Annual Report2020Essential CEO’s Message
Ready to Respond
Comptitive and Strategic Advantage
Moving Forward Through Innovation
Review of Operations
The Numbers
Management’s Discussion and Analysis
Audit Report
Consolidated Financial Statements
Notes to Consolidated Financial Statements
Company Information
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Oliver Hammond along with his sons started a business in 1917 just
before the deadly Spanish Flu pandemic spread worldwide from
1918-1920 claiming at least 50 million lives. The business survived
as did its founders, to carry on and establish what we know today as
Hammond Power Solutions. And here we are again, the year is 2020
and the deadly pandemic that has swept the globe is Covid-19. The
pandemic is not over, in fact some say we’re right in the middle of it
and its effects will be felt for years after.
There isn’t a business or a person that wasn’t changed by the year
2020. For far too many it meant loss of life and devastating change.
Our hearts reach out to all of those affected with the loss of a loved
one or long-term effects of the virus. Covid-19 will forever be etched in
our society and will have forever changed our lives.
The word essential took on a more impactful
meaning in 2020. Essential has always meant
fundamental, vital and indispensable but
in 2020 essential also meant survival – it
was a defining word that kept society safely
functioning and is trending to be one of the
most significant words of all time.
ANNUAL REPORT 2020
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Electricity is a very versatile, easily controlled and essential form of
energy. It can be converted into useful power without losses and
pollution and at the point of generation, it can be produced clean
through renewable methods such as wind, water and sunlight.
An essential part of converting electricity to
power is a transformer. Without either, the
simple act of flicking a switch for instant
power wouldn’t be possible.
Modern society relies on electricity to function. When Covid-19 swept
across the globe in 2020, people took to their homes – reorganizing
their lives with home offices, using e-commerce sites to do their
shopping and streaming video platforms for entertainment.
Electricity was critical for operating ventilators and other medical
equipment in the hospitals treating the afflicted.
HPS organized and took action finding ways to keep people and
places powered up and powered on. Not only were we classified
as an “essential” business in 2020, we continued to be an essential
product – one that the world can’t live without now more than ever.
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Essential isn’t a new word or concept to
the people at HPS – Essential has been the
heartbeat of our company for 100 years.
We’ve been able to weather the storms we’ve faced over the last
century because of the value we place on our essential customers,
people, relationships and shareholders – each playing a key role in
our ability to manufacture an essential product and deliver solid
financial performance.
Our people are essential – the ones that work in our plants and offices
as well as those adjusting to working from home. Our customers are
essential – the ones that need us most to help others and to stay
afloat themselves. Doing our part in the supply chain and forging
strong supplier relationships is essential – the organizations, people,
information and resources that depend on one another to deliver
products to customers. Sustainability is essential – how we create
long-term value through innovation, infrastructure upgrades and more
efficient production standards. And our shareholders are essential –
the ones that believe that we can consistently deliver operationally.
ANNUAL REPORT 2020
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HAMMOND POWER SOLUTIONS INC. At Our Core
Essential People
People are an essential part of our business success and are at the core
of everything we do. HPS employees are part of a valued and supportive
team. We have a passionate interest in energizing the careers and nurturing
the personal growth of our people, supporting them through the training
and education that help them to develop new skills. We foster diversity
and inclusion and with that we offer fair and equitable compensation
as well as an environment where we care about our people’s safety and
well-being. We believe that everyone’s role in the company is essential
to our success.
At the start of the pandemic, like all businesses deemed essential, we
initially reorganized our work force to allow for physical distancing not
only in our manufacturing facilities but also in our office areas. Where
appropriate, employees began working from home and adjusted hours to
meet the needs of their family. We designed and implemented rigorous
company-wide safety protocols. This gave way to more transformational
change within our organization as we identified risks, assessed impacts
and redefined our scope of work.
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HAMMOND POWER SOLUTIONS INC. Fast-forward to Today
Essential Customers
When Covid-19 shut the world down, we waited in anticipation for the
green light to continue business. We were fortunate to be identified early
as one of the companies of choice, providing hundreds of distribution
transformers to power newly constructed, expanded and renovated
hospitals and testing centres as well as life-saving medical equipment.
In 2020, Google, Facebook and Amazon invested significant money to
improve their networks in order to handle the massive increase in data
load as we all were forced to move inside and online. Worldwide data
centre upgrades, critical to our ability to communicate resulted in record
sales of transformers specifically designed to power those centres.
As life moves on the world is turning to smart electrification using
electrical energy sources such as sun, wind and water to replace other
forms of energy such as fossil fuels. Smart electrification means using
the advantages electricity offers to make overall better use of energy.
Transit and light rail as well as safe water projects, utility upgrades and
other major infrastructure projects rely on our essential product to provide
transformers to move forward.
ANNUAL REPORT 2020
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HAMMOND POWER SOLUTIONS INC. Reliable Heros
Essential Product
Transformers are essential to delivering electricity. They work to improve
the safety and efficiency in power systems by increasing and decreasing
voltage levels when needed. Power and distribution transformers work
together to enable the transmission of electricity. Power transformers receive
electricity at extremely high voltages and step that voltage down to lower
levels delivering it to power our lives through distribution transformers.
A transformer is one of those unsung and reliable heros of the modern
world, functioning as it should in the background of our lives.
The longevity of our company, coupled by our solid business practices,
innovation and diverse range of markets has enabled our essential products
to be products of choice.
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HAMMOND POWER SOLUTIONS INC. Strong and Sustainable
Essential Shareholders
During the most taxing social and economic challenges Hammond
Power Solutions has faced in our history, we have delivered solid financial
performance and market share gains.
Our shareholders have stood by us through the good times and the
unprecedented times as we continue to deliver our strong commitment
of operational and financial strength. Generating long-term value for our
shareholders is important to us as their support enables us to invest, grow
and innovate. We are committed to transparency and are thankful for the
value and trust our shareholders continue to place in us.
We continue to focus on creating long-term value through innovation,
relationships, infrastructure upgrades and more efficient production
standards.
ANNUAL REPORT 2020
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To our Shareholders,
After such a calamitous and uncertain year, I am very
pleased to report Hammond Power Solutions Inc.’ (“HPS”)
2020 results.
We like everyone else certainly did not foresee dealing with
a global pandemic and recession, as well as the impact that
these events have had on our customers, our employees and
our suppliers.
Recognizing that transformers are integral to the functioning
of everything powered by electricity, our business was deemed
essential in all of the countries where we have operations.
This however did not prevent our business, particularly in
Canada and India, from being very adversely affected by
nationwide lockdowns in the second quarter where we saw
our domestic sales drop dramatically in these two countries.
Fortunately, in Canada, our government provided
financial support which allowed us to maintain
employment levels in our four Canadian manufacturing
and warehouse facilities, and as a result we were able to
rebound quickly when business began to recover in the
third quarter.
True to our corporate values, when COVID began to roll
across the globe we immediately focused on the health and
safety of our employees and their families. Building on the
contingency plan we had developed to protect our business
during the SARS outbreak in 2003, we quickly implemented
a number of protocols including remote working, physical
distancing in the work place, mask usage and extensive
cleaning and sanitization measures. As a result, we were able
to minimize the infection rate of our employees and as best
as possible protect the welfare of their families. This also
enabled HPS to operate safely while continuing to serve the
needs of our distributors and customers during a time when
a number of our competitors were forced by local authorities
to close their operations due to high infection rates.
Throughout the year, we made very conscious decisions
about how we were going to run our Company with a focus
on the health and welfare of our employees and their families
as well as continuing to serve the needs of our customers
throughout the pandemic. During this most challenging time
it was through the dedication and tremendous support of our
employees and suppliers, that we were able to not only meet,
but to exceed our goals – certainly more than we thought
would be possible back in March and April of 2020 when the
dark cloud of COVID descended over the world. I have never
been more proud of our company, our people, our suppliers
and our accomplishments. Thank you to all who have made
this possible.
As the economy slowly comes back to life, I firmly believe
that Hammond Power Solutions will be even stronger and
more successful going forward into this decade.
William G. Hammond
CHAIRMAN OF THE BOARD & CHIEF EXECUTIVE OFFICER
Grandson of founder Oliver Hammond
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Our Values
We value the safety and well-being of all
We expect honesty, integrity and ethical behaviour
We embrace diversity by nurturing an inclusive environment
and treating everyone with dignity and respect
We promote innovation and a relentless pursuit of
continuous improvement through teamwork
We believe in a collaborative approach to
social and environmental sustainability
Our Vision
Our Mission
We are a growing and profitable
global supplier of transformers and
related magnetic products dedicated
to satisfying the collective needs
of our shareholders, customers,
suppliers, employees and
community.
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ANNUAL REPORT 2020To be a leading global supplier of transformers and magnetics within our chosen markets. Ready to Respond
An Essential Service
HPS has a rich and extensive history of growth,
innovation and resilience. As an essential service HPS
has always had to ensure we were ready to respond –
to our shareholders, customers and employees.
For our shareholders, HPS has provided:
• Escalating growth of the NAED channel;
• New global customers;
• Expanded relationships with existing customers;
• Capital investment in North American manufacturing facilities
in Canada, the U.S. and Mexico;
• Establishment of a state-of-the-art core manufacturing facility
in Mexico;
• Healthy gross margin rates, strong earnings per share,
solid cash generation; and
• Quarterly dividends paid with an attractive yield.
For our customers, HPS has provided:
• Compliance with regulatory changes;
• New product development;
• Expanded product offering using cast resin technology;
• Superior customer service;
• Accurate ship on time; and
• Competitive pricing for our products.
For our employees, HPS has provided:
• The tools to facilitate their best work, which includes development
and further implementation of our ERP system to enhance
availability of information and streamline processes;
• Space and time for innovation and development;
• Safety in the workplace, especially during COVID-19; and
• Ability for remote work, where able, to help manage school closures
and health concerns.
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Competitive and
Strategic Advantage
Competitive and Strategic Advantage
Focused on the Future
HPS is confronting future challenges and
continuously building our competitive and strategic
advantage while being cognizant of the importance
of our shareholders, customers and employees.
For our shareholders, HPS is focusing on:
• Disciplined cost management initiatives to ensure price
competitiveness in the market;
• Cash flow generation;
• Capital investment in capacity expansion and information
systems; and
• Strategic planning.
For our customers, HPS is focusing on:
• Sales development;
• NAED channel expansion;
• Broadened product offering;
• Product development; and
• Bringing quality and value to all that we produce.
For our employees, HPS is focusing on:
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Investing in our employees, through leadership training and
development programs;
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Implementing a new Human Resource information system to
provide an in-house payroll system, dynamic performance
evaluation module, succession planning, personal learning
development and people management tool;
• Relaunch of our internal continuous improvement program,
Transform, to further foster a culture of innovation; and
• Ongoing support through the CEWS wage subsidy where
we qualify.
ANNUAL REPORT 2020
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Moving Forward Through Innovation
Renewable and Innovative Power
As utilities look to the future when many traditional
forms of power generation go offline and a
substantial portion of smaller individual generation
point feed the grid, HPS is able to provide a solution
with our zigzag grounding transformers.
The flexibility of our custom manufacturing,
reputation in the distribution channel, and
dedication of HPS sales staff has cemented
this as a true success story.
Handling the Data Load
This past year Google, Facebook and Amazon invested
more money to improve their networks to handle the
massive increase in load as we all moved ‘Inside”.
HPS’ distribution and power products are specifically
designed to support these data criical centres. HPS
is part of these essential parts of today’s society.
Moving People
Transit and light rail systems reduce traffic congestion
and pollution by providing an accessible means of
affordable transportation for city centres. HPS has
provided custom transformers to suit various transit and
light rail projects in North America and are positioned
to continue to be a major part of additional projects
over the coming years.
$14,693
India
(in thousands of dollars)
$109,080
Canada
$198,324
United States/Mexico
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Geographic Sales
Healthcare
Response
HPS is proud to do our part in support of the
healthcare community. Our transformers are part
of exisiting hospital upgrades and additions as well
as field and portable hospitals and testing centres
that were set up in parts of the Canada and the
United States. Our inventory positioned us to be
able to react quicker than any other manufacturer
as these transformers are standard product for
HPS. Distribution transformers are integral parts
of the “step down” voltage powered life-saving
medical equipment that is reliant on clean power.
HPS supplies and continues to invest in developing
the best products to produce the best power quality
solutions for this equipment in the industry.
Safe Seawater
Systems
Containerized Seawater Reverse Osmosis systems
are designed to take the salt and pollutants out of
seawater making it safe for consumption. A new
system developed in the U.S. will be able to produce
300,000 GPD (1,136 m3/day) of high-quality water.
Engineers were able to overcome many challenges
to provide advanced Seawater Reverse Osmosis
systems suited for communities all over the globe.
HPS was in the on the ground floor of this new
technology supplying transformers to be included as
part of this highly advanced and efficient system.
HPS Academy –
Online Training Center
Several years ago we laid the foundation for
the development of a training system for HPS
customers. We are very proud of the robust system
that has become the HPS Academy – Online
Training Center.
HPS Academy is not only a place where customers
can access valuable specification information as well
as product features and benefits, but it also aids with
providing information about application challenges
accessible anytime and from anywhere!
As a result, Hammond now has the largest and
best E-commerce platforms of any dry transformer
company in North America with mobile device
capabilities being utilized by Contractors in the field.
We also have over 50 training modules and videos
available online which has given us a tremendous
advantage over the competition, especially given the
large demographic turnover in our industry and the
significant loss of knowledge and experience.
10,458
Year to Date
Enrollments
10,629
Year to Date Course
Completions
ANNUAL REPORT 2020
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HAMMOND POWER SOLUTIONS INC. A Review of Operations
HPS had a very positive year in 2020 – despite the global
pandemic and political unrest. Although our year-over-year sales
were down, in comparison to other electrical manufacturers of
industrial and commercial products our decline was small and
we experienced positive growth in some regions and markets.
We firmly believe that HPS will come through this time in a
stronger market share position.
A number of core strategic advantages have long benefitted
HPS and paved the way for our years of success – primarily our
business diversity. No other dry-transformer company has the
same range of geographical economies, end-markets, channels
and product capabilities as HPS does. Our diversity has not only
resulted in more rapid growth than our competitors, it has also
lessened our dependency on any one or two end user markets.
Prior to 2017, HPS was much more dependent on the highly
cyclical oil and gas, as well as mining markets than we are
today. In economic boom times, these two markets represented
over 25% of our business. Unfortunately, over the last twenty
years we have also experienced three significant down turns,
the most recent in 2020 with sales in these markets falling by
as much as 40%. Conversely since 2015, we have strategically
added over 1,700 distributor branches across the United
States (U.S.). Selling our product through this larger and more
dominant network of distributors has not only opened the doors
of growth opportunities such as we have never seen before,
but also diversified our business across a broader spectrum
of markets and customers. As a result, HPS transformers are
being used in power solar and wind generation, EV recharging
stations, water and sewage treatment facilities, hospitals,
data centres, automotive plants, Amazon distribution centres,
condominiums, transit systems, power systems for naval
ships, university research buildings and chemical refineries.
Now with the start of a potential commodity boom driven by a
recovering global economy, our oil drilling and pumping, as well
as our surface and underground mining equipment business, is
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ANNUAL REPORT 2020 expected to grow over the next several years
– an unexpected boost to our overall sales.
An equally important core advantage of
HPS is our company and employee culture.
There are many words and phrases that our
distributors and customers use to describe
HPS, including humble, driven by family values,
passionate, hardworking and focused on serving
our customers. We are a flat organization that
works hard at being fast and flexible. One of
our independent agents responsible for selling
our products in the U.S. recently said that
“Hammond personifies the ‘Easy Button’.” It took
some time to change our way of thinking and
doing things, but as a Company we do whatever
we can to build effective relationships with our
distributors and customers, understand their
needs and work hard to meet them as best
we can.
As with many companies today, we are going
through a transition as long-term managers
are retiring. A number of individuals who have
been very instrumental in building HPS over
the last 20 years from a new and separate
public company of $65 million in sales to the
dominant North American manufacturer of dry
transformers with sales of over $320 million, are
moving towards retirement. With the guidance
of our Board of Directors, we have been building
a solid succession strategy to ensure that we
have a combination of talent through internal
development as well as external recruitment to
fill these key positions. Going forward, this will
ensure we protect our unique culture as well as
build upon our sound foundation with new ways
of thinking and external best practices. We are
very excited about this evolution of HPS and
how it will help us grow in new and different
ways, while at the same time respecting our
family business values, the passion we have in
everything we do, the development of effective
customer relationships and our relentless focus
on service and quality.
