Hammond Manufacturing Company Limited
Annual Report 2022

Plain-text annual report

2022 ANNUAL REPORT Over 100 Years & Four Generations Server Racks and Cabinets Electrical Enclosures Power Distribution 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 2022 Annual Report 4 5 24 25 30 31 32 33 34 72 Report to Shareholders Management Discussion and Analysis Management’s Responsibility for Financial Reporting Independent Auditor's Report Consolidated Statements of Financial Position Consolidated Statements of Comprehensive Income Consolidated Statements of Changes in Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Corporate Directory www.hammondmfg.com Annual Report 2022 3 REPORT TO SHAREHOLDERS Dear fellow shareholders, employees, and stakeholders: 2022 is definitely one for our record book. Market demand remained strong throughout the year. Our sales of $226 million were up 18.8% over 2021. Foreign exchange had a favourable impact in 2022. 2.2% of the sales growth came from foreign exchange. Due to market conditions we did not have to struggle to put price increases through to meet and offset our rising costs. The increase in our production output against our fixed cost base provided a positive impact to our gross profit levels. Gross profit level of 31.7% is up from 29.5% achieved in 2021. We have worked hard to replenish our inventories. As sales took off in 2021 we had drawn down our inventories to meet the demand. We added resources and increased our output levels to meet the higher demand. We are now in a much better position to service our customers. We continue to build long term security and success for all our associates and once again want to express our appreciation for everyone’s involvement in the year’s success. Sincerely, Robert F. Hammond Alex Stirling Chairman & CEO CFO ANNUAL MEETING The meeting of the Shareholders will be held on May 2, 2023 at Hammond Manufacturing Company Limited 394 Edinburgh Rd North, Guelph, Ontario Commencing at 10:00 a.m. www.hammondmfg.com Annual Report 2022 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, 2022. This discussion should be read in conjunction with the Company’s consolidated financial statements for the year ended December 31, 2022 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 7, 2023. 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 2022 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, the Netherlands 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 In 2020 we saw sales decline as the COVID-19 pandemic took hold at the end of the first quarter of 2020. Business levels had returned to pre-COVID levels in the last quarter of 2020. Our markets continued to see significant growth throughout 2021. Sales levels remained strong in 2022. We have been adding employees since early 2021 to meet the increase in sales. Hourly staff levels increased by almost 35% in 2021 and another 6.7% in 2022. This does create a challenge of onboarding and training new employees. The team has worked hard to do this with as little disruption as possible. We are also starting to battle physical constraints at some of our operations. The teams in these facilities are working hard to streamline any areas we can in order to squeeze out all the available capacity. This year production has caught up with demand and has been replenishing our stock inventory at the warehouse. In July of 2021 the Company announced its plans to expand operations with the addition of a 96,000 square foot facility. This is a brand-new build and currently is expected to be operational in the second quarter of 2023. This facility will house a paint line and metal fabrication. The projected budget for the facility and equipment is approximately $28 million (this is up from the original project of $24 million). Commencing in 2020, the Company applied for the Canadian Emergency Wage Subsidy (CEWS). In 2020 we benefited from $2,308,000 in federal assistance under this program. In 2021 the Company received an additional $607,000 of assistance in the first quarter of the year. This year we did not receive any assistance. www.hammondmfg.com Annual Report 2022 6 MANAGEMENT DISCUSSION AND ANALYSIS QUARTERLY INFORMATION HAMMOND MANUFACTURING COMPANY LIMITED Summary of Quarterly Financial Information (In thousands of Canadian dollars except earnings per share) 2022 Q1 Q2 Q3 Q4 Year-to-date Total Net product sales $54,976 $57,251 $56,848 $56,847 $225,922 Income from operating activities Net income for the period Earnings per share - Basic & diluted 3,530 2,205 $0.19 3,980 2,295 $0.21 4,951 2,504 $0.22 6,981 4,999 $0.44 19,442 12,003 $1.06 Net product sales $42,140 $46,502 $46,146 $55,340 $190,128 Q1 Q2 Q3 Q4 2021 Year-to-date Total Income from operating activities Net income for the period 2,921 1,977 3,008 2,197 2,597 1,290 3,247 2,238 Earnings per share - Basic & diluted Note: Interim consolidated financial information has not been reviewed by an auditor. $0.20 $0.20 $0.11 $0.17 11,773 7,702 $0.68 FOURTH QUARTER RESULTS NET PRODUCT SALES Net product sales for the three months ended December 31, 2022 were $56,847,000, flat compared to net product sales of $56,848,000 in the third quarter of 2022. All our markets were down in local currencies over the prior quarter but the gain from USD foreign exchange offset this drop. In local currencies the Canadian market was down 7.0% while the US market was down about 3.8%. Our UK & European market was down 16.7%. This is a normal cycle for this market as in the last two weeks of the year shipping and businesses shut down for the holidays. We are attributing lower sales in this quarter compared to the prior quarter to the impact of the yearend holidays and customers deferring taking inventory for a better balance sheet presentation for those with a December 31 year end. Net product sales for the current quarter were up 2.7% compared to net product sales of $55,340,000 for the three months ended December 31, 2021. Comparatively in local currencies, Canada was down 10.2% and the UK & European markets were down 8.5% compared to the fourth quarter of 2021. The US market was up compared to the fourth quarter of 2021 in USD by 3.0%. Foreign exchange from the USD provided a lift of $1,370,000 while the impact of the British pound pulled sales down by $192,000. GROSS PROFIT Gross profit of $20,108,000 for the fourth quarter of 2022 was 35.4% of net sales compared to 31.2% in the third quarter of 2022. If we adjust for the impact of foreign exchange this quarters gross margin is closer to 34.0% compared to the 31.2% in the prior quarter. Earlier price increases are now impacting www.hammondmfg.com Annual Report 2022 7 MANAGEMENT DISCUSSION AND ANALYSIS our gross margins. These price increases were in anticipation of our annual labor cost increases that went through in November and January so we will lose some of this upside in the first quarter of 2023. When we compare gross profit levels between the comparative fourth quarter of 2021 and 2022 we can see a significant increase from 28.0% to 35.4%. The impact of foreign exchange compared to levels in the fourth quarter of 2021 helped increase margin levels by approximately 1.4%. In the fourth quarter of 2021 we were experiencing increase in materials costs that we had not been able to offset with price increases and this lead to the lower margins seen in that quarter. Conversely this quarter we have been able to put through price increases for anticipated labour and material cost increase that are going through at the end of the fourth quarter and the first quarter of 2023. SELLING AND DISTRIBUTION, GENERAL AND ADMINISTRATIVE EXPENSES AND LOSS ON DISPOSAL OF PROPERTY, PLANT AND EQUIPMENT Fourth quarter selling and distribution, general and administrative expenses and gain / loss on the disposal of property plant and equipment of $13,127,000 was 23.1% of net product sales for the three months ended December 31, 2022. This compared with spending of $12,775,000 in the previous quarter that was 22.5% of net sales. The fourth quarter of 2021 saw spending levels of $12,230,000 which was 22.1% of net sales. Selling and distribution spending in the fourth quarter of 2022 was $11,766,000 (20.7% of net product sales) up from 19.3% of sales in the third quarter of 2022. Marketing, travel and entertainment expenses were up over the previous quarter by $236,000 as our post-Covid external engagement continues to increase. Selling and distribution spending in the fourth quarter of 2021 was $10,657,000 (19.3% of net product sales). This quarter selling expenses such as travel and marketing increased over 2021 by close to $283,000. As noted earlier our post-Covid external engagement continues to increase. Freight and distribution expenses is the other main driver of the expense increase up $316,000. General and administrative expenses of $1,358,000 (2.4% of net product sales) in the fourth quarter is down 12.8% over the previous quarter’s spending of $1,558,000 (2.7% of net product sales). This quarter we recognized a credit of $112,500 to our legal expenses as we settled a legal suit this quarter and were awarded $112,500 toward the defense of the suit. In the fourth quarter of 2021 general and administrative expenses were $1,573,000 (2.8% of net product sales). As noted above we settled a legal suit this quarter and were award $112,500 toward the defense of the suit. Bad debt allowance expenses are down $128,000 compared to the fourth quarter of 2021. In the fourth quarter of 2021 we had increased our reserve for bad debts as sales had begun to increase. INCOME FROM OPERATING ACTIVITIES This quarter income from operating activities was $6,981,000 (12.3% of net product sales). This is up from the prior quarter of $4,951,000 (8.7% of net product sales) and up from the 2021 fourth quarter amount of $3,247,000 (5.9% of net product sales). INTEREST Fourth quarter interest expense on bank indebtedness and loans was $454,000 compared to an expense of $219,000 for the fourth quarter 2021.The comparative loan base has grown throughout the year and is up just over $14.6 million from the end on 2021 to the end of 2022. www.hammondmfg.com Annual Report 2022 8 MANAGEMENT DISCUSSION AND ANALYSIS Interest expense is comprised as follows: Three Months Ended: December 31, 2022 December 31, 2021 Long Term debt, excluding lease liabilities $ 268 $ 193 Bank indebtedness Interest expense Interest expense leases 186 26 $ 454 $ 219 $ 133 $ 165 Total Interest and Lease interest expense $ 587 $ 384 FOREIGN EXCHANGE TRANSACTIONAL IMPACT During the fourth quarter of 2022, the Company recognized a gain on transactional foreign exchange of $329,000 compared to a loss of $14,000 in the three months ended December 31, 2021. The intercompany balance payable to our US entity accounts is a big driver of this movement. 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 is part of the translational adjustment of the US entities balance sheet on consolidation. INCOME TAX EXPENSE Fourth quarter taxes of $1,633,000 is 24.6% of income before taxes which brings the overall years tax rate to 25.1% of income before taxes. NET INCOME FOR THE PERIOD Net income of $4,999,000 (8.8% return on net product sales) was recognized for the fourth quarter ended December 31, 2022. This is up from a net return of $2,504,000 (4.4% return on net product sales) in the previous quarter and up from the net return of $2,238,000 (4.0% return on net product sales) recognized in the fourth quarter of 2021. FOREIGN EXCHANGE TRANSLATION OF FOREIGN OPERATIONS The translation adjustment for the fourth quarter of 2022 was a loss of $116,000 compared to a translation loss of $20,000 in the fourth quarter of 2021. TOTAL COMPREHENSIVE INCOME Comprehensive income for the fourth quarter ended December 31, 2022 was $4,883,000 (8.6% of net product sales) up from the 3 months ended December 31, 2021 of $2,218,000 (4.0% of net product sales) and up from the previous quarter’s total comprehensive income of $3,977,000 (7.0% of net product sales). FULL YEAR RESULTS NET PRODUCT SALES Net product sales of $225,922,000 in 2022 were up 18.8% compared to net sales of $190,128,000 reported in 2021. Foreign exchange had a positive impact on the year over year reporting by approximately $4,263,000, 2.2% of the sales increase. Our Canadian market is up 10.6% over 2021 while the US market is up 23.2% when measured in USD. Due to the impact of foreign exchange the US sales are up 28.3% when measured in CAD. The rest of the world activity is down approximately 5.9%. This segment is mostly made up of our UK & European sales. In this case foreign exchange has had a negative impact. In local currencies these markets were actually flat year over year. www.hammondmfg.com