HSBC whereby equipment previously purchased in 2015 and 2016 using the Company’s line of credit in the amount of $4,271,000 USD was sold to the bank and leased back. There was no gain or loss on the sale transaction. 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, 2016 the group had received $1,535,000 of this funding (2015 - $385,000). 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, 2016 the group has received $500,000 of this funding (2015 - $300,000). The grant and government funding noted above are contingent on adding new jobs and retaining existing jobs at our 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 2017 2018 2019 2020 2021 Thereafter Long-term debt $ 12,050 $ 10,895 $ - $ - $ 270 $ 270 $ 615 Capital lease obligations Operating leases 5,793 9,347 892 1,971 929 1,744 1,033 1,552 865 1,312 867 577 1,207 2,191 Total contractual obligations $ 27,190 $ 13,758 $ 2,673 $ 2,585 $ 2,447 $ 1,714 $ 4,013 $10,895,000 of the $12,050,000 long-term debt are demand loans and therefore are shown as due in 2017. The following table depicts the repayment obligation without the debt being called. www.hammondmfg.com Annual Report 2016 12 MANAGEMENT DISCUSSION AND ANALYSIS Contractual obligations (In thousands) Total 2017 2018 2019 2020 2021 Thereafter Long-term debt $ 12,050 $ 463 $ 487 $ 252 $ 534 $ 546 $ 9,768 Capital lease obligations Operating leases 5,793 9,347 892 1,971 929 1,744 1,033 1,552 865 1,312 867 577 1,207 2,191 Total contractual obligations $ 27,190 $ 3,326 $ 3,160 $ 2,837 $ 2,711 $ 1,990 $ 13,166 In addition to the contractual obligations above, the Company has current obligations of $413,000 (2015 - $2,236,000) against open purchase orders for outstanding capital expenditures. The Company also has open purchase commitments with RITEC as at December 31, 2016 of $588,000 (2015 - $859,000). These expenditures should be completed in the first half of 2017. SHARE CAPITAL As of March 3, 2017, 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 our environmental consultant, the Ministry of Environment and the adjacent property owner to contain and remove any free flowing contaminants. The Company’s share of expense for legal and consulting work for 2016 related to this property was $93,000 (2015 - $85,000). 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 (2015 - $170,000) with $70,000 (2015 - $70,000) presented as a current liability in the financial statements. In June 2013, the Corporation received notice of an environmental claim from the owner of a property located nearby to a property that was once partially owned by the Corporation. At this time the Company feels that there is no merit to the claim. 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 2016 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 2016 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, 2016. 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 marketplaces, 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; • Brexit; • 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 2016 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 29% of the company debt financing. The rates for this financing are low but variable. The company is cognizant that a rise in interest rates will negatively impact the financial results of the Company. The Company continuously reviews this strategy of hedging this risk by fixing interest rates on part of its total debt. North American Economy 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 2016 16 MANAGEMENT DISCUSSION AND ANALYSIS OUTLOOK FACTORS FOR 2017 Our current market expectation is to see stable but low growth in all our market places. The strong US dollar is providing 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 was completed in 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 2016 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 3, 2017 www.hammondmfg.com Annual Report 2016 18 (cid:44)(cid:49)(cid:39)(cid:40)(cid:51)(cid:40)(cid:49)(cid:39)(cid:40)(cid:49)(cid:55)(cid:3)(cid:36)(cid:56)(cid:39)(cid:44)(cid:55)(cid:50)(cid:53)(cid:54)(cid:182)(cid:3)(cid:53)(cid:40)(cid:51)(cid:50)(cid:53)(cid:55) KPMG LLP 115 King Street South 2nd Floor Waterloo ON N2J 5A3 Telephone Fax Internet (519) 747-8800 (519) 747-8830 www.kpmg.ca To the Shareholders of Hammond Manufacturing Company Limited We have audited the accompanying consolidated financial statements of Hammond Manufacturing Company Limited, which comprise the consolidated statements of financial position as at December 31, 201(cid:25) and December 31, 201(cid:24), the consolidated statements of comprehensive income(cid:3) (cid:11)(cid:79)(cid:82)(cid:86)(cid:86)(cid:12), changes in equity and cash flows for the years then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management’s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Hammond Manufacturing Company Limited as at December 31, 201(cid:25) and December 31, 201(cid:24), and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards. Chartered Professional Accountants, Licensed Public Accountants March (cid:22), 201(cid:26) Waterloo, Canada www.hammondmfg.com KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity KPMG Canada provides services to KPMG LLP Annual Report 2016 19 HAMMOND MANUFACTURING COMPANY LIMITED Consolidated Statements of Financial Position (in thousands of Canadian dollars) As at December 31, Note 2016 2015 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 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 4 5 6 7 8 9 10 11 12 13 10 13 10 12 14 15 $ 614 15,536 460 32,873 1,131 50,614 $ 263 16,238 185 30,599 1,179 48,464 29,538 323 1,044 638 31,543 28,951 386 1,044 549 30,930 $ 82,157 $ 79,394 $ 7,343 12,276 125 67 11,787 31,598 $ 12,261 17,149 125 62 4,452 34,049 241 6,056 100 898 7,295 38,893 10,249 290 2,916 29,809 43,264 258 730 100 729 1,817 35,866 10,249 290 3,638 29,351 43,528 Commitments Contingency Subsequent event Total liabilities and equity 16 &17 18 $ 82,157 $ 79,394 The notes on pages 24 to 59 are an integral part of these consolidated financial statements. www.hammondmfg.com Annual Report 2016 20 HAMMOND MANUFACTURING COMPANY LIMITED Consolidated Statements of Comprehensive Income (Loss) (in thousands of Canadian dollars, except earnings per share) For The Years Ended December 31, Note 2016 2015 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 10 Share of profit of equity accounted investees Share of expenses from investment property 9 8 Income before income tax Income tax expense Net income for the year $ 115,724 $ 117,164 82,914 32,810 25,226 4,935 299 54 2,296 (864) (212) (1,076) 97 (93) 1,224 540 684 80,024 37,140 25,270 4,956 289 - 6,625 (345) (1,235) (1,580) 98 (85) 5,058 1,508 3,550 Other comprehensive income (loss): Foreign currency translation differences for foreign operations Other comprehensive income (loss) for the period, net of income tax (722) 2,436 (722) 2,436 Total comprehensive income (loss) for the year $ (38) $ 5,986 Earnings per share Basic earnings per share Diluted earnings per share 20 20 $ 0.06 $ 0.06 $ 0.31 $ 0.31 The notes on pages 24 to 59 are an integral part of these consolidated financial statements. www.hammondmfg.com Annual Report 2016 21 HAMMOND MANUFACTURING COMPANY LIMITED Consolidated Statements of Changes in