The onslaught of the global pandemic changed
our original 2020 growth objectives. We had
entered the year with a number of exciting
strategies to grow our business including an
aggressive expansion into the Mexico and Latin
America markets as well as further expansion
of our power quality business. Although we
continued to execute these plans as best we
could, the significant economic slowdown
and broad shut-down of businesses across
North America impaired our ability to deliver
our 2020 objectives. Our most important
priorities became the welfare of our employees
and minimizing as best we could the financial
impacts of this global pandemic recession.
Given the critical importance of transformers
to the fundamental functioning of anything
powered by electricity, HPS was at the onset
of the pandemic, classified as an essential
business in all of the countries where we have
operations. This did not however spare us from
a complete shutdown of our Indian operations
as the Indian economy plunged in April and
May, in turn having a calamitous impact on all
Indian electrical companies during the middle
portion of the year.
When some of our competitors in North
America suspended operations for a period of
time due to high COVID-19 infection rates within
their facilities, HPS through the tremendous
support of our employees and suppliers,
was able to continue operating and serving
the needs of our customers and markets for
the entirety of 2020. This continuity of business
had a positive effect as we were able to lean on
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HAMMOND POWER SOLUTIONS INC. our strengths to increase our sales and market
share, in spite of a slowdown in the economy.
In early March when there seemed no
doubt that a very disruptive pandemic would
wreak havoc on the world and our business,
we made a conscious decision to increase
our finished goods inventory. This strategy
was in part, insurance in the event that the
pandemic created service issues with our
suppliers, and put us in a stronger position
to take advantage of any similar issues that
our competitors might face. A number of our
competitors experienced major disruptions
and our distributors, supported by our strong
inventory, were able to expand our market share.
Our superior inventory position also attracted
new distributors and customers who were
unable to fill their transformer requirements
through their usual channels and hence began
to place orders for our products. We believe
the majority of this business will remain with
HPS after our competitors return to normal
business practices.
In addition to expanding our finished goods
inventory, HPS maintained our staffing levels
while many competitors reduced theirs. We
also continued to invest in our online/digital
capabilities which became an even more
important service as the year progressed. HPS
now has the largest and best e-commerce
platforms of any dry transformer company in
North America with mobile device capabilities
being utilized by contractors in the field. We
also have industry leading training modules
and videos available online which has given us
a tremendous advantage over the competition
– especially given the large demographic
turnover in our industry and the significant
loss of knowledge and experience. Our overall
support and flexibility, compared to other
manufacturers throughout the pandemic,
combined with our agility and willingness
to do whatever we can to help our agents,
distributors and customers, has solidified HPS
as the dominant dry transformer company in
North America.
Although our performance was better than
most other electrical manufacturers in the
industrial and commercial markets, especially
during the worst economic collapse since the
Great Depression, we did experience an overall
10% drop in sales from 2019 levels. The effects
of a global pandemic caused an unplanned
pause in our growth trajectory towards a target
of $500 million in sales by 2025.
Our Canadian business in particular was hit
especially hard in the second and third quarters,
falling by almost 25% compared to the same
period in 2019. Our U.S. distributor business was
not impacted as negatively, primarily because
shutdown measures imposed by State and
Federal governments were not as severe and
complete as in those imposed in Canada.
Our resource-related Original Equipment
Manufacturer (“OEM”) business was another
area hit hard by the global pandemic in 2020.
This business was already suffering by slowing
demand and falling commodity prices in 2019,
however the economic shutdown of the global
economy, especially China, along with the need
to close plants temporarily created the worst
business conditions for these OEMs in over
twenty-five years. As a result, we saw sales
decline by as much as 80% some of which
occurred during the first three quarters of 2020.
Approximately a third of our business is
related to longer-term industrial and commercial
projects and understandably with the great
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ANNUAL REPORT 2020
uncertainly created by the pandemic, the vast
majority of these projects were put on hold
across North America. Without a doubt, the
pandemic had the biggest impact on the North
American economy in 2020, HPS continues
to however, invest in our future and grow our
business. With a conscious decision to reduce
spending and focus on maintaining a strong
balance sheet, we continued to invest in several
projects that would expand our business and
scope into 2022 and beyond. A new endeavor
initiated in 2019 expands HPS into the power
quality market. The events of 2020 somewhat
slowed our progress on this project, yet we
were able to recruit resources as well as add
internal manufacturing and test capabilities to
set the stage for growth beginning in 2021. We
continue to look for opportunities to expand
our product offering through acquisition(s) in
addition to adding to our engineering talent and
broadening our product capabilities internally.
The groundwork for expansion into the
Mexican and Latin American markets continues,
as we build on our manufacturing presence in
Monterrey where we have three facilities and
a very engaged workforce. At the beginning
of the year, we began to put in place the sales
structure to lead this geographical expansion
and continued working on product development,
as well as building relationships “virtually” with
Mexican distributors who are eagerly awaiting
our revised launch, slated for Quarter 2 of 2021.
We are very excited about the promising
opportunities in Mexico and Latin America and
believe that within five years we can become
the largest dry transformer supplier in this part
of the continent.
In addition to these projects, we made a
significant investment of capital, time and
resources in continuing to upgrade our business
systems across the organization. In 2020 we
accelerated the process of converting the
business systems of our Delta entity operation
to our Microsoft AX platform. At completion
in 2021, all of our operations and entities
including India will be on our common financial
and business planning systems platform. This
work and investment continues into 2021 as we
ready the migration of our ERP and e-commerce
platforms to the Cloud, which will be finalized
in 2022.
We are also implementing a new Human
Resource Information System corporate-wide,
which will be expanding and integrating the
capabilities to serve our employee population.
Lastly, we are continuing to invest in
engineering design software as well as shop
floor data automation. These investments
will have a variety of benefits for the
Company including more consistent quality,
higher efficiency, lower costs, faster flow of
designs and information, additional tools for
better decision making and a higher level of
data security.
Looking forward, we are very optimistic with
regard to our growing momentum in 2021 and
2022. Despite the delays in vaccine rollouts
across North America there is a growing
overall sense of optimism, which at some
point will translate into a stronger economy.
As mentioned earlier, a large number of
industrial and commercial projects were put on
hold in 2020 due to the significant volatility and
uncertainty created by the pandemic. Over the
last several months, we have begun to see many
of these projects re-instated and rescheduled
over this year and next. We are seeing growth
coming from a wide spectrum of markets
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HAMMOND POWER SOLUTIONS INC.
contain spending for years to come which in
itself will slow this recovery.
I am very proud of the overall performance
of our Company during the most challenging
global environment since the Great Depression.
This pandemic and its significant impact was
something that none of us imagined as we
rang in 2020 – expecting our strong growth
momentum to continue. Our focus and priorities
immediately switched to the welfare of our
employees and their families while at the same
time getting prepared to do whatever was
necessary to protect the financial health of
HPS and its future. As a result of the hard work
and support of our employees; our diversity of
geography, channels, markets, and products; the
benefits of our many competitive advantages
built around customer service; and finally with
some luck - we were able to deliver respectable
financial performance and position ourselves
even more positively for the decade to come. I
am convinced, that Hammond Power Solutions
will come through this deep pandemic valley of
2020 in a stronger market position with even
more opportunities in 2021 and beyond!
including data centres, hospitals, food and
beverage companies, distribution warehouses
such as Amazon, water and sewage treatment
facilities, automotive plants, transit and public
infrastructure, as well as condominiums. Most
of this growth is coming through our expanding
distributor network as we continue to add new
distributors and more branches of existing
distributors because of our increasing market
dominance and share. We are even starting to
see the unexpected revival of our OEM business
due to the rising consumption of commodities
and higher commodity prices brought on by a
growing global economy especially in China.
Finally, we are beginning to see the Indian
economy starting to recover after its long
and broad shutdown nationally. Many of our
Indian independent competitors have suffered
financially through 2020, and this situation is
opening up a variety of opportunities for HPS.
As the world wobbles to some degree out of
this long and serious health crisis we have to
be very mindful of the potential risks, at least
those that we can see at this point. Clearly there
is a growing concern about re-occurring spikes
of infection from the virus mutations that are
now surfacing. Who knows what impact these
will have on the global and North American
economies over the next twelve to eighteen
months. There is certainly hope that with the
expanding availability of new vaccines and the
attainment of some degree of herd immunity,
these effects can be muted. But we all have
to be very cognizant of the significant impact
that the pandemic and shutdowns have had
on the economy and high unemployment. It
may take years for some sectors to recover
just to 2019 levels. It is inevitable that high
levels of personal and government debt will
25
ANNUAL REPORT 2020
Consolidated Sales*
(in thousands of dollars)
Gross Margin %*
$274,793
$301,750
$314,082
$358,782
$322,097
24.3%
25.6%
23.2%
24.5%
27.0%
2016
2017
2018
2019
2020
2016
2017
2018
2019
2020
* from continuing operations
* from continuing operations
COVID-19
Business Update
HPS is committed to managing the impact
the pandemic will have on its financial
performance through:
• Robust health and safety precautions;
• A dedication to providing a safe working environment
for our employees;
• Continuing to serve our customers during this
volatile and unpredictable time;
• Robust health and safety precautions;
• A dedication to providing a safe working environment
for our employees;
• Continuing to serve our customers during this
volatile and unpredictable time.
HPS has performed
very well during
these erratic and
unpredictable
times and remains
steadfast in its
execution of its
operational and
strategic plans.
.
C
N
I
I
S
N
O
T
U
L
O
S
R
E
W
O
P
D
N
O
M
M
A
H
26
Earnings from Operations*
(in thousands of dollars)
$22,041
$16,884
$20,543
$13,779
$10,873
2016
2017
2018
2019
2020
* from continuing operations
EBITDA*
(in thousands of dollars)
$14,356
$23,069
$17,915
$28,175
$29,482
Basic Earnings (Loss)*
Per Share
(in dollars)
$0.16
$0.53
$(1.10)
$0.99
$1.20
2016
2017
2018
2019
2020
* from continuing operations
Net Operating Debt**
to Equity
0.09
0.15
0.16
0.08
0.01
2016
2017
2018
2019
2020
* from continuing operations
2016
2017
2018
2019
2020
** operating line drawings net of cash
ANNUAL REPORT 2020
27
28
HAMMOND POWER SOLUTIONS INC. Management’s Discussion and Analysis
Hammond Power Solutions Inc. (“HPS” or the “Company”) is a leader in
the design and manufacture of custom electrical engineered magnetics,
standard electrical dry-type, cast resin and liquid filled transformers. Advanced
engineering capabilities, high quality products and fast responsive service to
customers’ needs have established the Company as a technical and innovative
manufacturer serving the electrical and electronic industries. The Company has
manufacturing plants in Canada, the United States (“U.S.”), Mexico, and India.
The following is Management’s Discussion and Analysis (“MD&A”) of the
Company’s consolidated financial position and performance for the years
ended December 31, 2020 and 2019, and should be read in conjunction with
the accompanying Consolidated Financial Statements of the Company as
at December 31, 2020 and 2019, which have been prepared in accordance
with International Financial Reporting Standards (“IFRS”). This information
is based on Management’s knowledge as at March 25, 2021. All amounts in
this report are expressed in thousands of Canadian dollars unless otherwise
noted. Additional information relating to the Company may be found on
SEDAR’s website at www.sedar.com or on the Company’s website at www.
hammondpowersolutions.com.
Caution regarding forward-looking information
This MD&A contains forward-looking statements that involve a number of
risks and uncertainties, including statements that relate to among other things,
HPS’ strategies, intentions, plans, beliefs, expectations and estimates, and
can generally be identified by the use of words such as “may”, “will”, “could”,
“should”, “would”, “likely”, “expect”, “intend”, “estimate”, “anticipate”, “believe”,
“plan”, “objective” and “continue” and words and expressions of similar import.
Although HPS believes that the expectations reflected in such forward-looking
statements are reasonable, such statements involve risks and uncertainties,
and undue reliance should not be placed on such statements. Certain material
factors or assumptions are applied in making forward-looking statements,
and actual results may differ materially from those expressed or implied in
such statements. Important factors that could cause actual results to differ
materially from expectations include but are not limited to: general business
and economic conditions (including but not limited to currency rates); changes
in laws and regulations; legal and regulatory proceedings; and the ability to
execute strategic plans. HPS does not undertake any obligation to update
publicly or to revise any of the forward-looking statements contained in this
document, whether as a result of new information, future events or otherwise,
except as required by law.
29
ANNUAL REPORT 2020
MANAGEMENT’S DISCUSSION AND ANALYSIS
Additional GAAP and Non-GAAP measures
This document uses the terms “earnings from operations”
which represents earnings before finance and other
costs/(income) and income taxes. “EBITDA” is also
used and is defined as earnings before interest, taxes,
depreciation and amortization. Adjusted EBITDA from
continuing operations represents EBITDA from continuing
operations adjusted for foreign exchange gain or loss.
Operating earnings, EBITDA and Adjusted EBITDA are
some of the measures the Company uses to evaluate
the operational profitability. The Company presents
EBITDA to show its performance before interest, taxes
and depreciation and amortization. Management
believes that HPS shareholders and potential investors
in HPS use additional GAAP and non-GAAP financial
measures, such as operating earnings, EBITDA and
Adjusted EBITDA in making investment decisions
about the Company and to measure its operational
results. A reconciliation of earnings from operations,
EBITDA and Adjusted EBITDA to net earnings for the
years ended December 31, 2020 and December 31,
2019 is contained within this MD&A. Earnings from
operations, EBITDA and Adjusted EBITDA should not be
construed as a substitute for net earnings determined
in accordance with IFRS.
“Order bookings” represent confirmed purchase orders
for goods or services received from our customers.
“Backlog” represents all unshipped customer orders.
“Book value per share” is the total shareholders’ equity
divided by the average outstanding shares. The terms
“earnings from operations”, “EBITDA”, “adjusted EBITDA”,
“order bookings”, “backlog” and “book value per share”
do not have any standardized meaning prescribed within
IFRS and therefore may not be comparable to similar
measures presented by other companies.
The Company’s 2020 consolidated financial
statements, which comprise the consolidated statements
of financial position as at December 31, 2020 and
December 31, 2019, the consolidated statements of
operations, comprehensive income , changes in equity
and cash flows for the years ended December 31, 2020
and December 31, 2019, and Notes thereto, have been
prepared under IFRS.
Overview
HPS is a transformer industry leader, providing superior
quality, custom engineered and standard product
solutions, broad offerings and market access through
multiple sales channels which makes us an essential
service business and has allowed us to continue to operate
during the global coronavirus (“COVID-19”) pandemic.
HPS has continued to produce transformers for our
customers throughout the entire pandemic period while
also supporting and ensuring employee safety during
this time. The pandemic has had a significant impact
on our business 2020 and continues to influence our
daily operations.
Demand for our product is stable, however sales
volumes will be determined primarily by which industries
and customers are continuing to operate and in what
capacity. Later in the year we saw activity in the project
and industrial markets that had stalled when the pandemic
gained momentum in North America while other markets
continued to struggle. The Canadian lockdown imposed
in early 2020 and again in early 2021 continues to impact
several of our markets.
HPS’ North American sales volumes experienced a
reduction in 2020 as COVID-19 impacted many of our
customers’ industries. While our sales dollars have
declined, our market share continues to grow thus
mitigating some of the decline that many companies
in the electrical industry have seen. The Company
continued to escalate its North American market
share growth, particularly through its North American
Electrical Distributor (“NAED”) channel. While our sales
volume declined, our financial results were supported in
other ways – varied sales mix, achieved price
increases, decreased commodity costs, receipt of the
Canadian Emergency Wage Subsidy (“CEWS”) benefit
and cost reductions.
The Company has incurred significant costs related
to COVID-19 to ensure the safety of our employees.
HPS has been fortunate that there have been a limited
number of cases impacting our employees and their
families to date. We continue to ensure our efforts do
not waiver as the length of the pandemic continues
to extend. HPS’ health and safety practices, including
remote work where possible, have allowed the Company
to continue to operate during the pandemic ensuring
business continuity and supplying our customers with
the products they need.
HPS’ history of success has been achieved through
its commitment to producing quality, innovative, energy
efficient, diverse transformers and related magnetic
products. The Company’s alignment of its operational
initiatives and strategic vision enhances these competitive
differentiators. HPS has a well-established and growing
market presence and a focus on continued growth
through current and new customers and products.
30
HAMMOND POWER SOLUTIONS INC.
The Company has a strong financial footing that allows for
continued focus on market share growth. The Company’s
increased global footprint provides a gateway to new
technologies, customers and markets. These strengths
are important to future revenue and earnings growth.
Technology and know how obtained through
acquisitions have allowed the Company to accelerate
the research and development program of its cast resin
transformer technology and product development which
are now manufactured in several HPS facilities.
