2018
ANNUAL REPORT
Over 100 Years
& Four Generations
Server Racks and Cabinets
Electrical Enclosures
Outlet Strips
Small Enclosures
Electronic Transformers
Over 100 years
& four generations
in business.
Established 1917.
Fred Hammond, VE3HC
(right) was part of the
second generation of a fast
growing family run business.
Fred was one of six brothers
and two sisters.
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): we go above
and beyond our competition and
provide our customers with the
exact solution required.
Our Values:
• We are dedicated to our
customers. We provide quality
products and service that
create value to our customers.
• We are responsible to our
shareholders. We provide
an adequate return on their
investment over the long term.
• We are committed to our
employees. We provide
competitive pay, open and frank
communication and a safe work
environments.
• We recognize the importance of
our suppliers assisting us in our
ability to serve our customers.
Hammond Manufacturing Company Limited
2018 Annual Report
4
5
Report to Shareholders
Management Discussion and Analysis
21 Management’s Responsibility for Financial Reporting
22
26
27
28
29
30
68
Independent Auditors’ Report
Consolidated Statements of Financial Position
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Changes in Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Corporate Directory
www.hammondmfg.com
Annual Report 2018 3
REPORT TO SHAREHOLDERS
Dear fellow shareholders, employees, and stakeholders:
In the following pages, we have explained the results for 2018 in great detail.
This analysis shows Hammond as a strong company with a number of areas for continual
improvement. Cost reduction, growth of market share, and lower bank debt are all on our focus list.
I would especially like to point out that 62% of our revenues come from customers outside
Canada. Moreover, our US sales growth of 14% confirms that we can be successful against our
competition when we all work together.
I would also like to mention that Hammond has broad employee ownership. Shares trade on the Toronto
exchange and are owned by hundreds of associates.
As you read this annual report, we are already well into 2019 and its challenges. All shareholders can
be assured that our associates in all countries are keeping Hammond strong and growing.
Sincerely,
Robert F. Hammond
Chairman & CEO
ANNUAL MEETING
The meeting of the Shareholders will be held on
April 29, 2019 at
Cutten Fields
190 College Avenue East, Guelph, Ontario
Commencing at 10:00 a.m.
www.hammondmfg.com
Annual Report 2018 4
MANAGEMENT DISCUSSION AND ANALYSIS
This management discussion and analysis (MD&A) comments on the consolidated financial position and
financial performance of Hammond Manufacturing Company Limited (“HMCL” or “the Company”) for the
year ended December 31, 2018. This discussion should be read in conjunction with the Company’s
consolidated financial statements for the year ended December 31, 2018 and related notes. Additional
information about the Company can be found on its website, www.hammfg.com, or through the SEDAR
website at www.sedar.com which includes the Company’s Annual Information Form. The information
contained herein is dated as of March 4, 2019.
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 2018 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
Our 2016 expansion has been put to good use. In 2018 we continued with smaller projects to stream
line activities as our market demand continued to be strong. Shop activities outpaced the market as
inventory levels were replenished and expanded to ensure we can meet our customer commitments.
With lower sales in the fourth quarter the inventories are now replenished. The challenge in the first
quarter of 2019 will be to keep the shop loaded for effective overhead absorption.
QUARTERLY INFORMATION
HAMMOND MANUFACTURING COMPANY LIMITED
Summary of Quarterly Financial Information
(In thousands of Canadian dollars except earnings per share)
Q1
Q2
Q3
Q4
2018
Year-to-date
Total
Net product sales
$36,150
$37,750
$37,333
$34,369
$145,602
Income from operating activities
Net income for the period
Earnings per share
- Basic & diluted
1,984
1,097
$0.10
1,925
904
$0.08
2,207
1,489
$0.13
1,597
274
$0.02
7,713
3,764
$0.33
Net product sales
$31,727
$33,486
$31,421
$30,772
$127,406
Q1
Q2
Q3
Q4
2017
Year-to-date
Total
Income from operating activities
Net income for the period
1,449
1,002
2,282
1,579
1,032
1,161
Earnings per share
- Basic & diluted
Note: Interim consolidated financial information has not been reviewed by an auditor.
$0.09
$0.14
$0.10
1,210
818
$0.07
5,973
4,560
$0.40
www.hammondmfg.com
Annual Report 2018 6
MANAGEMENT DISCUSSION AND ANALYSIS
FOURTH QUARTER RESULTS
NET PRODUCT SALES
Net product sales, for the three months ended December 31, 2018 were $34,369,000, down 7.9%
compared to net product sales of $37,333,000 in the third quarter of 2018. As expected, December sales
were down due to holidays. This can account for 3.5% of the drop. We did feel a drop in overall activity
on a daily basis compared to the third quarter although we cannot tie this to any specific event. Net
product sales for the current quarter were up 11.7% compared to net product sales of $30,772,000 for
the three months ended December 31, 2017. Foreign exchange helped the current quarter compared to
the last quarter by providing a currency gain of $96,000. Foreign exchange had a positive impact on the
current quarter versus the comparable quarter of 2017 by $46,000.
GROSS PROFIT
Gross profit of $10,609,000 for the fourth quarter of 2018 was 30.9% of net sales compared to 29.5% in
the third quarter of 2018. Despite the slowdown in sales, plant production levels remained strong as we
took the opportunity to rebuild some of our depleted inventory. Price increases put in play at the end of
the third quarter along with a positive foreign exchange impact helped offset material and labour cost
increases as well as providing some positive margin upside. Gross profits of 30.9% are up from the
fourth quarter of 2017 level of 29.9%.
SELLING AND DISTRIBUTION, GENERAL AND ADMINISTRATIVE, RESEARCH AND
DEVELOPMENT (“R&D”) EXPENSES AND LOSS (GAIN) ON DISPOSAL OF PROPERTY,
PLANT AND EQUIPMENT
Fourth quarter selling and distribution, general and administrative, R&D expenses and loss (gain) on the
disposal of property plant and equipment of $9,012,000 was 26.2% of net sales for the three months
ended December 31, 2018. This compared with spending of $8,817,000 in the previous quarter that was
23.6% of net sales. Foreign exchange impact increased costs by approximately $15,000. The fourth
quarter of 2017 saw spending levels of $7,989,000 which was 26.0% of net sales. Foreign exchange
increased the expense levels by $15,000 over this comparative period also.
Selling and distribution spending of $7,548,000 was up 2.1% over the prior quarter and up 12.8% over
the fourth quarter of 2017. Despite the drop in sales prepaid freight expenses were up quarter over
quarter. Our customers continue to take full advantage of our prepaid freight offering which has been
increasing our freight expenses. The increase over the fourth quarter of 2017 is primarily driven from
the increase in sales.
General and administrative expenses of $1,405,000 were up this quarter from the previous quarter’s
spending of $1,321,000 and up over the fourth quarter spend of 2017 of $1,344,000. Non-recurring
restructuring costs increased the fourth quarter spend of 2018 by $50,000. A project undertaken to
upgrade our information systems hardware and software in the fourth quarter incurred $40,000 of non-
recurring expenses.
Research and development spend of $103,000 was up from the comparative fourth quarter spend of
$59,000 in 2017. Increased staffing levels account for $20,000 of this increase. Canadian Standards
Association charges were up $21,000 over the comparative quarter and travel expense related to
training increased expense levels by $5,000.
www.hammondmfg.com
Annual Report 2018 7
MANAGEMENT DISCUSSION AND ANALYSIS
A net gain of $44,000 on disposal of property, plant and equipment was recognized this quarter with the
sale of our old punch that was fully depreciated and replaced by a modern piece of equipment
INCOME FROM OPERATING ACTIVITIES
Income from operating activities of $1,597,000 (4.6% of net sales) is down from the prior quarter of
$2,207,000 (5.9% of net sales) and up from the 2017 fourth quarter amount of $1,210,000 (3.9% of net
sales).
INTEREST
Interest expense in the fourth quarter was $607,000 compared to $243,000 in the prior quarter. Interest
expense is on the rise due to increased borrowings and a lump sum interest payment.
FOREIGN EXCHANGE TRANSACTIONAL IMPACT
During the fourth quarter of 2018, the Company recognized a loss on transactional foreign exchange of
$675,000 compared to a gain of $2,000 in the three months ended December 31, 2017. In 2018 the
intercompany balance impact was $420,000 of the $675,000 loss. The spot rate at the opening of the
fourth quarter of 2018 was 1.00 USD to 1.2945 CAD. The closing spot rate for 2018 was 1.00 USD to
1.3642 CAD. The opening intercompany balance payable to our US entity was almost $6.0 million. The
ending intercompany payable was $7.6 million USD. Since the Canadian entity held the payable in US
funds the 6.97 cent change in foreign exchange rates payable increased the Canadian valuation of the
payable due creating a transactional expense. . There is an offset to the intercompany impact found in
the foreign exchange translation of foreign operations as the offsetting US receivable is due from the
Canadian entity and would be part of the translational adjustment of the US entities balance sheet on
consolidation.
INCOME TAX EXPENSE (INCOME)
The final true up for the year’s activities combined with a low income before tax provided for tax income
of $24,000.
NET INCOME (LOSS) FOR THE PERIOD
Net income of $274,000 (0.8% return on net product sales) was recognized for the fourth quarter ended
December 31, 2018 this was down from a net return of $1,489,000 (4.0% return on net product sales)
in the previous quarter and down from the net return of $818,000 (2.7% return on net product sales)
recognized in the fourth quarter of 2017.
FOREIGN EXCHANGE TRANSLATION OF FOREIGN OPERATIONS
The translation adjustment for the fourth quarter of 2018 was a gain of $1,036,000 compared to a
translation gain of $89,000 in the fourth quarter of 2017. The Canadian dollar weakening against our
foreign entity currencies provided a positive impact from foreign translation.
TOTAL COMPREHENSIVE INCOME
Comprehensive income for the fourth quarter ended December 31, 2018 was $1,310,000 (3.8% of net
product sales) up from the 3 months ended December 31, 2017 of $907,000 (2.9% of net product sales)
and up from the previous quarters total comprehensive income of $1,135,000 (3.0% of net product
sales).
www.hammondmfg.com
Annual Report 2018 8
MANAGEMENT DISCUSSION AND ANALYSIS
FULL YEAR RESULTS
NET PRODUCT SALES
Net product sales of $145,602,000 in 2018 were up 14.3% compared to net sales of $127,406,000
reported in 2017. Foreign exchange had a positive impact on the year over year reporting by
approximately $238,000 (0.2%) so sales were actually up 14.1% in constant dollars. Price increases
make up 3 to 4% of the increase so our volume increase is close to 10%. Our markets did show signs
of leveling off in the fourth quarter and we are monitoring closely.
GROSS PROFIT
In 2018, gross profit was $43,426,000 or 29.8% of net product sales compared to $38,006,000 or 29.8%
achieved in 2017.Through price increases and efficiency improvements we were able to maintain our
gross profit margin levels.
SELLING AND DISTRIBUTION, GENERAL AND ADMINISTRATIVE, RESEARCH AND
DEVELOPMENT (“R&D”) EXPENSES AND LOSS (GAIN) ON DISPOSAL OF PROPERTY,
PLANT AND EQUIPMENT
Selling and distribution, general and administrative, R&D expenses including the net impact of the
disposal of property, plant and equipment of $35,713,000 (24.5% of net product sales) was up 11.5%
compared to the 2017 spend of $32,033,000 (25.1% of net product sales). Foreign exchange had the
impact of increasing the reported expense levels by approximately $65,000 compared to the cost base
in 2017 so spend was actually up 11.3% compared to 2017.
Selling and distribution expenses of $30,030,000 increased 11.2% compared to 2017. Foreign exchange
had the impact of increasing comparative costs by $47,000. On a constant dollar basis our costs were
up 11.1%. Our prepaid freight program costs of $8.6 million were up 26.3% over 2017 cost levels. Our
freight program is one of our drivers to grow volume. The remaining expenses were up only 6.3% as
there is a fixed expense component that provides an upside as we grow.