Equity For the years December 31, 2016 and December 31,2015 (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, 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 2,436 3,550 5,986 Balance at December 31, 2015 $ 10,249 $ 290 $ 3,638 $ 29,351 $ 43,528 Balance at January 1, 2016 $ 10,249 $ 290 $ 3,638 $ 29,351 $ 43,528 Total comprehensive income (loss) for year: Net income for the year Other comprehensive loss: Foreign currency translation differences Total comprehensive income (loss) for the year Transactions with owners, recorded directly in equity: Dividends to equity holders - - - - - - - - 684 684 (722) - (722) (722) 684 (38) - (226) (226) Balance at December 31, 2016 $ ** Accumulated other comprehensive income (loss) 10,249 $ 290 $ 2,916 $ 29,809 $ 43,264 The notes on pages 24 to 59 are an integral part of these consolidated financial statements. www.hammondmfg.com Annual Report 2016 22 HAMMOND MANUFACTURING COMPANY LIMITED Consolidated Statements of Cash Flows (in thousands of Canadian dollars) For the Years Ended December 31, 2016 2015 $ 684 $ 3,550 Cash flows from operating activities Net income for the year 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 (used in) operating activities Interest paid Income tax paid 3,286 78 864 540 54 (12) (89) 5,405 (2,887) 305 19 (4,725) (1,883) (864) (623) Net cash generated from (used in) operating activities (3,370) Cash flows from financing activities Bank indebtedness Payment of long-term debt Advances of long-term debt Payment of dividends Net cash generated from financing activities Cash flows from investing activities Acquisition of of property, plant and equipment Intangible asset additions Net cash used in investing activities Net increase (decrease) in cash Cash at beginning of year Foreign exchange gain on cash and cash equivalents in a foreign currency (4,894) (850) 13,536 (226) 7,566 (4,030) (41) (4,071) 125 263 226 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 Cash at end of year $ 614 $ 263 The notes on pages 24 to 59 are an integral part of these consolidated financial statements. www.hammondmfg.com Annual Report 2016 23 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2016 and 2015 (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, 2016 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 3, 2017. b) Basis of measurement: The consolidated financial statements have been prepared on the historical cost basis. c) Functional and presentation currency: The consolidated financial statements are presented in Canadian dollars. The functional currency of the Group’s entities is the currency of their primary economic environment. In individual companies, transactions in foreign currencies are recorded at the rate of exchange at the date of the transaction. Monetary assets and liabilities in foreign currencies at the reporting date are re-measured to the functional currency at the exchange rate at that date. Any resulting exchange differences are taken to the statement of comprehensive income. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. On consolidation, assets and liabilities of Group entities reported in their functional currencies are translated into the Canadian dollar, being the presentation currency, at the exchange rate on the reporting date. The income and expenses of foreign operations are translated to Canadian dollars using average exchange rates for the months during which the transactions occurred. Foreign currency translation differences are recognized in other comprehensive income which is included in the accumulated other comprehensive income account. The functional currency of the Company’s subsidiary operations located in the US, UK, Taiwan and Australia are the US dollar, the British pound, Taiwan dollar and the Australian dollar respectively. The functional currency of the Company’s Canadian operations is the Canadian dollar. d) Use of estimates: The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the application of accounting policies and the reported www.hammondmfg.com Annual Report 2016 24 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2016 and 2015 (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 2016 25 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2016 and 2015 (tabular amounts (except share amounts) in thousands of Canadian dollars) viii) Property value Management estimates the value of the investment property to assess if impairment has occurred. The estimate is made by reviewing local land prices and current sales of similar properties as well as property tax value assessment. ix) Environmental remediation: Management estimates the value to complete the remediation project on the Glen Ewing Property each year by reviewing the project status and activities still to be completed. Any changes to the project scope are updated in the cost estimation model and any change in the required reserve is booked in the current year. x) Sales returns: Management estimates the value of product that will be returned based on a historical analysis. Any change to the estimate is recorded as a reduction of revenue in the current period. e) Use of judgments: The preparation of financial statements in conformity with IFRS requires management to make judgments that affect the application of accounting policies and the interpretation of accounting standards. Management periodically reviews its judgments and underlying assumptions relating to the following items: i) Provision for claims Judgment is exercised in deciding whether a liability for a claim meets the criteria of a present obligation and in assessing the probability of the outflow of economic resources. ii) Lease classification The Company enters into leases for premises and operating equipment that may be classified as operating or finance leases. Management exercises judgment to determine whether substantially all the risks and rewards incidental to ownership have been transferred to the Company. iii) Impairment tests Management exercises judgment to determine whether there are factors that would indicate that an asset or a CGU is impaired. The determination of CGUs is also based on management’s judgment and is an assessment of the smallest group of assets that generate cash inflows independently of other assets. Factors considered include whether an active market exists for the output produced by the asset or group of assets as well as how management monitors and makes decisions about the Company’s operations. iv) Intangible assets Management exercises judgment to determine whether identifiable intangible assets were acquired in a business combination, separate from goodwill and whether they will provide future economic benefits to the Company. www.hammondmfg.com Annual Report 2016 26 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2016 and 2015 (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 Limited and its proportionate share of the Glen Ewing Property, an unincorporated co-tenancy (50%). All significant intercompany balances and financial statements include the investment in RITEC, which are accounted for using the equity method. transactions have been eliminated on consolidation. The consolidated b) Revenue recognition: The Company recognizes revenue on product sales and services at the time the products are shipped or services rendered to customers, when the customer takes ownership and assumes risk of loss, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable. A provision for sales returns is recognized when the underlying products or services are sold. The provision is based on historical returns data and a weighting of all possible outcomes against their associated probabilities. c) Inventories: Inventories are valued at the lower of cost, determined on a first-in, first-out basis and net realizable value, and include expenditures incurred in acquiring the inventories, production or conversion costs and other costs incurred in bringing them to their existing location and condition. In the case of manufactured inventories and work in progress, costs include an appropriate share of production overheads based on normal operating capacity. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. When circumstances that previously gave rise to an inventory write down no longer exist, the previous impairment is reversed. d) Investment property: Investment property is property held either to earn rental income or for capital appreciation or for both, but not for sale in the ordinary course of business, use in the production or supply of goods or services or for administrative purposes. The Group measures its investment property, being the land held by Glen Ewing Property, at historical cost. e) Property, plant and equipment: Property, plant and equipment are shown in the statements of financial position at their historical cost. Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the assets to a working condition for their intended use, the costs of dismantling and removing the items and restoring the site on which they are www.hammondmfg.com Annual Report 2016 27 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2016 and 2015 (tabular amounts (except share amounts) in thousands of Canadian dollars) located, and borrowing costs on qualifying assets. Purchased software that is integral to the functionality of the related equipment is capitalized as part of that equipment. When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment. Depreciation is provided on components that have homogenous useful lives by using the straight-line method or unit of production method so as to depreciate the initial cost down to the residual value over the estimated useful lives. The depreciation rates based on the estimated useful lives for the current and comparative periods are as follows: Asset Buildings Office equipment Machinery and equipment Tooling general use Tooling specific part Rate 2.5% - 5% 10% - 25% 10% - 25% 10% - 25% Based on anticipated life output Machinery and equipment under capital lease is initially recorded at the present value of minimum lease payments at the inception of the lease and amortized over the shorter of the lease term and their useful lives. Depreciation methods, useful lives and residual values are reviewed at each financial year- end and adjusted, if appropriate. f) Intangible assets other than goodwill: Intangible assets have been externally acquired. Intangible assets are stated at cost less accumulated amortization. Intangible assets with a finite life are amortized using the straight- line method at rates calculated to amortize the cost of these assets over their estimated useful lives. The amortization rates based on the estimated useful lives for the current and comparative periods are as follows: Asset Computer software Development costs Rate 20% 20% Amortization methods, useful lives and residual values are reviewed at each financial year-end and adjusted, if appropriate. g) Investments measured using equity method: The Company uses the equity method as a basis of accounting for investments in companies over which it exercises significant influence or joint control. Under the equity method, the Company records these investments initially at cost and the carrying values are adjusted www.hammondmfg.com Annual Report 2016 28 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2016 and 2015 (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 2016 29 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2016 and 2015 (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 2016 30 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2016 and 2015 (tabular amounts (except share amounts) in thousands of Canadian dollars) n) Impairment: i) Financial assets: A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably. Objective evidence that financial assets are impaired can include default or delinquency by a debtor, restructuring of an amount due to the Group on terms that the Group would not consider otherwise, indications that a debtor or issuer will enter bankruptcy, or the disappearance of an active market for a security. In addition, for an investment in an equity security, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment. level. All individually significant receivables are assessed The Group considers evidence of impairment for receivables at both a specific asset and collective for specific impairment. All individually significant receivables found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Receivables that are not individually significant are collectively assessed for impairment by grouping together receivables with similar risk characteristics. In assessing collective impairment the Group uses historical trends of the probability of default, timing of recoveries and the amount of loss incurred, adjusted for management’s judgment as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical trends. An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the asset’s original effective interest rate. Losses are recognized in profit or loss and reflected in an allowance account against receivables. Interest on the impaired asset continues to be recognized through the unwinding of the discount. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss. ii) Non-financial assets: The carrying amounts of the Group’s non-financial assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. For goodwill, and intangible assets that have indefinite useful lives or that are not yet available for use, the recoverable amount is estimated each year at the same time. The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets that cannot be tested individually are grouped www.hammondmfg.com Annual Report 2016 31 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2016 and 2015 (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, 2016 and December 31, 2015, and concluded there was no impairment. The Group’s corporate assets do not generate separate cash inflows. If there is an indication that a corporate asset may be impaired, then the recoverable amount is determined for the CGU to which the corporate asset is allocated. An impairment loss is recognized if the carrying amount of an asset or its CGU exceeds its estimated recoverable amount. Impairment losses are recognized in profit or loss. Impairment losses recognized in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the units, and then to reduce the carrying amounts of the other assets in the unit (group of units) on a pro rata basis. An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. Goodwill