Despite the challenges, 2020 was a successful year
financially for HPS. Solid sales and marketing strategies
increased organic customer sales and market share
growth was realized in markets not as heavily impacted
by COVID-19. Increased gross margin rates combined
with excellent manufacturing performance as well as
effectively managed general and administrative expenses
positively impacted HPS’ profitability and financial
performance. The financial performance of Corefficient
was reasonable as the joint venture experienced decreased
revenues due to COVID-19.
Looking forward, in an effort to deliver resilient
financial performance, HPS continues to concentrate on
sales growth, gross margin generation and operational
improvement. Globally in the U.S., Canada and Asia, HPS
is well situated for electrical industry market share growth
and continues to be a leader in the markets it serves. The
Company continues to build market presence through its
product capabilities, product quality, cost effectiveness,
service and geographical market expansion.
While we experience some sales variability with
fluctuations in the markets and those of our customer
industries which have a direct impact on our revenue,
there are indications that overall market activity will
be fairly robust. Booking rates have decreased from
2019 but are still at a healthy level going into 2021. The
benefit of the HPS diversified market approach allows
for the capitalization of growth in expanding market
segments, while counterbalancing the impact of cyclical
market declines. A portion of annual sales are derived
from major customer projects, for which exact timing
continues to be difficult to predict and will influence
quarterly sales fluctuations. Order booking rates continue
to grow in strategic target markets delivering additional
market share penetration, new account development
and expansion of organic sales. HPS is consistent in
calculating the risks and opportunities that are present
and unyielding in the execution of our strategies; there
are many opportunities to be recognized.
The industry outlook is very difficult to predict as the
full extent of COVID-19 continues to be unknown. While
vaccinations will begin to positively improve the economy,
the timing of when the majority of the population will be
vaccinated is very unclear given delays in shipments and
worldwide ingredient shortages. As always, we expect
to see some global economic growth in certain sectors
yet declines in others. We are optimistic in continued
market improvement later into 2021, particularly in
North America. HPS is cognizant of the resource-based
commodity cost uncertainty, the variability of foreign
currencies and the growing risks to the global economy
caused by trade wars and the impacts of tariffs.
HPS remains confident in its ability to generate growth
– through our strategic vision merged with our operational
strategies. Management is aware of the need to plan
and build for the future and is determined to proactively
confront the profitability pressures presented in the
market. The Company is persistent in identifying and
developing new market opportunities which will come from
organic and new customer sales expansion, product and
technology development, cost effectiveness, competitive
lead-times and manufacturing flexibility. Our capabilities
are extended through our multi-national operations
which provide expanded market opportunities, allowing
HPS to deliver results. The Company’s commitment
to continuous improvement, cost reduction, improved
efficiencies and overall cost effectiveness will assist in
reaching these goals. These strategies will improve and
build revenue and profitability trends.
The combination of a secure financial foundation,
strong business fundamentals and strategic vision
positions HPS for growth as well as creating stakeholder
value. The future of HPS is not only in its focus on market
share and sales growth, but also on improving its cost
competitiveness. The Company maintains a strong
and stable balance sheet and excellent liquidity
supported by a committed credit facility available to
implement investment strategies, operational plans and
advance growth initiatives. The Company’s current North
American credit agreement matures in June 2021. The
Company is currently in the process of finalizing a new
5-year agreement.
HPS gained significant momentum in 2019, continued
to hold steady in 2020 and is positioned well to continue
to grow and execute its vision into 2021.
Sales
Sales from continuing operations in 2020 were $322,097
as compared to sales of $358,782 in 2019, a decrease
31
ANNUAL REPORT 2020DOLLARS IN THOUSANDS UNLESS OTHERWISE STATED MANAGEMENT’S DISCUSSION AND ANALYSIS
of $36,685 or 10.2%.
U.S. market sales (stated in Canadian dollars) were
$198,324, a decrease of $27,385, or 12.1%, compared
to 2019 sales of $225,709. U.S. sales, (stated in U.S.
dollars), have decreased from $170,073 in 2019 to
$147,561 in 2020, a decline of $22,512 or 13.2%. The
U.S. market experienced declines in the motor control,
private-branding, mining and NAED markets.
Sales were favorably impacted by the strengthening
of the U.S. dollar relative to the Canadian dollar. The
average U.S. to Canadian exchange rate for 2020 was
$1.343 versus $1.327 in 2019, a U.S. dollar strengthening
of 1.2%.
Canadian sales were $109,080, a decrease of $7,916
or 6.8% as compared to sales of $116,996 in 2019. The
Canadian market suffered declines in the NAED, capital
equipment and motor control markets.
Indian sales in 2020 were $14,693, a decrease of
$1,384 or 8.6% compared to sales of $16,077 in 2019.
The decline in India is largely COVID-19 related as the
pandemic dramatically constrained the Indian market,
leading to delays in projects because of government
imposed lockdowns.
Stated by geographic segment, sales from continuing
operations in the U.S. were 61.6% (2019 – 62.9 %),
Canadian were 33.9% (2019 – 32.6 %) and India sales
accounted for 4.5% (2019 – 4.5 %) of our total sales.
The Company experienced declines in North American
sales through its established NAED and OEM channels
which were significantly impacted by COVID-19, resulting
in an overall drop in demand, project deferrals and
cancellations. Despite the pandemic, HPS is growing
its market share through distributor conversions and
its custom transformer capabilities. The ability to
continue to expand these segments is also a result of
new customer additions, organic customer diversity,
expanded product offerings and geographically diverse
manufacturing capabilities. HPS is not single-market
or industry dependent and our market diversification
strategies provide a natural business hedge.
HPS is committed to its growth strategy through our
focus on product development, innovative research and
development projects, capital expenditure program to
increase capacity, vertical integration strategies, business
development activities and its expanded NAED network.
The Company will continue to grow market share globally
as a result of expanded product offerings, the addition of
new customers, geographically diverse manufacturing
facilities and market influence.
HPS prides itself on providing value to our customers.
The Company is committed to consistent quality,
competitive product design, expertise in custom
engineered products and product breadth. These factors
combined with a strong, effective distribution channel and
multi-national manufacturing capabilities will continue
to be a competitive advantage for the Company and
important to continued revenue growth.
Order bookings and backlog
Overall, 2020 bookings decreased by 14.1% over the prior
year. In 2020 direct sales bookings decreased by 22.3%
and bookings in the distributor channel decreased by
8.4%. The decrease in both the direct and distributor
channels can be directly attributed to the impact of the
COVID-19 pandemic on overall business activity which
first began in March 2020 and continues to persist.
Although bookings were lower across a number of market
and geographical segments, the Company still achieved
increased market share in the distributor channel due
to expansion in the number of distributors carrying the
HPS line and late-year strengthening of demand in a
broad base of market segments.
The Company’s December 31, 2020 backlog decreased
by 4.7% as compared to December 31, 2019, due to lower
bookings in both channels but did increase 1% over
Quarter 3, 2020. It is expected the combination of the
Company’s strategic sales initiatives, service, dominant
distributor footprint and new product development will
support booking rates.
HPS is sensitive to the volatility and unpredictability
of current global economies and the impact that this
could have on booking trends. While several markets are
seeing positive quotation and order trends, the Company
is very cognizant that it may see some volatility and
unpredictability in longer term booking rates.
Gross margin
The consolidated gross margin rate from continuing
operations in 2020 increased to 27.0% versus 24.5% in
2019, an increase of 2.5% of sales. The improvement
in margin rates is attributed to favourable sales mix,
selling price increases, receipt of the CEWS benefit and
cost reductions.
The CEWS program provides an employee wage
subsidy for our Canadian entities for periods where
there was a significant decline in Canadian trade sales
due to the impact of COVID-19. During 2020, the wage
subsidy received for production labour was $5,557 or
1.7% of sales. The Company did incur additional operating
32
HAMMOND POWER SOLUTIONS INC.
expenses of $1,902 during 2020 relating to amounts
paid for suspended operational employee wages, non-
productive wages support for “at risk” employees,
employee transportation, increased cleaning, sanitation
and personal protective equipment expenses for the
safety of employees. Excluding the wage subsidy and
COVID-19 related expenses, the Company still delivered
an increase in its gross margin rate of 1.4%.
Demand for our product is stable, however sales
volumes will be determined primarily by which industries
and customers are continuing to operate and in what
capacity. Later in the year we saw activity in some
markets that had stagnated when the pandemic originally
started in North America while other markets continue
to struggle.
HPS continues to focus on price realization strategies
and achievement of cost reductions in an effort to
maintain or increase margin rates. Fluctuating markets,
product mix and the effect of COVID-19 on the current
global economy will have a short-term impact on financial
results. Looking forward, the unpredictability of the
economic, social and industrial impact of the pandemic
and the effect on business activity, combined with a
slightly decreased backlog provides an indication of
predictability caution for 2021. HPS was identified as
an essential service in all countries that we operate
in, and was able to continue to manufacture with the
exception of India where the country was in lockdown
at the end of the first quarter and a large portion of the
second quarter.
Margin rates can be sensitive to selling price
pressures, volatility in commodity costs, customer
mix and geographic blend. The Company continues
to combat competitor short-sighted pricing strategies
through its total value-added engineered solutions.
HPS’ focus during the year has been on execution of
its selling price realization strategies and achievement
of cost reductions in an effort to lift margin rates.
While some growth strategies can have a shorter-
term dilutive effect on gross margin rates, the Company
continues to focus on the long-term investment to fuel
future growth. Gross margin rates are supported by the
maintenance of market prices combined with material
procurement and engineering cost reduction initiatives.
The Company aggressively implemented a number of
cost reduction and expense management initiatives to
offset the lower absorption of factory overheads from
the reduction in manufacturing throughput due to the
lower sales. HPS is currently investing in the support of
future sales growth and new product development.
Quotation activity, improving bookings and backlog
from the end of 2020 as well as an encouraging sales
outlook, continue to provide a degree of optimism for the
future. Looking ahead, HPS remains cautiously optimistic
for the future as growth will be realized in some markets
along with a decline in others – underscoring the volatility
of markets and sales demand. Over the past few years,
to manage the impact of volatility, the Company widened
its distributor footprint in North America, expanded
its Indian market presence, implemented engineering
and material cost reduction initiatives, invested in new
product development and broadened manufacturing
capabilities. A diversified geographic approach supports
anticipated growth from implemented market strategies
and subsequent economic improvement.
HPS continues to commit resources to its continuous
improvement program, which will result in implementing
productivity enhancements, cost reductions and lead-
time improvements across the entire organization.
HPS is confident that these actions will enhance
future margin rates and improve profitability and overall
financial performance.
Selling and distribution expense
Total selling and distribution expenses from continuing
operations were $40,217 for 2020 versus $41,476 in
2019, a decrease of $1,259 or 3.0%. On a percentage-
of-continuing-sales basis, total selling and distribution
expense increased to 12.5% of sales for 2020 from
11.6% in 2019. The increase in the percentage of sales
is due to the reduced sales for 2020. Lower sales value
for the year resulted in a lower commission expense
of $560 and lower freight expense of $390 which are
variable selling expenses that naturally decline with
lower sales. Reduced travel expenses and the CEWS
benefit of $776 or 0.2% of sales also contributed to the
decline in expenses. These declines were partially offset
by higher USD exchange rate.
General and administrative expense
General and administrative expenses from continuing
operations in 2020 were $24,736 compared to $25,940
for 2019, a decrease of $1,204 or 4.6%. On a percentage-
of-continuing-sales basis these costs have increased
from 7.2% in 2019 to 7.7% in 2020. The increase in the
percentage of sales is due to the reduced sales for 2020.
During the year there was a reversal of an abnormal
expected credit loss provision related to the settlement
of the note receivable balance in the amount of $956.
33
ANNUAL REPORT 2020DOLLARS IN THOUSANDS UNLESS OTHERWISE STATED MANAGEMENT’S DISCUSSION AND ANALYSIS
The CEWS benefit related to general and administrative
employees was $1,950 or 0.6% of sales, which was partially
offset by a higher USD exchange rate. HPS continues
to invest in growth while remaining very cognizant of
prudent general and administrative expense management.
Earnings from continuing operations
Earnings from continuing operations surged, finishing
at $22,041 in 2020, as compared to earnings of $20,543
in 2019 – an increase of $1,498 or 7.3%. The increase in
earnings from operations is due to CEWS wage subsidy
support off-setting lower gross margin dollars and
increased operating expenses related to the pandemic.
Earnings from operations are calculated as outlined
in the following table:
2020
2019
Net earnings from
continuing operations
for the year
Add:
Income tax expense
Finance and other costs
Earnings from continued
operations
$ 14,062
$ 13,306
6,904
1,075
5,882
1,355
$ 22,041
$ 20,543
(“EUR”), $12,500 USD and 330,000 INR – all of which
were implemented as an economic hedge against
translation gains and losses on inter-company loans
as well as $46,500 USD to economically hedge the
U.S. dollar denominated accounts payable in Canadian
HPS operations.
The ongoing volatility is managed by HPS’ foreign
exchange contract hedging program. Details of the
outstanding forward foreign exchange contracts at
December 31, 2020 can be found in note 29 in the Notes
to Consolidated Financial Statements included in our
2020 Annual Report.
Earnings from continuing operations,
before income tax
2020 earnings before income taxes was $20,966 as
compared to earnings of $19,188 in 2019, – growing
by $1,778 or 9.3%. The main contributors to the higher
current year earnings before income tax were gross
margin rate improvement, decreases in selling, distribution,
general and administration expenses as a result of lower
variable selling costs, focused expense management and
government wage subsidy support in the current year
offset by decreased gross margin dollar contributions.
Net finance and other costs
Income taxes
Net finance and other costs decreased $280 from $1,355
in 2019 to $1,075 in 2020. The decrease from prior year
is a result of lower interest expense offset by a decrease
in the foreign exchange gain and lower income from the
joint venture.
Interest expense from continuing operations for the
year-ended December 31, 2020 finished at $1,247 as
compared to $1,739 in 2019, a decrease of $492. The
decrease in interest expense year-over-year was due
to the decrease in operating debt levels throughout the
year – a result of lower working capital requirements.
Interest expense includes all bank fees.
The foreign exchange gain from continuing operations
in 2020 of $123 related primarily to the transactional
exchange gain of the Company’s U.S. dollar trade accounts
payable in Canada, compared to a foreign exchange gain
of $234 in 2019. The decrease of the foreign exchange
gain for the year is related to the volatility in the exchange
rates during the year – primarily the U.S. dollar which
increased 1.2% relative to the Canadian dollar in 2020.
As at December 31, 2020, the Company had outstanding
foreign exchange contracts in place for 17,500 Euros
Income tax expense from continuing operations for
2020 was $6,904 as compared to $5,882 in 2019 – an
increase of $1,022 or 17.4%. The consolidated effective
tax rate on earnings from continuing operations for
2020 increased to 32.9% versus 30.7% last year – an
increase of 2.2%.
The Company’s deferred tax assets and liabilities
are related to temporary differences in various tax
jurisdictions, primarily reserves and allowances, which
are not deductible in the current year. A difference in
the carrying value of property, plant and equipment
and intangible assets for accounting purposes and
for tax purposes is a result of business combination
accounting and a different basis of depreciation
utilized for tax purposes. The Company’s income tax
provision is explained further in note 16 in the Notes
to Consolidated Financial Statements included in our
2020 Annual Report.
34
HAMMOND POWER SOLUTIONS INC.
Net earnings from continuing operations
Net earnings from continuing operations for 2020 finished at $14,062 compared to net earnings of $13,306 in 2019,
an increase of $756 or 5.7%. The increase in the net earnings from continuing operations is a result of gross margin
rate improvement, decreases in selling, distribution, general and administration expenses as a result of lower variable
selling costs, focused expense management and government wage subsidy support in the current year offset by
decreased gross margin dollar contributions.
Discontinued operations and restructuring charges
HPS executed several strategic restructuring plans to advance and expedite profitability improvement and cost
competitiveness.
During 2019, the Company continued the closure process of the Italian facility and was successful in selling the
machinery and equipment, inventory and certain employee related liabilities to a third party. The Asset Purchase
and Sale Agreement closed in late November 2019 for a sale price of 1,086 EUR (approximately $1,583) and
resulted in a loss on disposal of 471 EUR (approximately $687). Also, as a result of this transaction, 1,369 EUR
(approximately $2,035) of the 2018 restructuring provision for severances that were accrued but not paid was
reversed. This recovery was partially offset by additional restructuring charges totaling 897 EUR (approximately
$1,307) for cancellation costs, legal fees and additional expected credit losses. These restructuring costs are
included in loss from discontinued operations in the Financial Statements. The loss from discontinued operations
for 2019 was $1,699.