Our general and administrative expenses of $5,341,000 were up $504,000 or 10.4% compared to 2017
spending levels of $4,837,000. Foreign exchange increased costs over 2017 by $18,000. The year over
year increases came from the following. Staff additions added $130,000 and provision increases for bad
debts of $123,000 of which $70,000 was related to one specific customer. Legal expenses were up
$38,000 as the defense continues for a lawsuit noted under environmental issues. We also had non-
recurring restructuring charges of $47,000. We also incurred charges for hardware and software
upgrades of $60,000 to support our computer systems. Travel and entertainment was up $48,000 as a
function of increased sales levels.
In 2018 the research and development spending level was up 30.6% to $371,000 over 2017 spending
levels. The primary driver of this increase was an addition of an employee to the department. We
continue to invest in our future.
A net gain of $29,000 on disposal of property, plant and equipment was recognized as some old
equipment was sold and replaced. This compares to a net gain on disposals of $87,000 recognized in
2017.
INCOME FROM OPERATING ACTIVITIES
Overall, 2018 earnings from operating activities of $7,713,000 (5.3% of net product sales) is up
compared to 2017 earnings of $5,973,000 (4.7% of net product sales).
www.hammondmfg.com
Annual Report 2018 9
MANAGEMENT DISCUSSION AND ANALYSIS
INTEREST
Interest expense of $1,414,000 increased $414,000 or 41.4% from the 2017 expense level of
$1,000,000. Our external debt grew throughout 2018 as we invested in our operations. External debt at
the end of 2018 was $31,210,000 up from $22,552,000 at the end of 2017.
FOREIGN EXCHANGE TRANSACTIONAL IMPACT
A $1,122,000 foreign exchange transactional loss was reported in 2018, compared to a transactional
gain of $1,286,000 in 2017. The Canadian dollar weakened against the US dollar throughout 2018. It
opened at $1.00 USD to $1.255 CAD and closed the year at $1.00 USD to $1.364 CAD. A large portion
of the gain is from the intercompany receivable. Our Canadian entity has a payable to our US entity in
US dollars. The Opening payable was $6.9 million USD and the closing balance was $7.6 million. This
year it created transaction losses of just under $800,000 with the offset going to translational gains of
other foreign operations.
INCOME TAX EXPENSE
2018 tax expenses of $1,288,000 were 25.5% of income before income tax. This compares to a 2017
tax expense of $1,827,000 which was 28.6% of income before income tax. Taxes as a percent of income
before income tax improved as a direct result of the US tax rate reforms that came into play in 2018.
NET INCOME FOR THE YEAR
Net income for the year ended December 31, 2018 was $3,764,000 (2.6% of net product sales) down
17.5% from the prior year net income of $4,560,000 (3.6% of net product sales).
FOREIGN EXCHANGE TRANSLATION OF FOREIGN OPERATIONS
During 2018 a gain of $1,532,000 on translational foreign exchange was realized compared to a loss of
$1,041,000 in 2017. The strengthening Canadian dollar caused a decrease in the valuation of our foreign
entities. As noted earlier a large part of this is offset by the foreign exchange transactional impact of
intercompany loans.
TOTAL COMPREHENSIVE INCOME
Comprehensive income for 2018 was $5,296,000 (3.6% of net product sales) up from comprehensive
income of $3,519,000 (2.8% of net product sales) in 2017.
www.hammondmfg.com
Annual Report 2018 10
MANAGEMENT DISCUSSION AND ANALYSIS
SELECTED ANNUAL INFORMATION
Three year financial summary:
For the years ended December 31,
(In thousands except per share amounts)
Consolidated Statements of Comprehensive Income
2018
2017
2016
Net product sales
$
145,602
$
127,406
$
115,724
Income from operating activities
Net income for the year
Per share - basic & fully diluted
net earnings for the year
7,713
3,764
5,973
4,560
2,296
684
$0.33
$0.40
$0.06
Consolidated Statement of Financial Position
2018
2017
2016
Total assets
Total funded debt
Working capital
Net cash generated from (used in) operating activities
Dividends declared and paid
Shareholders' equity
CAPITAL RESOURCES AND LIQUIDITY
$
$
$
100,813
31,210
20,152
1,354
452
51,401
85,889
22,552
21,270
7,244
226
46,557
82,157
25,186
19,016
(3,370)
226
43,264
$
$
$
Net cash generated in operating activities for 2018 was $1,354,000 (net cash generated in 2017 -
$7,244,000). Cash flows from financing activities generated $7,851,000 (2017 – use of $2,229,000).
Cash used in investing activities was $10,614,000 (2017 - $3,440,000).
Trade and other receivables of $19,054,000 at December 31, 2018 have increased 17.2% compared to
the 2017 year-end. Higher sales contributed to this increase. Day’s sales outstanding (DSO) increased
2.2 days over the previous year end. DSO as at December 31, 2018 calculated on net sales was 53.6
days which was up from 51.4 days calculated as at December 31, 2017. Our customers continue to
push for longer payment terms. The quality of accounts receivable remains high.
The year-end investment in inventory of $40,185,000 was an increase of 15.8% from the 2017 inventory
value of $34,700,000. Inventory turnover increased slightly to 2.8 from 2.7 (cost of sales divided by the
twelve month average inventory level). Our value statement of having our standard product on our
shelves combined with the increasing number of stock keeping units makes for a low turn ratio.
Trade and other payables increased by $1,647,000, or 11.7% over 2017 to $15,728,000. The majority
of this increase can be attributed to our increased output levels. Our total debt (long-term debt and bank
indebtedness) increased by $8,658,000 over the prior year to $31,210,000. Our debt-to-equity ratio at
year-end was approximately 0.61:1 (2017 - 0.48:1).
Total dividends paid in 2018 were $452,000 (2017 - $226,000).
Property, plant, equipment and intangible asset additions in 2018 were $9,738,000 up from $4,098,000
in 2017. The Company spent $1,557,000 (2017 - $491,000) on building and leasehold improvements.
$73,000 (2017 - $1,003,000) was invested toward replacing machinery and equipment, $6,906,000
(2017 - $1,954,000) was invested toward machinery and equipment for capacity growth, $677,000 (2017
www.hammondmfg.com
Annual Report 2018 11
MANAGEMENT DISCUSSION AND ANALYSIS
- $511,000) was invested in tooling, $28,000 (2017 - $1,000) was invested in office equipment. $434,000
(2017 - $138,000) was invested in the upgrade / replacement of our computer hardware which we run
our main ERP system on. $4,000 (2017 – $nil) was spent on software and development costs. 2018
spending on product development of $59,000 was up from $nil in 2017.
In 2015, the Group successfully applied for and was approved by the Federal Economic Development
Agency for Southern Ontario for an interest free loan up to $3,461,500 on eligible spending. As at
December 31, 2018, the Group had received $3,115,000 of this funding (2017 - $2,493,000).
In 2015, the Group successfully applied for and was approved by the Southwestern Ontario
Development Fund for a grant up to $1,500,000 on eligible spending. As at December 31, 2018, the
Group has received $989,000 of this funding (2017 - $724,000).
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)
Long-term debt and
Capital lease obligations
Total
2019
2020
2021
2022
2023
Thereafter
$
23,611
$
17,955
$
1,484
$
1,460
$
1,438
$
805
$
469
Operating leases
8,534
2,326
1,981
1,122
941
808
1,356
Total contractual obligations
$
32,145
$
20,281
$
3,465
$
2,582
$
2,379
$
1,613
$
1,825
$16,874,000 of the $19,474,000 long-term debt are demand loans and therefore are shown as due in
2019. The following table depicts the repayment obligation without the debt being called.
Contractual obligations
(In thousands)
Long-term debt and
Capital lease obligations
Total
2019
2020
2021
2022
2023
Thereafter
$
23,611
$
2,216
$
2,670
$
2,699
$
2,733
$
7,764
$
5,529
Operating leases
8,534
2,326
1,981
1,122
941
808
1,356
Total contractual obligations
$
32,145
$
4,542
$
4,651
$
3,821
$
3,674
$
8,572
$
6,885
In addition to the contractual obligations above, the Company has current obligations of $519,000 (2017
- $4,609,000) against open purchase orders for outstanding capital expenditures. The Company also
has open purchase commitments with RITEC as at December 31, 2018 of $827,000 (2017 - $959,000).
These expenditures should be completed in the first half of 2019.
SHARE CAPITAL
As of March 4, 2019, 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.
EBITDA
EBITDA for the fourth quarter of 2018 was $1,776,000 down from $2,042,000 in the fourth quarter of
2017. If you remove the impact of the transactional impact of foreign exchange it shows as an
improvement quarter over quarter (see chart below). Year to date 2018 EBITDA was $9,808,000 down
www.hammondmfg.com
Annual Report 2018 12
MANAGEMENT DISCUSSION AND ANALYSIS
$590,000 over the $10,398,000 achieved in 2017. EBITDA adjusted for foreign exchange shows a year
over year improvement. EBITDA and adjusted EBITDA is calculated as outlined in the following table:
Reconciliation of Net Earnings to Earnings Before Interest, Taxes Depreciation and Amortization
(EBITDA)*.
(In thousands of Canadian dollars)
Years Ended:
December 31,
2018
December 31,
2017
Net income (loss) for the period
3,764
4,560
Three Months Ended:
December 31,
2018
274
December 31,
2017
818
Add
Income tax expense
Depreciation and amortization
Finance costs
Subtotal
EBITDA*
Add:
FX transactional loss (gain)
Adjusted EBITDA *
1,288
3,342
1,414
6,044
9,808
1,122
10,930
1,827
3,011
1,000
5,838
10,398
(1,286)
9,112
(24)
919
607
1,502
1,776
675
2,451
257
724
243
1,224
2,042
(2)
2,040
* EBITDA and Adjusted EBITDA are non-IFRS earnings measures, therefore they do not have any
standardized meaning prescribed by International Financial Reporting Standards and may not be similar
to measures presented by other companies. EBITDA represents earnings before interest, income taxes,
depreciation and amortization. Adjusted EBITDA removes the impact of transactional foreign exchange
so management can assess the impact of this on the operating results. Management uses these
measurements to evaluate the operating results of the Company. These measures are also important
to management since they are used by the Company’s lenders to evaluate the ongoing cash generating
capability of the Company and therefore the amounts those lenders are willing to lend to the Company.
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 2018 related to this property was $89,000 (2017 - $76,000).
In 2017 the Company was successful in claiming back $126,000 of prior and current year expenses from
an adjacent property owner who is also involved in the environmental remediation. $70,000 was for
years prior to 2016, $31,000 was for the year 2016 and $25,000 was for 2017. The net reported expense
for 2018 was $89,000 (2017 – income of $50,000).
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 (2017 - $170,000) with $70,000 (2017 -
$70,000) presented as a current liability in the consolidated financial statements.
A statement of claim was issued on June 19, 2013, against the Company with respect to a property once
held by the Company. The claim alleges that contaminants originating from the property once owned by
the Company have migrated to a nearby, but not adjoining property owned by the claimants. The amount
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Annual Report 2018 13
MANAGEMENT DISCUSSION AND ANALYSIS
of the claim is not fully known but includes $3,500,000 which is the estimated cost of construction of a
barrier and related expenses. At this point in time, there is no certainty that the contaminants emanated
from the property once owned by the Company. Furthermore, given the nature of the claim, there
remains significant uncertainty as to any costs to be incurred as a result of the claim and accordingly
management is unable to reasonably estimate any liability that may arise as a result of this claim. As
such, no amount has been recorded in these consolidated financial statements. In 2017 the claim moved
into the discovery proceedings level and we have seen corresponding legal fees in 2017 and 2018.
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 consolidated 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 consolidated financial statements (note 8).
Based on this analysis, it is management’s judgment that the reported carrying values of these properties
are reasonable.
The value of goodwill related to the Company’s UK operations was reviewed by management and tested
for impairment in accordance with the guidelines set out in International Accounting Standard 36. Based
on this analysis, it is management’s judgment that the reported carrying value for goodwill is not
impaired.
The environmental provision 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 net realizable value.
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.
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Annual Report 2018 14
MANAGEMENT DISCUSSION AND ANALYSIS
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.