Annual Report 2022 9 MANAGEMENT DISCUSSION AND ANALYSIS GROSS PROFIT In 2022, gross profit was $71,631,000 or 31.7% of net product sales compared to $56,001,000 or 29.5% achieved in 2021. If we remove the impact of CEWS in 2021 of $485,000 the gross profit level would have been closer to 29.2%. If we remove the foreign exchange impact on 2022, gross margin would be closer to 30.4% which is still up over the adjusted 29.2%. Price increases have managed to offset cost increases we have seen from our vendors throughout the year and have some positive impact on our gross margin levels. Strong activity levels driven by sales levels have also had a positive impact on our absorption levels against our fixed costs. Spending related to COVID safety measures this year is approximately $278,000 (2021- $353,000). SELLING AND DISTRIBUTION, GENERAL AND ADMINISTRATIVE, AND LOSS ON DISPOSAL OF PROPERTY, PLANT AND EQUIPMENT Selling and distribution, general and administrative including the net impact of the disposal of property, plant and equipment of $52,189,000 (23.1% of net product sales) was up 18.0% compared to the 2021 spend of $44,228,000 (23.3% of net product sales). Year over year sales increase of 18.8% and associated variable costs that go with this is the driver of the cost increases. Receipt of CEWS provided a cost reduction of $122,000 in 2021 and was not repeated in 2022. Foreign exchange had the impact of increasing the reported expense levels in 2022 compared to 2021 by approximately $607,000. Selling and distribution expenses of $46,054,000 increased $7,594,000 or 19.7% compared to 2021. Decreases in CEWS assistance accounts for $103,000 of this increase. Foreign exchange had the impact of increasing comparative costs by $595,000. Shipping and warehouse costs as a function of sales went from 8.1% of sales in 2021 to 8.8% of sales in 2022. Freight expenses have increased disproportionately to other expenses. In prior year with the restrictions of COVID we saw our marketing and advertising expenses decline. In 2022 external interactions of our sales group increased significantly and we saw the related expenses in these areas return to pre-COVID levels. We did see a savings of approximately $277,000 on insurance as a result of putting in a sprinkler system in our warehouse in 2021. Our general and administrative expenses of $6,120,000 were up $337,000 or 5.8% compared to 2021 spending levels of $5,783,000. Decreases in CEWS assistance accounts for $19,000 of this increase. Foreign exchange had the impact of increasing comparative costs by $12,000. Severances were down $191,000, legal and professional fees were down $179,000 as a suit against the company was closed out in 2022 and we were awarded $112,500 toward our defense costs. Bank charges are up $186,000 which is driven by one of our large customers moving to credit card payment and this is driving the associated fees. Bad debt expenses were up $60,000 as we increased our reserve as a function of the increase in our accounts receivable levels. This year we saw a net loss of $15,000 on the disposal of property, plant and equipment. This compares to a net gain on disposals of $15,000 recognized in 2021. INCOME FROM OPERATING ACTIVITIES Overall, 2022 income from operating activities was $19,442,000 (8.6% of net product sales) which is up compared to 2021 earnings of $11,773,000 (6.2% of net product sales). www.hammondmfg.com Annual Report 2022 10 MANAGEMENT DISCUSSION AND ANALYSIS INTEREST Interest expense on bank indebtedness and loans was $1,372,000 compared to an expense of $820,000 for 2021. The comparative loan base has increased throughout the year and is up almost $15.0 million from the end on 2021 to the end of 2022. The following is a breakdown of the interest expenses. Interest expense is comprised as follows: Long Term debt, excluding lease liabilities $ 1,032 $ 749 Bank indebtedness Interest expense 340 71 $ 1,372 $ 820 December 31, 2022 December 31, 2021 Interest expense leases $ 566 $ 661 Total Interest and Lease interest expense $ 1,938 $ 1,481 FOREIGN EXCHANGE TRANSACTIONAL IMPACT A $1,270,000 foreign exchange transactional loss was reported in 2022, compared to a transactional loss of $14,000 in 2021. The Canadian dollar strengthened against the US dollar throughout 2021. It opened at $1.00 USD to $1.273 CAD and rose to $1.00 USD to $1.229 level in the first half of 2021 and slowly worked its way back down and closed the year at $1.00 USD to $1.268 CAD. In 2022 the trend reversed and the Canadian dollar weakened against the US dollar throughout 2022 and closed the year at $1.00 US dollar to $1.354 CAD. A large portion of the loss seen in 2022 is from our intercompany receivable. Our Canadian entity has a payable to our US entity in US dollars. This is offset in translational gains of other foreign operations. INCOME TAX EXPENSE 2022 tax expenses of $4,032,000 were 25.1% of income before income tax. This compares to a 2021 tax expense of $2,459,000 which was 24.2% of income before income tax. NET INCOME FOR THE YEAR Net income for the year ended December 31, 2022 was $12,003,000 (5.3% of net product sales) compared to the prior year net income of $7,702,000 (4.1% of net product sales). FOREIGN EXCHANGE TRANSLATION OF FOREIGN OPERATIONS During 2022 a gain of $1,530,000 on translational foreign exchange was recorded compared to a loss of $99,000 in 2021. The weakening of the Canadian dollar caused an increase in the measurement of our financial assets and liabilities in our foreign entities. As noted earlier a large part of the 2022 gain is offset by the loss on foreign exchange transactional impact of intercompany loans. TOTAL COMPREHENSIVE INCOME Comprehensive income for 2022 was $13,533,000 (6.0% of net product sales) this compared to comprehensive income of $7,603,000 (4.0% of net product sales) in 2021. www.hammondmfg.com Annual Report 2022 11 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 2022 2021 2020 Net product sales Income from operating activities Net income for the year Per share - basic & fully diluted net earnings for the year $ 225,922 $ 190,128 $ 148,223 19,442 12,003 11,773 7,702 11,682 7,724 $1.06 $0.68 $0.68 Consolidated Statement of Financial Position 2022 2021 2020 Total assets Total funded debt and lease liabilities Working capital Net cash generated from operating activities Dividends declared and paid Shareholders' equity $ $ $ 168,005 48,392 32,665 4,824 680 81,545 136,976 35,533 32,786 14,923 453 68,692 120,255 35,715 28,018 15,689 453 61,542 $ $ $ CAPITAL RESOURCES AND LIQUIDITY Net cash generated in operating activities for 2022 was $4,824,000 (net cash generated in 2021 - $14,262,000). Cash flows from financing activities generated $11,091,000 (2021 – financing activities used $1,298,000). Net cash used in investing activities was $20,158,000 (2021 - $11,544,000). Trade and other receivables of $30,014,000 as at December 31, 2022 have increased 10.6% compared to the 2021 year end. Day’s sales outstanding (DSO) calculated as at December 31, 2022 was 51.6 compared to 47.5 days as calculated on December 31, 2021. 2021 was an exceptional year. Historically our DSO has sat in the low 50’s. The quality of accounts receivable remains high. The year-end investment in inventory of $63,267,000 was an increase of 39.0% from the 2021 inventory value of $45,516,000. Inventory turnover decreased to 2.8 from 3.3 (cost of sales divided by the twelve month average inventory level). Last year as sales increased it depleted our inventory levels which drove our inventory turns up. We have been working hard to replenish our inventories to support the higher sales volumes we are experiencing and this is bringing our turns back down to historical levels. Our value statement hinges on having our standard product on our shelves. Trade and other liabilities increased by $2,680,000, or 10.0% over 2021 to $29,609,000. At year end 2022 we had accrued expenses of $2,530,000 toward our new facility project. Total long-term debt, lease liabilities and bank indebtedness increased by $12,859,000 over the prior year to $48,392,000. This is being driven by our investment in our new facility. Our debt-to-equity ratio at year-end (excluding lease liabilities) was approximately 0.45:1 (2021 - 0.32:1). Debt-to-equity calculated inclusive of the lease liabilities was 0.59:1 (2021 – 0.52:1). In December of 2021, with rate increases in the forecast we took the opportunity to lock in $5,660,000 of debt for seven years at 3.83%. It did put us in a positive cash position but we knew we would need this toward the outlay for our new facility that started early in 2022. Total dividends paid in 2022 were $680,000 (2021 - $453,000). www.hammondmfg.com Annual Report 2022 12 MANAGEMENT DISCUSSION AND ANALYSIS Property, plant, equipment and intangible asset additions excluding right of use assets in 2022 were $20,218,000 up from $11,565,000 in 2021. The Company spent $14,514,000 (2021 - $4,252,000) on land, building and leasehold improvements. $198,000 (2021 - $452,000) was invested toward replacing machinery and equipment, $5,078,000 (2021 - $5,751,000) was invested toward machinery and equipment for capacity growth, $339,000 (2021 - $871,000) was invested in tooling, $40,000 (2021 - $119,000) was invested in office equipment. $49,000 (2021– $93,000) was spent on software and development costs. 2022 spending on product development of $nil compared with $27,000 in 2021. The overall cash position decreased by $3,127,000 in 2022 compared to a cash position increase of $1,284,000 in 2021. As noted earlier we had excess cash on hand in December of 2021 in anticipation of the cash requirements for building our new facility that started in early 2022. There were not any significant or renewed leases made in 2022. The Company is in compliance with all the bank covenants, and the credit facilities are well designed to meet expected on going requirements. As at December 31, 2022 the contractual obligations showing demand loans as current was as follows. Contractual obligations (In thousands) Current 1-2 Years 2-3 Years 3-4 Years 4-5 Years After 5 Years Total Long-term debt Lease Liabilities $ 22,198 $ 13,962 $ 1,937 $ 1,404 $ 1,476 $ 1,551 $ 1,868 11,748 2,585 2,215 2,284 1,571 839 2,254 Total contractual obligations $ 33,946 $ 16,547 $ 4,152 $ 3,688 $ 3,047 $ 2,390 $ 4,122 As at December 31, 2022 the contractual obligations based on repayment not being called early. Contractual obligations (In thousands) Current 1-2 Years 2-3 Years 3-4 Years 4-5 Years Total After 5 Years Long-term debt Lease Liabilities $ 22,198 $ 8,896 $ 3,131 $ 4,109 $ 2,642 $ 1,551 $ 1,869 11,748 2,585 2,215 2,284 1,571 839 2,254 Total contractual obligations $ 33,946 $ 11,481 $ 5,346 $ 6,393 $ 4,213 $ 2,390 $ 4,123 In addition to the contractual obligations above, the Company has current obligations of $9,959,000 (2021 - $12,523,000) against open purchase orders for outstanding capital expenditures. $3,910,000 of this is toward the construction of our new facility in Palmerston, Ontario and $6,049,000 is toward equipment that will go in this new facility. The new facility is scheduled for completion in the second quarter of 2023. The Company also has open purchase commitments with RITEC as at December 31, 2022 of $2,805,000 (2021 - $3,140,000). These expenditures should be completed in the first half of 2023. SHARE CAPITAL As of March 7, 2023, 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 2022 was $25,535,000. This showed improvement over EBITDA of $18,432,000 achieved in 2021. www.hammondmfg.com Annual Report 2022 13 MANAGEMENT DISCUSSION AND ANALYSIS EBITDA adjusted for transactional impact of foreign exchange was $26,805,000 in 2022 compared to an adjusted EBITDA of 18,446,000 in 2021. 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: Three Months Ended: Net income for the period Add Income tax expense Depreciation and amortization Right-of-use depreciation Finance costs on debt Right-of-use finance costs Subtotal EBITDA* Add: FX transactional loss (gain) Adjusted EBITDA * December 31, 2022 12,003 December 31, 2021 7,702 December 31, 2022 4,999 December 31, 2021 2,238 4,032 4,748 2,814 1,372 566 13,532 25,535 1,270 26,805 2,459 3,971 2,819 820 661 10,730 18,432 14 18,446 1,633 1,144 714 454 133 4,078 9,077 (329) 8,748 579 1,146 716 219 165 2,825 5,063 14 5,077 * 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 foreign exchange transactional 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. Investors find EBITDA and Adjusted EBITDA to be useful information because they provide measures of the Company’s operating performance. 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 2022 related to this property was $148,000 (2021 - $139,000). 