The 2020 Italy operations consist of investment properties which has been consolidated into continuing
operations. During 2020 the cancellation and closure costs of $855 were paid and $92 of the provision was reversed
into income. The expected credit loss related to the VAT receivable continues to be provided for and is included in
the net accounts receivable value in the amount of $339.
EBITDA
EBITDA from continuing operations for the year-ended December 31, 2020 was $29,482 versus $28,175 in 2019 –
an increase of $1,307 or 4.6%. Adjusted for foreign exchange gains, adjusted EBITDA for 2020 was $29,359 versus
$27,941 in 2019 – an increase of $1,418 or 5.1%.
EBITDA and adjusted EBITDA is calculated as outlined in the following table:
Net earnings from continuing operations
Add:
Interest expense
Income tax expense
Depreciation and amortization
EBITDA from continuing operations
Subtract :
Foreign exchange gain
2020
2019
$ 14,062
$ 13,306
1,247
6,904
7,269
1,739
5,882
7,248
$ 29,482
$ 28,175
(123)
(234)
Adjusted EBITDA from continuing operations
$ 29,359
$ 27,941
35
ANNUAL REPORT 2020DOLLARS IN THOUSANDS UNLESS OTHERWISE STATED
MANAGEMENT’S DISCUSSION AND ANALYSIS
Summary of quarterly financial information (unaudited)
Fiscal 2020 Quarters
Q1
Q2
Q3
Q4
Total
Sales
Net earnings
$ 88,420
$ 75,393
$ 78,115
$ 80,169
$ 322,097
$ 2,148
$ 4,420
$ 3,462
$ 4,032
$ 14,062
Net earnings per share – basic
$ 0.18
$ 0.38
$ 0.30
$ 0.34
$ 1.20
Net earnings per share – diluted
$ 0.18
$ 0.38
$ 0.30
$ 0.34
$ 1.20
Average U.S. to Canadian
exchange rate
$ 1.3388
$ 1.3907
$ 1.3346
$ 1.3087
$ 1.3432
Fiscal 2019 Quarters
Q1
Q2
Q3
Q4
Total
Sales
$ 84,690
$ 91,937
$ 91,502
$ 90,653
$ 358,782
Net earnings from continuing
operations
Net earnings per share from
continuing operations – basic
Net earnings per share from
continuing operations – diluted
Average U.S. to Canadian
exchange rate
$ 2,508
$ 3,352
$ 3,595
$ 3,851
$ 13,306
$ 0.21
$ 0.29
$ 0.31
$ 0.32
$ 1.13
$ 0.21
$ 0.29
$ 0.31
$ 0.32
$ 1.13
$ 1.3301
$ 1.3379
$ 1.3198
$ 1.3203
$ 1.3270
Quarterly sales for 2020, with the exception of Quarter 1, decreased from the same quarter in 2019 due to the impact
of COVID-19. Quarter 2, 2020 was the first quarter where the company saw sales declines due to the pandemic.
While year-over-year there has been a decline the sales volume has increased from Quarter 2 to Quarter 4. There
continues to be significant fluctuations of sales volumes in various markets, with some markets being more heavily
impacted by COVID-19 than others. Sales for 2020 have been favourably impacted due to small fluctuations in
exchange rates.
Gross margin rates for the fourth quarter have increased from the same quarter last year and year-to-date
margins have also increased despite a slight decline in the first quarter of the same year. The margin improvement
can be attributed to sales mix, market specific pricing, raw material commodity costs and cost reductions and
expense containment. HPS Canadian entities received the CEWS government subsidy to partially offset additional
costs related to managing COVID-19.
Changing and challenging economic conditions, changes in product mix and competitive pricing pressures
have all had an impact on the year-over-year quarterly fluctuations for both sales and income.
36
HAMMOND POWER SOLUTIONS INC. Quarter 4, 2020 financial results
Sales
Gross margin rate
Earnings from operations
Exchange loss (gain)
Net earnings
Quarter ended
December 31,
2020
Quarter ended
December 31,
2019
$ 80,169
$ 90,653
28.9%
25.7%
$ 7,047
$ 5,862
$ 401
$ (154)
$ 4,032
$ 3,211
Net earnings from continuing operations
$ 4,032
$ 3,851
Earnings per share – basic
Earnings per share – diluted
$ 0.34
$ 0.27
$ 0.34
$ 0.27
Earnings per share from continuing operations – basic
$ 0.34
$ 0.32
Earnings per share from continuing operations – diluted
$ 0.34
$ 0.32
Cash provided by operations
$ 8,073
$ 16,447
Sales for the quarter ended December 31, 2020 were
$80,169, a decrease of $10,484 or 11.6% from the
comparative quarter last year, which is reflective of
decreased market activity due to the impact of COVID-19.
Quarter 4, 2020 gross margin dollars decreased
slightly by $102 compared to Quarter 4, 2019. The gross
margin rate increased to 28.9% in Quarter 4, 2020 versus
25.7% in Quarter 4, 2019 as a result of sales mix and the
receipt of the CEWS government subsidy.
Total selling and distribution expenses amounted to
$10,202 in Quarter 4, 2020 versus $9,924 in Quarter 4,
2019 – an increase of $278 or 2.8%. Selling and distribution
expenses as a percentage of sales have increased to
12.7% in 2020 compared to 10.9% in 2019 – a result of
the decline in sales.
General and administrative expenses for Quarter
4, 2020 totaled $5,950, a decrease of $1,565 when
compared to Quarter 4, 2019 costs of $7,515. The prior
year abnormal expected credit loss provisions primarily
related to our international operations account for the
current year decrease. General and administrative
expenses as a percentage of sales have decreased to
7.4% in 2020 compared to 8.3% in 2019.
Quarter 4, 2020 net finance and other costs were
$582 compared to $369 for the same quarter in 2019, an
increase of $213 or 57.7%. The Quarter 4, 2020 interest
cost decreased from $679 in Quarter 4, 2019 to $296 in
Quarter 4, 2020 – a result of lower bank indebtedness
levels. Foreign exchange loss in Quarter 4, 2020 was
$401 compared to a foreign exchange gain of $154 in
Quarter 4, 2019.
Earnings from operations for the quarter were
positively impacted by lower general and administrative
expenses, offset by decreased sales, less gross margin
dollar contribution and higher selling and distribution
expenses. Quarter 4, 2020 earnings from operations
increased $1,185 from earnings of $5,862 in Quarter 4,
2019 to earnings of $7,047 in Quarter 4, 2020.
Quarter 4, 2020 income tax expense was $2,433 on
earnings before income taxes of $6,465 (an effective tax
rate of 37.6%) as compared to an income tax expense
of $1,642 on income before income taxes of $5,493
(an effective tax rate of 29.9%) in Quarter 4, 2019 – an
increase of $791.
Net earnings from continuing operations for
Quarter 4, 2020 was $4,032 compared to net income
of $3,851 in Quarter 4, 2019 – an improvement of $181.
Cash provided by operations for Quarter 4, 2020 was
$8,073 versus $16,447 in Quarter 4, 2019 – a decrease of
$8,374. A decrease in the cash generated from operations
37
ANNUAL REPORT 2020DOLLARS IN THOUSANDS UNLESS OTHERWISE STATED
MANAGEMENT’S DISCUSSION AND ANALYSIS
was the main driver of the lower value for the quarter.
Quarter 4, 2020 had non-cash working capital usage
of $825, compared to Quarter 4, 2019 were non-cash
working capital generated by operations was $7,926.
Overall operating debt balance, net of cash, was
$1,278 as at December 31 2020, a decrease of $8,048 as
compared to a net debt balance of $9,326 as at December
31, 2019, primarily reflecting improved profitability, cash
generated from operations and the receipt of the CEWS
government subsidy.
Capital resources and liquidity
The Company continued to focus on generating cash from
operations, debt management, investment and liquidity.
Cash provided from operating activities during 2020
was $19,683 versus $17,810 in 2019, an increase in cash
generated of $1,873. This increase in cash generated
from operating activities was due to higher net income.
Non-cash working capital used cash of $4,992 in 2020
versus $6,374 in 2019, resulting in a decrease of $1,382
from 2019. The change in non-cash working capital for
2020 was primarily a result of decreases in accounts
receivable and inventory, offset by decreases in accounts
payable and foreign exchange adjustments.
Accounts receivable finished the year at $53,078
as compared to $64,004 as at December 31, 2019,
a decrease of $10,926 – a result of lower sales and
higher collections in Quarter 4, 2020 compared to
Quarter 4, 2019. HPS’ days sales outstanding ratio
remains below industry standards, which can be
attributed to effective credit policies and tightly
managed accounts receivable administration.
Inventories finished the year at $49,206 as at
December 31, 2020, versus $50,926 as at December 31,
2019, a decrease of $1,720. The higher inventory levels in
2019 were attributed to a buildup of inventory to satisfy
a predicted increase in 2020 sales volume.
Accounts payable and accrued liabilities, excluding
derivative liability, decreased by $10,597 finishing at
$44,227 as at December 31, 2020 compared to $54,824
at the end of 2019. The change in accounts payable is
related to the timing of purchases from and payments
to suppliers.
Net income taxes payable were $454 (income
taxes receivable of $488 less income taxes payable
of $942) as at December 31, 2020, versus net income
taxes receivable of $571 (income taxes receivable
of $1,626 less income taxes payable of $1,055) as at
December 31, 2019 – a change of $1,025 due to increased
Quarter 4, 2020 earnings.
Cash used in financing activities was $24,184 in 2020,
compared to cash used of $7,393 in 2019, a change of
$16,791. The change in the balance can be attributed
to higher repayment of bank operating lines in 2020
compared to 2019 and higher dividend payments.
Cash used in investing activities in 2020 increased
$1,779 from $2,968 in 2019 to $4,747 in 2020, a result of
the prior year including proceeds on disposal of Italian
assets of $1,583 which offset cash outflows in this
category. There was an increase in capital spending
for property, plant and equipment of $540 over the prior
year, totaling $4,222 in 2020 – compared to $3,682
for 2019. The Company continues to invest in the
areas of manufacturing processes and capabilities
as well as information technology, product and
research development.
Bank operating lines of credit finished the year at
$16,073 as at December 31, 2020, compared to $32,697
as at December 31, 2019 resulting in a large decrease
of $16,624 in the year. The Company had cash and cash
equivalent balances of $14,795 as at December 31, 2020
as compared to $23,371 as at December 31, 2019.
Overall operating debt balance, net of cash, was
$1,278 as at December 31 2020, an improvement of
$8,048 as compared to a net debt balance of $9,326
as at December 31, 2019, primarily reflecting improved
profitability and cash generated from operations.
All bank covenants were met as at December 31, 2020,
and the Company was in compliance with its covenants
throughout the year.
The Company’s liquidity is strong. HPS is well funded,
with sufficient cash and debt capacity to fund its
operating activities, investments and strategic growth
initiatives. The Company has several alternatives to
fund future capital requirements, including its existing
cash position, credit facility, future operating cash flows
and debt financing. The Company continually evaluates
these options to ensure that the appropriate mix of
capital resources is effectively managed for current and
future requirements.
The Company has outstanding capital expenditure
commitments of $1,029 primarily for manufacturing
efficiency improvement projects and capacity expansion.
These ongoing projects are in support of future business
development and growth.
Additional details of our change in non-cash
working capital can be found in note 27 in the Notes to
Consolidated Financial Statements contained in our 2020
Annual Report.
38
HAMMOND POWER SOLUTIONS INC.
Credit agreement
The Company’s current credit agreement consists of a
$40,000 U.S. revolving credit facility and a $10,000 U.S.
delayed draw credit facility. The revolving borrowing can
be comprised of U.S. Prime Borrowings, Canadian Prime
Borrowings, CDOR Borrowings or LIBOR Borrowings.
This agreement aligns our Canadian and U.S. banking
requirements, supports our hedging strategies and
provides financing for our operational requirements
and capital for our strategic initiatives. The Company
has access to a 4,070 EUR facility that matures in May
2021, made up of a 3,750 EUR revolver and 250 EUR
overdraft facility, as well as a 70 EUR letter of credit
line. Hammond Power Solutions Private Limited (“HPS
India”) maintains a demand credit facility of 375,000
INR, consisting of a 131,000 INR short-term working
capital demand loan facility and a 244,000 INR bank
guarantee and letters of credit facility.
Based on exchange rates in effect at December 31,
2020, the combined Canadian dollar equivalent available
prior to any utilization of these facilities was $76,477.
The Company’s current North American credit
agreement matures in June 2021. The Company is
currently in the process of finalizing a new 5-year
agreement.
Contractual obligations
The following table outlines payments due for each of
the next 5 years and thereafter related to debt, lease,
purchase and other long-term obligations.
2021
2022
2023
2024
2025 &
Thereafter
Total
Accounts payable
and accrued liabilities
$ 44,227
Capital expenditure
purchase commitments
1,029
Operating lines of credit
16,073
Derivative liability
1,952
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
$ 44,227
1,029
16,073
1,952
Lease liabilities
2,719
2,622
1,848
1,675
1,577
10,441
Total
$ 66,000 $ 2,622 $ 1,848 $ 1,675
$ 1,577
$ 73,722
Hammond Power Solutions S.p.A. – Italy
As part of the VPI asset sale agreement, the lease
agreement relating to the Meledo, Italy building includes
a put and call sale option related to the leased premises,
exercisable within 60 days after September 30, 2023. The
call option grants the purchaser an option to purchase
the premises from the Company for consideration equal
to 2,225 EUR. The plant purchase price will be reduced
by 50% of the monthly rent installments received, to
a maximum of 375 EUR (approximately $573). If the
purchaser does not execute the call option HPS can
exercise its put option which grants HPS an option to
sell the plant to the purchaser for consideration equal
to the same plant purchase price. If the purchaser
rejects the put option, the purchaser will pay 500 EUR
(approximately $764) as liquidated damages.
Contingent liabilities
In June 2017, the Corporation received notice of an
environmental claim from the owner of a property
located nearby to a property that was once partially
owned by the Corporation. At this time the Company
feels that there is no merit to the claim.
Management is not aware of any further contingent
liabilities.
Regular quarterly dividend
The Board of Directors of HPS declared a 21.4% increase
in the quarterly cash dividend to eight and a half cents
($0.085) per Class A Subordinate Voting Share of HPS
and of eight and a half cents ($0.085) per Class B
Common Share of HPS.
The Quarter 1 dividend was paid on March 26, 2020
to shareholders of record at the close of business on
March 19, 2020 – the ex-dividend date was March 18,
2020. The Quarter 2 dividend was paid on June 18, 2020
to shareholders of record at the close of business on
the 11th day of June 2020 – the ex-dividend date was
June 10, 2020. The dividend for Quarter 3 was paid on
September 28, 2020 to shareholders of record at the close
of business on September 21, 2020 – the ex-dividend
date was September 18, 2020. The Quarter 4 dividend
was paid on December 9, 2020 to shareholders of record
at the close of business on December 2, 2020 – the
ex-dividend date was December 1, 2020.
In 2020, the Company has paid a total cash dividend
of thirty-four cents ($0.34) per Class A Subordinate
Voting Share and thirty-four cents ($0.34) per Class B
Common Share compared to 2019, the Company had
paid a total cash dividend of twenty-eight cents ($0.28)
per Class A Subordinate Voting Share and twenty-eight
cents ($0.28) per Class B Common Share.
39
ANNUAL REPORT 2020DOLLARS IN THOUSANDS UNLESS OTHERWISE STATED
MANAGEMENT’S DISCUSSION AND ANALYSIS
Controls and procedures
The Chief Executive Officer and the Chief Financial
Officer are responsible for establishing and maintaining
disclosure controls and procedures and for establishing
and maintaining adequate internal controls over financial
reporting. The control framework used in the design of
disclosure controls and procedures and internal control
over financial reporting is the 2013 Internal Control
Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission
(“2013 COSO Framework”). Our internal control system
was designed to provide reasonable assurance to our
Management and Board of Directors regarding the
preparation and fair presentation of published financial
statements in accordance with International Financial
Reporting Standards. All internal control systems, no
matter how well designed, have inherent limitations,
therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to
financial statement preparation and presentation.
As at December 31, 2020, the Company conducted
an evaluation, under the direction and supervision of
the Chief Executive Officer and the Chief Financial
Officer, of the effectiveness of the design and operation
of our disclosure controls and procedures. Based
on this evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that as of
December 31, 2020 such disclosure controls and
procedures were operating effectively.