Evaluation of Disclosure Controls and Procedures:
Management is responsible for establishing and maintaining disclosure controls and procedures. Under
the supervision and with the participation of the Chief Executive Officer (CEO) and Chief Financial Officer
(CFO), management evaluated the effectiveness of the Company’s disclosure controls and procedures.
Disclosure controls and procedures are designed to provide reasonable assurance that information
required to be disclosed in annual filings, interim filings or other reports filed or submitted by the
Company under securities legislation is recorded, processed, summarized and reported within the time
periods specified in the securities legislation and include controls and procedures designed to ensure
that information required to be disclosed in the annual filings, interim filings or other reports filed or
submitted under securities legislation is accumulated and communicated to management, including the
Company’s certifying officers, as appropriate to allow timely decisions regarding required disclosure.
Management concluded that the Company’s disclosure controls and procedures were effectively
designed as at the December 31, 2018 year end.
Evaluation of Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining internal control over financial reporting.
Under the supervision and with the participation of the Company’s CEO and the CFO, management
evaluated the effectiveness of the Company’s internal control over financial reporting. Internal control is
a process designed by, or under the supervision of, an issuer’s certifying officers, and effected by the
issuer’s board of directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with IFRS and includes those policies and procedures that: (a) pertain to the
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Annual Report 2018 15
MANAGEMENT DISCUSSION AND ANALYSIS
maintenance of records that in reasonable detail accurately and fairly reflect the transactions and
dispositions of the assets of the company; (b) are designed to provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with
the IFRS, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (c) are designed to provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the
company’s assets that could have a material effect on the annual financial statements or interim financial
statements. The CEO and CFO did not identify any material weaknesses in their evaluation of internal
control, and concluded that the Company’s internal control over financial reporting was effective, as at
December 31, 2018.
There has been no change to internal controls in the most recent quarter ended on December 31, 2018
that have materially affected, or are reasonably likely to materially affect, the Company’s internal control
over financial reporting.
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:
•
•
•
•
•
Security Breaches or Disruptions of Information Technology Systems Risk;
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.
Security Breaches or Disruptions of Information Technology Systems Risk
The Corporation utilizes a variety of information technology systems to manage and operate its
businesses. These information systems may be owned and maintained by the Corporation, outsource
providers or third parties such as customers, vendors and contractors. These information systems are
subject to attacks, failures, and access denials from a number of potential sources including viruses,
destructive or inadequate code, power failures, and physical damage to computers, hard drives,
communication lines and networking equipment. Despite the implementation of extensive security
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Annual Report 2018 16
MANAGEMENT DISCUSSION AND ANALYSIS
measures (including access controls, data encryption, vulnerability assessments, continuous
monitoring, and maintenance of back-up and protective systems), the Corporation’s information
technology systems are potentially vulnerable to interruptions or delays, unauthorized access, computer
viruses, cyber-attack and other events, ranging from individual attempts to advanced persistent threats.
It is possible a security breach could result in theft of trade secrets or other intellectual property or
disclosure of confidential customer, supplier or employee information. Should the Corporation be unable
to prevent security breaches, disruptions could have an adverse effect on the Corporation’s operations
and financial results, as well as expose the Corporation to litigation, increased cyber security protection
costs, and reputational damage.
Key Personnel
The Company is dependent on the experience and industry knowledge of its executive officers and other
key employees to execute its business plan. If the Company were to experience a substantial turnover
in its leadership or other key employees, business results from operations and financial condition could
be materially adversely affected.
Commodity Prices
An area that has had a definite effect on the Company’s costs and earnings is the cyclical effects and
unprecedented market cost pressures of copper commodity and steel pricing in the global market. Due
to this unpredictability and volatility, particularly with copper pricing, the Company does not currently
utilize future contracts. Strategic supply line agreements and alliances are in place with our major steel
suppliers to ensure adequate supply and competitive market pricing.
Foreign Exchange
The Company’s operating results are reported in Canadian dollars. A significant portion of our sales is
denominated in US dollars. A change in the value of the Canadian dollar against the US dollar will impact
revenues and earnings. We have created a 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. In a sensitivity review, if we did not
react in any way to a one cent change in the value of the Canadian to US dollar value it would have an
approximate impact of $679,000 for each cent movement. 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. The Company is also exposed
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Annual Report 2018 17
MANAGEMENT DISCUSSION AND ANALYSIS
to the impact from the British pound sterling and Euro as well as to the Australian dollar but not to the
level of exposure of the US dollar.
Interest Rates
Bank indebtedness makes up close to 24.3% of the Company’s 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
Over the past several years the US dollar compared to the Canadian dollar has ranged from the low
1.20’s to the high 1.30’s Canadian dollar to US dollar ratio. A strengthening US market place has
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. We will continue to react to the market conditions
to grow our business. Our efforts over the next 12 months will continue to 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.
Global Political Unrest
Today’s politics can have significant repercussions on doing business. Issues are constantly changing
and management has to assess the potential outcomes of the different issues and be prepared to react
or mitigate anything that would have a negative impact on our business. In 2018 the North American
Trade Agreement was under negotiation signed on November 30, 2018. It still needs to be ratified. US
tariffs put in place on steel are still in play despite have the agreement in place.
BREXIT is currently playing out overseas. We have operations in the UK that service the UK and Europe.
The landscape of doing business will more than likely change as a result of the situation although no
one can determine what the final result will look like. Management is closely watching the situation and
is looking at different options for doing business overseas.
ACCOUNTING POLICY CHANGES
IFRS 9 Financial instruments
Effective January 1, 2018, the Company adopted IFRS 9 on a retrospective basis, which sets out
requirements for recognition and measurement, impairment, derecognition of financial instruments and
general hedge accounting. This standard simplifies the classification of a financial asset as either at
amortized cost or at fair value as opposed to the multiple classifications which were permitted under IAS
39. This standard also requires the use of a single impairment method as opposed to the multiple
methods in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial instruments
in the context of its business model and the contractual cash flow characteristics of the financial assets.
The standard also adds guidance on the classification and measurement of financial liabilities.
Cash and trade and other receivables that were classified as loans and receivables under IAS 39 are
classified as financial assets measured at amortized cost. There is no change to the initial measurement
of the Company’s financial assets. Impairment of financial assets is based on an expected credit loss
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Annual Report 2018 18
MANAGEMENT DISCUSSION AND ANALYSIS
(“ECL”) model under IFRS 9, rather than the incurred loss model under IAS 39. ECLs are a probability
weighted estimate of credit losses. The Company calculated ECLs based on consideration of customer
specific factors and actual credit loss experience. As a percentage of revenue, the Company’s actual
credit loss experience has not been significant.
The adoption of IFRS 9 has not had an effect on the Company’s accounting policies related to financial
liabilities.
There was no material impact of transition to IFRS 9 on the Company’s statement of financial position
at January 1, 2018.
IFRS 15 Revenue from contracts with customers
The Company has adopted IFRS 15 with a date of initial application of January 1, 2018. IFRS 15 includes
a single, five-step revenue recognition model that requires entities to recognize revenue when control of
the promised goods or services is transferred to customers at an amount that reflects the consideration
to which the entity expects to be entitled to in exchange for those goods or services. The standard also
requires more informative, relevant disclosures. IFRS 15 supersedes IAS 11 “Construction Contracts”
and IAS 18 “Revenue”, as well as various IFRIC and SIC interpretations regarding revenue. The
Company has applied IFRS 15 using the cumulative effect method (without practical expedients) and
therefore the comparative information has not been restated and continues to be reported under IAS 11
and IAS 18. The adoption of IFRS 15 did not result in a in significant differences between the point of
risk and rewards transfer for the sale of product under IAS 18, and the point of transfer of control under
IFRS 15, therefore no transition adjustments were recognized as at January 1, 2018. As a result of the
adoption of IFRS 15, the Company’s accounting policies have been updated, and additional disclosure
has been included. See note 2 to the consolidated financial statements for these changes in accounting
policies. IFRS 15 had no impact on the Company’s consolidated statement of income for the year ended
December 31, 2018.
Future Accounting Changes
The International Accounting Standards Board (IASB) issued the following standards that have not been
applied in preparing the consolidated financial statements and notes thereto, for the year ended
December 31, 2018 as their effective dates fall within annual periods beginning subsequent to the
current reporting period: IFRS 16 “Leases” and IFRIC 23 “Uncertainty over Income Tax Treatments”.
IFRS 16 Leases
In January 2016 the IASB issued IFRS 16, Leases. The new standard is effective for annual periods
beginning on or after January 1, 2019. Earlier application is permitted for entities that apply IFRS 15
Revenue from Contracts with Customers at or before the date of initial adoption of IFRS 16. IFRS 16
will replace IAS 17 Leases. This standard introduces a single lessee accounting model and requires a
lessee to recognize assets and liabilities from all leases with a term of more than 12 months, unless the
underlying asset is of low value. A lessee is required to recognize a right-of-use asset representing its
right to use the underlying asset and a lease liability representing its obligation to make lease payments.
This standard substantially carries forward the lessor accounting requirements of IAS 17, while requiring
enhanced disclosures to be provided by lessors. Other areas of the lease accounting model have been
impacted, including the definition of a lease. The Group intends to adopt IFRS 16 in its consolidated
financial statements for the annual and interim reporting periods beginning on January 1, 2019. The
extent of the impact of adoption of this standard has yet to be determined.
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Annual Report 2018 19
MANAGEMENT DISCUSSION AND ANALYSIS
IFRIC 23 Uncertainty over Income Tax Treatments
On June 7, 2017, the IASB issued IFRIC Interpretation 23 Uncertainty over Income Tax Treatments.
The Interpretation provides guidance on the accounting for current and deferred tax liabilities and assets
in circumstances in which there is uncertainty over income tax treatments.
The Interpretation requires:
•
•
•
an entity to contemplate whether uncertain tax treatments should be considered separately, or
together as a group, based on which approach provides better predictions of the resolution;
an entity to determine if it is probable that the tax authorities will accept the uncertain tax
treatment; and
if it is not probable that the uncertain tax treatment will be accepted, measure the tax uncertainty
based on the most likely amount or expected value, depending on whichever method better
predicts the resolution of the uncertainty.
The Interpretation is applicable for annual and interim reporting periods beginning on or after January 1,
2019. Earlier application is permitted.
The Group intends to adopt the Interpretation in its consolidated financial statements for the annual and
interim reporting periods beginning on January 1, 2019. The extent of the impact of adoption of the
Interpretation has not yet been determined.
OUTLOOK FACTORS FOR 2019
The fourth quarter showed signs of slowing. Our current market expectation is to see stable growth in
all our market places although at a slower pace than we had been experiencing. The strong US dollar
continues to provide us the opportunity to competitively price our products and stimulate market share
growth. The Company continues with the objective of sales growth and increased market share but will
weigh this against achieving acceptable margins.
Capital spending will continue to be focused on high impact projects as accommodated by cash flows.
Our primary focus continues to be on productivity and margin improvement.
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Annual Report 2018 20
MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING
The consolidated financial statements are the responsibility of the management of Hammond
Manufacturing Company Limited. These statements have been prepared in accordance with
International Financial Reporting Standards, using management’s best estimates and judgments, where
appropriate.
Management is responsible for the reliability and integrity of the consolidated financial statements, the
notes to the consolidated financial statements and other financial information contained in the report. In
the preparation of these statements, estimates are sometimes necessary because a precise
determination of certain assets and liabilities is dependent on future events. Management believes such
estimates have been based on careful judgment and have been properly reflected in the accompanying
consolidated financial statements.
Management is responsible for the maintenance of a system of internal controls designed to provide
reasonable assurance that the assets are safeguarded and that accounting systems provide timely,
accurate and reliable financial information.
The Board of Directors is responsible for ensuring that management fulfills its responsibilities for financial
reporting and internal control. The Board of Directors is assisted in exercising its responsibilities through
the Audit Committee of the Board, which is composed of three non-management directors. The Audit
Committee meets periodically with management and the auditors to satisfy itself that management’s
responsibilities are properly discharged, to review the consolidated financial statements and to
recommend approval of the consolidated financial statements to the Board of Directors.
KPMG LLP, the independent auditors appointed by the shareholders, has audited the Company’s
consolidated financial statements in accordance with Canadian generally accepted auditing standards
and their report follows. The independent auditors have full and unrestricted access to the Audit
Committee to discuss their audit and related findings as to the integrity of the financial reporting process.