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 remediation plans intent is to contain and collect any mobile pollutants. It does not include obtaining a record of site condition. Our provision covers the next four years activities. The Company’s remaining portion of environmental remediation costs for this site is $225,000 (2021 - $225,000) with $80,000 (2021 - $80,000) presented as a current liability in the consolidated financial statements. www.hammondmfg.com Annual Report 2022 14 MANAGEMENT DISCUSSION AND ANALYSIS 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 alleged that contaminants originating from the property once owned by the Company have migrated to a nearby, but not adjoining property owned by the claimants. This claim was settled in 2022. The Company agreed to a without costs dismissal of the action in exchange for payment to the Company of $112,500. A third party statement of claim was issued on March 6, 2019, against the Company with respect to an adjacent property to one of our Waterloo facilities. The claim alleges that contaminants originating from our property have migrated to the adjoining property owned by the claimants. The amount of the claim is estimated at $160,000 to $670,000. Our records do not show any spills of chemicals at this location and 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 condensed consolidated financial statements. Other than the above noted sites, management is not aware of any unusual or significant environmental issues. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS 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 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) Inventory Inventories are valued at the lower of cost or net realizable value. When necessary, the write-down of inventory to its net realizable value is recorded as a result of industry conditions. We have made certain assumptions when determining expected future demand by utilizing information such as inventory quantities and aging, historical sales of inventory and general market understanding. Reductions in demand for certain of our inventories or declining market values, as well as differences between actual results and the assumptions utilized by us when determining the market value of our inventories, could result in the recognition of write-down expenses in future periods. ii) 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. iii) 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”). iv) 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 www.hammondmfg.com Annual Report 2022 15 MANAGEMENT DISCUSSION AND ANALYSIS 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. v) 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. vi) 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. vii) 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. 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 recorded 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. xi) Leases: For the purpose of initial and subsequent measurement of leases the Company utilizes a discounted interest rate in the lease that is readily available or the Groups incremental borrowing rate. The group also utilizes its best estimate of any costs to dismantle and remove the asset at the end of the lease. www.hammondmfg.com Annual Report 2022 16 MANAGEMENT DISCUSSION AND ANALYSIS 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: xii) 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. xiii) Leases The Company exercises judgement as to whether it is likely to extend the term of the lease when the option is provided. xiv) 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. xv) 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. 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 www.hammondmfg.com Annual Report 2022 17 MANAGEMENT DISCUSSION AND ANALYSIS 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, 2022 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 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, 2022. There has been no change to internal controls in the most recent quarter ended on December 31, 2022 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; www.hammondmfg.com Annual Report 2022 18 MANAGEMENT DISCUSSION AND ANALYSIS • • • • Key personnel; The cyclical effects, unpredictability and volatility of market driven commodity costs, raw materials such as copper and steel pricing and supply and demand; A significant, unexpected change in the global demand for resources; The variability of the Canadian dollar versus the US dollar; • Rising interest rates; • • • Economic slowdown in the US and Canada; Trade restrictions; Labour costs and labour relations; • Competition; and • Global political unrest; • Pandemics 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 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 www.hammondmfg.com Annual Report 2022 19 MANAGEMENT DISCUSSION AND ANALYSIS 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 on income from operations of $1,104,000 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 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 39.4% of the Company’s debt financing (excluding Right of use obligations). The interest rates have climbed significantly in 2022 as governments try to fight inflation. The Company is cognizant that a rise in interest rates negatively impacts the financial results of the Company. The Company continuously reviews this strategy of hedging this risk by fixing interest rates on part of its total debt. North American Economy We 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. PANDEMICS Global Pandemics such as the COVID outbreak that started in 2020 can have dramatic impacts on markets as supply chains, labour forces, logistic etc. become susceptible to disruption. It is important to get out in front of these situations and be prepared to react to mitigate the issues as they arise. www.hammondmfg.com Annual Report 2022 20 MANAGEMENT DISCUSSION AND ANALYSIS ACCOUNTING POLICY CHANGES The International Accounting Standards Board (IASB) has issued the following Standards, Interpretations and Amendments to Standards that were adopted by the Group. Property, Plant and Equipment — Proceeds before Intended Use (Amendments to IAS 16) On May 14, 2020, the IASB issued Property, Plant and Equipment — Proceeds before Intended Use (Amendments to IAS 16). The amendments clarify that proceeds from selling items before the related item of Property, Plant and Equipment is available for use should be recognised in profit or loss, together with the cost of producing those items. The amendments were adopted January 1, 2022. The impact of adoption of these amendments did not have an impact on the business. Onerous Contracts – Cost of Fulfilling a Contract (Amendments to IAS 37) On May 14, 2020, the IASB issued Onerous Contracts – Cost of Fulfilling a Contract (Amendments to IAS 37). This amendment clarifies which costs are included as a cost of fulfilling a contract when determining whether a contract is onerous. The amendments were adopted January 1, 2022. The impact of adoption of these amendments did not have an impact on the business. Annual Improvements to IFRS Standards 2018–2020 On May 14, 2020, the IASB issued Annual Improvements to IFRS Standards 2018–2020. The amendments were adopted January 1, 2022. The impact of adoption of these amendments did not have an impact on the business. IFRS 9 Financial Instruments Clarifies which fees are included for the purpose of performing the ‘10 per cent test’ for derecognition of financial liabilities. IFRS 16 Leases Removes the illustration of payments from the lessor relating to leasehold improvements. The impact of adoption of these improvements did not have an impact on the business. Future Accounting Changes At the date of authorization of these financial statements, several new, but not yet effective, Standards and amendments to existing Standards, and Interpretations have been published by the IASB. None of these Standards or amendments to existing Standards have been adopted early by the Group and it is still to be determined if any will have a material impact on the Group’s financial statements. Classification of Liabilities as Current or Non-current (Amendments to IAS 1) On January 23, 2020, the IASB issued amendments to IAS 1 Presentation of Financial Statements, to clarify the classification of liabilities as current or non-current. In October 2022, the IASB issued Non-current Liabilities with Covenants (amendments to IAS 1) (the 2022 amendments), to improve the information a company provides about long-term debt with covenants. www.hammondmfg.com Annual Report 2022 21 MANAGEMENT DISCUSSION AND ANALYSIS The 2020 amendments and the 2022 amendments (collectively “the Amendments”) are effective for annual periods beginning on or after January 1, 2024. Early adoption is permitted. A company that applies the 2020 amendments early is required to also apply the 2022 amendments. Definition of Accounting Estimates (Amendments to IAS8) On February 12, 2021, the IASB issued Definition of Accounting Estimates (Amendments to IAS8). The amendments introduce a new definition for accounting estimates, clarifying that they are monetary amounts in the financial statements that are subject to measurement uncertainty. The amendments also clarify the relationship between accounting policies and accounting estimates by specifying that a company develops an accounting estimate to achieve the objective set out by an accounting policy. The amendments are effective for annual periods beginning on or after January 1, 2023. Early adoption is permitted. Disclosure initiative – Accounting Policies (Amendments to IAS 1) On February 12, 2021, the IASB issued amendments to IAS 1 Presentation of Financial Statements and an update to IFRS Practice Statement 2 Making Materiality Judgements to help companies provide useful accounting policy disclosures. The key amendments to IAS 1 include a requirement for companies to disclose their material accounting policies rather than their significant accounting policies; clarifying that accounting policies related to immaterial transactions, other events or conditions are themselves immaterial and as such need not be disclosed; and clarifying that not all accounting policies that relate to material transactions, other events or conditions are themselves material to a company’s financial statements. The amendments are effective for annual periods beginning on or after January 1, 2023. Early adoption is permitted. Deferred Tax related to Assets and Liabilities arising from a Single Transaction (Amendments to IAS 12 Income Taxes) On May 7, 2021, the IASB issued Deferred Tax related to Assets and Liabilities arising from a Single Transaction (Amendments to IAS 12). The amendments narrow the scope of the initial recognition exemption (IRE) so that it does not apply to transactions that give rise to equal and offsetting temporary differences. As a result, companies will need to recognize a deferred tax asset and a deferred tax liability for temporary differences arising on initial recognition of a lease and a decommissioning provision. The amendments are effective for annual periods beginning on or after January 1, 2023. Earlier adoption is permitted. Lease Liability in a Sale and Leaseback (Amendments to IFRS 16 Leases) On September 22, 2022, the IASB issued Lease Liability in a Sale and Leaseback (Amendments to IFRS 16). The amendments introduce a new accounting model which impacts how a seller-lessee accounts for variable lease payments that arise in a sale-and-leaseback transaction. www.hammondmfg.com Annual Report 2022 22 MANAGEMENT DISCUSSION AND ANALYSIS The amendments clarify that: – – on initial recognition, the seller-lessee includes variable lease payments when it measures a lease liability arising from a sale-and-leaseback transaction. after initial recognition, the seller-lessee applies the general requirements for subsequent accounting of the lease liability such that it recognises no gain or loss relating to the right of use it retains. The amendments need to be applied retrospectively, which require seller-lessees to reassess and potentially restate sale-and-leaseback transactions entered into since implementation of IFRS 16 in 2019. The amendments are effective for annual periods beginning on or after January 1, 2024. Early adoption is permitted. Management anticipates that all relevant pronouncements will be adopted for the first period beginning on or after the effective date of the pronouncement. New Standards, amendments and Interpretations not adopted in the current year have not been disclosed as they are not expected to have a material impact on the Group’s financial statements. OUTLOOK FACTORS FOR 2023 The feedback we have from our markets is that we will see growth in the low-single digit area in 2023. . The current outlook for the US dollar is that it will remain relatively strong. A strong US dollar does help our return in our US markets. We continue 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. www.hammondmfg.com Annual Report 2022 23 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 7, 2023 www.hammondmfg.com Annual Report 2022 24 KPMG LLP 120 Victoria Street South Suite 600 Kitchener ON N2G 0E1 Canada Tel 519-747-8800 Fax 519-747-8811 INDEPENDENT AUDITOR’S REPORT To the Shareholders of Hammond Manufacturing Company Limited Opinion We have audited the consolidated financial statements of Hammond Manufacturing Company Limited (the Company), which comprise:      the consolidated statements of financial position as at December 31, 2022 and 2021 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 consolidated financial statements, including a summary of significant accounting policies (Hereinafter referred to as the “financial statements”). In our opinion, the accompanying financial statements present fairly, in all material respects, the consolidated financial position of the Company as December 31, 2022 and 2021, 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 “Auditor’s Responsibilities for the Audit of the Financial Statements” section of our auditor’s report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the 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.  