The Company aggressively bolstered its internal
controls of the operation, including the implementation
of the Enterprise Resource Planning System (“ERP”)
system and additional third party audits.
Internal controls over financial reporting
Management is responsible for establishing and
maintaining adequate internal controls over financial
reporting. Our internal control system was designed
to provide reasonable assurance to our Management
and Board of Directors regarding the preparation and
fair presentation of published financial statements
in accordance with International Financial Reporting
Standards. All internal control systems, no matter how
well designed, have inherent limitations. Therefore, even
those systems determined to be effective can provide
only reasonable assurance with respect to financial
statement preparation and presentation.
Canadian Securities Administrators require that
companies certify the effectiveness of internal controls
over financial reporting. It also requires a company to
use a control framework such as the COSO Framework
to design internal controls over financial reporting. As
well, the threshold for reporting a weakness of internal
controls over financial reporting should be of a “material
weakness” rather than “reportable deficiency.” HPS has
designed its internal controls in accordance with the
COSO Framework and has carried out retesting in 2020,
which was completed in the fourth quarter.
As of December 31, 2020 Management, with the
supervision and participation of the Chief Executive Officer
and Chief Financial Officer, assessed the effectiveness of
the Company’s internal control over financial reporting.
Based on that assessment, the Chief Executive Officer
and Chief Financial Officer have concluded that the
internal controls are effective and that there were no
material weaknesses in the Company’s internal control
over financial reporting as of December 31, 2020.
Changes in internal control over financial reporting
and disclosure controls and procedures
During 2020 there were no material changes identified
in HPS’ internal controls over financial reporting that
had materially affected, or were reasonably likely to
materially affect HPS’ internal control over financial
reporting. HPS does carry out ongoing improvements to
its internal controls over financial reporting but nothing
considered at a material level. .
Subsequent events
Dividends
On March 5, 2021, the Company declared a dividend of
eight and a half cents ($0.085) per Class A subordinate
voting shares of HPS and a quarterly cash dividend of
eight and a half cents ($0.085) per Class B common
shares of HPS payable on March 25, 2021 to shareholders
of record at the close of business on March 18, 2021.
The ex-dividend date is March 17, 2021.
Risks and uncertainties
The Company’s goal is to proactively manage risks in
a structured approach in conjunction with strategic
planning, with the intent to preserve and enhance
shareholder value. However, as with most businesses,
HPS is subject to a number of marketplace, industry
and economic-related business risks, which could
cause our results to vary materially from anticipated
future results. The Company is acutely cognizant of
40
HAMMOND POWER SOLUTIONS INC.
these risks and continually assesses the current and
potential impacts that they have on the business. HPS
continuously strives to curtail the negative impact of
these risks through diversification of its core business,
market channel expansion, breadth of product offering,
geographic diversity of its operations and business
hedging strategies.
Coronavirus (COVID-19 – Business Disruption/
Interruption
Markets, governments and health organizations around
the world are working to contain the COVID-19 pandemic.
COVID-19 presents a wide range of potential issues
or complications for the Company, most of which the
Company is not able to know the full extent of.
The following is a summary of what the Company has
experienced, or believes may impact their business as
a result of COVID-19:
• Disruptions to business operations resulting from
quarantines of employees, customers, suppliers and
third party service providers in areas affected by the
pandemic;
• Disruptions to business operations resulting from
travel restrictions;
• Disruptions to business operations resulting from
government mandated lockdowns;
• Uncertainty around the duration of the virus’ impact;
• Change in classification of essential services, requiring
HPS to shutdown operations; and
• Availability of the COVID-19 vaccine in jurisdictions
where HPS operates.
Currently, COVID-19 has been, and will continue to be,
a material disruption to the Company’s business. Our
operations in Canada, the U.S. and Mexico have been
designated as “essential service” businesses. Our Indian
operations were not operating from March 24, 2020 to
May 2, 2020 as the government had imposed a 100%
lockdown of the country, shutting down all businesses.
The Company has seen significant reductions in sales
in the U.S., Canadian and Indian markets. Due to the
uncertainty and unpredictability of the impacts of the
COVID-19 pandemic on the business operations, the
uncertainty of governmental and health authorities’
legislation, the full negative financial impact of the
unprecedented pandemic will be not be fully known until
vaccines are widely available and the economy begins
to recover.
Other Business Risks
If any of the following risks were to occur they could
materially adversely affect HPS’ financial condition,
liquidity or results of operations.
These risks include:
Market supply and demand impact on commodity prices
An area that has a definite impact on the Company’s costs
and earnings is the cyclical effects and unprecedented
market cost pressures of both copper commodity and
steel pricing in the global markets. There is a risk in the
ability of recouping rapid escalating commodity costs
through selling price increases expediently. This risk
is mitigated through strategic supply line agreements
and alliances in place with major steel suppliers to
ensure adequate supply, competitive market pricing and
implementing market specific selling price increases.
We may not realize all of the anticipated benefits of our
acquisitions, divestitures, joint ventures or strategic
initiatives, or these benefits may take longer to realize
than expected.
In order to be profitable, the Company must successfully
execute upon its strategic initiatives and effectively
manage the resulting changes in its operations. The
Company’s assumptions underlying its strategic plans
may be subjective, the market may react negatively to
these plans, and HPS may not be able to successfully
execute these plans, and even if successfully executed,
its actions may not be effective or may not lead to the
anticipated benefits within the expected time frame.
These strategic initiatives can include acquisitions and
joint ventures. To be successful, management will conduct
due diligence to identify valuation issues and potential
loss contingencies, negotiate transaction terms, complete
complex transactions and manage post-closing matters
such as the integration of acquired startup businesses.
Management’s due diligence reviews are subject to the
completeness and accuracy of disclosures made by third
parties. The Company may incur unanticipated costs or
expenses following a completed acquisition, including
post-closing asset impairment charges, expenses
associated with eliminating duplicate facilities, litigation
or other liabilities.
Many of the factors that could have an adverse impact
will be outside of management’s control and could
result in increased costs and decreases in the amount
of expected revenues and diversion of management’s
time and attention. Failure to implement an acquisition
strategy, including successfully integrating acquired
businesses, could have an adverse effect on our business,
financial condition and result of operations.
41
ANNUAL REPORT 2020DOLLARS IN THOUSANDS UNLESS OTHERWISE STATED MANAGEMENT’S DISCUSSION AND ANALYSIS
We sell to customers around the world and have global
operations and, therefore, are subject to the risks of
doing business in many countries.
We do business in a host of countries around the world.
Approximately 70% of our sales were to customers outside
of Canada. In addition, a number of our manufacturing
operations, suppliers and employees are located in many
places around the world. The future success of our
business depends in large part on growth in our sales
in non-Canadian markets. Our global operations are
subject to numerous financial, legal and operating risks,
such as political and economic instability; prevalence
of corruption in certain countries; enforcement of
contract and intellectual property rights and compliance
with existing and future laws, regulations and policies,
including those related to tariffs, investments, taxation,
trade controls, product content and performance,
employment and repatriation of earnings.
Our global business translates into conducting business
in various currencies, all of which are subject to
fluctuations.
HPS’ global footprint exposes the Company to currency
fluctuations and volatility and, at times, has had a
significant impact on the financial results of the Company.
The Company’s functional currency is the Canadian
dollar with its operating results reported in Canadian
dollars. A significant portion of Company sales and
material purchases are denominated in U.S. dollars.
There is a natural hedge, as sales denominated in U.S.
dollars are partially offset by the cost of raw materials
purchased from the U.S., and commodities tied to U.S.
dollar pricing. A change in the value of the Canadian
dollar against the U.S. dollar will impact earnings,
significantly at times. Generally, a lower value for the
Canadian dollar compared to the U.S. dollar will have
a beneficial impact on the Company’s results, while a
higher value for the Canadian dollar compared to the
U.S. dollar will have a corresponding negative impact
on the Company’s profitability.
HPS has partially reduced the impact of foreign
exchange fluctuations by increasing our U.S. dollar
driven manufacturing output, periodically instituting
price increases to help offset negative changes and
entering into forward foreign exchange contracts.
Worldwide HPS is subject to, and required to comply
with, multiple income and other taxes, regulations and
is exposed to uncertain tax liabilities risk.
The Company operates and is subject to income tax and
other forms of taxation in numerous tax jurisdictions.
Taxation laws and rates, which determine taxation expenses,
may vary significantly in different jurisdictions, and legislation
governing taxation laws and rates is also subject to change.
Therefore, the Company’s earnings may be impacted by
changes in the proportion of earnings taxed in different
jurisdictions, changes in taxation rates, changes in estimates
of liabilities and changes in the amount of other forms
of taxation. Tax structures are subject to review by both
domestic and foreign taxation authorities. The determination
of the consolidated tax provision and liabilities requires
significant judgment. Tax filings are subject to audits,
which could materially change the amount of current and
deferred income tax assets and liabilities.
We face the potential harms of natural disasters,
pandemics, acts of war, terrorism, international conflicts
or other disruptions to our operations.
Our business depends on the movement of goods around
the world. Natural disasters, pandemics, acts or threats
of war or terrorism, international conflicts, political
instability and the actions taken by governments could
cause damage to or disrupt our business operations, our
suppliers or our customers and could create economic
instability. Although it is not possible to predict such
events or their consequences, these events could
decrease demand for our products or make it difficult
or impossible to deliver our products.
The U.S. political uncertainty and potential for changes
in the business environment can lead to legislative
changes that could impact business.
The results of the last U.S. election have created a number
of geopolitical risks that could be challenging for the
Company. The impact of these political changes can be
difficult to predict and can have a pervasive impact on
the global business climate. Changes in political leaders
can impact trade relations as well as taxes and/or duties.
HPS’ current structure includes a significant amount of
business that crosses borders and any changes in the
current trade structure could have a material impact
for us. HPS’ global footprint will be critical to mitigating
any impact for political changes that would modify the
current trade relationships.
Our industry is highly competitive.
HPS faces competition in all of our market segments.
Current and potential competitors may have greater brand
name recognition, more established distribution networks,
access to larger customer bases and substantially
42
HAMMOND POWER SOLUTIONS INC. greater financial, distribution, technical, sales and market,
manufacturing and other resources than HPS does. As a
result, those competitors may have advantages relative to
HPS; including stronger bargaining power with suppliers
that may result in more favourable pricing, the ability
to secure supplies at time of shortages, economies of
scale in production, the ability to respond more quickly
to changing customer demands and the ability to devote
great resources to the development, promotion and
sales of their products and services. If HPS is unable to
compete effectively, it may experience a loss of market
share or reduced profitability. We expect the level of
competition to remain high in the future.
Our business is highly sensitive to global and regional
economic conditions in the industries we serve.
Current global economic conditions influence the
Company’s focus, direction, strategic initiatives and
financial performance. To address the current uncertainty,
we are focusing our efforts on projects that will increase
our market reach, advance our cost competiveness,
expand capacity and improve our manufacturing flexibility.
The Company believes that being an agile organization
will hold even greater importance in order to respond
quickly to both unexpected opportunities and challenges.
HPS’ management believes that the key to expanding
our market share during this economic slowdown is
growing our access to a variety of domestic and global
markets. This will be achieved through our current and
new OEM and distributor channels.
The disruption to businesses that can come from
unpredictable weather can have an impact on sales
volume as customer projects can be delayed or cancelled.
Extreme weather conditions such as heavy rains, flooding,
snowfall, tornadoes and hurricanes can potentially have
a negative impact on the Company’s sales trends and
booking rates. When these conditions are present, the
Company may see short-term effects of such occurrences
due to their unpredictability. This may impact delivery
and capacity requirements.
The business practice of extending credit to customers
can lead to a risk of uncollectability.
A substantial portion of the Company’s accounts receivable
are with customers in manufacturing sectors and are
subject to credit risks normal to those industries. The
Company’s expansion into emerging markets increases
credit risk. This risk is partially mitigated by managements
credit policy under which each new customer is analysed
individually for creditworthiness before the Group’s
standard payment and delivery terms and conditions are
offered. The Group’s review includes external ratings, if
they are available, financial statements, credit agency
information, industry information and in some cases
bank references. Sale limits are established for each
customer and reviewed quarterly. Any sales exceeding
those limits require approval from Executive management.
Although the Company has historically incurred very low
bad debt expense, the current economic environment
conditions elevate this exposure.
Risk of Cyberattack
Globally there have been increased incidences of outside
cyberattacks and viruses on companies’ information
infrastructure and technologies. This risk is reduced
through a number of initiatives to mitigate exposure.
Off-balance sheet arrangements
The Company has no off-Balance Sheet arrangements,
other than capital commitments disclosed in note 15
in the Notes to the Consolidated Financial Statements
contained in our 2020 Annual Report.
Transactions with related parties
The Company had transactions with related parties
in 2020, as disclosed in note 25 in the Notes to the
Consolidated Financial Statements contained in our
2020 Annual Report.
Proposed transactions
The Company had no proposed transactions as at
December 31, 2020. The Company continues to evaluate
potential business expansion initiatives in accordance
with its long-term growth strategy.
Financial instruments
The Company’s financial instruments consist of cash
and cash equivalents, accounts receivable, long-term
lease receivable, note receivable, bank operating lines
of credit, accounts payable and accrued liabilities and
the following derivative instruments:
At December 31, 2020, the Company had outstanding
foreign exchange contracts in place for 17,500 EUR,
$12,500 USD and 330,000 INR – which were implemented
as an economic hedge against translation gains and losses
on inter-company loans and $46,500 USD to economically
43
ANNUAL REPORT 2020DOLLARS IN THOUSANDS UNLESS OTHERWISE STATED MANAGEMENT’S DISCUSSION AND ANALYSIS
hedge the U.S. dollar denominated accounts payable in
the Canadian operations of HPS. The Company had total
outstanding foreign exchange contracts in place as at
December 31, 2019 for 17,200 EUR and $12,000 USD and
330,000 INR as economic hedges against translation
gains and losses on inter-company loans and $52,000
USD to economically hedge the U.S. dollar denominated
accounts payable in the Canadian operations.
Further details regarding the Company’s financial
instruments and the associated risks are disclosed
in note 29 in the Notes to the Consolidated Financial
Statements contained in our 2020 Annual Report.
Critical accounting estimates
The preparation of the Company’s consolidated financial
statements requires Management to make estimates
and assumptions that affect the reported amounts
of assets, liabilities, revenues and expenses and the
disclosure of contingent assets and liabilities. These
estimates are based upon Management’s historical
experience and various other assumptions that are
believed by Management to be reasonable under
the circumstances.
Such assumptions and estimates are evaluated on an
ongoing basis and form the basis for making judgments
about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results
could differ from these estimates.
The Company conducts its annual impairment
assessment of goodwill, intangible assets and property,
plant and equipment in the fourth quarter of each year,
which corresponds with its annual planning cycle, and
whenever events or changes in circumstances indicate
that the carrying amount of an asset or Cash Generating
Unit (“ CGU”) may not be recoverable. The Company did
not identify any triggering events during the course of
2020 indicating that the carrying amount of its assets
and CGUs may not be recoverable, which would require
the performance of an impairment test for those CGUs
which did not contain goodwill.
Outstanding share data
Details of the Company’s outstanding share data as of
December 31, 2020, are as follows:
8,966,624
2,778,300
11,744,924
Class A Shares
Class B Common Shares
Total Class A and B Shares
There have been no material changes to the outstanding
share data as of the date of this report.
New accounting pronouncements
Definition of a Business (Amendments to IFRS 3)
On October 22, 2018, the International Accounting
Standards Board (“IASB”) issued amendments to IFRS
3 Business Combinations that seeks to clarify whether a
transaction results in an asset or a business acquisition.
The amendments apply to businesses acquired in annual
reporting periods beginning on or after January 1, 2020.
Earlier application is permitted.
The amendments include an election to use a
concentration test. This is a simplified assessment
that results in an asset acquisition of substantially all
of the fair value of the gross assets is concentrated
in a single identifiable asset or as a group of similar
identifiable assets. If the preparer chooses not to
apply the concentration test, or the test is failed, then
the assessment focuses on the existence of a
substantive process.
The Company adopted the amendments in its
financial statements for the annual period beginning
on January 1, 2020. The adoption of the amendments
did not have a material impact on the consolidated
financial statements.
New accounting pronouncements to be adopted
The IASB has issued the following standards,
interpretations and amendments to standards that
are not yet effective, have not yet been adopted by the
Company and are not expected to have a material impact
on the consolidated financial statements.