R.F. Hammond
A. Stirling
Chairman & CEO
Secretary & CFO
Guelph, Ontario
March 4, 2019
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Annual Report 2018
21
KPMG LLP
115 King Street South
2nd Floor
Waterloo ON N2J 5A3 Canada
Tel 519-747-8800
Fax 519-747-8830
INDEPENDENT AUDITORS’ REPORT
To the Shareholders of Hammond Manufacturing Company Limited
Opinion
We have audited the consolidated financial statements of Hammond Manufacturing
Company Limited (the Entity), which comprise:
The consolidated statements of financial position as at December 31, 2018 and 2017
the consolidated statements of comprehensive income for the years then ended
the consolidated statements of changes in equity for the years then ended
the consolidated statements of cash flows for the years then ended
and notes to the financial statements, including a summary of significant accounting
policies
(Hereinafter referred to as the “financial statements”).
In our opinion, the accompanying consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Entity as December 31, 2018
and 2017, and its consolidated financial performance and its consolidated cash flows for the
years then ended in accordance with International Financial Reporting Standards (IFRS).
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing
standards. Our responsibilities under those standards are further described in the
“Auditors’ Responsibilities for the Audit of the Financial Statements” section of our
auditors’ report.
We are independent of the Entity in accordance with the ethical requirements that are
relevant to our audit of the consolidated financial statements in Canada and we have fulfilled
our other ethical responsibilities in accordance with these requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide
a basis for our opinion.
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.
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Annual Report 2018 22
Other Information
Management is responsible for the other information. Other information comprises:
the information included in Management’s Discussion and Analysis filed with the
relevant Canadian Securities Commissions.
the information, other than the financial statements and the auditors’ report thereon,
included in a document likely to be entitled “Glossy Annual Report”.
Our opinion on the consolidated financial statements does not cover the other information
and we do not and will not express any form of assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to
read the other information identified above and, in doing so, consider whether the other
information is materially inconsistent with the financial statements or our knowledge
obtained in the audit and remain alert for indications that the other information appears to
be materially misstated.
We obtained the information included in Management’s Discussion and Analysis filed with
the relevant Canadian Securities Commissions as at the date of this auditors’ report. If,
based on the work we have performed on this other information, we conclude that there is
a material misstatement of this other information, we are required to report that fact in the
auditors’ report.
We have nothing to report in this regard.
The information, other than the financial statements and the auditors’ report thereon,
included in a document likely to be entitled “Glossy Annual Report” is expected to be made
available to us after the date of this auditors’ report. If, based on the work we will perform
on this other information, we conclude that there is a material misstatement of this other
information, we are required to report that fact to those charged with governance.
Responsibilities of Management and Those Charged with Governance
for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial
statements in accordance with International Financial Reporting Standards (IFRS), and for
such internal control as management determines is necessary to enable the preparation of
financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible for assessing the Entity’s
ability to continue as a going concern, disclosing as applicable, matters related to going
concern and using the going concern basis of accounting unless management either intends
to liquidate the Entity or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Entity’s financial
reporting process.
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Annual Report 2018 23
Auditors’ Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial
statements as a whole are free from material misstatement, whether due to fraud or error,
and to issue an auditors’ report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit
conducted in accordance with Canadian generally accepted auditing standards will always
detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in
the aggregate, they could reasonably be expected to influence the economic decisions of
users taken on the basis of the consolidated financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we
exercise professional judgment and maintain professional skepticism throughout the audit.
We also:
Identify and assess the risks of material misstatement of the financial statements,
whether due to fraud or error, design and perform audit procedures responsive to those
risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for
our opinion.
The risk of not detecting a material misstatement resulting from fraud is higher than for
one resulting from error, as fraud may involve collusion, forgery, intentional omissions,
misrepresentations, or the override of internal control.
Obtain an understanding of internal control relevant to the audit 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.
Evaluate the appropriateness of accounting policies used and the reasonableness of
accounting estimates and related disclosures made by management.
Conclude on the appropriateness of management's use of the going concern basis of
accounting and, based on the audit evidence obtained, whether a material uncertainty
exists related to events or conditions that may cast significant doubt on the Entity's
ability to continue as a going concern. If we conclude that a material uncertainty exists,
we are required to draw attention in our auditors’ report to the related disclosures in the
consolidated financial statements or, if such disclosures are inadequate, to modify our
opinion. Our conclusions are based on the audit evidence obtained up to the date of our
auditors’ report. However, future events or conditions may cause the Entity to cease to
continue as a going concern.
Evaluate the overall presentation, structure and content of the consolidated financial
statements, including the disclosures, and whether the consolidated financial
statements represent the underlying transactions and events in a manner that achieves
fair presentation.
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Annual Report 2018 24
Communicate with those charged with governance regarding, among other matters, the
planned scope and timing of the audit and significant audit findings, including any
significant deficiencies in internal control that we identify during our audit.
Provide those charged with governance with a statement that we have complied with
relevant ethical requirements regarding independence, and communicate with them all
relationships and other matters that may reasonably be thought to bear on our
independence, and where applicable, related safeguards.
Obtain sufficient appropriate audit evidence regarding the financial information of the
entities or business activities within the group Entity to express an opinion on the
financial statements. We are responsible for the direction, supervision and performance
of the group audit. We remain solely responsible for our audit opinion.
Chartered Professional Accountants, Licensed Public Accountants
The engagement partner on the audit resulting in this auditors’ report is Ian J. Jeffreys.
Waterloo, Canada
March 4, 2019
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Annual Report 2018 25
HAMMOND MANUFACTURING COMPANY LIMITED
Consolidated Statements of Financial Position
(in thousands of Canadian dollars)
As at December 31,
Note
2018
2017
Assets
Current assets:
Cash
Trade and other receivables
Income taxes receivable
Inventories
Prepaid expenses
Total current assets
Non-current assets:
Property, plant and equipment
Intangible assets and goodwill
Investment property
Equity investment
Total non-current assets
Total assets
Liabilities
Current liabilities:
Bank indebtedness
Trade and other payables
Income taxes payable
Current portion of provisions
Current portion of employee future benefits
Current portion of long-term debt
Total current liabilities
Non-current liabilities:
Employee future benefits
Long-term debt
Provisions
Deferred tax liabilities
Total non-current liabilities
Total liabilities
Equity:
Share capital
Contributed surplus
Accumulated other comprehensive income
Retained earnings
Total equity
Commitments
Contingency
Total liabilities and equity
4
5
6
7
8
9
10
11
12
13
10
13
10
12
14
15
$
625
19,054
453
40,185
1,312
61,629
$
1,051
16,261
-
34,700
1,181
53,193
37,059
284
1,044
797
39,184
30,629
269
1,044
754
32,696
$
100,813
$
85,889
$
7,599
15,728
-
124
71
17,955
41,477
$
5,716
14,081
918
115
53
11,040
31,923
209
5,656
100
1,970
7,935
49,412
10,249
290
3,407
37,455
51,401
237
5,796
100
1,276
7,409
39,332
10,249
290
1,875
34,143
46,557
16 &17
18 & 24
$
100,813
$
85,889
The notes on pages 30 to 64 are an integral part of these consolidated financial statements.
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Annual Report 2018 26
HAMMOND MANUFACTURING COMPANY LIMITED
Consolidated Statements of Comprehensive Income
(in thousands of Canadian dollars, except earnings per share)
For The Years Ended December 31,
Note
2018
2017
Net product sales
Cost of sales
Gross profit
Selling and distribution
General and administrative
Research and development
Gain on disposal of property, plant and equipment
Income from operating activities
Interest expense
Foreign exchange gain (loss)
Net finance income (expense)
Share of profit of equity accounted investees
Share of recovery (expenses) from investment property
Income before income tax
Income tax expense
Net income for the year
10
9
8
19
$ 145,602
$ 127,406
102,176
43,426
30,030
5,341
371
(29)
7,713
(1,414)
(1,122)
(2,536)
(36)
(89)
5,052
1,288
3,764
89,400
38,006
26,999
4,837
284
(87)
5,973
(1,000)
1,286
286
78
50
6,387
1,827
4,560
Other comprehensive gain (loss):
Foreign currency translation differences for foreign
operations
1,532
(1,041)
Other comprehensive income (loss) for the year, net of income
tax
1,532 (1,041)
Total comprehensive income for the year
$ 5,296
$ 3,519
Earnings per share
Basic earnings per share
Diluted earnings per share
20
20
$ 0.33
$ 0.33
$ 0.40
$ 0.40
The notes on pages 30 to 64 are an integral part of these consolidated financial statements.
www.hammondmfg.com
Annual Report 2018 27
HAMMOND MANUFACTURING COMPANY LIMITED
Consolidated Statements of Changes in Equity
For the years December 31, 2018 and December 31, 2017
(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, 2017
$
10,249
$
290
$
2,916
$
29,809
$
43,264
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
-
-
-
-
-
-
-
-
-
4,560
4,560
(1,041)
-
(1,041)
(1,041)
4,560
3,519
-
(226)
(226)
Balance at December 31, 2017
$
10,249
$
290
$
1,875
$
34,143
$
46,557
Balance at January 1, 2018
$
10,249
$
290
$
1,875
$
34,143
$
46,557
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
-
-
-
-
-
-
-
-
-
3,764
3,764
1,532
-
1,532
1,532
3,764
5,296
-
(452)
(452)
Balance at December 31, 2018
** Accumulated other comprehensive income (loss)
$
10,249
$
290
$
3,407
$
37,455
$
51,401
The notes on pages 30 to 64 are an integral part of these consolidated financial statements.
www.hammondmfg.com
Annual Report 2018 28
HAMMOND MANUFACTURING COMPANY LIMITED
Consolidated Statements of Cash Flows
(in thousands of Canadian dollars)
For the Years Ended December 31,
2018
2017
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
Gain on disposal of property, plant and equipment
Provisions and employee future benefits
Equity investments
Change in non-cash working capital:
Inventories
Trade and other receivables
Prepaid expenses
Trade and other payables
Cash generated from operating activities
Interest paid
Income tax paid
Net cash generated from operating activities
Cash flows from financing activities
Bank indebtedness
Payment of long-term debt
Advances of long-term debt
Payment of dividends
Net cash generated (used) from financing activities
Cash flows from investing activities
Proceeds from disposal of property, plant and equipment
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
$
3,764
$
4,560
3,289
53
1,414
1,288
(29)
10
(43)
9,746
(5,232)
(2,181)
(117)
2,289
4,505
(1,300)
(1,851)
1,354
1,875
(1,336)
7,764
(452)
7,851
44
(10,595)
(63)
(10,614)
(1,409)
1,051
2,955
56
1,000
1,827
(87)
-
(116)
10,195
(1,899)
(1,068)
(54)
1,057
8,231
(915)
(72)
7,244
(1,635)
(1,326)
958
(226)
(2,229)
94
(3,534)
-
(3,440)
1,575
614
Foreign exchange gain (loss) on cash and cash
equivalents in a foreign currency
Cash at end of year
983
(1,138)
$
625
$
1,051
The notes on pages 30 to 64 are an integral part of these consolidated financial statements.
www.hammondmfg.com
Annual Report 2018 29
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(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, 2018 include the Company and its subsidiaries (together referred to as the
“Group” and individually as “Group entities”) and the Group’s interest in jointly controlled entities.
The Group primarily is involved in the design, manufacture and sale of electrical and electronic
components. Facilities are located in Canada, the US, the UK, Taiwan and Australia, with agents
and distributors located worldwide. The Company also maintains a 40% ownership share of RITEC
Enclosures Inc. (RITEC) located in Taiwan. RITEC produces plastic and die cast enclosures for sale
through the Company’s sales network and its own existing market channels.
2) Basis of preparation:
a) Statement of compliance:
These consolidated financial statements have been prepared in accordance with International
Financial Reporting Standards (IFRS).
The Board of Directors approved these consolidated financial statements on March 4, 2019.