www.hammondmfg.com Annual Report 2022 25 Page 2 Key Audit Matter Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements for the year ended December 31, 2021. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. We have determined the matters described below to be the key audit matters to be communicated in our auditor’s report. Evaluation of the write-down of inventory for excess or obsolescence Description of the matter We draw attention to notes 2(d)(i), 3(c) and 5 to the financial statements. The Company has inventory with a carrying value of $63,267 thousand. Inventory is valued at the lower of cost or net realizable value. When necessary, the Company will write-down inventory to its net realizable value. The determination of net realizable value requires the Entity to make certain assumptions including forecasted demand. Why the matter is a key audit matter We identified the evaluation of the write-down of inventory for excess and obsolescence as a key audit matter. There is a high degree of estimation uncertainty as well as complexity in predicting forecasted demand. Significant auditor judgement was required to evaluate the results of our audit procedures due to the estimation uncertainty associated with the determination of net realizable value. How the matter was addressed in the audit The primary procedures we performed to address this key audit matter included the following: We evaluated the Entity’s ability to accurately forecast demand by comparing the Entity’s prior year expectations of forecasted demand to actual sales data, inventory usage, and publicly available industry outlook reports. 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 auditor’s report thereon, included in a document entitled “Annual Report”. Our opinion on the financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon. www.hammondmfg.com Annual Report 2022 26 Page 3 In connection with our audit of the 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 and the Annual Report as at the date of this auditor’s 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 auditor’s report. We have nothing to report in this regard. 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 Company’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 Company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company’s financial reporting process. Auditor’s Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s 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 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. www.hammondmfg.com Annual Report 2022 27 Page 4 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 Company'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 Company's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the 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 auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern.  Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.  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. www.hammondmfg.com Annual Report 2022 28 Page 5  Determine, from the matters communicated with those charged with governance, those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our auditor’s report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Chartered Professional Accountants, Licensed Public Accountants The engagement partner on the audit resulting in this auditor’s report is Matthew Betik. Kitchener, Canada March 7, 2023 www.hammondmfg.com Annual Report 2022 29 HAMMOND MANUFACTURING COMPANY LIMITED Consolidated Statements of Financial Position (in thousands of Canadian dollars) As at December 31, Assets Current assets: Note 2022 2021 $ 4, 26 5 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 Right-of-use assets 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 Current portion of lease liabilities Total current liabilities Non-current liabilities: Employee future benefits Long-term debt Lease liabilities Provisions Deferred tax liabilities Total non-current liabilities Total liabilities Equity: Share capital Contributed surplus Accumulated other comprehensive income Retained earnings Total equity 6 7 8 9 10 11 14 15 16 12 8 16 12 8 15 17 942 30,014 - 63,267 1,859 96,082 57,286 347 12,423 1,044 823 71,923 $ 4,069 27,143 76 45,516 1,723 78,527 41,141 428 15,000 1,044 836 58,449 $ 168,005 $ 136,976 $ 14,446 29,609 2,481 220 114 13,962 2,585 63,417 286 8,236 9,163 145 5,213 23,043 86,460 10,249 290 3,413 67,593 81,545 $ 995 26,929 - 220 89 14,551 2,957 45,741 304 6,125 10,905 145 5,064 22,543 68,284 10,249 290 1,883 56,270 68,692 Total liabilities and equity $ 168,005 $ 136,976 The notes on pages 34 to 68 are an integral part of these consolidated financial statements. www.hammondmfg.com Annual Report 2022 30 HAMMOND MANUFACTURING COMPANY LIMITED Consolidated Statements of Comprehensive Income (in thousands of Canadian dollars, except earnings per share) For The Years Ended December 31, 2022 Note 2021 Net product sales Cost of sales Gross profit 27 $ 225,922 $ 190,128 154,291 71,631 134,127 56,001 Selling and distribution General and administrative Loss (gain) on disposal of property, plant and equipment Income from operating activities Interest expense Interest expense leases Foreign exchange loss Net finance expense Share of profit (loss) of equity accounted investees Share of expenses from investment property Income before income tax Income tax expense 46,054 6,120 15 19,442 (1,372) (566) (1,270) (3,208) (51) (148) 16,035 4,032 38,460 5,783 (15) 11,773 (820) (661) (14) (1,495) 22 (139) 10,161 2,459 13 13 10 9 21 Net income for the period $ 12,003 $ 7,702 Other comprehensive Income (loss): Foreign currency translation differences for foreign operations Other comprehensive Income (loss) for the period, net of income tax 1,530 1,530 (99) (99) Total comprehensive income for the period $ 13,533 $ 7,603 Earnings per share Basic earnings per share Diluted earnings per share 22 22 $ 1.06 $ 1.06 $ 0.68 $ 0.68 The notes on pages 34 to 68 are an integral part of these consolidated financial statements. www.hammondmfg.com Annual Report 2022 31 HAMMOND MANUFACTURING COMPANY LIMITED Consolidated Statements of Changes in Equity For the years December 31, 2022 and December 31, 2021 (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, 2021 $ 10,249 $ 290 $ 1,982 $ 49,021 $ 61,542 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 - - - - - - - - 7,702 7,702 (99) - (99) (99) 7,702 7,603 - (453) (453) Balance at December 31, 2021 $ 10,249 $ 290 $ 1,883 $ 56,270 $ 68,692 Balance at January 1, 2022 $ 10,249 $ 290 $ 1,883 $ 56,270 $ 68,692 Net income for the year Other comprehensive gain: Foreign currency translation differences Total comprehensive income for the year Transactions with owners, recorded directly in equity: Dividends to equity holders - - - - - 12,003 12,003 1,530 - 1,530 1,530 12,003 13,533 - (680) (680) - - - Balance at December 31, 2022 ** Accumulated other comprehensive income (loss) $ 10,249 $ 290 $ 3,413 $ 67,593 $ 81,545 The notes on pages 34 to 68 are an integral part of these consolidated financial statements. www.hammondmfg.com Annual Report 2022 32 HAMMOND MANUFACTURING COMPANY LIMITED Consolidated Statements of Cash Flows (in thousands of Canadian dollars) For The Years ended December 31, 2022 2021 Cash flows from operating activities Net income for the period Adjustments for: Depreciation of property, plant and equipment Amortization of intangible assets Depreciation of right-of-use assets Interest expense Interest expense on leases Income tax expense Loss (gain) on disposal of property, plant and equipment Provisions and employee future benefits Equity investments Change in inventory allowance for lower of cost or market Change in non-cash working capital: Inventories Trade and other receivables Prepaid expenses Trade and other payables Cash generated from operating activities Interest paid Interest paid on leases Income tax paid Net cash generated from operating activities Cash flows from financing activities Bank indebtedness (repayment) withdrawl Payment of long-term debt Payment of lease liabilities Advances of long-term debt Payment of dividends Net cash generated (used) in financing activities Cash flows from investing activities Proceeds from disposal of property, plant and equipment Acquisition of property, plant and equipment Intangible asset additions $ 12,003 $ 7,702 4,698 50 2,814 1,372 566 4,032 15 7 13 57 25,627 (17,974) (2,114) (140) 2,706 8,105 (1,372) (566) (1,343) 4,824 13,457 (2,935) (3,091) 4,340 (680) 11,091 60 (20,169) (49) 3,932 39 2,819 820 661 2,459 (15) 234 28 159 18,838 (3,613) (6,602) 134 9,812 18,569 (820) (661) (2,826) 14,262 (1,692) (1,919) (2,894) 5,660 (453) (1,298) 21 (11,445) (120) Net cash used in investing activities (20,158) (11,544) Net increase (decrease) in cash Cash at beginning of period Foreign exchange loss on cash and cash equivalents in a foreign currency (4,243) 4,069 1,116 1,420 2,785 (136) Cash at end of period $ 942 $ 4,069 The notes on pages 34 to 68 are an integral part of these consolidated financial statements. www.hammondmfg.com Annual Report 2022 33 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2022 and 2021 (tabular amounts (except share amounts) in thousands of Canadian dollars) 1) Introduction: a) 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, 2022 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, the Netherlands, Taiwan and Australia, with agents and distributors located worldwide. The Company also maintains a 40% ownership share of RITEC Enclosures Inc. (RITEC) located in Taiwan. RITEC produces plastic and die cast enclosures for sale through the Company’s sales network and its own existing market channels. 2) Basis of preparation: a) Statement of compliance: These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS). The Board of Directors approved these consolidated financial statements on March 7, 2023. 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 income which is included in accumulated other recognized in other comprehensive comprehensive income. The functional currency of the Company’s subsidiary operations located in the US, UK, Netherlands, Taiwan and Australia are the US dollar, the British pound sterling, Euro, Taiwan dollar and the Australian dollar respectively. The functional currency of the Company’s Canadian operations is the Canadian dollar. www.hammondmfg.com Annual Report 2022 34 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2022 and 2021 (tabular amounts (except share amounts) in thousands of Canadian dollars) 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 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) Inventory Inventories are valued at the lower of cost or net realizable value. When necessary, the write-down of inventory to its net realizable value is recorded as a result of industry conditions. We have made certain assumptions including expected forecasted demand by utilizing information such as inventory quantities and aging, historical sales of inventory and general market understanding. Reductions in demand for certain of our inventories or declining market values, as well as differences between actual results and the assumptions utilized by us when determining the market value of our inventories, could result in the recognition of write-down expenses in future periods. ii) 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. iii) 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”). iv) 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. v) 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. vi) 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. www.hammondmfg.com Annual Report 2022 35 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2022 and 2021 (tabular amounts (except share amounts) in thousands of Canadian dollars) vii) 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. 