The Company intends to adopt the following
amendments in its financial statements for the annual
period beginning on January 1, 2022:
• Property, Plant and Equipment – Proceeds before
Intended Use (Amendments to IAS 16)
• Onerous Contracts – Cost of Fulfilling a Contract
(Amendments to IAS 37)
• Reference to the Conceptual Framework (Amendments
to IFRS 3)
• Annual Improvements to IFRS Standard 2018-2020
The Company intends to adopt the following amendment
in its financial statements for the annual period beginning
on January 1, 2023:
• Classification of Liabilities as Current or Non-Current
(Amendments to IAS 1)
The Company intends to adopt the following amendment
once an effective date has been announced:
44
HAMMOND POWER SOLUTIONS INC.
• Sale or Contribution of Assets Between an Investor
and its Associate or Joint Venture
Strategic direction and outlook
HPS has a rich and extensive history of growth, innovation
and resilience. As an essential service HPS has always
had to ensure they were ready to respond to their
shareholders, customers and employees.
For our shareholders, HPS has provided:
• Escalating growth of the NAED channel;
• New global customers;
• Expanded relationships with existing customers;
• Capital investment in North American manufacturing
facilities in Canada, the U.S. and Mexico;
• Establishment of a state-of-the-art core manufacturing
facility in Mexico;
• Healthy gross margin rates, strong earnings per share,
solid cash generation; and
• Quarterly dividends paid with an attractive yield.
For our customers, HPS has provided:
• Compliance with regulatory changes;
• New product development;
• Expanded product offering using cast resin technology;
• Superior customer service;
• Accurate ship on time; and
• Competitive pricing for our products.
For our employees, HPS has provided:
• The tools to facilitate their best work, which includes
development and further implementation of our ERP
system to enhance availability of information and
streamline processes;
• Space and time for innovation and development;
• Safety in the workplace, especially during COVID-19;
and
• Ability for remote work, where able, to help manage
school closures and health concerns.
Hammond Power Solutions has a history of strength,
perseverance and depth. We have navigated through
difficult and fluctuating economic times, increased
globalization, adapted to changes in customers and
markets and have experienced significant advances in
technology. Most recently HPS has steered through the
COVID-19 pandemic. HPS has framed these challenges
as opportunities and developed strategies to address
these rapid changes while continuing to grow and expand.
HPS is aware that the global economy is vital to
maintaining competitiveness and market share growth.
The international expansion into India has allowed
HPS to expand product offerings and opened up
additional markets and customers that were previously
not accessible. These acquisitions also provided
HPS with cast resin technology, which has introduced
new markets.
The COVID-19 pandemic continues to have an
unprecedented impact on the global economy. The
extent of the impact or timeline is still not yet known, but
governmental decisions to declare a state of emergency
in a number of countries in which we operate had an
immediate impact on the economies of such countries.
The demand for our transformers particularly in North
America continues, but sales volumes have been and are
expected to be, tempered due to the economic impact
caused by the pandemic. Based on the foregoing, HPS
expects to see continued moderation and fluctuation
of revenues as well as a continuation of increases in
operational costs which had the effect of reducing HPS’
financial performance in 2020 and will continue to have
an impact into 2021. Our Canadian entities received a
government subsidy for eligible wages in Quarter 2-4,
2020 which offset some additional wages and operational
COVID-19 related costs and supported operational and
financial performance. The wage subsidy has been
extended into 2021 and the Company will continue to
monitor eligibility. HPS will remain cognizant of further
programs that may be announced.
The Company has implemented robust health and
safety precautions dedicated to providing a safe working
environment for our employees while continuing to
manufacture and serve our customers during this volatile
and unpredictable time.
As an essential service, the Company has continued
to remain open and producing to ensure our customers
have the transformers they need to fulfill the many
applications they are purchased for. HPS is committed
to managing the impact the pandemic will have on our
financial performance. The Company will maintain its
liquidity and balance sheet strength.
The implementation of our ERP system has allowed
HPS to enhance the availability and quality of information
accessible to support operational performance, improve
customer service, supplement strategic decision making
and audit and control. The ERP system implementation is
currently in progress at our operation in Granby Quebec,
an implementation project which began in Quarter 1,
45
ANNUAL REPORT 2020DOLLARS IN THOUSANDS UNLESS OTHERWISE STATED
MANAGEMENT’S DISCUSSION AND ANALYSIS
2020 and represents the Company’s final operation that
will be converted to our ERP platform. It is expected to
be fully implemented by the end of Quarter 2, 2021. The
consolidation to the ERP platform is an important step
towards providing one global, integrated, consistent
source of information and data.
HPS has modern manufacturing facilities throughout
the world and this continues to be enhanced through our
committed capital investment. HPS continues to focus
on customer service and growth – expanding existing
relationships as well as exploring new opportunities.
Past regulatory requirements to comply with the U.S.
Department of Energy (“DOE”) regulations and the
Canadian efficiency standard changes (“NRCan”)
have created opportunities for us to deliver energy
efficient, regulatory compliant transformers fulfilling
the needs of our customers. These regulation changes
have resulted in new product development and
manufacturing techniques.
HPS continues to have a strong reputation of being an
industry leader and is both operationally and financially
strong. HPS is well positioned to meet the evolving
needs of both our traditional markets while becoming
a leading player in a growing number of other market
sectors. We continue to be focused on escalation of
market share, improved sales growth from new product
development, geographic diversification, productivity
gains, cost reduction and capacity flexibility.
While HPS has experienced a number of successes
and challenges, the unpredictable and fluctuating global
economic climate has had a pervasive and persistent
impact on HPS’ profitability over a number of years. The
Company has also experienced the adverse impact of
variability of raw material commodity costs, unpredictable
foreign currency rates, fluctuating manufacturing
throughput and market pricing pressures. Through
HPS’ strategic projects and operational plans these
deterrents are being prudently managed.
HPS is confronting these challenges and continuously
building our competitive and strategic advantage while
being cognizant of the importance of our shareholders,
customers and employees.
For our shareholders, HPS is focusing on:
• Disciplined cost management initiatives to ensure
price competitiveness in the market;
• Cash flow generation;
• Capital investment; and
• Strategic planning.
For our customers, HPS is focusing on:
• Sales development;
• NAED channel expansion;
• Broadened product offering;
• Product development; and
• Bringing quality and value to all that we produce.
For our employees, HPS is focusing on:
• Investing in our employees, through leadership training
and development programs;
• Implementing a new Human Resource information
system to provide an in-house payroll system,
dynamic performance evaluation module, succession
planning, personal learning development and people
management tool;
• Relaunch of our internal continuous improvement
program, Transform, to further foster a culture of
innovation; and
• Ongoing support through the CEWS wage subsidy
where we qualify.
HPS’ strategic vision and operational initiatives have
supported our industry leadership, operational strength
and financial stability. The combination of our resilience,
drive, decades of experience, commitment, engineering
expertise, solid supplier relationships and a broad and
unique business perspective gained through our diverse
products, customers and markets are all key success
factors critical to our success.
As an essential service, HPS will continue to deliver
solid financial performance, provide a sustainable
return to our shareholders, support employees
well-being and growth and deliver long-term value to
all stakeholders. U
46
HAMMOND POWER SOLUTIONS INC. Selected Annual and Quarterly Information
(tabular amounts in thousands of dollars)
Annual Information (1)
Sales
Earnings from operations
EBITDA
Net earnings (loss)
Total assets
Non-current liabilities
Total liabilities
2016
2017
2018
2019
2020
274,793
301,750
314,082
358,792
322,097
10,873
14,356
1,793
14,470
23,069
6,114
13,779
17,915
(12,917)
20,543
28,175
11,607
22,041
29,482
14,062
205,177
192,449
205,527
214,953
189,394
4,131
84,524
3,641
77,438
2,528
96,793
11,271
105,186
8,329
75,478
Total shareholders’ equity attributable
to equity holders of the Company
120,441
114,848
108,734
109,767
113,916
Operating debt, net of cash
(11,318)
(16,983)
(17,056)
(9,326)
(1,278)
Cash provided by operations
Basic earnings (loss) per share
Diluted earnings (loss) per share
Dividends declared and paid
Average exchange rate (USD$=CAD$)
Book value per share
15,216
0.16
0.16
2,808
1.325
10.29
2019
1,032
0.53
0.52
2,809
1.298
9.80
6,474
(1.10)
(1.10)
2,818
1.294
9.26
17,810
19,683
0.99
0.99
3,287
1.327
9.36
2020
1.20
1.20
3,993
1.343
9.70
Quarterly Information
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Sales
84,690
91,937
91,502
90,653
88,420
75,393
78,115
80,169
Earnings from operations
EBITDA
Net earnings
Total assets
4,479
6,111
4,731
7,111
2,508
3,352
5,471
7,302
3,595
5,862
7,651
2,152
3,033
5,678
6,514
8,447
5,447
7,466
7,047
7,891
2,148
4,420
3,462
4,032
206,554
205,059
206,586
214,953
212,929
197,895
203,443
189,394
Non-current liabilities
10,914
10,558
9,947
11,271
9,729
9,039
8,558
8,329
Total liabilities
99,939
99,640
96,870
105,186
97,156
81,375
87,215
75,478
Total shareholders’ equity
attributable to equity
holders of the Company
106,615
105,419
109,716
109,767
115,773
116,520
116,228
113,916
Operating debt, net of cash
(16,588)
(18,582)
(22,678)
(9,326)
(18,356)
(12,906)
(4,790)
(1,278)
Cash (used) provided by
operations
Basic earnings per share
Diluted earnings per share
Dividends declared and paid
Average exchange rate
(USD$=CAD$)
2,316
507
(1,460)
16,447
(6,038)
7,229
10,419
8,073
0.20
0.20
822
0.25
0.25
821
0.27
0.27
821
0.27
0.27
823
0.18
0.18
998
0.38
0.38
999
0.30
0.30
998
0.34
0.34
998
1.330
1.338
1.320
1.320
1.339
1.391
1.335
1.309
Book value per share
9.09
8.99
9.33
9.36
9.86
9.92
9.90
9.70
(1) Balances for 2016 – 2017 not restated to reflect discontinued operations
47
ANNUAL REPORT 2020 Management’s Responsibility for Financial Statements
The Consolidated Financial Statements are the responsibility of the management of Hammond Power Solutions Inc. These statements have
been prepared in accordance with International Financial Reporting Standards (“IFRS”), 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 Consolidated Financial
Statements and other financial information contained in the report. In the preparation of these statements, estimates were 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 assurances 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 through the Audit Committee of the
Board, which is composed of all of the directors, of whom seven are 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.
William G. Hammond
Chairman of the Board
& Chief Executive Officer
Christopher R. Huether
Corporate Secretary
& Chief Financial Officer
March 25, 2021
To the Shareholders of Hammond Power Solutions Inc.
Opinion
We have audited the consolidated financial statements of Hammond Power Solutions Inc. (the Entity), which comprise:
the consolidated statements of financial position as at end of December 31, 2020 and end of December 31, 2019
•
the consolidated statements of operations for the years then ended
•
the consolidated statements of comprehensive income (loss) 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
Entity as December 31, 2020 and December 31, 2019, and its consolidated financial performance and its consolidated cash flows for the
years then ended in accordance with International Financial Reporting Standards (IFRS).
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards
are further described in the “Auditors’ Responsibilities for the Audit of the Financial Statements” section of our auditors’ report.
We are independent of the Entity in accordance with the ethical requirements that are relevant to our audit of the 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.
Key Audit Matters
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, 2020. 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 auditors’ report.
48
HAMMOND POWER SOLUTIONS INC.
Evaluation of the carrying value of goodwill for the India cash generating unit
Description of the matter
We draw attention to Notes 2(d)(ii), 3(g) and 12 of the financial statements. The goodwill balance is $10,908 thousand, of which, $8,728
thousand relates to the Hammond Power Solutions Private Limited (“India”) cash generating unit (“CGU”). The Entity conducts its annual
impairment assessment of goodwill on an annual basis or whenever events or changes in circumstances indicate that the carrying amount
of a CGU may not be recoverable. Performing impairment testing requires management to determine the estimated recoverable amount
of the relevant cash-generating units on the basis of projected future cash flows. The determination of the recoverable amount requires
management to make significant estimates and assumptions which include projected revenue, projected gross margin rates, terminal
growth rates, and the discount rate.
Why the matter is a key audit matter
We identified the evaluation of the goodwill impairment analysis for the India CGU as a key audit matter. The estimated recoverable amount
of the India CGU approximated its carrying value. This indicated a significant risk of misstatement as changes to certain significant
assumptions had a significant effect on the recoverable amount of the India CGU. As a result, significant auditor judgment was required
in evaluating the results of the audit procedures.
How the matter was addressed in the audit
The following are the primary procedures we performed to address this key audit matter:
• We compared the Entity’s historical projected revenue and projected gross margin rates to actual results to assess the Entity’s ability
to accurately project revenue and gross margin rates.
• We performed sensitivity analyses over the projected revenue and discount rate assumptions to assess their impact on the Entity’s
determination that the estimated recoverable amount of the CGU exceeded its carrying value.
• We evaluated the terminal growth rate by comparing to overall market and industry conditions and overall macro-economic conditions.
• We involved valuation professionals with specialized skills and knowledge, who assisted in evaluating the appropriateness of the discount
rate assumption used in the estimated recoverable amount, by comparing it to a discount rate range that was independently developed
using publicly available information and considering risks specific to the CGU.
the information included in Management’s Discussion and Analysis filed with the relevant Canadian Securities Commissions.
the information, other than the financial statements and the auditors’ report thereon, included in a document likely to be entitled “Annual
Other Information
Management is responsible for the other information. Other information comprises:
•
•
Report 2020”.
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.
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 and the Annual Report 2020 filed with the relevant
Canadian Securities Commissions as at the date of this auditors’ report. If, based on the work we have performed on this other information,
we conclude that there is a material misstatement of this other information, we are required to report that fact in the auditors’ report.
We have nothing to report in this regard.
Responsibilities of Management and Those Charged with Governance for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance with International Financial
Reporting Standards (IFRS), and for such internal control as management determines is necessary to enable the preparation of financial
statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible for assessing the Entity’s ability to continue as a going concern,
disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless management either
intends to liquidate the Entity or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Entity’s financial reporting process.
.
49
ANNUAL REPORT 2020DOLLARS IN THOUSANDS UNLESS OTHERWISE STATED
Auditors’ 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 auditors’ report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally
accepted auditing standards will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be
expected to influence the economic decisions of users taken on the basis of the financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain
professional skepticism throughout the audit.
We also:
• Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform
audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion.
• The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve
collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the Entity’s internal control.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures
made by management.
• Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence
obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Entity’s ability to
continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report
to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are
based on the audit evidence obtained up to the date of our auditors’ report. However, future events or conditions may cause the Entity
to cease to continue as a going concern.
• Evaluate the overall presentation, structure and content of the 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.
• 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 auditors’
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 auditors’ 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 of the audit resulting in this auditors
report is R. Alexander Dilts
March 25, 2021
Waterloo, Canada
.
50
HAMMOND POWER SOLUTIONS INC.
Consolidated Statements of Financial Position
(in thousands of dollars)
Current assets
Cash and cash equivalents
Accounts receivable (note 4)
Inventories (note 5)
Income taxes receivable
Prepaid expenses and other assets (note 6)
Total current assets
Non-current assets
Long-term lease and note receivable (note 7)
Property, plant and equipment (note 8)
Investment in properties (note 9)
Investment in joint venture (note 10)
Deferred tax assets (note 16)
Intangible assets (note 11)
Goodwill (note 12)
Total non-current assets
Total assets
Liabilities
Current liabilities
As at
December 31, 2020
December 31, 2019
$
14,795
$
53,078
49,206
488
2,687
23,371
64,004
50,926
1,626
2,657
120,254
142,584
3,201
30,372
3,649
13,300
1,809
5,901
10,908
69,140
3,180
32,468
3,709
13,428
1,944
6,331
11,309
72,369
$
189,394
$
214,953
Bank operating lines of credit (note 13)
$
16,073
$
Accounts payable and accrued liabilities (notes 17 and 29)
Income taxes payable
Provisions (note 20)
Current portion of lease liabilities (note 14)
46,179
942
1,811
2,144
32,697
56,216
1,055
1,710
2,237
Total current liabilities
Non-current liabilities
Provisions (note 20)
Deferred tax liabilities (note 16)
Long-term portion of lease liabilities (note 14)
Total non-current liabilities
Total liabilities
Shareholders’ Equity
Share capital (note 17)
Contributed surplus
Accumulated other comprehensive income
Retained earnings
Total shareholder’s equity
Commitments (note 15)
Subsequent events (note 32)
$
67,149
$
93,915
317
836
7,176
8,329
$
75,478
$
14,491
2,498
1,519
95,408
113,916
285
1,819
9,167
11,271
105,186
14,491
2,498
7,439
85,339
109,767
Total liabilities and shareholders’ equity
$
189,394
$
214,953
See accompanying Notes to Consolidated Financial Statements.