that forms part of the carrying amount of an investment in an associate is not recognized separately, and therefore is not tested for impairment separately. Instead, the entire amount of the investment in an associate is tested for impairment as a single asset when there is objective evidence that the investment in an associate may be impaired. o) Employee Benefits: i) Defined contribution plans: A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution pension plans are recognized as an employee benefit expense in the periods during which services are rendered by the employees. Prepaid contributions are recognized as an asset to the extent that a cash refund or a reduction in future payments is available. www.hammondmfg.com Annual Report 2016 32 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2016 and 2015 (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 2016 33 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2016 and 2015 (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 Recognition of Deferred Tax Assets for Unrealized Losses (Amendments to IAS 12) In January 2016, the IASB issued Amendments to IAS 12, Income Taxes to clarify the deferred tax treatment for debt instruments and the determination of ‘future taxable profit’ for the recognition of deferred tax assets. The amendments clarify that the existence of a deductible temporary difference on debt instruments measured at fair value are dependent solely on a comparison of the carrying amount of an asset and its tax base at the end of the reporting period, and is not affected by possible future changes in the carrying amount or expected manner of recovery of the asset. The methodology to determine the future taxable profits has been clarified to state that the future taxable profit, for the purpose of the recognition of deferred tax asset, is not the bottom line of the tax return, but is rather the bottom line of the tax return adjusted for the reversing taxable temporary differences and deductible temporary differences to avoid double counting. Consequently, taxable profit used for assessing the utilization of deductible temporary differences is different from taxable profit on which income taxes are payable. The amendments are effective for annual periods beginning on or after January 1, 2017, with earlier application permitted. The amendments shall be applied retrospectively. The Group will adopt the amendments to IAS 12 in its consolidated financial statements for the annual period beginning on January 1, 2017. The extent of the impact of adoption of the amendments has not yet been determined. IAS 40 Transfer of Investment Property In December 2016, the IASB issued Amendments to IAS 40, Transfers of Investment Property. The amendments clarify that: • • an entity shall transfer a property to, or from, investment property when, and only when, there is a change in use of a property supported by evidence that a change in use has occurred; and the list of circumstances of when a change in use has occurred is non-exhaustive. The amendments apply for annual periods beginning on or after January 1, 2018. Early adoption is permitted. www.hammondmfg.com Annual Report 2016 34 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2016 and 2015 (tabular amounts (except share amounts) in thousands of Canadian dollars) The amendments provide transitional provisions which allow an entity to apply the amendments prospectively to changes in use that occur on or after the beginning of the annual reporting period in which the entity first applies the amendments (the date of initial application). At the date of initial application, an entity shall also reassess the classification of property held at that date and, if applicable, reclassify property to reflect conditions that exist at that date. An entity is permitted to apply the amendments retrospectively, but only if it does not involve the use of hindsight. The Group intends to adopt the amendments to IAS 40 in its consolidated financial statements for the annual period beginning on January 1, 2018. The Group does not expect the amendments to have a material impact on the consolidated financial statements. Classification and Measurement of Share-Based Payment Transactions (Amendment to IFRS 2): In June 2016, the IASB issued amendments to IFRS 2, Share-Based Payments clarifying how to account for certain types of share-based payment transactions. The amendments apply for annual periods beginning on or after January 1, 2017. As a practical simplification, the amendments can be applied prospectively. Retrospective, or early, application is permitted if information is available without the use of hindsight. The amendments provide requirements on the accounting for: • • the effects of vesting and non-vesting conditions on the measurement of cash-settled share-based payments; share-based payment transactions with a net settlement feature for withholding tax obligations; and • a modification to the terms and conditions of a share-based payment that changes the classification of the transaction from cash-settled to equity settled. The Group intends to adopt the amendments to IFRS 2 in its consolidated financial statements for the annual period beginning on January 1, 2018. The extent of the impact of adoption of the amendments has not yet been determined, however it is expected to be immaterial as the Group does not provide any share-based payments to employees. IFRS 15 Revenue from contracts with customers In May 2014 the IASB issued IFRS 15, Revenue from Contracts with Customers. This new standard is effective for annual periods beginning on or after January 1, 2018. IFRS 15 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. On April 12, 2016, the IASB issued Clarification to IFRS 15, Revenue from Contracts with Customers, which is effective at the same time as IFRS 15. 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 www.hammondmfg.com Annual Report 2016 35 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2016 and 2015 (tabular amounts (except share amounts) in thousands of Canadian dollars) to contracts with customers and is effective for 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 the standard has not yet been determined. IFRS 9 Financial instruments In July 2014 the IASB issued the complete IFRS 9, Financial Instruments (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 Group intends to adopt IFRS 9 (2014) in its consolidated 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 16 Leases In January 2016 the IASB issued IFRS 16, 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. The Group intends to adopt IFRS 16 in its consolidated financial statements for the annual period beginning on January 1, 2019. The extent of the impact of adoption of this standard has yet to be determined. Annual Improvements to IFRSs 2014-2016 Cycle In December 2016, as part of its process to make non-urgent but necessary amendments to IFRS, the IASB issued narrow-scope amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards, IFRS 12 Disclosure of Interest in Other Entities and IAS 28 Investments in Associates and Joint Ventures. The amendments to IFRS 12 and IAS 28 clarify that: • the disclosure requirements for interests in other entities also apply to interests