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 recorded 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. xi) Leases: For the purpose of initial and subsequent measurement of leases the Company utilizes a discount rate in the lease that is readily available or the Group’s incremental borrowing rate. The Group also utilizes its best estimate of any costs to dismantle and remove the asset at the end of the lease. 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) Leases The Company exercises judgement as to whether it is likely to extend the term of the lease when the option is provided. 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 www.hammondmfg.com Annual Report 2022 36 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2022 and 2021 (tabular amounts (except share amounts) in thousands of Canadian dollars) 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. 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, Hammond Electronics B.V. 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. www.hammondmfg.com Annual Report 2022 37 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2022 and 2021 (tabular amounts (except share amounts) in thousands of Canadian dollars) Contract liabilities are recorded when cash payments are received or due in advance of the Company’s performance. 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 Useful Life 20 to 40 years 4 to 10 years 4 to 10 years 4 to 10 years Based on anticipated life unit output Assets are amortized over their useful life on a straight-line basis, except for specific tooling items which are amortized based on units of production method. www.hammondmfg.com Annual Report 2022 38 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2022 and 2021 (tabular amounts (except share amounts) in thousands of Canadian dollars) Depreciation methods, useful lives and residual values are reviewed at each financial year-end and adjusted, if appropriate. f) Intangible assets other than goodwill: Intangible assets have been externally acquired. Intangible assets are stated at cost less accumulated amortization. Intangible assets with a finite life are amortized using the straight- line method at rates calculated to amortize the cost of these assets over their estimated useful lives. The amortization rates based on the estimated useful lives for the current and comparative periods are as follows: Asset Computer software Development costs Straight-Line Method 5 years 5 years 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, www.hammondmfg.com Annual Report 2022 39 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2022 and 2021 (tabular amounts (except share amounts) in thousands of Canadian dollars) to the extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. i) Goodwill: Acquisitions 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. www.hammondmfg.com Annual Report 2022 40 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2022 and 2021 (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. The Group completed its annual impairment test at December 31, 2022 and December 31, 2021, and concluded there was no impairment. www.hammondmfg.com Annual Report 2022 41 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2022 and 2021 (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. www.hammondmfg.com Annual Report 2022 42 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2022 and 2021 (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) Leases: At inception of a contract, the Group assesses whether a contract is, or contains, a lease. A contract is, or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. To assess whether a contract conveys the right to control the use of an identified asset, the Group uses the definition of a lease in IFRS 16. www.hammondmfg.com Annual Report 2022 43 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2022 and 2021 (tabular amounts (except share amounts) in thousands of Canadian dollars) As a Lessee: At commencement or on modification of a contract that contains a lease component, the Group allocates the consideration in the contract to each lease component on the basis of its relative stand-alone prices. The Group recognizes a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is located, less any lease incentives received. The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the end of the lease term, unless the lease transfers ownership of the underlying asset to the Group by the end of the lease term or the cost of the right-of-use asset reflects that the Group will exercise a purchase option. In that case the right-of-use asset will be depreciated over the useful life of the underlying asset, which is determined on the same basis as those of property and equipment. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability. The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group’s incremental borrowing rate. Generally, the Group uses its incremental borrowing rate as the discount rate. The Group determines its incremental borrowing rate by obtaining interest rates from various external financing sources and makes certain adjustments to reflect the terms of the lease and type of the asset leased. Lease payments included in the measurement of the lease liability comprise the following: fixed payments, including in-substance fixed payments; — — variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date; — amounts expected to be payable under a residual value guarantee; and — the exercise price under a purchase option that the Group is reasonably certain to exercise, lease payment in an optional renewal period if the Group is reasonably certain to exercise an extension option, and penalties for early termination of a lease unless the Group is reasonably certain not to terminate early. The lease liability is measured at amortized cost using the effective interest method. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, if there is a change in the Group’s estimate of the amount expected to be payable under a residual value guarantee, if the Group changes its assessment of whether it will exercise a purchase, extension or termination option or if there is a revised in-substance fixed lease payment. When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset, or is recorded in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero. www.hammondmfg.com Annual Report 2022 44 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2022 and 2021 (tabular amounts (except share amounts) in thousands of Canadian dollars) Short-term leases and leases of low-value assets: The Group has elected not to recognize right-of-use assets and lease liabilities for leases of low-value assets and short-term leases, including IT equipment. The Group recognizes the lease payments associated with these leases as an expense on a straight-line basis over the lease term. s) 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. Property, Plant and Equipment — Proceeds before Intended Use (Amendments to IAS 16) On May 14, 2020, the IASB issued Property, Plant and Equipment — Proceeds before Intended Use (Amendments to IAS 16). The amendments clarify that proceeds from selling items before the related item of Property, Plant and Equipment is available for use should be recognised in profit or loss, together with the cost of producing those items. The amendments were adopted January 1, 2022. The impact of adoption of these amendments did not have an impact on the business. Onerous Contracts – Cost of Fulfilling a Contract (Amendments to IAS 37) On May 14, 2020, the IASB issued Onerous Contracts – Cost of Fulfilling a Contract (Amendments to IAS 37). This amendment clarifies which costs are included as a cost of fulfilling a contract when determining whether a contract is onerous. The amendments were adopted January 1, 2022. The impact of adoption of these amendments did not have an impact on the business. Annual Improvements to IFRS Standards 2018–2020 On May 14, 2020, the IASB issued Annual Improvements to IFRS Standards 2018–2020. The amendments were adopted January 1, 2022. The impact of adoption of these amendments did not have an impact on the business. IFRS 9 Financial Instruments Clarifies which fees are included for the purpose of performing the ‘10 per cent test’ for derecognition of financial liabilities. IFRS 16 Leases Removes the illustration of payments from the lessor relating to leasehold improvements. The impact of adoption of these improvements did not have an impact on the business. t) New standards and interpretations not yet adopted: At the date of authorization of these financial statements, several new, but not yet effective, Standards and amendments to existing Standards, and Interpretations have been published by the IASB. None of these Standards or amendments to existing Standards have been adopted early by the Group and it is still to be determined if any will have a material impact on the Group’s financial statements. www.hammondmfg.com Annual Report 2022 45 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2022 and 2021 (tabular amounts (except share amounts) in thousands of Canadian dollars) Classification of Liabilities as Current or Non-current (Amendments to IAS 1) On January 23, 2020, the IASB issued amendments to IAS 1 Presentation of Financial Statements, to clarify the classification of liabilities as current or non-current. In October 2022, the IASB issued Non-current Liabilities with Covenants (amendments to IAS 1) (the 2022 amendments), to improve the information a company provides about long-term debt with covenants. The 2020 amendments and the 2022 amendments (collectively “the Amendments”) are effective for annual periods beginning on or after January 1, 2024. Early adoption is permitted. A company that applies the 2020 amendments early is required to also apply the 2022 amendments. Definition of Accounting Estimates (Amendments to IAS8) On February 12, 2021, the IASB issued Definition of Accounting Estimates (Amendments to IAS8). The amendments introduce a new definition for accounting estimates, clarifying that they are monetary amounts in the financial statements that are subject to measurement uncertainty. The amendments also clarify the relationship between accounting policies and accounting estimates by specifying that a company develops an accounting estimate to achieve the objective set out by an accounting policy. The amendments are effective for annual periods beginning on or after January 1, 2023. Early adoption is permitted. Disclosure initiative – Accounting Policies (Amendments to IAS 1) On February 12, 2021, the IASB issued amendments to IAS 1 Presentation of Financial Statements and an update to IFRS Practice Statement 2 Making Materiality Judgements to help companies provide useful accounting policy disclosures. The key amendments to IAS 1 include a requirement for companies to disclose their material accounting policies rather than their significant accounting policies; clarifying that accounting policies related to immaterial transactions, other events or conditions are themselves immaterial and as such need not be disclosed; and clarifying that not all accounting policies that relate to material transactions, other events or conditions are themselves material to a company’s financial statements. The amendments are effective for annual periods beginning on or after January 1, 2023. Early adoption is permitted. Deferred Tax related to Assets and Liabilities arising from a Single Transaction (Amendments to IAS 12 Income Taxes) On May 7, 2021, the IASB issued Deferred Tax related to Assets and Liabilities arising from a Single Transaction (Amendments to IAS 12). The amendments narrow the scope of the initial recognition exemption (IRE) so that it does not apply to transactions that give rise to equal and offsetting temporary differences. As a result, companies will need to recognize a deferred tax asset and a deferred tax liability for temporary differences arising on initial recognition of a lease and a decommissioning provision. The amendments are effective for annual periods beginning on or after January 1, 2023. Earlier adoption is permitted. www.hammondmfg.com Annual Report 2022 46 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2022 and 2021 (tabular amounts (except share amounts) in thousands of Canadian dollars) 4) Trade and other receivables: Trade receivables Employee receivables Other receivables Estimated credit losses Trade and other receivables December 31, 2022 December 31, 2021 $ 28,910 12 1,501 30,423 (409) $ 30,014 $ 27,214 13 232 27,459 (316) $ 27,143 The Company’s exposure to credit and currency risks, and impairment losses related to trade and other receivables is disclosed in note 26. 