On behalf of the Board:
William G. Hammond
Chairman of the Board & Chief Executive Officer
David J. FitzGibbon
Chairman Audit Committee
51
ANNUAL REPORT 2020
Consolidated Statements of Operations
Years ended December 31, 2020 and 2019 (in thousands of dollars except for per share)
Sales (note 21)
Cost of sales (note 5 and note 22)
Gross margin
Selling and distribution (note 22)
General and administrative (note 22)
Earnings from operations
Finance and other costs
Interest expense
Foreign exchange gain
Share of income of investment in joint venture, net of tax
(note 10)
Other
Net finance and other costs
Earnings before income taxes
Income tax expense (recovery) (note 16):
Current
Deferred
2020
2019
$ 322,097
$ 358,782
235,103
86,994
40,217
24,736
270,823
87,959
41,476
25,940
$ 64,953
$ 67,416
22,041
20,543
1,247
(123)
(153)
104
1,075
1,739
(234)
(267)
117
1,355
20,966
19,188
7,827
(923)
6,904
6,425
(543)
5,882
Net earnings from continuing operations
$
14,062
$ 13,306
Loss from discontinued operations, net of tax (note 23)
Net earnings
–
14,062
(1,699)
11,607
Earnings per share (note 18)
Basic earnings per share
Diluted earnings per share
Basic earnings per share from continuing operations
Diluted earnings per share from continuing operations
See accompanying Notes to Consolidated Financial Statements.
$
$
$
$
1.20
1.20
1.20
1.20
$ 0.99
$ 0.99
$ 1.13
$ 1.13
52
HAMMOND POWER SOLUTIONS INC. Consolidated Statements
of Comprehensive Income
Years ended December 31, 2020 and 2019 (in thousands of dollars)
Net earnings
Other comprehensive loss
Items that will be recognized within profit and loss:
Foreign currency translation differences for foreign operations
Foreign currency translation differences for discontinued operations
Other comprehensive loss, net of income tax
Total comprehensive income
See accompanying Notes to Consolidated Financial Statements.
2020
2019
$ 14,062
$ 11,607
(5,920)
–
(5,920)
(7,456)
2,155
(5,301)
$
8,142
$
6,306
53
ANNUAL REPORT 2020 Consolidated Statements of Changes in Equity
Years ended December 31, 2020 and 2019 (in thousands of dollars)
SHARE
CAPITAL
CONTRIBUTED
SURPLUS
AOCI*
RETAINED
EARNINGS
TOTAL
SHAREHOLDERS’
EQUITY
Balance as at January 1, 2019
$ 14,217
$ 2,559
$ 12,740
$ 77,258
$ 106,774
Total comprehensive income for the period
Net income
Other comprehensive loss
Foreign currency translation differences related
to joint venture
Foreign currency translation differences
Total other comprehensive loss
Total comprehensive income for the period
Transactions with owners, recorded
directly in equity
Dividends to equity holders (note 17)
Stock options exercised (note 17)
Repurchase of shares (note 17)
Total transactions with owners
–
–
–
–
–
–
339
(65)
274
–
–
–
–
–
–
(49)
(12)
(61)
–
11,607
11,607
(869)
(4,432)
(5,301)
–
–
–
(5,301)
11,607
(869)
(4,432)
(5,301)
6,306
–
–
–
–
(3,287)
(3,287)
–
(239)
290
(316)
(3,526)
(3,313)
Balance at December 31, 2019
$ 14,491
$ 2,498
$ 7,439
$ 85,339
$ 109,767
Balance at January 1, 2020
$ 14,491
$ 2,498
$ 7,439
$ 85,339
$ 109,767
Total comprehensive income for the period
Net income
Other comprehensive loss
Foreign currency translation differences related
to joint venture (note 10)
Foreign currency translation differences
Total other comprehensive loss
Total comprehensive income for the period
Transactions with owners, recorded directly in equity
Dividends to equity holders (note 17)
Total transactions with owners
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
14,062
14,062
(281)
(5,639)
(5,920)
–
–
–
(5,920)
14,062
(281)
(5,639)
(5,920)
8,142
–
–
(3,993)
(3,993)
(3,993)
(3,993)
Balance at December 31, 2020
$ 14,491
$ 2,498
$ 1,519
$ 95,408
$ 113,916
54
*AOCI – Accumulated other comprehensive income
See accompanying Notes to Consolidated Financial Statements.
HAMMOND POWER SOLUTIONS INC.
2020
2019
$
14,062
$
11,607
Consolidated Statements of Cash Flows
Years ended December 31, 2020 and 2019 (in thousands of dollars)
Cash flows from operating activities
Net earnings
Adjustments for:
Share of income of investment in joint venture
Depreciation of property, plant and equipment and
right-of-use assets
Amortization of intangible assets
Gain on disposal of right to use asset
Provisions
Interest expense
Loss on disposition (note 23)
Income tax expense
Unrealized loss on derivatives
Share-based compensation expense
Change in non-cash working capital (note 27)
Cash generated from operating activities
Income tax paid
Net cash provided from operating activities
Cash flows from investing activities
Investment in joint venture (note 10)
Proceeds on disposal of property, plant and equipment
Repayment of note and lease receivable
Acquisition of property, plant and equipment
Acquisition of intangible assets
Cash used in investing activities
Cash flows from financing activities
Proceeds from issue of share capital
Cash dividends paid
Net (repayments) advances of bank operating lines of credit
Share repurchase (note 17)
Interest paid
Payment of lease liabilities (note 14)
Cash used in financing activities
Foreign exchange on cash and cash equivalents held in a foreign currency
(Decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
(153)
6,233
1,036
(10)
1,080
1,247
–
6,904
560
518
31,477
(4,992)
26,485
(6,802)
19,683
–
–
188
(4,222)
(713)
(4,747)
–
(3,993)
(16,624)
–
(917)
(2,650)
(24,184)
672
(8,576)
23,371
Cash and cash equivalents at end of period
$
14,795
$
(267)
6,151
1,097
–
(132)
1,745
687
5,882
2,997
364
30,131
(6,374)
23,757
(5,947)
17,810
(728)
1,583
182
(3,682)
(323)
(2,968)
290
(3,287)
96
(316)
(1,745)
(2,431)
(7,393)
377
7,826
15,545
23,371
55
ANNUAL REPORT 2020 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2020 and 2019 (tabular amounts in thousands of dollars, except share and per share amounts)
1.
Reporting entity
Hammond Power Solutions Inc. (“HPS” or “the Company”) is a corporation domiciled in Canada. The address of the
Company’s registered office is 595 Southgate Drive, Guelph, Ontario. The Company’s Class A subordinate voting shares
are listed on the Toronto Stock Exchange and trade under the symbol HPS.A.
The consolidated financial statements of the Company comprise the Company and its subsidiaries (together referred
to as the “Group” and individually as “Group entities”). The Group primarily is involved in the design and manufacture of
custom electrical magnetics, cast resin, custom liquid filled distribution and power transformers and standard electrical
transformers, serving the electrical and electronic industries. The Group has manufacturing plants in Canada, the United
States (“U.S.”), Mexico and India. The Company also holds a 55% economic interest in a joint venture located in Mexico
called Corefficient de R.L. de C.V. (“Corefficient”).
2.
Basis of preparation
(a)
Statement of compliance
These consolidated financial statements have been prepared in accordance with International Financial Reporting
Standards (“IFRS”), and were approved by the Board of Directors on March 25, 2021.
(b)
Basis of measurement
The consolidated financial statements have been prepared on the historical cost basis except for inventories carried at
net realizable value, derivative financial instruments and share based payments which are measured at fair value, and
the initial present value of finance leases receivable which are determined using cash flows implicit in the lease and a
discount rate reflecting the interest rate implicit in the lease.
(c)
Functional and presentation currency
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 income statement.
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 month during which the
transactions occurred. Foreign currency differences are recognized in other comprehensive income in the cumulative
translation account within accumulated other comprehensive income.
The functional currency of the Company’s Canadian operations and its subsidiaries are as follows:
Canadian & Subsidiary Operations
Functional Currency
Canada
United States
Mexico
Mexico – Corefficient
Italy
India
56
Canadian dollar
($)
U.S. dollar
Mexican Peso
U.S. dollar
Euro
Rupee
($ USD)
(Pesos)
($ USD)
(EU €)
(INR)
HAMMOND POWER SOLUTIONS INC.
For the years ended December 31, 2020 and 2019 (tabular amounts in thousands of dollars, except share and per share amounts)
(d)
Use of estimates and judgments
The preparation of the consolidated financial statements in conformity with IFRS requires Management to make
judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of
assets, liabilities, income and expenses. Actual results may differ from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are
recognized in the period in which the estimates are revised and in any future periods affected.
(i) Critical judgments in applying accounting policies
The following are the critical judgments, apart from those involving estimations, that Management has made in the
process of applying the Group’s accounting policies and that have the most significant effects on the amounts recognized
in the consolidated financial statements.
Cash generating units
As indicated in note 3(g) and 3(k); the Group conducts its impairment tests at the individual asset level or, where the
recoverable amount cannot be determined for an individual asset, or for goodwill, at the cash generating unit (CGU) level.
The Group defines its CGUs based on the way it monitors and derives economic benefits from the acquired goodwill and
intangibles. A cash-generating unit is the smallest group of assets that generates cash inflows that are largely independent
of the cash inflows from other assets or groups of assets. The identification of a cash-generating unit involves judgment.
The Company has defined its cash generating units primarily as each manufacturing and contract manufacturing
location, due to the fact that each location is managed separately and has its own dedicated human resources and
property, plant and equipment. Each manufacturing facility produces products largely independent of the other facilities
and is ultimately responsible for producing products that generate revenue.
The Company monitors the performance of each manufacturing unit through the use of profitability analysis, and also
considers the profitability of each manufacturing unit relative to the Company’s business plan.
Initial lease term
The Group leases certain manufacturing facilities, warehouse facilities, vehicles and other assets. In determining the value
of a right-of-use asset and lease liability, IFRS 16 requires the Group to determine the lease payments to be made over
the initial term of the lease, including renewal options which are reasonably certain to be exercised. Such payments are
then discounted based on the interest rate implicit in the lease or the Group’s incremental borrowing rate. In determining
the initial lease term, Management makes an assessment of the renewal periods available to the Group within each lease
and evaluates the likelihood and corresponding time horizon of available renewal options. Such assessments involve
judgment and ultimately may differ from the terms of leases actually experienced.
Operating segments
An operating segment is a component of an entity that engages in business activities from which it may earn revenues
and incur expenses, whose operating results are regularly reviewed by the entity’s chief operating decision maker to make
decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial
information is available. The determination of operating segments involves judgment. Management has determined that
the Group operates as a single operating segment, being the design, manufacture and sale of transformers.
(ii) Key sources of estimation uncertainty
The following are the key sources of estimation uncertainty at the end of the reporting period that have a significant risk
of causing a material adjustment to the consolidated financial statements within the next twelve months.
57
ANNUAL REPORT 2020
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2020 and 2019 (tabular amounts in thousands of dollars, except share and per share amounts)
Recoverability of goodwill and intangible assets
The Group tests annually or more frequently if necessary, whether goodwill or other long-lived assets have suffered
any impairment in accordance with the accounting policy provided in note 3(k). Performing impairment testing requires
management to determine the estimated recoverable amount of the relevant cash-generating units on the basis of
projected future cash flows using internal business plans or forecasts, and discounting these cash flows to appropriately
reflect the time value of money.
The key assumptions made by management in deriving the recoverable amount are i) projected revenue, ii) projected
gross margin rates, iii) terminal growth rates, and iv) the discount rate.
Impairment assessments inherently involve judgment as to assumptions about expected future cash flows and the
impact of market conditions on those assumptions. Future events and changing market conditions may impact the
Company’s assumptions as to prices, costs or other factors that may result in changes in the Company’s estimates
of future cash flows. Failure to realize the assumed revenues at an appropriate gross margin or failure to improve the
financial results of a CGU could result in impairment losses in the CGU in future periods.
For assumptions relating to impairment testing, refer to note 12.
Provisions for warranty claims
The Group records a provision for warranties based on historical warranty claim information and anticipated warranty
claims, based on a weighted probability of possible outcomes.
The key assumptions made by management in recording the provision are i) warranty cost, ii) probability of claim, and
iii) quantum of units which may be subject to any warranty claim.
Quantifying provisions inherently involves judgement, and future events and conditions may impact these assumptions.
Differences in actual future experience from the assumptions utilized may result in a greater or lower warranty cost. For
further information on the Group’s provisions, refer to note 20.
3.
Summary of significant accounting policies:
The accounting policies set out below have been applied consistently to all periods presented in these consolidated
financial statements and by all Group entities.
(a)
Basis of consolidation
The consolidated financial statements include the accounts of Hammond Power Solutions Inc. and its wholly-owned
subsidiaries, Hammond Power Solutions, Inc., Hammond Power Solutions, S.A. de C.V., Delta Transformers Inc.,
Hammond Power Solutions Private Limited., Continental Transformers s.r.l., and its wholly-owned subsidiary, Hammond
Power Solutions S.p.A.
Joint operations arise from an arrangement in which the interested parties are bound by a contract which gives two or
more parties joint control of the arrangement, and those parties have rights to the assets and obligations for the liabilities
relating to the arrangement. The Company has a 50% interest in Glen Ewing Properties, an unincorporated co-tenancy.
The consolidated financial statements include the Group’s share of the entity’s assets, liabilities, revenue and expenses
with items of a similar nature on a line-by-line basis.
Joint ventures arise in which the interested parties are bound by a contract which gives two or more parties joint
control of the arrangement, and those parties have rights to the net assets of the arrangement. The Company’s interest
in Corefficient is considered to represent a joint venture. Interests in joint ventures are initially recognized at cost.
Subsequent to initial recognition, the consolidated financial statements include the Group’s share of the profit or loss and
other comprehensive income.
All significant inter-company transactions and balances have been eliminated.
58
HAMMOND POWER SOLUTIONS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2020 and 2019 (tabular amounts in thousands of dollars, except share and per share amounts)
(b)
Financial instruments
Financial assets and financial liabilities, including derivatives, are recognized on the consolidated statement of financial
position when the Group becomes a party to the financial instrument or derivative contract.
The Group classifies its financial assets and financial liabilities in the following measurement categories i) those to be
measured subsequently at fair value (either through other comprehensive income or through profit or loss) and ii) those
to be measured at amortized cost. The classification of financial assets depends on the business model for managing the
financial assets and the contractual terms of the cash flows. Financial liabilities are classified as those to be measured
at amortized cost unless they are designated as those to be measured subsequently at fair value through profit or loss
(irrevocable election at the time of recognition). For assets and liabilities measured at fair value, gains and losses are
either recorded in profit or loss or other comprehensive income.
The Group reclassifies financial assets when and only when its business model for managing those assets changes.
Financial liabilities are not reclassified.
The Group has applied the following classifications:
• Cash and cash equivalents, accounts receivable and long-term lease and note receivable are classified as assets at
amortized cost and are measured using the effective interest rate method. Interest income is recorded in the
consolidated statement of operations, as applicable.
• Accounts payable, accrued liabilities and bank operating lines of credit are classified as other financial liabilities and
are measured at amortized cost using the effective interest rate method. Interest expense is recorded in the
consolidated statement of operations, as applicable.
• Derivatives are initially recognized at fair value on the date a derivative contract is entered into and are subsequently
re-measured to their fair value at the end of each reporting period. The accounting for subsequent changes in fair
value depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being
hedged and the type of hedge relationship designated. The Group has not historically designated such items as
hedging instruments and accordingly changes in fair value are recorded through the statement of operations.
All financial instruments are required to be measured at fair value on initial recognition, plus, in the case of a financial
asset or financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the
acquisition or issue of the financial asset or financial liability.
Transaction costs of financial assets and financial liabilities carried at fair value through profit or loss are expensed in
profit or loss. Financial assets with embedded derivatives are considered in their entirety when determining whether their
cash flows are solely payment of principal and interest.
Financial assets that are held within a business model whose objective is to collect the contractual cash flows, and
that have contractual cash flows that are solely payments of principal and interest on the principal outstanding are
generally measured at amortized cost at the end of the subsequent accounting periods.
The Group assesses all information available, including, on a forward-looking basis, the expected credit losses
associated with its assets carried at amortized cost. The impairment methodology applied depends on whether there
has been a significant increase in credit risk. To assess whether there is a significant increase in credit risk, the Group
compares the risk of a default occurring on the asset as at the reporting date with the risk of default as at the date of
initial recognition based on all information available, and reasonable and supportive forward-looking information. For
trade receivables only, the Group applies the simplified approach as permitted by IFRS 9 which requires expected lifetime
losses to be recognized from initial recognition of receivables.