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 accumulated other
comprehensive income. The functional currency of the Company’s subsidiary operations located
in the US, UK, Taiwan and Australia are the US dollar, the British pound sterling, Taiwan dollar
and the Australian dollar respectively. The functional currency of the Company’s Canadian
operations is the Canadian dollar.
d) Use of estimates:
The preparation of financial statements in conformity with IFRS requires management to make
estimates and assumptions that affect the application of accounting policies and the reported
amount of assets, liabilities, income and expense. Actual results may differ from these
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Annual Report 2018 30
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(tabular amounts (except share amounts) in thousands of Canadian dollars)
estimates. Revisions to accounting estimates are recognized in the period in which the
estimates are revised and in any future periods affected. Management periodically reviews its
estimates and underlying assumptions relating to the following items:
i) Amortization
Management makes estimates of the appropriate useful lives to be assigned to intangible
assets based on the individual circumstances of an acquisition. Management reviews the
appropriateness of the lives assigned and makes adjustments prospectively, where
necessary.
ii)
Impairment tests
Management makes estimates of sustainable earnings, future expected cash flows and
discount rates in the determination of the value-in-use or fair value less costs of disposal of
cash-generating units (“CGUs”).
iii) Provision against accounts receivable
Management makes estimates on the expected credit losses (“ECLs”) of accounts
receivable balances based on customer 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 2018 31
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(tabular amounts (except share amounts) in thousands of Canadian dollars)
viii) Property value
Management estimates the value of the investment property to assess if impairment has
occurred. The estimate is made by reviewing local land prices and current sales of similar
properties as well as property tax value assessment.
ix) Environmental remediation:
Management estimates the value to complete the remediation project on the Glen Ewing
Property each year by reviewing the project status and activities still to be completed. Any
changes to the project scope are updated in the cost estimation model and any change in
the required reserve is booked in the current year.
x) Sales returns:
Management estimates the value of product that will be returned based on a historical
analysis. Any change to the estimate is recorded as a reduction of revenue in the current
period.
e) Use of judgments:
The preparation of financial statements in conformity with IFRS requires management to make
judgments that affect the application of accounting policies and the interpretation of accounting
standards. Management periodically reviews its judgments and underlying assumptions relating
to the following items:
i) Provision for claims
Judgment is exercised in deciding whether a liability for a claim meets the criteria of a
present obligation and in assessing the probability of the outflow of economic resources.
ii) Lease classification
The Company enters into leases for premises and operating equipment that may be
classified as operating or finance leases. Management exercises judgment to determine
whether substantially all the risks and rewards incidental to ownership have been
transferred to the Company.
iii) Impairment tests
Management exercises judgment to determine whether there are factors that would indicate
that an asset or a CGU is impaired. The determination of CGUs is also based on
management’s judgment and is an assessment of the smallest group of assets that generate
cash inflows independently of other assets. Factors considered include whether an active
market exists for the output produced by the asset or group of assets as well as how
management monitors and makes decisions about the Company’s operations.
iv) Intangible assets
Management exercises judgment to determine whether identifiable intangible assets were
acquired in a business combination, separate from goodwill and whether they will provide
future economic benefits to the Company.
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Annual Report 2018 32
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(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 Limited, 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
transactions have been eliminated on consolidation. The consolidated financial statements
include the investment in RITEC, which is accounted for using the equity method.
b) Revenue recognition:
The Company determines revenue recognition through the following steps: a) identification of
the contract with a customer, b) identification of the performance obligations in the contract, c)
determination of the transaction price, d) allocation of the transaction price to the performance
obligations in the contract and e) recognition of revenue when the Company satisfies a
performance obligation.
The Company principally generates revenue through the manufacturing and sale of industrial
enclosures, electronic enclosures, racks and cabinets, transformers and other products.
Revenue is recognized when control of a product is transferred to a customer. This is generally
at the point in time when product is available for physical delivery, and the customer has legal
title to, physical possession of (or through their carrier), and the risks and rewards of ownership
of the product have transferred; therefore, the customer is able to direct the use of and obtain
substantially all of the benefits of the product. There is only a single performance obligation,
except for where delivery is provided by Hammond after the point of transfer.
Revenue is measured based on the consideration specified in a contract with a customer, net
of variable consideration, including rebates, returns and discounts. Rebates are accrued using
sales data and rebate percentages specific to each customer contract. Accruals for sales returns
are calculated based on the best estimate of the amount of product that will ultimately be
returned by customers. All customer receivables are expected to be paid within one year and
therefore the Company does not adjust for the effects of a financing component.
Contract liabilities are recorded when cash payments are received or due in advance of the
Company’s performance.
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Annual Report 2018 33
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(tabular amounts (except share amounts) in thousands of Canadian dollars)
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. Costs include expenditures that are 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 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.
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Annual Report 2018 34
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(tabular amounts (except share amounts) in thousands of Canadian dollars)
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
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.
www.hammondmfg.com
Annual Report 2018 35
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(tabular amounts (except share amounts) in thousands of Canadian dollars)
i) Goodwill:
Acquisitions 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
CGUs that are expected to benefit from the synergies of the business combination. 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 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 assets and financial liabilities:
Financial assets are initially measured at fair value. On initial recognition, the Company
classifies its financial assets at either amortized cost, fair value through other comprehensive
income or fair value through profit or loss, depending on its business model for managing the
financial assets and the contractual cash flow characteristics of the financial assets. Financial
assets are not reclassified subsequent to their initial recognition, unless the Company changes
its business model for managing financial assets.
A financial asset is measured at amortized cost if it meets both of the following conditions: a)
the asset is held within a business model whose objective is to hold assets to collect contractual
cash flows and b) the contractual terms of the financial asset give rise on specified dates to cash
flows that are solely payments of principal and interest on the principal amount outstanding.
Financial liabilities are initially measured at fair value, net of transaction costs incurred. They
are subsequently carried at amortized cost using the effective interest rate method; any
difference between the proceeds (net of transaction costs) and the redemption value is
recognized as an adjustment to interest expense over the period of the borrowings.
Financial liabilities include bank indebtedness, trade and other payables and long-term debt.
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Annual Report 2018 36
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(tabular amounts (except share amounts) in thousands of Canadian dollars)
m) Impairment:
i) Financial assets:
ECLs are recognized on all financial assets not carried at fair value through profit or loss.
Expected credit losses are based on the difference between the contractual cash flows due
in accordance with the contract and all the cash flows that the Company expects to receive,
discounted at an approximation of the original effective interest rate.
ECLs are recognized in two stages. For credit exposures for which there has not been a
significant increase in credit risk since initial recognition, ECLs are provided for credit losses
that result from default events that are possible within the next 12-months. For those credit
exposures for which there has been a significant increase in credit risk since initial
recognition, a loss allowance is required for credit losses expected over the remaining life
of the exposure, irrespective of the timing of the default.
For trade receivables and contract assets, the Company applies a simplified approach in
calculating ECLs. Therefore, the Company does not track changes in credit risk, but instead
recognizes a loss allowance based on lifetime ECL at each reporting date. The Company
has established a provision matrix that is based on its historical credit loss experience,
adjusted for forward looking factors specific to the debtors and the economic environment.
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 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, 2018 and December 31, 2017, and concluded there was no impairment.
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Annual Report 2018 37
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(tabular amounts (except share amounts) in thousands of Canadian dollars)
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.
n) Employee Benefits:
i) Defined contribution plans:
A defined contribution plan is a post-employment benefit plan under which an entity pays
fixed contributions into a separate entity and will have no legal or constructive obligation to
pay further amounts. Obligations for contributions to defined contribution pension plans are
recognized as an employee benefit expense in the periods during which services are
rendered by the employees. Prepaid contributions are recognized as an asset to the extent
that a cash refund or a reduction in future payments is available.
ii) Other long-term employee benefits:
The Group’s net obligation in respect of long-term employee benefits, other than pension
plans, is the amount of future benefit that employees have earned in return for their service
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.
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Annual Report 2018 38
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(tabular amounts (except share amounts) in thousands of Canadian dollars)
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.
o) Segment reporting:
The continuing operations of the Company are in one operating segment, electrical and
electronic components.
p) Finance costs:
Finance costs consist of interest on borrowings and finance leases.
q) 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.
r) New standards and interpretations adopted:
The International Accounting Standards Board (IASB) has issued the following Standards,
Interpretations and Amendments to Standards that were adopted by the Group.
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
www.hammondmfg.com
Annual Report 2018 39
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(tabular amounts (except share amounts) in thousands of Canadian dollars)
annual periods beginning on or after January 1, 2018. 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 adopted the amendments to IFRS 2 in its consolidated financial statements for the
annual period beginning on January 1, 2018. The amendments did not have a material impact
on the consolidated financial statements.
IFRS 9 Financial instruments
Effective January 1, 2018, the Company adopted IFRS 9 on a retrospective basis, which sets
out requirements for recognition and measurement, impairment, derecognition of financial
instruments and general hedge accounting. This standard simplifies the classification of a
financial asset as either at amortized cost or at fair value as opposed to the multiple
classifications which were permitted under IAS 39. This standard also requires the use of a
single impairment method as opposed to the multiple methods in IAS 39. The approach in IFRS
9 is based on how an entity manages its financial instruments in the context of its business
model and the contractual cash flow characteristics of the financial assets. The standard also
adds guidance on the classification and measurement of financial liabilities.
Cash and trade and other receivables that were classified as loans and receivables under IAS
39 are classified as financial assets measured at amortized cost. There is no change to the
initial measurement of the Company’s financial assets. Impairment of financial assets is based
on an expected credit loss (“ECL”) model under IFRS 9, rather than the incurred loss model
under IAS 39. ECLs are a probability weighted estimate of credit losses. The Company
calculated ECLs based on consideration of customer specific factors and actual credit loss
experience. As a percentage of revenue, the Company’s actual credit loss experience has not
been significant.
The adoption of IFRS 9 has not had an effect on the Company’s accounting policies related to
financial liabilities.
There was no material impact of transition to IFRS 9 on the Company’s statement of financial
position at January 1, 2018.
IFRS 15 Revenue from contracts with customers
The Company has adopted IFRS 15 with a date of initial application of January 1, 2018. IFRS
15 includes a single, five-step revenue recognition model that requires entities to recognize
revenue when control of the promised goods or services is transferred to customers at an
amount that reflects the consideration to which the entity expects to be entitled to in exchange
for those goods or services. The standard also requires more informative, relevant disclosures.
www.hammondmfg.com
Annual Report 2018 40
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(tabular amounts (except share amounts) in thousands of Canadian dollars)
IFRS 15 supersedes IAS 11 “Construction Contracts” and IAS 18 “Revenue”, as well as various
IFRIC and SIC interpretations regarding revenue. The Company has applied IFRS 15 using the
cumulative effect method (without practical expedients) and therefore the comparative
information has not been restated and continues to be reported under IAS 11 and IAS 18. The
adoption of IFRS 15 did not result in a in significant differences between the point of risk and
rewards transfer for the sale of product under IAS 18, and the point of transfer of control under
IFRS 15, therefore no transition adjustments were recognized as at January 1, 2018. As a result
of the adoption of IFRS 15, the Company’s accounting policies have been updated, and
additional disclosure has been included. See note 2 for these changes in accounting policies.
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.
The Group adopted the amendments to IAS 40 in its consolidated financial statements for the
annual period beginning on January 1, 2018. There was no 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.
www.hammondmfg.com
Annual Report 2018 41
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(tabular amounts (except share amounts) in thousands of Canadian dollars)
The Group adopted the Interpretation in its consolidated financial statements for the annual
period beginning on January 1, 2018. There was no material impact from the adoption of this
Interpretation on the consolidated financial statements.
s) New standards and interpretations not yet adopted:
The IASB has issued 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.
IFRS 16 Leases
In January 2016 the IASB issued IFRS 16, Leases. The new standard is effective for annual
periods beginning on or after January 1, 2019. Earlier application is permitted for entities that
apply IFRS 15 Revenue from Contracts with Customers at or before the date of initial adoption
of IFRS 16. IFRS 16 will replace IAS 17 Leases. This standard introduces a single lessee
accounting model and requires a lessee to recognize assets and liabilities from all leases with
a term of more than 12 months, unless the underlying asset is of low value. A lessee is required
to recognize a right-of-use asset representing its right to use the underlying asset and a lease
liability representing its obligation to make lease payments. This standard substantially carries
forward the lessor accounting requirements of IAS 17, while requiring enhanced disclosures to
be provided by lessors. Other areas of the lease accounting model have been impacted,
including the definition of a lease. 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 2015-2017 Cycle
On December 12, 2017 the IASB issued narrow-scope amendments to three standards as part
of its annual improvements process.