5) Inventories: Raw materials and work-in-process Finished goods Inventories December 31, 2022 December 31, 2021 $ 23,709 39,558 $ 63,267 $ 18,928 26,588 $ 45,516 Inventories carried at net realizable value $ 2,261 $ 2,090 In 2022, raw materials, consumables and changes in finished goods and work in progress recognized as cost of sales amounted to approximately $154,234,000 (2021 - $133,968,000). In 2022, the write-down of inventories to net realizable value net of recovery was $57,000 (2021 - $159,000). 6) Property, plant and equipment: Cost Balance at December 31, 2020 Additions Disposals Effect of movements in exchange rates Land and buildings $ 22,363 $ 4,252 (6) 1 Machinery and equipment $ 49,464 Tooling Office equipment Total $ 11,109 $ 2,423 $ 85,359 $ 6,203 (664) (8) $ 871 - (12) $ 119 (34) (4) $ 11,445 (704) (23) Balance at December 31, 2021 $ 26,610 $ 54,995 $ 11,968 $ 2,504 $ 96,077 Reclassifications Additions Disposals Effect of movements in exchange rates $ (322) 14,514 (21) (4) $ 799 5,276 (388) 86 $ 128 339 - 64 $ 509 40 - 6 1,114 20,169 (409) 152 Balance at December 31, 2022 $ 40,777 $ 60,768 $ 12,499 $ 3,059 $ 117,103 At December 31, 2022, the amount of expenditures recognized in the carrying amount that were in the course of construction was $15,741,000 (2021 - $2,222,000) in land and buildings, $3,828,000 (2021 - $1,441,000) in machinery and equipment, $194,000 (2021 - $255,000) in tooling and $Nil (2021 - $82,000) in office equipment. www.hammondmfg.com Annual Report 2022 47 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2022 and 2021 (tabular amounts (except share amounts) in thousands of Canadian dollars) The Company made certain opening balance reclassifications between property plant and equipment, intangible assets and right-of-use assets during the period to align classification within categories. The reclassifications have no impact on net income for the period.. Accumulated depreciation Land and buildings Balance at December 31, 2020 $ 8,042 Machinery and equipment $ 33,882 Tooling Office equipment Total $ 7,928 $ 1,870 $ 51,722 Depreciation for the period Disposals Effect of movements in exchange rates $ 756 (4) (1) $ 2,561 (662) (5) $ 415 - (12) $ 200 (32) (2) $ 3,932 (698) (20) Balance at December 31, 2021 $ 8,793 $ 35,776 $ 8,331 $ 2,036 $ 54,936 Reclassifications Depreciation for the period Disposals Effect of movements in exchange rates $ 42 842 (10) (5) $ (144) 2,895 (324) 55 $ 69 763 - 54 $ 441 198 - 5 408 4,698 (334) 109 Balance at December 31, 2022 $ 9,662 $ 38,258 $ 9,217 $ 2,680 $ 59,817 Carrying amounts Land and buildings Machinery and equipment Tooling Office equipment Total At December 31, 2020 $ 14,321 $ 15,582 $ 3,181 $ 553 $ 33,637 At December 31, 2021 $ 17,817 $ 19,219 $ 3,637 $ 468 $ 41,141 At December 31, 2022 $ 31,115 $ 22,510 $ 3,282 $ 379 $ 57,286 Depreciation of $4,698,000 (2021 - $3,932,000) was recorded in the consolidated statement of comprehensive income as follows: cost of sales $4,285,000 (2021 – $3,497,000), selling and distribution $299,000 (2021 – $311,000) and general and administrative $114,000 (2021 – $124,000). 7) Intangible assets and goodwill: Cost Goodwill Balance at December 31, 2020 $ 116 Computer software 1,010 $ Development costs 361 $ Total $ 1,487 Additions Effect of movement in exchange rates $ - (2) $ 93 (1) $ 27 - $ 120 (3) Balance at December 31, 2021 $ 114 $ 1,102 $ 388 $ 1,604 Reclassifications (see note 6) Additions Effect of movement in exchange rates - - $ (5) $ (476) 49 7 8 - $ - (468) 49 2 Balance at December 31, 2022 $ 109 $ 682 $ 396 $ 1,187 www.hammondmfg.com Annual Report 2022 48 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2022 and 2021 (tabular amounts (except share amounts) in thousands of Canadian dollars) Amortization Goodwill Balance at December 31, 2020 $ - Computer software 859 $ Development costs 279 $ Total $ 1,138 Amortization for the period Effect of movement in exchange rates - $ - $ 11 (1) 28 $ - $ 39 (1) Balance at December 31, 2021 $ - $ 869 $ 307 $ 1,176 Reclassifications (see note 6) Amortization for the period Effect of movement in exchange rates $ - - $ (398) 22 6 6 $ 28 - $ $ (392) 50 6 Balance at December 31, 2022 $ - $ 499 $ 341 $ 840 Carrying amounts At December 31, 2020 At December 31, 2021 At December 31, 2022 Goodwill Computer software Development costs Total $ 116 $ 151 $ 82 $ 349 $ 114 $ 233 $ 81 $ 428 $ 109 $ 183 $ 55 $ 347 All the intangible assets have been externally acquired. Amortization expense of $50,000 (2021 - $39,000) was recorded in the consolidated statement of comprehensive income as follows: cost of sales $12,000 (2021 – $3,000), selling and distribution $25,000 (2021 - $29,000) and general and administrative $13,000 (2021 – $7,000). Impairment testing for CGUs: The Company has defined its CGUs as each individual legal entity since 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, 2022. 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 9.0%. The cash flow model also incorporated growth rates in the range of 2% – 4% 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, 2022 and December 31, 2021, the assets, including goodwill of $109,000 (2021 - $114,000), of the Company’s wholly owned subsidiary, Hammond Electronics Limited, were tested and no impairment was found. www.hammondmfg.com Annual Report 2022 49 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2022 and 2021 (tabular amounts (except share amounts) in thousands of Canadian dollars) 8) Leases: Right-of-use assets Balance at December 31, 2020 Buildings Machinery and equipment $ 15,303 6,142 $ Tooling Office equipment $ 221 $ 95 Trucks and Vehicles $ 1,888 Total $ 23,649 Additions for the period Disposals Effect of movements in exchange rates $ - - (65) $ 219 - (10) $ - - - $ 9 (87) - $ 528 (298) (3) $ 756 (385) (78) Balance at December 31, 2021 $ 15,238 $ 6,351 $ 221 $ 17 $ 2,115 $ 23,942 Reclassifications (see note 6) Additions for the period Disposals Effect of movements in exchange rates - $ - - (60) $ (606) - (10) (36) (40) $ - - - - $ - - $ 978 (249) 6 (8) 1 $ (646) 978 (267) (89) Balance at December 31, 2022 $ 15,178 $ 5,699 $ 181 $ 10 $ 2,850 $ 23,918 Accumulated depreciation Balance at December 31, 2020 Buildings Machinery and equipment $ 2,443 3,202 $ Tooling Office equipment $ 216 $ 85 Trucks and Vehicles $ 587 Total $ 6,533 Depreciation for the period Disposals Effect of movements in exchange rates $ 1,734 - (12) $ 541 - (2) $ 5 - - $ 10 (87) - $ 529 (298) (11) $ 2,819 (385) (25) Balance at December 31, 2021 $ 4,924 $ 2,982 $ 221 $ 8 $ 807 $ 8,942 Reclassifications (see note 6) Depreciation for the period Disposals Effect of movements in exchange rates $ - 1,722 - 19 $ 24 573 (10) 3 $ (40) - - - $ - 3 (8) - $ - 516 (249) - $ (16) 2,814 (267) 22 Balance at December 31, 2022 $ 6,665 $ 3,572 $ 181 $ 3 $ 1,074 $ 11,495 Carrying amounts Buildings Machinery and equipment Tooling Office equipment Trucks and Vehicles Total At December 31, 2020 $ 12,101 $ 3,699 $ 5 $ 10 $ 1,301 $ 17,116 At December 31, 2021 $ 10,314 $ 3,369 $ - $ 9 $ 1,308 $ 15,000 At December 31, 2022 $ 8,513 $ 2,127 $ - $ 7 $ 1,776 $ 12,423 Depreciation of $2,814,000 (2021 - $2,819,000) was recorded in the consolidated statement of comprehensive income as follows: cost of sales $1,175,000 (2021 – $1,198,000), selling and distribution $1,627,000 (2021 – $1,603,000) and general and administrative $12,000 (2021 – $18,000). www.hammondmfg.com Annual Report 2022 50 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2022 and 2021 (tabular amounts (except share amounts) in thousands of Canadian dollars) Total Lease obligations: Total Leases Less current protion due in the next 12 months Non-current leases December 31, 2022 $ 11,748 2,585 $ 9,163 December 31, 2021 $ 13,862 2,957 $ 10,905 The Group leases warehouse and factory facilities. These leases typically run for a period of 5 years with an option to renew the lease after that date. Lease payments generally are renegotiated every five years to reflect current market rates of office and production buildings. The Group leases automobiles with a typical lease period of 3 years. The Company provides for a guaranteed residual value when the vehicle is turned in. The Group’s fleet trucks are generally leased for a five-year term after which they are turned in. The lease rates for the trucks are a fixed rate plus a variable charge per kilometer driven. The variable charge is excluded from the initial measurement of the lease liability and asset. The variable charge is expensed in the month it is incurred. The lease liabilities are secured by the related underlying assets. Future minimum lease payments at December 31, 2022 were as follows: Minimum lease payments due Current 1-2 Years 2-3 Years 3-4 Years 4-5 Years After 5 Years Total December 31, 2022 Lease Payments Finance Charge Net Present Value December 31, 2021 Lease Payments Finance Charge Net Present Value $ $ 3,057 (472) 2,585 $ $ 2,588 (373) 2,215 $ $ 2,562 (278) 2,284 $ $ 1,763 (192) 1,571 $ $ 972 (133) 839 2,499 (245) 2,254 $ $ $ $ 3,515 (558) 2,957 $ $ 2,833 (443) 2,390 $ $ 2,382 (352) 2,030 $ $ 2,377 (265) 2,112 $ $ 1,620 (184) 1,436 $ $ 3,317 (380) 2,937 $ $ 13,441 (1,693) 11,748 $ $ 16,044 (2,182) 13,862 Lease payments not recognized as a liability: The Group has elected not to recognize a lease liability for short term leases (leases with an expected term of 12 months or less) or for leases of low value assets. Payments made under such leases are expensed on a straight-line basis. In addition, certain variable lease payments are not permitted to be recognized as lease liabilities and are expensed as incurred. The expense relating to payments not included in the measurement of the lease liability is as follows: Year to date Short Term leases Variable lease payments Total 9) Investment property: December 31, 2022 December 31, 2021 $ 321 67 $ 388 $ 347 55 $ 402 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 www.hammondmfg.com Annual Report 2022 51 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2022 and 2021 (tabular amounts (except share amounts) in thousands of Canadian dollars) 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, 2021. 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 2022 related to the property was $148,000 (2021- $139,000). 10) Equity investment: RITEC Enclosures Inc. December 31, 2020 Equity in 2021 loss December 31, 2021 Equity in 2022 loss December 31, 2022 Total $ 864 (28) $ 836 (13) $ 823 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. For the years ended December 31, 2022 2021 Share of gain (loss) Foreign exchange loss Equity investment loss Share of profit (loss) Profit in inventory movement $ 13 $ (27) (26) (1) $ (13) $ (28) $ 13 $ (27) (64) 49 Share of profit (loss) of equity accounted investees $ (51) $ 22 RITEC Enclosures Inc. Assets Liabilities Revenues December 31, 2022 December 31, 2021 3,104 $ $ 3,498 2,065 4,143 1,661 3,172 Profit (loss) (after tax) $ 33 $ (67) 11) Bank indebtedness: Bank indebtedness is due on demand and secured by inventories, a general assignment of trade receivables and a charge on specific assets of the Company. The Company has established www.hammondmfg.com Annual Report 2022 52 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2022 and 2021 (tabular amounts (except share amounts) in thousands of Canadian dollars) 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 GBP UK entity Bank indebtedness December 31, 2022 December 31, 2021 Local currency $ 13,995 £ 277 CAD $ 13,995 451 $ 14,446 Local currency $ 795 £ 116 CAD $ 795 200 $ 995 Interest was payable at the rate of bank prime plus 25 basis point from December 2020 until October 2021 when it was dropped to bank prime and held here through all of 2022. 