that are classified (or included in a disposal group that is classified) as held for sale, held for distribution or discontinued operations; www.hammondmfg.com Annual Report 2016 36 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2016 and 2015 (tabular amounts (except share amounts) in thousands of Canadian dollars) • • a venture capital organization, or other qualifying entity, may elect to measure its investments in an associate or joint venture at fair value through profit or loss. This election can be made on an investment-by-investment basis; and a non-investment entity investor may elect to retain the fair value accounting applied by an investment entity associate or investment entity joint venture to its subsidiaries. This election can be made separately for each investment entity associate or joint venture. The amendments to IFRS 12 and IAS 28 are to be applied retrospectively for annual periods beginning on or after January 1, 2017 and January 1, 2018 respectively. The amendments also remove outdated exemptions for first-time adopters of IFRS, which are effective for annual periods beginning on or after January 1, 2018. The Group intends to adopt these amendments in its consolidated financial statements for the annual period beginning on January 1, 2017 or 2018 as applicable. The Group does not expect the amendments to have a material impact on the consolidated financial statements. Foreign Currency Transactions – Advance Consideration In December 2016, the IASB issued IFRIC Interpretation 22, Foreign Currency Transactions and Advance Consideration in response to diversity in practice in determining the appropriate exchange rate to use when translating assets, expenses or income, when foreign currency consideration is paid or received in advance of the item to which it relates. The Interpretation clarifies that the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income (or part of it) is the date on which an entity initially recognizes the non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration. For transactions involving multiple payments or receipts, each payment or receipt gives rise to a separate transaction date. The Interpretation may be applied either: • • retrospectively; or prospectively to all assets, expenses and income in the scope of the Interpretation initially recognized on or after: – – the beginning of the reporting period in which the entity first applies the Interpretation; or the beginning of a prior reporting period presented as comparative information in the financial statements. The Interpretation is applicable for annual periods beginning on or after January 1, 2018. Earlier application is permitted. The Group intends to adopt the Interpretation in its consolidated financial statements for the annual period beginning on January 1, 2018. The Group does not expect the Interpretation to have a material impact on the consolidated financial statements. www.hammondmfg.com Annual Report 2016 37 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2016 and 2015 (tabular amounts (except share amounts) in thousands of Canadian dollars) 4) Trade and other receivables: Trade receivables Employee receivables Other receivables Allowance for doubtful accounts Trade and other receivables December 31, 2016 December 31, 2015 $ 15,024 12 650 15,686 (150) $ 15,536 $ 15,150 11 1,223 16,384 (146) $ 16,238 The Company’s exposure to credit and currency risks, and impairment losses related to trade and other receivables is disclosed in note 24. 5) Inventories: December 31, 2016 December 31, 2015 Raw materials and work-in-process Finished goods $ 9,981 22,892 $ 8,533 22,066 Inventories $ 32,873 $ 30,599 Inventories carried at fair value less cost to sell $ 1,288 $ 1,012 In 2016, raw materials, consumables and changes in finished goods and work in progress recognized as cost of sales amounted to approximately $82,914,000 (2015 - $80,024,000). In 2016, the write-down of inventories to net realizable value amounted to approximately $83,000 (2015 - $159,000). The write-down is included in cost of sales. www.hammondmfg.com Annual Report 2016 38 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2016 and 2015 (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, 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 Additions Disposals Effect of movements in exchange rates $ 1,021 - (19) $ 2,484 (1,197) (122) 311 $ - (269) $ 214 - (51) $ 4,030 (1,197) (461) Balance at December 31, 2016 $ 20,130 $ 43,278 $ 9,757 $ 5,111 $ 78,276 At December 31, 2016, the amount of expenditures recognized in the carrying amount that were in the course of construction is $nil (2015 - $9,721,000) in land and buildings, $111,507 (2015 - $4,904,000) in machinery and equipment, $56,000 (2015 - $431,000) in tooling and $nil (2015 - $8,000) in office equipment. Accumulated depreciation Land and buildings Machinery and equipment Tooling Office equipment Total 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 Depreciation for the year Disposals Effect of movements in exchange rates $ 453 (15) $ 2,354 (1,143) (78) $ 353 $ 126 (219) (46) $ 3,286 (1,143) (358) Balance at December 31, 2016 $ 5,754 $ 30,819 $ 7,321 $ 4,844 $ 48,738 Carrying amounts Land and buildings Machinery and equipment Tooling Office equipment Total At December 31, 2015 $ 13,812 $ 12,427 $ 2,528 $ 184 $ 28,951 At December 31, 2016 $ 14,376 $ 12,459 $ 2,436 $ 267 $ 29,538 www.hammondmfg.com Annual Report 2016 39 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2016 and 2015 (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, 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 Additions Effect of movement in exchange rates $ - (26) $ 10 (2) $ 31 - $ 41 (28) Balance at December 31, 2016 $ 110 $ 2,121 $ 241 $ 2,472 Amortization and impairment losses Goodwill Computer software Development costs Total 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 Amortization for the year Effect of movement in exchange rates - $ - $ 51 (2) $ 27 - $ 78 (2) Balance at December 31, 2016 $ - $ 1,987 $ 162 $ 2,149 Carrying amounts Goodwill Computer software Development costs Total At December 31, 2015 $ 136 $ 175 $ 75 $ 386 At December 31, 2016 $ 110 $ 134 $ 79 $ 323 www.hammondmfg.com Annual Report 2016 40 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2016 and 2015 (tabular amounts (except share amounts) in thousands of Canadian dollars) 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 at December 31, 2016. 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 6.0%. 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, 2015 and December 31, 2016, the assets, including goodwill of $110,000 (2015 – $136,000), 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, 2015. 