Amendments were made to the following standards:
•
•
•
IFRS 3 Business Combinations and IFRS 11 Joint Arrangements - to clarify how a
company accounts for increasing its interest in a joint operation that meets the definition
of a business;
IAS 12 Income Taxes – to clarify that all income tax consequences of dividends are
recognized consistently with the transactions that generated the distributable profits –
i.e. in profit or loss, OCI, or equity; and
IAS 23 Borrowing Costs – to clarify that specific borrowings – i.e. funds borrowed
specifically to finance the construction of a qualifying asset should be transferred to the
general borrowings pool once the construction of the qualifying asset has been
completed.
The amendments are effective on or after January 1, 2019, with early application permitted.
Each of the amendments has its own specific transition requirements.
The Company intends to adopt these amendments in its consolidated financial statements for
the annual period beginning on January 1, 2019. The extent of the impact of adoption of the
amendments has not yet been determined.
www.hammondmfg.com
Annual Report 2018 42
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(tabular amounts (except share amounts) in thousands of Canadian dollars)
IFRIC 23 Uncertainty over Income Tax Treatments
On June 7, 2017, the IASB issued IFRIC Interpretation 23 Uncertainty over Income Tax
Treatments.
The Interpretation provides guidance on the accounting for current and deferred tax liabilities
and assets in circumstances in which there is uncertainty over income tax treatments.
The Interpretation requires:
•
•
•
an entity to contemplate whether uncertain tax treatments should be considered
separately, or together as a group, based on which approach provides better
predictions of the resolution;
an entity to determine if it is probable that the tax authorities will accept the uncertain
tax treatment; and
if it is not probable that the uncertain tax treatment will be accepted, measure the tax
uncertainty based on the most likely amount or expected value, depending on
whichever method better predicts the resolution of the uncertainty.
The Interpretation is applicable for annual periods beginning on or after January 1, 2019.
Earlier application is permitted.
The Group intends to adopt the Interpretation in its consolidated financial statements for the
annual period beginning on January 1, 2019. The extent of the impact of adoption of the
Interpretation has not yet been determined.
4) Trade and other receivables:
Trade receivables
Employee receivables
Other receivables
Allowance for doubtful accounts
Trade and other receivables
December 31, 2018
December 31, 2017
$ 18,095
17
1,220
19,332
(278)
$ 19,054
$ 15,485
20
911
16,416
(155)
$ 16,261
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, 2018
December 31, 2017
Raw materials and work-in-process
Finished goods
$ 11,791
28,394
$ 10,472
24,228
Inventories
$ 40,185
$ 34,700
Inventories carried at net realizable value
$ 1,752
$ 1,443
In 2018, raw materials, consumables and changes in finished goods and work in progress
recognized as cost of sales amounted to approximately $102,087,000 (2017 - $89,357,000). In
2018, the write-down of inventories to net realizable value amounted to approximately $89,000
(2017 - $43,000). The write-down is included in cost of sales.
www.hammondmfg.com
Annual Report 2018 43
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(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, 2016
$
20,130
$
43,278
$
9,757
$
5,111
$
78,276
Additions
Disposals
Effect of movements in exchange rates
$
491
(3)
1
$
2,957
(1,068)
(98)
$
511
(507)
(73)
$
139
(106)
(5)
$
4,098
(1,684)
(175)
Balance at December 31, 2017
$
20,619
$
45,069
$
9,688
$
5,139
$
80,515
Additions
Disposals
Effect of movements in exchange rates
1,557
$
(215)
$
$
3
$
$
$
6,979
(954)
148
677
$
$
-
$
128
$
462
$
20
$
9,675
(1,169)
299
Balance at December 31, 2018
$
21,964
$
51,242
$
10,493
$
5,621
$
89,320
At December 31, 2018, the amount of expenditures recognized in the carrying amount that were in
the course of construction is $5,200 (2017 - $nil) in land and buildings, $536,909 (2017 - $733,292)
in machinery and equipment, $70,213 (2017 - $143,039) in tooling and $nil (2017 - $10,941) in
office equipment.
Accumulated depreciation
Land and
buildings
Machinery
and
equipment
Tooling
Office
equipment
Total
Balance at December 31, 2016
$
5,754
$
30,819
$
7,321
$
4,844
$
48,738
Depreciation for the year
Disposals
Effect of movements in exchange rates
$
525
(2)
1
$
1,965
(1,068)
(80)
$
353
(488)
(62)
$
112
(106)
(2)
$
2,955
(1,664)
(143)
Balance at December 31, 2017
$
6,278
$
31,636
$
7,124
$
4,848
$
49,886
Depreciation for the year
Disposals
Effect of movements in exchange rates
$
612
(206)
3
$
2,172
(948)
118
$
394
-
105
$
111
14
$
3,289
(1,154)
240
Balance at December 31, 2018
$
6,687
$
32,978
$
7,623
$
4,973
$
52,261
Carrying amounts
Land and
buildings
Machinery
and
equipment
Tooling
Office
equipment
Total
At December 31, 2016
$
14,376
$
12,459
$
2,436
$
267
$
29,538
At December 31, 2017
$
14,341
$
13,433
$
2,564
$
291
$
30,629
At December 31, 2018
$
15,277
$
18,264
$
2,870
$
648
$
37,059
www.hammondmfg.com
Annual Report 2018 44
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(tabular amounts (except share amounts) in thousands of Canadian dollars)
Depreciation of $3,289,000 (2017 - $2,955,000) was recorded in the consolidated statement of
comprehensive income (loss) as follows: cost of sales $3,029,000 (2017 – $2,694,000), selling and
distribution $181,000 (2017 – $183,000) and general and administrative $79,000 (2017 – $78,000).
7)
Intangible assets and goodwill:
Cost
Goodwill
Computer
software
Development
costs
Total
Balance at December 31, 2016
$
110
$
2,121
$
241
$
2,472
Additions
Effect of movement in exchange rates
$
-
2
$
-
(5)
$
-
-
$
-
(3)
Balance at December 31, 2017
$
112
$
2,116
$
241
$
2,469
Additions
Effect of movement in exchange rates
$
-
4
$
4
7
$
59
-
$
63
11
Balance at December 31, 2018
$
116
$
2,127
$
300
$
2,543
Amortization
Goodwill
Computer
software
Development
costs
Total
Balance at December 31, 2016
$
-
$
1,987
$
162
$
2,149
Amortization for the year
Effect of movement in exchange rates
$
-
-
$
28
(5)
$
28
-
$
56
(5)
Balance at December 31, 2017
$
-
$
2,010
$
190
$
2,200
Amortization for the year
Effect of movement in exchange rates
-
$
-
$
23
6
$
30
-
$
53
6
Balance at December 31, 2018
$
-
$
2,039
$
220
$
2,259
Carrying amounts
Goodwill
Computer
software
Development
costs
Total
At December 31, 2016
$
110
$
134
$
79
$
323
At December 31, 2017
At December 31, 2018
$
112
$
106
$
51
$
269
$
116
$
88
$
80
$
284
All the intangible assets have been externally acquired. All amortization expense have been recoded
against cost of sales in the consolidated statement of comprehensive income (loss).
www.hammondmfg.com
Annual Report 2018 45
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(tabular amounts (except share amounts) in thousands of Canadian dollars)
Impairment testing for CGUs:
The Company has defined its CGUs 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, 2018.
Impairment testing for CGUs 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 5.5%. The cash flow
model also incorporated growth rates in the range of 3% – 5% based on the market location and the
facility’s operating history. This was then compared to the carrying value of the facility’s assets,
including goodwill, to determine if there was impairment. Effective December 31, 2018 and
December 31, 2017, the assets, including goodwill of $116,000 (2017 - $112,000), 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, 2017. No
independent valuation has been performed. The property is currently vacant and no income is being
derived from it. The Company’s direct operating expense in 2018 related to the property was
$89,000 (2017 - recovery of $50,000).
9) Equity investment:
RITEC Enclosures Inc.
December 31, 2016
Equity in 2017 earnings
December 31, 2017
Equity in 2018 earnings
December 31, 2018
Total
$ 638
116
$ 754
43
$ 797
Since 2008, the Company has had 40% ownership of RITEC. All dividends paid since taking the
40% holding in 2008 have been reinvested in RITEC.
www.hammondmfg.com
Annual Report 2018 46
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(tabular amounts (except share amounts) in thousands of Canadian dollars)
For the years ended December 31,
2018
2017
RITEC Enclosures Inc.
Share of profit
Foreign exchange gain (loss)
Income tax expense
Equity investment earnings
Share of profit
Profit in inventory movement
$
2
$
43
41
-
80
(7)
$
43
$
116
$
2
$
43
(38)
35
Share of profit of equity accounted investees
$
(36)
$
78
RITEC Enclosures Inc.
Assets
Liabilities
Revenues
Profit (after tax)
10) Loans and borrowings:
Bank indebtedness:
December 31, 2018 December 31, 2017
2,931
$
$
3,148
1,756
3,269
108
1,617
3,457
290
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 on each of the entities’ lines of credit.
Canadian entities CAD
UK entity
GBP
Bank indebtedness
December 31, 2018
December 31, 2017
Local currency
$ 7,243
£ 204
CAD
$ 7,243
356
$ 7,599
Local currency
$ 5,351
£ 215
CAD
$ 5,351
365
$ 5,716
Interest was payable at the rate of bank prime plus 50 basis points through August of 2018 and
subsequently at the rate of bank prime plus 25 basis points (2017 - bank prime plus 50 basis points).
www.hammondmfg.com
Annual Report 2018 47
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(tabular amounts (except share amounts) in thousands of Canadian dollars)
Long-term debt:
Demand term loan drawn in USD 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 HMCL. Monthly blended installments of $9 USD.
Demand term loan amortized over 25 years drawn in CAD funds at a
fixed interest rate of 5.20% through March 2026, secured by the assets
of HMCL. Monthly blended installments of $9 CAD.
Demand term loan amortized over 25 years drawn in CAD funds at a
fixed interest rate of 4.1% through December 2023, secured by the
assets of HMCL. Monthly blended installments of $37 CAD.
Demand term loan amortized over 7 years drawn in CAD funds at a fixed
interest rate of 4.43% through December 2025, secured by the assets
of HMCL. Monthly blended installments of $70 CAD.
Demand term loan amortized over 7 years drawn in CAD funds at a fixed
interest rate of 4.0% through December 2025, secured by the assets of
HMCL. Monthly blended installments of $26 CAD.
Interest free term loan of $385 CAD made in 2015, $1,150 CAD in 2016,
$958 CAD in 2017 and $624 CAD in 2018 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 GBP sterling at interest rate 5.3%.
Monthly installments of £1.6 GBP until February 2022.
Secured by equipment, drawn in USD 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.
December 31,
December 31,
2018
2017
$
-
$ 230
1,963
1,845
1,438
1,470
6,560
6,728
4,988
1,925
-
-
2,600
19,474
1,975
12,248
8
53
100
190
31
79
-
267
Secured by equipment, drawn in USD funds at interest rate of 3.75%.
Monthly installments of $57 USD until May 2023.