12) Long term debt: Demand term loan amortized over 25 years drawn in USD funds at a fixed interest rate of 5.30% through November 2025, 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 December 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 October 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. Term loan amortized over 7 years drawn in CAD funds at a fixed interest rate of 3.83% through November 2028, secured by the assets of HMCL. Monthly blended installments of $77 CAD. Term loan amortized over 7 years drawn in CAD funds at a fixed interest rate of 6.5% through June 2029, secured by the assets of HMCL. Monthly blended installments of $64 CAD. Interest free term loan of $385 CAD made in 2015, $1,150 CAD in 2016, $958 CAD in 2017, $624 CAD in 2018 and $346 CAD in 2019 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 Less current portion of long-term debt Non-current long-term debt December 31, 2022 December 31, 2021 $ 1,769 $ 1,703 1,296 1,335 5,837 6,034 2,253 2,982 891 1,165 4,880 5,601 4,027 - 1,245 $ 22,198 13,962 $ 8,236 1,856 $ 20,676 14,551 $ 6,125 www.hammondmfg.com Annual Report 2022 53 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2022 and 2021 (tabular amounts (except share amounts) in thousands of Canadian dollars) The following reflects the aggregate amount of principal payments required to meet the existing long-term debt obligations in each of the next five years if the loans are not placed on demand: 2023 2024 2025 2026 2027 Thereafter $ 8,896 3,131 4,109 2,642 1,551 1,869 $ 22,198 13) Interest expense December 31, 2022 December 31, 2021 Long term debt, excluding lease liabilities $ 1,032 $ 749 Bank indebtedness Interest expense 340 71 $ 1,372 $ 820 Interest expense leases $ 566 $ 661 Total Interest and lease interest expense $ 1,938 $ 1,481 Reconciliation of movements of liabilities to cash flows arising from financing activities: Lease Liabilities Long-term debt Bank indebtedness Total Balance at December 31, 2020 $ 16,084 $ 16,942 $ 2,689 $ 35,715 Changes from financing cash flows Proceeds from loans and borrowings Repayment of lease liabilities Repayment of borrowings Total changes from financing cash flows Liability related Interest expense Interest paid Total liability-related other changes Non-cash added liabilities - (3,555) - (3,555) 661 - 661 756 5,660 - (1,919) 3,741 749 (749) - - - - (1,692) (1,692) 71 (71) - - 5,660 (3,555) (3,611) (1,506) 1,481 (820) 661 756 Foreign exchange impact Balance at December 31, 2021 (84) $ 13,862 (7) $ 20,676 (2) $ 995 (93) $ 35,533 www.hammondmfg.com Annual Report 2022 54 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2022 and 2021 (tabular amounts (except share amounts) in thousands of Canadian dollars) Lease Liabilities Long-term debt Bank indebtedness Total Balance at December 31, 2021 $ 13,862 $ 20,676 $ 995 $ 35,533 Changes from financing cash flows Proceeds from loans and borrowings Repayment of lease liabilities Repayment of borrowings Total changes from financing cash flows Liability related Interest expense Interest paid Total liability-related other changes - (3,091) - (3,091) 566 (566) - 4,340 - (2,935) 1,405 1,032 (1,032) - Non-cash added liabilities Foreign exchange impact Balance at December 31, 2022 978 (1) $ 11,748 - 117 $ 22,198 13,457 - - 13,457 340 (340) - - (6) $ 14,446 17,797 (3,091) (2,935) 11,771 1,938 (1,938) - 978 110 $ 48,392 14) Trade and other payables: Trade payables Non-trade payables and accrued expenses December 31, 2022 December 31, 2021 $ 8,205 21,404 $ 29,609 $ 10,224 16,705 $ 26,929 The Group’s exposure to currency and liquidity risk related to trade and other payables is disclosed in note 26. 15) Provisions: Environmental remediation Sales returns Total Balance at December 31, 2020 $ 225 $ 84 $ 309 Provisions made during the period Provisions used during the period 97 (97) 1,561 (1,505) 1,658 (1,602) Balance at December 31, 2021 $ 225 $ 140 $ 365 Provisions made during the period Provisions used during the period 54 (54) 1,800 (1,800) 1,854 (1,854) Balance at December 31, 2022 $ 225 $ 140 $ 365 Non-current Current 145 80 - 140 145 220 Balance at December 31, 2022 $ 225 $ 140 $ 365 The provision for environmental remediation is based on the estimated costs to setup and extract any free flowing contamination from the Glen Ewing Property. The anticipated costs are based on www.hammondmfg.com Annual Report 2022 55 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2022 and 2021 (tabular amounts (except share amounts) in thousands of Canadian dollars) an external consultant’s remediation plan, discounted for expected timing of expenditures. The current estimate assumes the containment plan will be completed by 2026. 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. 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 $225,000 (2021 - $225,000) with $80,000 (2021 - $80,000) 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. 16) Employee future benefits: The Company’s net obligation in respect of its current and long-term employee benefits is calculated by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods. The terms of the agreements do not require the Company to fund these obligations as they accumulate. The Company has accounted for these post-employment benefits as defined benefit plans. The benefit plans are broken into two categories: a) Benefit for post-employment health benefits: If an employee meets the set criteria and retires between the age of 60 and 65, their health plan will continue until age 65. b) Disability health coverage: This benefit is for employees who are off work due to a covered disability. Health coverage will continue until they are off disability or reach the age of 65, whichever occurs first. In determining both the post-employment health benefit and the disability health coverage liabilities a 3.5% (2021 – 3.5%) per annum health cost increase and a discount rate of 4.0% (2021 – 4.0%) 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 $22,100 (2021 - $21,500). Changes in assumptions resulted in nominal gains/losses which have been included in general and administrative expense. Post employment health benefits Employee health benefits while on disability Total employee future benefits December 31, 2022 December 31, 2021 $ 70 $ 60 340 $ 400 323 $ 393 www.hammondmfg.com Annual Report 2022 56 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2022 and 2021 (tabular amounts (except share amounts) in thousands of Canadian dollars) Post employment health benefits Balance at December 31, 2020 $ 15 Employee health benefits while on disability $ 200 Provisions made during the period Provisions used during the period 59 (4) 179 (56) Total $ 215 238 (60) Balance at December 31, 2021 $ 70 $ 323 $ 393 Provisions made during the period Provisions used during the period 4 (14) 149 (132) 153 (146) Balance at December 31, 2022 $ 60 $ 340 $ 400 Non-current Current 46 14 240 100 286 114 Balance at December 31, 2022 $ 60 $ 340 $ 400 17) Deferred tax assets and liabilities: Unrecognized deferred tax liabilities: At December 31, 2022, temporary differences of $27,340,000 (2021 - $23,547,000) 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 Investment property Inventories Loans and borrowings Provisions Other Total deferred tax assets Deferred tax liabilities Other Loans and borrowings Property, plant and equipment Total deferred tax liabilities December 31, 2022 December 31, 2021 $ 8 $ 8 617 570 - 233 304 288 64 60 1,159 993 (25) (28) (16) (6,165) (6,195) (6,206) (6,223) - Net deferred tax liabilities $ (5,213) $ (5,064) 18) 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 www.hammondmfg.com Annual Report 2022 57 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2022 and 2021 (tabular amounts (except share amounts) in thousands of Canadian dollars) 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. b) Issued: 8,556,000 Class A shares (2021 - 8,556,000) 2,778,300 Class B shares (2021 - 2,778,300) $ 10,242 7 $ 10,242 7 $ 10,249 $ 10,249 December 31, 2022 December 31, 2021 No shares were issued in 2022 or in 2021. c) Dividends: The following dividends were declared and paid by the Company: Cash dividends of $0.06 per Class A subordinate voting share were declared and paid in 2022 (2021 – $0.04) and cash dividends of $0.06 per Class B common share were declared and paid in 2022 (2021 – $0.04). Total dividends declared and paid in 2022 were $680,000 (2021 - $453,000). 19) Commitments: The Company has contractual obligations for outstanding capital expenditures of $9,959,000 (2021 - $12,523,000). These expenditures are primarily for a new facility and related equipment the Company is building in Palmerston, Ontario. 20) Contingency: 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 alleged that contaminants originating from the property once owned by the Company have migrated to a nearby, but not adjoining property owned by the claimants. This claim was settled in 2022. The Company agreed to a without costs dismissal of the action in exchange for payment to the Company of $112,500. A third party statement of claim was issued on March 6, 2019, against the Company with respect to an adjacent property to one of our Waterloo facilities. The claim alleges that contaminants originating from our property have migrated to the adjoining property owned by the claimants. The amount of the claim is estimated at $160,000 to $670,000. Our records do not show any spills of chemicals at this location and 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 condensed consolidated financial statements. www.hammondmfg.com Annual Report 2022 58 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2022 and 2021 (tabular amounts (except share amounts) in thousands of Canadian dollars) 21) Income tax expense: Current tax expense $ 3,895 $ 1,449 December 31, 2022 December 31, 2021 Deferred tax expense: Origination and reversal of temporary differences Total income tax expense 137 1,010 $ 4,032 $ 2,459 2022 2021 Income before income tax $ 16,035 $ 10,161 Income tax using the Company’s domestic tax rate 26.50% 4,249 26.50% 2,693 Reduced rate for active business and manufacturing and processing Effect of tax rates in foreign jurisdictions Non-deductible expenses Other 22) Earnings per share: (190) (105) 44 (109) (122) 21 34 25.15% $ 4,032 (24) 24.20% $ 2,459 The computations for basic and diluted earnings per share are as follows: Net income for the year December 31,2022 $ 12,003 December 31,2021 $ 7,702 Average number of common shares outstanding: Basic and Diluted 11,334,300 11,334,300 Earnings per share: Basic Diluted $ 1.06 1.06 $ 0.68 0.68 No share options to purchase common shares were outstanding as at December 31, 2022 or December 31, 2021. 23) 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 2022 2021 $ 58,911 6,211 3,711 1,871 $ 70,704 $ 52,548 5,354 3,171 1,589 $ 62,662 2022 2021 $ 54,812 12,705 3,187 $ 70,704 $ 47,397 12,156 3,109 $ 62,662 www.hammondmfg.com Annual Report 2022 59 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2022 and 2021 (tabular amounts (except share amounts) in thousands of Canadian dollars) Government subsidy: In response to the COVID pandemic a wage subsidy was made available to the Company for its operations in Canada (the CEWS program). If a company met a certain level of sales reduction criteria they would be eligible for a wage subsidy for the employees that they kept employed. The company met the required criteria to apply for a subsidy of $NIL (2021 - $607,000). The Company has recognized this grant as a reduction in related wages and salaries expenses. In the above chart, Cost of Sales was reduced by $NIL (2021 - $485,000), Selling and distribution was reduced by $NIL (2021 - $103,000), General and administrative expenses was reduced by $NIL (2021 - $19,000). 24) Management share option plan: As at December 31, 2022, the Company has a stock-based compensation plan, which is described below. No options were granted through December 31, 2022 or in 2021 and no stock options were outstanding as of January 1, 2021, 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. 25) 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 fair values of financial assets and liabilities together with the carrying amounts shown in the statements of financial position are as follows: Assets carried at amortized cost Cash Trade and other receivables Liabilities carried at amortized cost Bank indebtedness Trade and other payables Term loans December 31, 2022 Carrying amount Fair value December 31, 2021 Carrying amount Fair value $ 942 30,014 $ 30,956 $ 942 30,014 $ 30,956 $ 4,069 27,143 $ 31,212 $ 4,069 27,143 $ 31,212 $ 14,446 29,609 22,198 $ 66,253 $ 14,446 29,609 20,092 $ 64,147 $ 995 26,929 20,676 $ 48,600 $ 995 26,929 20,365 $ 48,289 Interest rates used to discount estimated cash flows, when applicable, are based on bank indication rates for similar type arrangements. www.hammondmfg.com Annual Report 2022 60 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2022 and 2021 (tabular amounts (except share amounts) in thousands of Canadian dollars) Bank indication interest rates December 31, 2022 December 31, 2021 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 6.45% 6.60% 5.90% 5.75% 5.85% 6.20% To 7.45% 7.60% 6.90% 6.75% 6.85% 7.20% From 2.55% 2.95% 3.00% 3.25% 3.45% 3.80% To 3.55% 3.95% 4.00% 4.25% 4.45% 4.80% Rates fluctuate depending on currency and jurisdiction. 