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 2016 related to the property were $93,000 (2015 - $85,000). www.hammondmfg.com Annual Report 2016 41 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2016 and 2015 (tabular amounts (except share amounts) in thousands of Canadian dollars) 9) Equity investment RITEC Enclosures Inc. December 31, 2014 Equity in 2015 earnings December 31, 2015 Equity in 2016 earnings December 31, 2016 Total $ 380 169 $ 549 89 $ 638 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 $89,000 (2015 – $169,000) were supplemented with a decrease in elimination of profit held in inventory of $8,000 (2015 – increase $71,000). Reported share of profit of equity accounted investees is $97,000 (2015 - $98,000). RITEC Enclosures Inc. Assets Liabilities Revenues Profit (after tax) 10) Loans and borrowings: Bank indebtedness: December 31, 2016 December 31, 2015 2,525 $ $ 2,645 1,361 4,124 223 1,782 3,958 422 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, 2016 December 31, 2015 Local currency CDN $ Local currency CDN $ Canadian entities CDN UK entity GBP Bank indebtedness $ 7,076 £ 161 $ 7,076 267 $ 7,343 $ 12,219 £ 21 $ 12,219 42 $ 12,261 Interest is payable at the rate of bank prime plus 50 basis points (2015 - bank prime plus 50 basis points). www.hammondmfg.com Annual Report 2016 42 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2016 and 2015 (tabular amounts (except share amounts) in thousands of Canadian dollars) Long-term debt: 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 Limited. Monthly blended installments of $9 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 Limited. Monthly blended installments of $9 CDN. Demand term loan amortized over 25 years drawn in CDN funds at a fixed interest rate of 4.1% through December 2023, secured by the assets of Hammond Manufacturing Company Limited. Monthly blended installments of $37 CDN. Interest free term loan of $385 made in 2015 and $1,150 in 2016 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 rate 8.8%. Monthly installments of £1 GBP until April 2019. Secured by equipment, drawn in GBP Sterling at interest rate 4.85%. Monthly installments of £1.46 GBP until October 2020. 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. Secured by equipment, drawn in US funds at interest rate of 3.75%. Monthly installments of $57 USD until May 2023. Secured by equipment, drawn in US funds at interest rate of 3.5%. Monthly installments of $0.42 USD until December 2020. Subtotal Total long-term debt Less current portion of long-term debt Non-current long-term debt December 31, December 31, 2016 2015 $ 491 $ 760 2,014 2,076 1,500 1,500 6,890 - 1,155 12,050 275 4,611 51 101 87 - 380 484 5,236 25 5,793 - - 571 $ 17,843 $ 5,182 11,787 $ 6,056 4,452 $ 730 www.hammondmfg.com Annual Report 2016 43 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2016 and 2015 (tabular amounts (except share amounts) in thousands of Canadian dollars) During the year, the Company entered into a sale-leaseback transaction with HSBC whereby equipment previously purchased in 2015 and 2016 using the Company’s line of credit in the amount of $4,271,000 USD was sold to the bank and leased back. There was no gain or loss on the sale transaction. 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: 2017 2018 2019 2020 2021 Thereafter $ 11,787 929 1,033 1,135 1,137 1,822 $ 17,843 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: 2017 2018 2019 2020 2021 Thereafter $ 1,369 1,416 1,285 1,397 1,413 10,963 $ 17,843 Interest expense is comprised as follows: December 31, 2016 December 31, 2015 Long-term debt, including capital leases Bank indebtedness $ 444 420 $ 47 298 Interest expense $ 864 $ 345 11) Trade and other payables: Trade payables Non-trade payables and accrued expenses December 31, 2016 December 31, 2015 $ 5,116 7,160 $ 12,276 $ 4,802 12,347 $ 17,149 The Group’s exposure to currency and liquidity risk related to trade and other payables is disclosed in note 24. www.hammondmfg.com Annual Report 2016 44 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2016 and 2015 (tabular amounts (except share amounts) in thousands of Canadian dollars) 12) Provisions: Environmental Remediation Sales Returns Total 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 Provisions made during the year Provisions used during the year 93 (93) 55 (55) 148 (148) Balance at December 31, 2016 $ 170 $ 55 $ 225 Non-current Current 100 70 - 55 100 125 Balance at December 31, 2016 $ 170 $ 55 $ 225 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 two years which in turn has pushed the remediation plan out two years. 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, 2015 - $170,000) with $70,000 (2015 - $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: www.hammondmfg.com Annual Report 2016 45 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2016 and 2015 (tabular amounts (except share amounts) in thousands of Canadian dollars) 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% (2015 – 3.5%) per annum health cost increase and a discount rate of 6.0% (2015 – 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 $21,000 (2015 - $22,000). Changes in assumptions resulted in nominal gains/losses which have been included in general and administrative expense. Post employment health benefits December 31, 2016 December 31, 2015 $ 40 $ 27 Employee health benefits while on disability 281 280 Total employee future benefits $ 308 $ 320 Post employment health benefits Balance at December 31, 2014 $ 72 Employee health benefits while on disability $ 300 Provisions made during the year Provisions used during the year - (32) 42 (62) Total $ 372 42 (94) Balance at December 31, 2015 $ 40 $ 280 $ 320 Provisions made during the year Provisions used during the year 2 (15) 69 (68) 71 (83) Balance at December 31, 2016 $ 27 $ 281 $ 308 Non-current Current 17 10 224 57 241 67 Balance at December 31, 2016 $ 27 $ 281 $ 308 www.hammondmfg.com Annual Report 2016 46 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2016 and 2015 (tabular amounts (except share amounts) in thousands of Canadian dollars) 14) Deferred tax assets and liabilities: Unrecognized deferred tax liabilities: At December 31, 2016, temporary differences of $16,016,000 (2015 - $15,461,000) 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. 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 December 31, 2016 December 31, 2015 $ 27 $ 30 8 8 505 508 1,410 140 105 107 2,055 793 (2,953) (1,522) (2,953) (1,522) Net tax liabilities $ (898) $ (729) 15) Share capital: a) Authorized: Unlimited number of Class A subordinate voting shares. Unlimited number of Class B common shares with four votes per share, convertible into Class A subordinate voting shares on a one-for-one basis. Annual dividends on the Class B common shares may not exceed the annual dividends on the Class A subordinate voting shares. Unlimited number of Class YA non-voting, redeemable, retractable shares entitled to non- cumulative discretionary dividends. No dividends shall be declared or paid on the Class YA shares unless the same dividend is simultaneously declared and paid on the Class YB shares. Unlimited number of Class YB non-voting, redeemable, retractable shares entitled to non- cumulative discretionary dividends. No dividends shall be declared or paid on the Class YB shares unless the same dividend is simultaneously declared and paid on the Class YA shares. www.hammondmfg.com Annual Report 2016 47 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2016 and 2015 (tabular amounts (except share amounts) in thousands of Canadian dollars) b) Issued: 8,556,000 Class A shares (2015 - 8,556,000) 2,778,300 Class B shares (2015 - 2,778,300) $ 10,242 7 $ 10,242 7 $ 10,249 $ 10,249 December 31, 2016 December 31, 2015 No shares were issued in 2016 or in 2015. c) Dividends: The following dividends were declared and paid by the Company: Special cash dividends of $0.02 Class A subordinate voting share were declared in 2016 (2015 – none declared per class A subordinate voting share) and special cash dividends of $0.02 Class B common share were declared in 2016 (2015 – none declared per class B common share). Special cash dividends of $0.02 per Class A subordinate voting share (2015 - $0.02) and special cash dividends of $0.02 per Class B common share (2015 - $0.02) were paid in 2016. Total dividends declared were $226,000 (2015 - $nil). Total dividends paid were $226,000 (2015 - $226,000). 