3,773
4,193
Secured by equipment, drawn in USD 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
13
4,137
18
4,588
$ 23,611
$ 16,836
17,955
11,040
$ 5,656
$ 5,796
www.hammondmfg.com
Annual Report 2018 48
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(tabular amounts (except share amounts) in thousands of Canadian dollars)
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:
2019
2020
2021
2022
2023
Thereafter
$
17,955
1,484
1,460
1,438
805
469
$
23,611
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:
2019
2020
2021
2022
2023
Thereafter
$
2,216
2,670
2,699
2,733
7,764
5,529
$
23,611
Interest expense is comprised as follows:
December 31, 2018
December 31, 2017
Long-term debt, including capital leases
Bank indebtedness
$ 895
519
$ 670
330
Interest expense
$ 1,414
$ 1,000
Reconciliation of movements of liabilities to cash flows arising from financing activities:
Long-term debt
Bank indebtedness
Balance at January 1, 2018
$ 16,836
$ 5,716
Changes from financing cash flows
Proceeds from loans and borrowings
Repayment of borrowings
Total changes from financing cash flows
Liability related
Interest expense
Interest paid
Impact of interest free term loan
Total liability-related other changes
Foreign exchange impact
Balance at December 31, 2018
7,764
(1,336)
6,428
895
(781)
(121)
(7)
354
$ 23,611
1,875
-
1,875
519
(519)
-
-
8
$ 7,599
www.hammondmfg.com
Annual Report 2018 49
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(tabular amounts (except share amounts) in thousands of Canadian dollars)
11) Trade and other payables:
Trade payables
Non-trade payables and accrued expenses
December 31, 2018
December 31, 2017
$ 4,902
10,826
$ 15,728
$ 4,911
9,170
$ 14,081
The Group’s exposure to currency and liquidity risk related to trade and other payables is disclosed
in note 24.
12) Provisions:
Environmental
remediation
Sales returns
Total
Balance at December 31, 2016
$ 170
$ 55
$ 225
Provisions made during the year
Provisions used during the year
-
-
39
(49)
39
(49)
Balance at December 31, 2017
$ 170
$ 45
$ 215
Provisions made during the year
Provisions used during the year
-
-
45
(36)
45
(36)
Balance at December 31, 2018
$ 170
$ 54
$ 224
Non-current
Current
100
70
-
54
100
124
Balance at December 31, 2018
$ 170
$ 54
$ 224
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 three years which in turn has pushed the remediation plan out three 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 (2017
- $170,000) with $70,000 (2017 - $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
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Annual Report 2018 50
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(tabular amounts (except share amounts) in thousands of Canadian dollars)
the current and prior periods. The terms of the agreements do not require the Company to fund
these obligations as they accumulate. The Company has accounted for these post-employment
benefits as defined benefit plans. The benefit plans are broken into two categories:
a) Benefit for post-employment health benefits:
If an employee meets the set criteria and retires between the age of 60 and 65, their health plan
will continue until age 65. This program was closed in 2014 and the obligation reflects the
anticipated cost for those employees who exercised this option prior to closing.
b) Disability health coverage:
This benefit is for employees who are off work due to a covered disability. Health coverage will
continue until they are off disability or reach the age of 65, whichever occurs first.
In determining both the post-employment health benefit and the disability health coverage liabilities
a 3.5% (2017 – 3.5%) per annum health cost increase and a discount rate of 6.0% (2017 – 6.0%)
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 $19,000 (2017 - $20,000). Changes in assumptions resulted in nominal
gains/losses which have been included in general and administrative expense.
December 31, 2018 December 31, 2017
$ 20
$ 23
Post employment health benefits
Employee health benefits while on disability
Total employee future benefits
Post employment
health benefits
Balance at December 31, 2016
$ 27
257
$ 280
Employee health
benefits while on
disability
$ 281
Provisions made during the year
Provisions used during the year
-
(7)
46
(57)
270
$ 290
Total
$ 308
46
(64)
Balance at December 31, 2017
$ 20
$ 270
$ 290
Provisions made during the period
Provisions used during the period
9
(6)
50
(63)
59
(69)
Balance at December 31, 2018
$ 23
$ 257
$ 280
Non-current
Current
15
8
194
63
209
71
Balance at December 31, 2018
$ 23
$ 257
$ 280
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Annual Report 2018 51
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(tabular amounts (except share amounts) in thousands of Canadian dollars)
14) Deferred tax assets and liabilities:
Unrecognized deferred tax liabilities:
At December 31, 2018, temporary differences of $19,900,000 (2017 - $16,598,000) 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, 2018
December 31, 2017
$ - $ 25
8
8
391 426
995
1,104
95 96
1,659
1,489
(3,459) (2,935)
(3,459) (2,935)
Net tax liabilities
$ (1,970) $ (1,276)
15) Share capital:
a) Authorized:
Unlimited number of Class A subordinate voting shares, no par value.
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, no par value. 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, no par value, 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, no par value, 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.
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Annual Report 2018 52
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(tabular amounts (except share amounts) in thousands of Canadian dollars)
b)
Issued:
8,556,000 Class A shares (2017 - 8,556,000)
2,778,300 Class B shares (2017 - 2,778,300)
$
10,242
7
$
10,242
7
$
10,249
$
10,249
December 31, 2018 December 31, 2017
No shares were issued in 2018 or in 2017.
c) Dividends:
The following dividends were declared and paid by the Company:
Special cash dividends of $0.04 per Class A subordinate voting share were declared and paid
in 2018 (2017 – $0.02) and special cash dividends of $0.04 per Class B common share were
declared and paid in 2018 (2017 – $0.02).
Total dividends declared and paid in 2018 were $452,000 (2017 - $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, 2018
$ 2,326
4,852
1,356
$ 8,534
December 31, 2017
$ 2,046
4,597
1,773
$ 8,416
The Group leases a number of office, warehouse 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, 2018, an amount of $2,487,000 was recognized as an expense
in profit or loss in respect of operating leases (2017 - $2,032,000).
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 $519,000 (2017 -
$4,609,000). These expenditures should be completed in the first half of 2019.
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 $3,500,000 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
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Annual Report 2018 53
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(tabular amounts (except share amounts) in thousands of Canadian dollars)
emanated from the property once owned by HMCL. In 2017, the claim moved into the discovery
proceedings level. There have been no significant developments to this claim otherwise. 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 consolidated financial
statements.
19) Income tax expense:
December 31, 2018 December 31, 2017
Current tax expense
$ 593 $ 1,450
Deferred tax expense:
Origination and reversal of temporary differences
Total income tax expense
685 377
$ 1,288
$ 1,827
Net income for the year
Total income tax expense
Income before income tax
2018
2018
2017
2017
$ 3,764
1,288
$ 5,052
$ 4,560
1,827
$ 6,387
Income tax using the Company’s domestic tax rate
38.00% 1,920
38.00% 2,427
Reduced rate for active business and manufacturing
and processing
(7.22%) (365)
(8.02%) (512)
Effect of tax rates in foreign jurisdictions
(6.59%) (333)
(2.27%) (145)
Reduction in tax rate
Non-deductible expenses
Other
20) Earnings per share:
0.00% -
0.08% 5
0.57% 29
0.22% 14
0.73% 37
25.49% $ 1,288
0.59% 38
28.61% $ 1,827
The computations for basic and diluted earnings per share are as follows:
December 31, 2018
December 31, 2017
Net income for the year
$ 3,764
$ 4,560
Average number of common shares outstanding:
Basic and Diluted
Earnings per share:
Basic
Diluted
11,334,300
11,334,300
$ 0.33
0.33
$ 0.40
0.40
No share options to purchase common shares were outstanding as at December 31, 2018 or
December 31, 2017.
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Annual Report 2018 54
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(tabular amounts (except share amounts) in thousands of Canadian dollars)
21) Personnel expenses:
Wages and salaries
Health benefit plans
Canada Pension Plan and Employment Insurance
Contributions to defined contribution plans
Cost of sales
Selling and distribution
General and administrative
Research and development
22) Management share option plan:
2018
$ 44,912
4,908
2,536
1,349
$ 53,705
2018
$ 40,421
10,115
2,938
231
$ 53,705
2017
$ 38,777
4,515
2,108
1,157
$ 46,557
2017
$ 34,085
9,379
2,912
181
$ 46,557
As at December 31, 2018, the Company has a stock-based compensation plan, which is described
below. No options were granted through December 31, 2018 or in 2017 and no stock options were
outstanding as of January 1, 2017, and, accordingly, no stock-based compensation expense has
been incurred in either year.
In 1986, the Company established the management share option plan providing for the granting to
directors, officers and key employees of the Company options to purchase the Class A subordinate
voting shares of the Company. A maximum number of 540,000 Class A subordinate voting shares
are issuable under the plan. The exercise price for purchasing Class A subordinate voting shares
may not be less than the market price of the Class A subordinate voting shares at the date the option
is granted.
23) Determination of fair values:
The carrying values of the Group’s financial assets and liabilities, consisting of cash, trade and other
accounts receivables, bank indebtedness, trade and other accounts payables approximate their fair
values due to the relatively short periods to maturity of the instruments.
The market values of financial assets and liabilities together with the carrying amounts shown in the
statements of financial position are as follows:
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Annual Report 2018 55
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(tabular amounts (except share amounts) in thousands of Canadian dollars)
Assets carried at amortized cost
Cash
Trade and other receivables
Liabilities carried at amortized cost
Bank indebtedness
Trade and other payables
Term loans
Finance lease obligations
December 31, 2018
Carrying
amount
Fair value
December 31, 2017
Carrying
amount
Fair value
$ 625
19,054
$ 19,679
$ 625
19,054
$ 19,679
$ 1,051
16,261
$ 17,312
$ 1,051
16,261
$ 17,312
$ 7,599
15,728
19,474
4,137
$ 46,938
$ 7,599
15,728
18,892
4,025
$ 46,244
$ 5,716
14,081
12,248
4,588
$ 36,633
$ 5,716
14,081
11,804
4,434
$ 36,035
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, 2018
December 31, 2017
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
4.0%
4.5%
4.6%
4.7%
4.9%
5.1%
To
5.0%
5.6%
5.7%
5.7%
5.9%
6.1%
From
3.2%
4.3%
4.6%
4.7%
4.9%
5.1%
To
4.2%
5.3%
5.6%
5.7%
5.9%
6.1%
Rates fluctuate depending on currency and jurisdiction.
24) Financial instruments and risk management:
Overview
The Group has exposure to the following risks from its use of financial instruments:
•
•
credit risk
liquidity risk
• market risk
•
•
•
foreign currency risk
interest rate risk
operational risk
This note presents information about the Group’s exposure to each of the above risks, the
Group’s objectives, policies and processes for measuring and managing risk, and the Group’s
management of capital. Further quantitative disclosures are included throughout these
consolidated financial statements.
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Annual Report 2018 56
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(tabular amounts (except share amounts) in thousands of Canadian dollars)
Risk management framework:
The Board of Directors has overall responsibility for the oversight of the Group’s risk
management framework. The Board is responsible for monitoring the Group’s risk management
policies.
The Group’s risk management policies are established to identify and analyze the risks faced
by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to
limits. Risk management policies and systems are reviewed regularly to reflect changes in
market conditions and the Group’s activities. The Group, through its training and management
standards and procedures, aims to develop a disciplined and constructive control environment
in which all employees understand their roles and obligations.
The Group’s Audit Committee oversees how management monitors compliance with the
Group’s risk management policies and procedures, and reviews the adequacy of the risk
management framework in relation to the risks faced by the Group. The Group’s Audit
Committee is assisted in its oversight role by the corporate finance group. The corporate finance
group undertakes both regular and ad hoc reviews of risk management controls and procedures,
the results of which are reported to the Audit Committee.
Credit risk:
Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial
instrument fails to meet its contractual obligations, and arises principally from the Group’s
receivables from customers. The carrying amount of financial assets represents the maximum
credit risk exposure.
Trade and other receivables:
The Group’s exposure to credit risk is influenced mainly by the individual characteristics of each
customer. However, management also considers the demographics of the Group’s customer
base, including the default risk of the industry and country in which customers operate, as these
factors may have an influence on credit risk.
The Group has established a credit policy under which each new customer is analyzed
individually for creditworthiness before the Group’s standard payment and delivery terms and
conditions are offered. The Group’s review includes external ratings, when available, and in
some cases bank references. Purchase limits are established for each customer, which
represents the maximum open amount without requiring approval from management.
Customers that fail to meet the Group’s benchmark creditworthiness may transact with the
Group only on a prepayment basis.
In monitoring customer credit risk, customers are grouped according to their credit
characteristics, including whether they are an individual or legal entity, whether they are a
wholesale, retail or end-user customer, geographic location, industry, aging profile, maturity and
existence of previous financial difficulties. Trade and other receivables relate mainly to the
Group’s wholesale customers. Customers that are graded as “high risk” are placed on a
restricted customer list and monitored by the accounts receivable department, and future sales
are made on a prepayment basis.