26) Financial instruments and risk management: Overview The Group has exposure to the following risks from its use of financial instruments: • • credit risk liquidity risk • market risk • • • foreign currency risk interest rate risk operational risk This note presents information about the Group’s exposure to each of the above risks, the Group’s objectives, policies and processes for measuring and managing risk, and the Group’s management of capital. Further quantitative disclosures are included throughout these consolidated financial statements. Risk management framework: The Board of Directors has overall responsibility for the oversight of the Group’s risk management 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. www.hammondmfg.com Annual Report 2022 61 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2022 and 2021 (tabular amounts (except share amounts) in thousands of Canadian dollars) 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. 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: Cash and receivables: Cash Trade and other receivables December 31, 2022 December 31, 2021 $ 942 30,014 $ 30,956 $ 4,069 27,143 $ 31,212 www.hammondmfg.com Annual Report 2022 62 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2022 and 2021 (tabular amounts (except share amounts) in thousands of Canadian dollars) The maximum exposure to credit risk for cash and receivables at the reporting date by geographic region was: December 31, 2022 December 31, 2021 Cash and receivables: Canada US UK Australia $ 15,440 14,055 1,324 137 $ 30,956 $ 15,306 14,068 1,631 207 $ 31,212 The following table reflects the net details of trade receivables as at December 31, 2022 and December 31, 2021: December 31, 2022 December 31, 2021 Gross Impairment Carrying value Gross Impairment Carrying value Aging of trade receivables: 1 – 30 days 31 – 60 days 61 – 90 days Over 90 days $ 13,492 12,103 2,664 651 $ $ 13,492 $ 14,157 10,259 2,128 670 12,103 2,664 242 - - - 409 $ $ 14,157 - 10,259 - 2,128 - 354 316 Trade receivables $ 28,910 $ 409 $ 28,501 $ 27,214 $ 316 $ 26,898 The following table provides the roll forward of the allowance for doubtful accounts: Allowance for doubtful accounts, beginning of year December 31, 2022 $ 316 December 31, 2021 $ 171 Accounts provided for in the period Amounts written off during the period 215 (122) 145 - Allowance for doubtful accounts $ 409 $ 316 Allowance for doubtful accounts as % of net trade receivable 1.4% 1.2% The following table provides the net details of trade and other receivables: December 31, 2022 December 31, 2021 Net trade receivable Employee receivables Other receivable $ 28,501 12 1,501 $ 26,898 13 232 Trade and other receivables $ 30,014 $ 27,143 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. www.hammondmfg.com Annual Report 2022 63 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2022 and 2021 (tabular amounts (except share amounts) in thousands of Canadian dollars) The Group uses planning tools to identify future cash flow requirements. The Group has established a $30,000,000 (2021 – $20,000,000) overdraft facility that is secured against inventory and accounts receivable. If drawn upon, interest would be payable at the rate of bank prime (2021 - bank prime). The Company had available unused credit facilities in the amount of $16,043,000 at December 31, 2022 (2021 - $19,519,000) to meet fluctuations in working capital requirements. The Group has available a line of credit to finance new equipment purchases of which it has available $10,000,000 (2021 - $4,340,000). 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, 2022, the Group had received $3,461,500 of this funding (2021 - $3,461,500). The present value of this funding of $2,646,385 was set up as long term debt and $815,115 which reflects the interest savings has been offset to property, plant and equipment. Repayment of this loan is over five years and started in January of 2020. As at December 31, 2022 the present value of the funding is $1,245,000 (2021 – $1,855,591). 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, 2022, 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, 2022 Carrying amount Contractual cash flows 2023 2024 2025 to 2026 Thereafter Non-derivative financial liabilities Term loans Lease obligations $ 22,198 11,748 (24,689) $(15,364) $ (2,312) $ (3,385) $ (3,628) (13,441) (3,057) (2,588) (4,325) (3,471) Trade and other payables 29,609 14,446 Bank indebtedness (29,609) (29,609) (14,446) (14,446) - - - - - - Total $ 78,001 $ (82,185) $(62,476) $ (4,900) $ (7,710) $ (7,099) December 31, 2021 Carrying amount Contractual cash flows 2022 2023 2024 to 2025 Thereafter Non-derivative financial liabilities Term loans Lease obligations $ 20,676 $ (23,113) $(16,335) $ (1,619) $ (2,466) $ (2,693) (16,044) (3,515) (2,833) (4,759) (4,937) 13,862 Trade and other payables 26,929 Bank indebtedness (26,929) (26,929) 995 (995) (995) - - - - - - Total $ 62,462 $ (67,081) $(47,774) $ (4,452) $ (7,225) $ (7,630) www.hammondmfg.com Annual Report 2022 64 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2022 and 2021 (tabular amounts (except share amounts) in thousands of Canadian dollars) Market risk: Market risk is the risk that changes in market prices, such as foreign exchange rates and interest rates will affect the Group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing the return. Foreign currency risk: The Group has a substantial number of transactions denominated in US dollars and is exposed to risk with respect to fluctuations in exchange rates between Canadian and US dollars. The Group holds smaller positions in other foreign currencies. The Group does not use derivative instruments to reduce its exposure to foreign currency risk. As a result, variations in foreign exchange rates could cause unanticipated fluctuations in the Group’s operating results. The following chart depicts the foreign currency positions. Currency Accounts receivable Dec 31, 2022 Dec 31, 2021 Accounts payable Dec 31, 2022 Dec 31, 2021 Australia Europe New Zealand Taiwan UK US AUD EURO NZD TWD GBP USD Currency 32 328 49 699 484 10,325 45 195 67 575 569 9,609 (26) (27) - (2,328) (572) (3,592) (17) (15) - (847) (856) (2,454) Long-term debt Dec 31, 2022 Dec 31, 2021 Lease Liabilities Dec 31, 2022 Dec 31, 2021 UK US GBP USD - (1,306) - (1,343) (1,753) (944) (1,976) (1,829) Long-term debt and lease liabilities denominated in foreign currencies 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 2022 would have increased net product sales by $1,025,000 (2021 - $833,000) and increased income from operations by $1,104,000 (2021 - $872,000). Inversely, a one cent increase in the Canadian dollar against the US dollar in 2022 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. www.hammondmfg.com Annual Report 2022 65 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2022 and 2021 (tabular amounts (except share amounts) in thousands of Canadian dollars) Sensitivity Analysis: A one percent increase in the variable rates charged on ending 2022 bank indebtedness would increase annual interest expense by $144,000 (2021 - $10,000). This analysis assumes that all other variables remain constant. Inversely, a one percent decrease in the variable rates charged on ending 2022 bank indebtedness would have had the equal but opposite effect. Operational risk: Operational risk is the risk of direct or indirect loss arising from a wide variety of causes associated with the Group’s processes, personnel, technology and infrastructure, and from external factors other than credit, liquidity and market risks such as those arising from legal and regulatory requirements and generally accepted standards of corporate behavior. The Group’s objective is to manage operational risk so as to balance the avoidance of financial losses and damage to the Group’s reputation with overall cost effectiveness and to avoid control procedures that restrict initiative and creativity. The primary responsibility for the development and implementation of controls to address operational risk is assigned to senior management within each business unit. This 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 www.hammondmfg.com Annual Report 2022 66 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2022 and 2021 (tabular amounts (except share amounts) in thousands of Canadian dollars) • 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, 2022 and has been in compliance with its covenants through 2021 and 2022. There were no changes to the Group’s approach to capital management during 2022. Neither the Company, nor any of its subsidiaries, is subject to externally imposed capital requirements. 27) 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, 2022 December 31, 2021 Net product sales: Canada: Sales to customers US: Sales to customers All other countries: Sales to customers Net product sales Non-current assets: Canada: Non-current assets US: Non-current assets All other countries: Non-current assets $ 81,009 $ 73,249 131,034 102,127 13,879 $ 225,922 14,752 $ 190,128 $ 66,350 $ 52,030 2,197 3,376 2,432 3,987 Total Non-current assets $ 71,923 $ 58,449 28) Related party transactions: a) Key management includes the Company’s directors and members of the executive management team. Compensation awarded to key management included: Years ended: December 31, 2022 December 31, 2021 Salaries and short-term employee benefits $ 835 $ 816 www.hammondmfg.com Annual Report 2022 67 HAMMOND MANUFACTURING COMPANY LIMITED Notes to Consolidated Financial Statements Years ended December 31, 2022 and 2021 (tabular amounts (except share amounts) in thousands of Canadian dollars) b) The Company purchased $5,785,000 of product from RITEC in 2022 (2021 - $2,993,000). The Company sold $43,600 of product to RITEC in 2022 (2021 - $29,000). These transactions were made in the normal course of business and have been recorded at the exchange amounts, being the amount agreed to by the two parties. All outstanding trade balances with related parties are to be settled in cash within six months of the reporting date. None of the balances are secured. Receivables as at December 31, 2022 were $185,000 (2021 - $26,000) while payables were $103,000 (2021 - $11,000). Trade receivables and payables to related parties are included within trade and other receivables and trade and other payables on the Consolidated Statement of Financial Position. c) The Chairman of the Corporation, Robert Frederick Hammond, through direct and indirect ownership of Class A and Class B voting shares effectively controls the Company. d) Consolidated entities: HAMMOND MANUFACTURING COMPANY LIMITED Country of incorporation % Ownership interest December 31, 2022 December 31, 2021 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 Hammond Electronics B.V. UK Taiwan Netherlands Hammond Manufacturing Company Inc. US Subsidiaries of above: Hammond Holdings Inc. Paulding Electrical Products, Inc US US 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 The year end for each of the entities listed in the table above is December 31. www.hammondmfg.com Annual Report 2022 68 THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK www.hammondmfg.com Annual Report 2022 69 THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK www.hammondmfg.com Annual Report 2022 70 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 CFO & Director for Odd Burger Corporation *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 Ross N. Hammond Assistant Secretary *Michael Fricker CFO of Qvella Corporation Director of Edjar International Inc. Director of Tippet Foundation Director for Odd Burger Corporation *Blaine Witt Vice President – Senior Consultant of Witt Holding Company Inc. Sarah Hansen Profit Centre Manager for Riptide Fulfillment Corporation in Calgary Director of Eramosa Group Ltd. Director of DKH Engineering Services Inc. Stock Listing Toronto Stock Exchange Symbol: HMM.A Bankers HSBC Auditors KPMG LLP Wise & Co., UK ATA Audits PTY Ltd Legal Counsel Borden Ladner Gervais Transfer Agent and Registrar Computershare Investor Services Inc. *Members of the Audit Committee and Compensation Committee 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- 2022- AnnualReport 

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