16) Operating leases: The Company is committed to payments under operating leases for equipment and buildings. The future minimum non-cancellable operating lease rentals are payable as follows: Less than 1 year Between 1 and 5 years Thereafter Total minimum payments December 31, 2016 December 31, 2015 $ 1,857 4,439 - $ 1,971 5,185 2,191 $ 9,347 $ 6,296 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. The Group does have one warehouse lease that runs to 2027. During the year ended December 31, 2016, an amount of $1,931,000 was recognized as an expense in profit or loss in respect of operating leases (2015 - $1,775,000). 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 $413,000 (2015 - $2,236,000). These expenditures should be completed in the first half of 2017. www.hammondmfg.com Annual Report 2016 48 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2016 and 2015 (tabular amounts (except share amounts) in thousands of Canadian dollars) 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. There were no significant developments to this claim in 2016. 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. 19) Income tax expense: Current tax expense: Current period Adjustment for prior periods December 31, 2016 December 31, 2015 $ 360 $ 1,544 1 (53) 361 1,491 Deferred tax expense: Origination and reversal of temporary differences 179 17 Total income tax expense $ 540 $ 1,508 Net income for the year Total income tax expense Income before income tax 2016 2016 2015 2015 $ 684 540 $ 1,224 $ 3,550 1,508 $ 5,058 Income tax using the Company’s domestic tax rate 38.00% 465 38.00% 1,922 Reduced rate for active business and manufacturing and processing 8.33% 102 (5.99%) (303) Effect of tax rates in foreign jurisdictions (7.27%) (89) (2.23%) (113) Reduction in tax rate Non-deductible expenses Other 0.00% - 0.00% - 3.10% 38 1.05% 53 1.96% 24 44.13% $ 540 (1.01%) (51) 29.81% $ 1,508 www.hammondmfg.com Annual Report 2016 49 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2016 and 2015 (tabular amounts (except share amounts) in thousands of Canadian dollars) 20) Earnings per share: The computations for basic and diluted earnings per share are as follows: December 31, 2016 December 31, 2015 Net income for the year $ 684 $ 3,550 Average number of common shares outstanding: Basic and Diluted Earnings per share: Basic Diluted 11,334,300 11,334,300 $ 0.06 0.06 $ 0.31 0.31 No share options to purchase common shares were outstanding as at December 31, 2016 or December 31, 2015. 21) Personnel expenses: Wages and salaries Health benefit plans Canada Pension Plan and Employment Insurance remittances Contributions to defined contribution plans Cost of sales Selling and distribution General and administrative Research and development 22) Management share option plan: 2016 $ 37,166 4,701 1,841 966 $ 44,674 2016 $ 32,665 9,021 2,787 201 $ 44,674 2015 $ 35,907 4,541 1,730 889 $ 43,067 2015 $ 30,959 8,969 2,950 189 $ 43,067 As at December 31, 2016, the Company has a stock-based compensation plan, which is described below. No options were granted through December 31, 2016 or in 2015 and no stock options were outstanding as of January 1, 2015, 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. www.hammondmfg.com Annual Report 2016 50 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2016 and 2015 (tabular amounts (except share amounts) in thousands of Canadian dollars) 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. 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 Term loans Finance lease obligations December 31, 2016 Carrying amount Market value December 31, 2015 Carrying amount Market value $ 614 15,536 460 $ 16,610 $ 7,343 12,276 12,050 5,793 $ 37,462 $ 614 15,536 460 $ 16,610 $ 7,343 12,276 11,842 5,712 $ 37,173 $ 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 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, 2016 December 31, 2015 Nonsecured variable interest rates Fixed rates 1 to 2 year secured 3 to 4 year secured 5 year secured 7 year secured 10 year secured From 2.7% 3.5% 3.8% 4.0% 4.3% 4.5% To 3.7% 4.5% 4.8% 5.0% 5.3% 5.5% From 2.7% 3.7% 4.0% 4.3% 4.8% To 3.7% 4.7% 5.0% 5.3% 5.8% Rates fluctuate depending on currency and jurisdiction. www.hammondmfg.com Annual Report 2016 51 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2016 and 2015 (tabular amounts (except share amounts) in thousands of Canadian dollars) 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. Risk management framework: The Board of Directors has overall responsibility for the oversight of the Group’s risk management the Group’s risk 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. www.hammondmfg.com Annual Report 2016 52 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2016 and 2015 (tabular amounts (except share amounts) in thousands of Canadian dollars) 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. 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, 2016 December 31, 2015 Cash and receivables: Cash Trade and other receivables $ 614 15,536 $ 16,150 $ 263 16,238 $ 16,501 The maximum exposure to credit risk for loans and receivables at the reporting date by geographic region was: December 31, 2016 December 31, 2015 Cash and receivables: Canada United States United Kingdom Australia $ 9,294 5,773 973 110 $ 16,150 $ 9,018 6,156 1,235 92 $ 16,501 www.hammondmfg.com Annual Report 2016 53 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2016 and 2015 (tabular amounts (except share amounts) in thousands of Canadian dollars) The following table reflects the net details of trade receivables as at December 31, 2016 and December 31, 2015: December 31, 2016 December 31, 2015 Gross Impairment Carrying Value Gross Impairment Carrying Value Aging of trade receivables: 1 – 30 days 31 – 60 days 61 – 90 days Over 90 days $ 8,098 5,394 1,225 307 - $ - - 150 $ 8,098 5,394 1,225 157 $ 8,441 5,165 1,247 297 - $ - - 146 $ 8,441 5,165 1,247 151 Trade receivables $ 15,024 $ 150 $ 14,874 $ 15,150 $ 146 $ 15,004 The following table provides the roll forward of the allowance for doubtful accounts: Allowance for doubtful accounts, beginning of year December 31, 2016 December 31, 2015 122 $ $ 146 Accounts provided for in the period Amounts written off during the period 6 (2) 37 (13) Allowance for doubtful accounts $ 150 $ 146 Allowance for doubtful accounts as % of net trade receivable 1.0% 1.0% The following table provides the net details of trade and other receivables: Net trade receivable Employee receivables Other receivable December 31, 2016 December 31, 2015 $ 14,873 12 651 $ 15,004 11 1,223 Trade and other receivables $ 15,536 $ 16,238 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 $15,500,000 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 (2015 - bank prime plus 50 basis points). The Company had available www.hammondmfg.com Annual Report 2016 54 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2016 and 2015 (tabular amounts (except share amounts) in thousands of Canadian dollars) unused credit facilities in the amount of $8,154,000 at December 31, 2016 (2015 - $3,339,000) to meet fluctuations in working capital requirements. The Group has established an $11,000,000 lease line to finance new equipment purchases of which it has utilized $5,236,000. 