The Group does not require collateral in respect of trade and other receivables.
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Annual Report 2018 57
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(tabular amounts (except share amounts) in thousands of Canadian dollars)
The Group establishes an allowance for doubtful accounts that represents its estimate of
expected credit losses that could arise from the failure or inability of customers to make
payments when due. This allowance is determined based on historical data of payment statistics
for similar financial assets and historical credit losses, adjusted for forward looking factors,
specific to the debtor and the economic environment.
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, 2018
December 31, 2017
Cash and receivables:
Cash
Trade and other receivables
$ 625
19,054
$ 19,679
$ 1,051
16,261
$ 17,312
The maximum exposure to credit risk for cash and receivables at the reporting date by
geographic region was:
December 31, 2018
December 31, 2017
Cash and receivables:
Canada
US
UK
Australia
$ 10,727
7,652
1,190
110
$ 19,679
$ 9,327
6,818
1,082
85
$ 17,312
The following table reflects the net details of trade receivables as at December 31, 2018 and
December 31, 2017:
December 31, 2018
December 31, 2017
Gross
Impairment
Carrying
value
Gross
Impairment
Carrying
value
Aging of trade receivables:
1 – 30 days
31 – 60 days
61 – 90 days
Over 90 days
$ 8,764
7,245
1,733
353
$
-
-
-
278
$ 8,764 $ 8,685
5,151
1,363
286
7,245
1,733
75
$
-
-
-
155
$ 8,685
5,151
1,363
131
Trade receivables
$ 18,095
$
278
$ 17,817 $ 15,485
$
155
$ 15,330
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Annual Report 2018 58
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(tabular amounts (except share amounts) in thousands of Canadian dollars)
The following table provides the roll forward of the allowance for doubtful accounts:
Allowance for doubtful accounts, beginning of year
December 31, 2018 December 31, 2017
150
$
$
155
Accounts provided for in the period
Amounts written off during the period
131
(8)
5
-
Allowance for doubtful accounts
$
278
$
155
Allowance for doubtful accounts as % of net
trade receivable
1.5%
1.0%
The following table provides the net details of trade and other receivables:
Net trade receivable
Employee receivables
Other receivable
December 31, 2018 December 31, 2017
$
17,817
17
1,220
$
15,330
20
911
Trade and other receivables
$
19,054
$
16,261
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
25 basis points (2017 - bank prime plus 50 basis points). The Company had available unused
credit facilities in the amount of $7,901,000 at December 31, 2018 (2017 - $9,784,000) to meet
fluctuations in working capital requirements.
The Group has established an $13,500,000 (2017 - $11,000,000) lease line to finance new
equipment purchases of which it has utilized $12,252,000 (2017 - $5,236,000).
In 2015, the Group successfully applied for and was approved by the Federal Economic
Development Agency for Southern Ontario for an interest free loan up to $3,461,500 on eligible
spending. As at December 31, 2018, the group had received $3,115,000 of this funding (2017 -
$2,493,000). The present value of this funding $2,354,000 was set up as long term debt and
$761,000 which reflects the interest savings has been offset to property, plant and equipment.
In 2015, the Group successfully applied for and was approved by the Southwestern Ontario
Development Fund for a grant up to $1,500,000 on eligible spending. As at December 31, 2018,
the Group had received $989,000 (2017 - $724,000) of this funding and has a receivable for an
additional $511,000 based on the eligible spending to date. The $1,500,000 has been offset to
property, plant and equipment.
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Annual Report 2018 59
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(tabular amounts (except share amounts) in thousands of Canadian dollars)
The interest free loan and grant noted above are contingent on adding new jobs and retaining
existing jobs at its Guelph, Ontario locations. As at December 31, 2018, 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, 2018
Carrying
amount
Contractual
cash flows
2019
2020
2021 to
2022
Thereafter
Non-derivative financial liabilities
$ 19,474 $ (19,989) $(16,874) $ (623) $ (1,246) $ (1,246)
Term loans
Finance lease obligations 4,137 (4,473) (1,218) (1,011) (1,929) (315)
Trade and other payables 15,728
Bank indebtedness
(15,728) (15,728)
7,599 (7,599) (7,599)
- - -
- - -
Total
$ 46,938 $ (47,789) $(41,419) $ (1,634) $ (3,175) $ (1,561)
December 31, 2017
Carrying
amount
Contractual
cash flows
2018
2019
2020 to
2021
Thereafter
Non-derivative financial liabilities
Term loans
$ - $ (997) $ (1,496)
Finance lease obligations 4,588 (5,052) (1,034) (1,091) (1,769) (1,158)
$ 12,248 $ (12,766) $(10,273)
Trade and other payables 14,081
Bank indebtedness
(14,081) (14,081)
5,716 (5,716) (5,716)
- - -
- - -
Total
$ 36,633 $ (37,615) $(31,104) $ (1,091) $ (2,766) $ (2,654)
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.
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Annual Report 2018 60
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(tabular amounts (except share amounts) in thousands of Canadian dollars)
The following chart depicts the foreign currency positions.
Currency
Accounts receivable
Accounts payable
Dec 31, 2018 Dec 31, 2017 Dec 31, 2018 Dec 31, 2017 Dec 31, 2018 Dec 31, 2017
Long-term debt
Australia
Europe
New Zealand
Taiwan
UK
US
AUD
EURO
NZD
TWD
GBP
USD
40
33
78
182
748
5,523
30
203
52
499
473
5,281
(3)
(33)
-
(198)
(405)
(1,937)
(14)
(22)
-
-
(232)
(2,451)
-
-
-
-
(92)
(4,354)
-
-
-
-
(65)
(5,223)
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 2018 would
have increased net product sales by $629,000 (2017 - $552,000) and increased income
from operations by $679,000 (2017 - $594,000). Inversely, a one cent increase in the
Canadian dollar against the US dollar in 2018 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 2018 bank indebtedness
would increase annual interest expense by $76,000 (2017 - $57,000). This analysis
assumes that all other variables remain constant. Inversely, a one percent decrease in the
variable rates charged on ending 2018 bank indebtedness would have had the equal but
opposite effect.
Operational risk:
Operational risk is the risk of direct or indirect loss arising from a wide variety of causes
associated with the Group’s processes, personnel, technology and infrastructure, and from
external factors other than credit, liquidity and market risks such as those arising from legal and
regulatory requirements and generally accepted standards of corporate behavior.
The Group’s objective is to manage operational risk so as to balance the avoidance of financial
losses and damage to the Group’s reputation with overall cost effectiveness and to avoid control
procedures that restrict initiative and creativity.
www.hammondmfg.com
Annual Report 2018 61
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(tabular amounts (except share amounts) in thousands of Canadian dollars)
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
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, 2018 and has been in compliance with its covenants through 2017 and 2018. There were
no changes to the Group’s approach to capital management during 2018. Neither the Company,
nor any of its subsidiaries, is subject to externally imposed capital requirements.
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Annual Report 2018 62
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(tabular amounts (except share amounts) in thousands of Canadian dollars)
25) Segment disclosures:
The continuing operations of the Company are in one operating segment, electrical and electronic
components.
The Company and its subsidiaries operate in Canada, the US, the UK and Australia.
Geographic segments
Year ended:
December 31, 2018
December 31, 2017
Net product sales:
Canada:
Sales to customers
$ 55,434
$ 47,811
US:
Sales to customers
All other countries:
Sales to customers
Net product sales
Non-current assets:
Canada:
77,160
13,008
67,737
11,858
$ 145,602
$ 127,406
Non-current assets
$ 37,425
$ 31,619
US:
Non-current assets
All other countries:
Non-current assets
Non-current assets
Total
26) Related party transactions:
1,128
631
541
536
$ 39,184
$ 32,696
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, 2018
December 31, 2017
Salaries and short-term employee benefits
$ 716
$ 696
b) The Company purchased $3,870,000 of product from RITEC in 2018 (2017 - $2,601,000). The
Company sold $13,990 of product to RITEC in 2018 (2017 - $27,533). 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, 2018
were $8,111 (2017 - $21,200) while payables were $8,840 (2017 - $nil). 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.
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Annual Report 2018 63
HAMMOND MANUFACTURING COMPANY LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(tabular amounts (except share amounts) in thousands of Canadian dollars)
Consolidated entities:
HAMMOND MANUFACTURING COMPANY LIMITED
Country of
incorporation
% Ownership interest
December 31,
2018
December 31,
2017
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
Taiwan
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 2018 64
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www.hammondmfg.com
Annual Report 2018 65
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www.hammondmfg.com
Annual Report 2018 66
Through
the Years
Hammond Rack and
Cabinet Division
celebrates 85 years.
2019
2017
Hammond
Celebrates 100
Years in Business
Guelph Operations
Expands with an
additional state-of-the-art
Manufacturing Facility.
2016
2000
Dry-Type Transformer Business
split off under new company,
Hammond Power Solutions.
Shares of Hammond power
solutions distributed as a
separate public company
Hammond goes
Public on Toronto
Stock Exchange
1986
1980’s
Hammond expands to the
UK opening in Basingstoke
Hammond
Manufacturing
re-branded to
current identify
1976
1955
New Factory built
on Speedvale/
Edinburgh Road
Added NEMA
Enclosures
1950
1930
Transition into
manufacture of
Transformers, Wire
Wound Resistors
and Broadcast
Racks/Cabinets
Hammond O.S. & Son -
built radios, amplifiers, and
battery eliminators
1927
Backyard Workshop - Charging
batteries, installing antennas,
custom machining
1917
Corporate Directory
1-877-535-3282 (Canada) | 1-800-526-2266 (USA) | www.hammondmfg.com | @hammondmfg
Directors
Robert F. Hammond
Chairman and CEO
*Edward Sehl
Principal - Sehl Consulting
Director Of Guelph General Hospital
*Paul Quigley
President - Quigley Group Inc.
Sheila Hammond B.A., B.Ed., M.Sc.
Registered Marriage & Family Therapist
Officer & Director, Eramosa Group Ltd.
Officers / Senior Management
Robert F. Hammond
Chairman and CEO
Alexander Stirling
Secretary and CFO
Ray Shatzel
Vice-President, Electronic Sales
Ross N. Hammond
Assistant Secretary
*Michael Fricker
CFO of Qvella Corporation and Reunion Foods Inc.
*William Wiener
Chairman of the Board of Viscor Inc.
Chairman of the Board of 35 Oak Holdings Ltd.
Sarah Hansen
Operations Manager of Emco Corporation in Calgary
Director of Eramosa Group Ltd.
Director of DKH Engineering Services Inc.
Auditors
KPMG LLP
RSM, UK
ASF Audits, Australia
Legal Counsel
Borden Ladner Gervais
Transfer Agent and Registrar
Computershare Investor
Services Inc.
*Members of the Audit Committee and Compensation Committee
Stock Listing
Toronto Stock Exchange
Symbol: HMM.A
Bankers
HSBC
Head Office
Hammond
Manufacturing
394 Edinburgh Rd N,
Guelph, ON, N1H 1E5
P. (519) 822 2960
F. (519) 822 0715
ir@hammfg.com
Québec
Les Fabrications
Hammond
(Québec) Inc.
985 Rue Bergar,
Laval, QC, H7L 4Z6
P. (450) 975 1884
F. (450) 975 2098
sales@hammfg.com
USA
Hammond
Manufacturing
Company Inc.
475 Cayuga Rd,
Cheektowaga, NY
14225
P. (716) 630 7030
F. (716) 630 7042
sales@hammfg.com
Australia
Hammond
Electronics Pty. Ltd.
11-13 Port Rd,
Queenstown
SA 5014
P. +61 8 8240 2244
F. +61 8 8240 2255
australia@hammfg.com
United Kingdom
Hammond
Electronics Ltd.
1 Onslow Close,
Kingsland Business Park,
Basingstoke, Hampshire,
RG24 8QL, England
P. +44 1256 812812
F. +44 1256 332249
sales@hammond-electronics.co.uk
HM- 2019 -18AnnualReport