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, 2016 the group had received $1,535,000 of this funding (2015 - $385,000). The present value of this funding $1,155,000 was set up as long term debt and $380,000 which reflects the interest savings has been offset to property plant and equipment. 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, 2016 the group had received $500,000 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, 2016, 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, 2016 Carrying amount Contractual cash flows 2017 2018 2019 to 2020 Thereafter Non-derivative financial liabilities Term loans $ - $ (307) $ (1,228) Finance lease obligations 5,793 (6,571) (1,101) (1,101) (2,122) (2,247) $ 12,050 $ (12,430) $(10,895) Trade and other payables 12,276 Bank indebtedness (12,276) (12,276) 7,343 (7,343) (7,343) - - - - - - Total $ 37,462 $ (38,620) $(31,615) $ (1,101) $ (2,429) $ (3,475) December 31, 2015 Carrying amount Contractual cash flows 2016 2017 2018 to 2019 Thereafter Non-derivative financial liabilities Term loans Finance lease obligations 571 (639) (145) (145) (349) $ (4,721) $ (4,336) $ - $ 4,611 $ - $ (385) - Trade and other payables 17,149 12,261 Bank indebtedness (17,149) (17,149) (12,261) (12,261) - - - - - - Total $ 34,592 $ (34,770) $(33,891) $ (145) $ (349) $ (385) www.hammondmfg.com Annual Report 2016 55 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2016 and 2015 (tabular amounts (except share amounts) in thousands of Canadian dollars) Market risk: Market risk is the risk that changes in market prices, such as foreign exchange rates and interest rates will affect the Group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing the return. 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 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, 2016 Dec 31, 2015 Dec 31, 2016 Dec 31, 2015 Dec 31, 2016 Dec 31, 2015 Long-term Debt Australia Europe New Zealand Taiwan UK USA AUD EURO NZD TWD GBP USD 41 155 46 166 455 6,658 65 176 29 211 475 4,587 (14) (22) (14) (3) - (2,595) (213) (2,572) (92) (6,066) - - - - (43) (2,398) 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 2016 would have increased net product sales by $489,000 (2015 - $529,000) and increased income from operations by $536,000 (2015 - $562,000). Inversely, a one cent increase in the Canadian dollar against the US dollar in 2016 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 2016 bank indebtedness would increase annual interest expense by $73,000 (2015 - $123,000). This analysis assumes that all other variables remain constant. Inversely, a one percent decrease in the variable rates charged on ending 2016 bank indebtedness would have had the equal but opposite effect. www.hammondmfg.com Annual Report 2016 56 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2016 and 2015 (tabular amounts (except share amounts) in thousands of Canadian dollars) 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 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 www.hammondmfg.com Annual Report 2016 57 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2016 and 2015 (tabular amounts (except share amounts) in thousands of Canadian dollars) • • 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, 2016 and has been in compliance with its covenants through 2015 and 2016. • There were no changes to the Group’s approach to capital management during 2016. • Neither the Company, nor any of its subsidiaries, is subject to externally imposed capital requirements. 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: Net Product Sales: Canada: Sales to customers $ 43,743 $ 42,413 December 31, 2016 December 31, 2015 United States: Sales to customers All other countries: Sales to customers Net product sales Non-current assets: Canada: 61,165 10,816 63,648 11,103 $ 115,724 $ 117,164 Non-current assets $ 30,314 $ 29,672 United States: Non-current assets All other countries: Non-current assets Non-current assets Total 627 602 682 575 $ 31,543 $ 30,930 www.hammondmfg.com Annual Report 2016 58 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2016 and 2015 (tabular amounts (except share amounts) in thousands of Canadian dollars) 26) Related party transactions: a) Key management includes the Company’s directors and members of the executive management team. Compensation awarded to key management included: Years Ended: December 31, 2016 December 31, 2015 Salaries and short-term employee benefits $ 650 $ 697 b) The Company purchased $2,708,000 of product from RITEC in 2016 (2015 - $3,597,000). The Company sold $11,300 of product to RITEC in 2016 (2015 - $12,000). 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. Receivables as at December 31, 2016 were $23,000 (2015 - $9,000) while payables were $277,000 (2015 - $158,000). 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. 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, 2016 December 31, 2015 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. www.hammondmfg.com Annual Report 2016 59 THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK www.hammondmfg.com Annual Report 2016 60 THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK www.hammondmfg.com Annual Report 2016 61 THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK www.hammondmfg.com Annual Report 2016 62 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 Edward Sehl * Principal - Sehl Consulting Paul Quigley * President Quigley Group Inc. Sheila Hammond B.A., B.Ed., M.Sc. Registered Psychotherapist Registered Marriage & Family Therapist Officer & Director, Eramosa Group Ltd. *Members of the Audit Committee and Compensation Committee Auditors KPMG LLP RSM, UK Grant Thornton, Australia Legal Counsel Borden Ladner Gervais Stock Listing Toronto Stock Exchange Symbol: HMM.A Bankers HSBC Transfer Agent and Registrar Computershare Investor Services Inc. Over 95 Years of providing Quality Products & Service Excellence. Corporate Head Office 394 Edinburgh Road North Guelph, Ontario N1H 1E5 Canada Email: ir@hammfg.com Les Fabrications Hammond (Québec) Inc. 985 Rue Bergar Laval, Quebec H7L 4Z6 Canada OFFICES AND LOCATIONS Hammond Manufacturing Co. Inc. 475 Cayuga Rd. Cheektowaga, NY 14225 USA Hammond Electronics Ltd. 1 Onslow Close Kingsland Business Park Basingstoke, Hampshire RG248QL England Hammond Electronics Pty. Ltd. 11-13 Port Road Queenstown, SA 5024 Australia Tel: Fax: (519) 822-2960 (519) 822-7289 Tel: Fax: (450) 975-1884 (450) 975-2098 Tel: Fax: (716) 630-7030 (716) 630-7042 Tel: Fax: 01256 812812 01256 332249 Tel: Fax: 61-8-8235-0744 61-8-8356-3652 © Copyright. Hammond Manufacturing Co. Ltd. 

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