(c)
Cash and cash equivalents
Cash and cash equivalents include cash and short-term deposits with maturities of three months or less.
(d)
Property, plant and equipment
Property, plant and equipment are shown in the statement of financial position at their historical cost. Cost includes
59
ANNUAL REPORT 2020
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2020 and 2019 (tabular amounts in thousands of dollars, except share and per share amounts)
expenditure that is directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the
cost of materials and direct labour, any other costs directly attributable to bringing the assets to a working condition for
their intended use, the costs of dismantling and removing the items and restoring the site on which they are 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 so as to
depreciate the initial cost down to the residual value over the estimated useful lives.
The estimated useful lives for the current and comparative periods are as follows:
• Buildings
14-30 years
• Leaseholds and improvements
lesser of 5 years and lease term
• Machinery and equipment
• Office equipment
• Land is not depreciated
4-10 years
4-10 years
Depreciation methods, useful lives and residual values are reviewed at each financial year-end and adjusted
if appropriate.
Assets included in construction-in-progress are not depreciated until the assets are available for use. Idle assets that
are available for use are depreciated.
(e)
Intangible assets other than goodwill
Intangible assets that are acquired either separately or in a business combination are recognized when they are identifiable
and can be reliably measured. Intangible assets are considered to be identifiable if they arise from contractual or other
rights, or if they are separable (i.e. they can be disposed of either individually or together with other assets). Intangible
assets comprise finite life intangible assets.
Finite life intangible assets are those for which there is an expectation of obsolescence that limits their useful
economic life or where the useful life is limited by contractual or other terms. They are amortized over the shorter of their
contractual or useful economical lives.
The estimated useful lives for the current and comparative periods are as follows:
• Customer lists and relationships
15 years
• Technology
• Software and other
• Branding
20 years
4 years
5 years
Amortization methods, useful lives and residual values are reviewed at each financial year-end and adjusted
if appropriate.
(f)
Research and development expenses
Research expenses are recognized as expenses in the financial period incurred.
Development expenses are recognized as an intangible asset if the Group can demonstrate the technical feasibility
of making the intangible asset ready for commissioning or sale; its intention to complete the intangible asset and use
or sell it; its ability to use or sell the intangible asset; how the intangible asset will generate future economic benefits;
the availability of the appropriate resources (technical, financial or other) to complete development and use or sell the
intangible asset; and its ability to provide a reliable estimate of expenses attributable to the intangible asset during
its development.
60
HAMMOND POWER SOLUTIONS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2020 and 2019 (tabular amounts in thousands of dollars, except share and per share amounts)
(g)
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 cash generating units 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.
The impairment tests are performed at the cash generating unit (“CGU”) level. The Group defines its CGUs based on
the way it monitors and derives economic benefits from the acquired goodwill and intangibles. The impairment tests
are performed by comparing the carrying value of the assets of these CGUs with the greater of its value in use and its
fair value, less costs to sell. The value in use is based on their future projected cash flows discounted to the present
value at an appropriate pre-tax discount rate. 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 terminal growth rate given that the Group businesses are of a long-term nature. The Group assesses
the uncertainty of these estimates by conducting sensitivity analyses. The discount rate used approximates the CGUs
weighted average cost of capital, with business risk incorporated into the development of the cash flow projections.
An impairment loss in respect of goodwill is never subsequently reversed. The Group completed its annual goodwill
impairment tests at December 31, 2020.
(h)
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 properties, being the property held by Glen Ewing Properties, at historical cost.
In a period in which a change of use of a property occurs such that it becomes an investment property, depreciation
ceases and its then carrying value becomes its cost.
(i)
Joint Venture
The Company applies the equity method of accounting for its investment in the joint venture. Under the equity method of
accounting, interests in joint ventures are initially recognized in the Consolidated Statements of Financial Position at initial
cost and adjusted thereafter to recognize the Group’s share of profits or losses and movements in other comprehensive
income in the income statement and in other comprehensive income respectively. When the Group’s share of losses in a
joint venture equals or exceeds its interest in the joint venture, the Group does not recognize further losses unless it has
incurred obligations or made payments on behalf of the joint venture.
Unrealized gains or transactions between the Group and its joint venture are eliminated to the extent of the Group’s
interest in the joint venture. Unrealized losses are also eliminated unless the transaction provides evidence of impairment
of the assets transferred.
(j)
Inventories
Inventories are valued at the lower of cost and net realizable value.
The cost of inventories is based on the first-in first-out principle and includes 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, cost includes 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 which previously caused inventories to be written down to their net realizable value no longer
exist, the previous impairment is reversed.
61
ANNUAL REPORT 2020
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2020 and 2019 (tabular amounts in thousands of dollars, except share and per share amounts)
(k)
Impairment of property, plant and equipment and finite life intangible assets
The Group periodically reviews the useful lives and the carrying values of its long-lived assets for continued appropriateness.
Consideration is given at each reporting date to determine whether there is any indication of impairment of the carrying
amounts of the Group’s property, plant and equipment and finite life intangible assets. The Group reviews for impairment
of long-lived assets, or asset groups, held and used whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable.
The recoverable amount is the greater of the fair value less cost of disposal and value in use. If the recoverable amount
cannot be determined for one individual asset, the Group conducts its impairment test at the CGU level. In assessing
value in use, the estimated future cash flows are discounted to their present value, based on the time value of money and
the risks specific to the country where the assets are located. Assets that suffer impairment are assessed for possible
reversal of the impairment at each reporting date.
(l)
Share-based payment transactions
Stock Option Plan
The Group has a stock-based compensation plan, which is described in note 17. The Group accounts for all stock-based
payments using the fair value based method.
Under the fair value based method, compensation cost for stock options and direct awards of stock is measured at
fair value at the grant date. Compensation cost is recognized in earnings on a straight-line basis over the relevant vesting
period, with a corresponding amount recorded in contributed surplus. The amount recognized as an expense, is adjusted
to reflect the number of awards for which the related services are expected to be met. Upon exercise of a stock option,
share capital is recorded at the sum of the proceeds received and the related amount of contributed surplus.
Deferred Share Unit Plan
The Company implemented a deferred share unit plan (“DSU Plan”) for its senior-executive management and Directors.
Under the DSU Plan, participants may elect to defer compensation and receive DSUs equal to the value of the deferred
compensation. DSUs are increased by the dividend rate on a quarterly basis.
Under IFRS, DSUs are classified as cash-settled share-based payment transactions as the participants shall receive
cash following a Redemption Event, as defined in the DSU Plan. DSUs do not contain any vesting conditions or forfeiture
provisions, as they are issued in exchange for deferred compensation. As such, the Company recognizes the expense and
the liability to pay for eventual redemption when DSUs are issued. Thereafter, the Company re-measures the fair-value
of the liability at the end of each reporting date and the date of settlement, with the difference recognized in income or
expense for the period. The fair value of DSUs is determined in accordance with the DSU Plan, which uses the average
closing price for HPS shares for the five trading days immediately preceding the relevant date. DSU liability is included in
accrued liabilities.
(m)
Provisions
Provisions comprise liabilities of uncertain timing or amounts that arise from restructuring plans, environmental, litigation,
commercial or other risks. Provisions are recognized when there exists a legal or constructive obligation stemming from
a past event and when the future cash outflows can be reliably estimated. A provision for warranties is recognized when
the underlying products or services are sold. The provision is based on historical warranty data and a weighting of all
possible outcomes against their associated probabilities. A restructuring provision relating to a sale or termination
of a line of business, the closure of business locations in a country or region, changes in management structure or
fundamental reorganizations that have a material effect of the nature or focus of the Group’s operations are recognized
when the Group has a detailed, formal plan for the restructuring that identifies:
•
the business or part of a business concerned;
62
HAMMOND POWER SOLUTIONS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2020 and 2019 (tabular amounts in thousands of dollars, except share and per share amounts)
•
•
•
the principal locations affected;
the location, function and approximate number of employees affected;
the expenditures that will be undertaken; and
• when the plan will be implanted.
Notwithstanding the above, no provision is recorded until such time a valid expectation by those affected by the plan
has been raised.
(n)
Revenue
The Group recognizes revenue using a 5-step approach:
• Step 1: Identify the contract(s) with a customer.
• Step 2: Identify the performance obligations in the contract.
• Step 3: Determine the transaction price.
• Step 4: Allocate the transaction price to the performance obligations in the contract.
• Step 5: Recognize revenue when (or as) the Group satisfies a performance obligation.
The Group considers a performance obligation satisfied when “control” of the goods or services underlying the
particular performance obligation is transferred to the customer. A performance obligation represents a good and service
(or a bundle of goods or services) that is distinct or a series of distinct goods or services that are substantially the
same. The Group typically satisfies its performance obligation upon shipment of its transformers Any required testing or
compliance requirements will have been satisfied prior to shipment of the transformer. Payment is typically due within
30 days of shipment, with limited customers being granted extended terms of up to 60 days – consideration is generally
fixed and does not contain any significant financing components. The Group has a return policy for credit on standard
stocked items and no custom build product can be returned. Historically, returns have been minimal and are expected to
continue to remain low. The Group’s product is purchased with a standard warranty and there is no option to purchase any
additional warranty coverage.
A contract asset represents the Group’s right to consideration in exchange for goods or services that the Group has
transferred to a customer that is not yet unconditional. In contrast, a receivable represents the Group’s unconditional right
to consideration in that only the passage of time is required before payment of that consideration is due.
A contract liability represents the Group’s obligation to transfer goods or services to a customer for which the Group
has received consideration (or an amount of consideration is due) from the customer.
Incremental costs to obtain a contract are typically short-term in nature and the Group applies the practical expedient
permitted under IFRS 15 to recognize such costs as an expense when incurred if the amortization of the asset that the
Group would have otherwise recognized is less than one year.
(o)
Income taxes
Income tax expense comprises current and deferred tax. Current tax is the expected tax payable or receivable on the
taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date and any
adjustment to tax payable in respect of previous years. Deferred tax is recognized in respect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation
purposes. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they
reverse, based on the laws that have been enacted or substantively enacted at the reporting date.
A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the
extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax assets
are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit
will be realized.
63
ANNUAL REPORT 2020
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2020 and 2019 (tabular amounts in thousands of dollars, except share and per share amounts)
(p)
Employee benefits
The Group maintains a defined contribution plan, which is described in note 19, and have short-term employee benefits.
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 profit or loss in the periods in which
services are rendered by employees.
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.
(q)
Finance income and finance costs
Finance income and finance costs comprise interest income, interest expense on borrowings, foreign currency losses
(including changes in fair value of derivative foreign currency financial instruments measured at fair value through profit
and loss), the Group’s share of income or losses arising from its investment in joint ventures and other finance costs.
Foreign currency gains and losses are reported on a net basis.
(r)
Earnings per share
The Group presents basic and diluted earnings per share (“EPS”) data for its common shares. Basic EPS is calculated by
dividing net earnings of the Group by the weighted average number of common shares outstanding during the reporting
period. Diluted EPS are computed similar to basic EPS 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 proceeds from such exercises along with
any unamortized stock-based compensation were used to acquire common shares at the average market price during
the year.
(s)
Leases
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, and subsequently at cost less any accumulated depreciation and impairment losses, 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
applies a single discount rate to the portfolio of leases with reasonably similar characteristics.
The lease liability is subsequently increased by the interest cost on the lease liability and decreased by lease payments
made. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, a
change in the estimate or the amount expected to be payable under a residual value guarantee, or as appropriate, changes
in the assessment of whether a purchase or extension option is reasonably certain to be exercised or a termination option
is reasonably certain not to be exercised.
The Group does not recognize right-of-use assets and lease liabilities for contracts that have a lease term of 12
months or less or are low-value assets (under $5,000).
(t)
Government assistance
The Group recognizes government assistance in the statement of operations on a systematic basis over the periods in
which the entity recognises expenses for the related costs for which the assistance is intended to compensate.
64
HAMMOND POWER SOLUTIONS INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2020 and 2019 (tabular amounts in thousands of dollars, except share and per share amounts)
(u)
New accounting pronouncements adopted during the period
Definition of a Business (Amendments to IFRS 3)
On October 22, 2018, the IASB issued amendments to IFRS 3 Business Combinations, that seeks to clarify whether a
transaction results in an asset or a business acquisition. The amendments apply to businesses acquired in annual
reporting periods beginning on or after January 1, 2020.
The amendments include an election to use a concentration test. This is a simplified assessment that results in an
asset acquisition if substantially all of the fair value of the gross assets is concentrated in a single identifiable asset or as
a group of similar identifiable assets. If the preparer chooses not to apply the concentration test, or the test is failed, then
the assessment focuses on the existence of a substantive process.
The Company adopted the amendments in its financial statements for the annual period beginning on January 1, 2020.
The adoption of the amendments did not have a material impact on the consolidated financial statements.
(v)
New accounting pronouncements
The International Accounting Standards Board has issued the following Standards, Interpretations and Amendments
to Standards that are not yet effective, have not yet been adopted by the Group and are not expected to have a material
impact on the consolidated financial statements.
The Group intends to adopt the following amendments in its financial statements for the annual period beginning on
January 1, 2022:
• Property, Plant and Equipment – Proceeds before Intended Use (Amendments to IAS 16)
• Onerous Contracts – Cost of Fulfilling a Contract (Amendments to IAS 37)
• Reference to the Conceptual Framework (Amendments to IFRS 3)
• Annual Improvements to IFRS Standard 2018-2020
The Group intends to adopt the following amendment in its financial statements for the annual period beginning on
January 1, 2023:
• Classification of Liabilities as Current or Non-Current (Amendments to IAS 1)
The Group intends to adopt the following amendment once an effective date has been announced:
Sale or Contribution of Assets Between an Investor and its Associate or Joint Venture
•
4.
Accounts receivable
Trade accounts receivable
Other receivables
December 31, 2020
December 31, 2019
$
49,129
$
60,589
3,949
3,415
$
53,078
$
64,004
Trade accounts receivable is presented net of expected credit losses of $2,577,000 (December 31, 2019 – $2,997,000).
A continuity of the Group’s allowance for doubtful accounts is as follows:
Opening balance
Additional allowances
Writeoffs
Adjustments
December 31, 2020
December 31, 2019
$ 2,997
$ 2,481
494
(25)
379
(116)
(889)
253
$ 2,577
$ 2,997
65
ANNUAL REPORT 2020
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2020 and 2019 (tabular amounts in thousands of dollars, except share and per share amounts)
5.
Inventories
Raw materials
Work in progress
Finished goods
December 31, 2020
December 31, 2019
$
19,002
$
20,974
1,867
2,276
28,337
27,676
$
49,206
$
50,926
Raw materials and changes in finished goods, and work in progress recognized as cost of sales during the year amounted
to $234,395,000 (2019 – $271,475,000), of which $nil (2019 – $1,461,000) is included in discontinued operations. In
addition, during the year, reversal of write-downs in the amount of $4,000 were recognized (2019 – $24,000). Inventories
carried at net realisable value as at December 31, 2020 were $821,000 (December 31, 2019 – $1,190,000).
6.
Prepaid and other assets
Prepaid expenses
December 31, 2020
December 31, 2019
$
2,455
$
2,440
Current portion of long-term lease and note receivable (note 7)
232
$
2,687
$
217
2,657
7.
Long-term lease and note receivable
On October 31, 2017, the Group sold the assets and disposed of certain liabilities of its Vacuum Pressure Impregnated
(VPI) transformers product line located in Italy. Consideration due to the Group in connection with the transaction included
a note receivable in the amount of 1,158,000 Euros (approximately $1,687,000).
Concurrent with the disposal of the VPI product line, the Group entered into a lease agreement (“agreement”) for one of
its manufacturing facilities in Italy, under which the purchaser will have the use of the plant, which includes both the land
and the building, to 2023. Consideration was in the form of a lease receivable, which the Company has determined meets
the definition of a finance lease.
The lease receivable is calculated based on the present value of the future principal and interest cash flows, discounted
at the market rate of interest at the lease inception date, determined to be 1.15%. Unless one of the Parties sends to
the other a twelve month prior written notice of termination, at the end of each six year term, the agreement will be
automatically renewed by an equal period.
In fiscal 2018, the Group recorded a provision for amounts outstanding in respect of the note receivable, as the
purchaser had ceased making payments and was disputing the value of certain of the acquired assets, amongst
other matters.
In October 2020, the dispute with the purchase was resolved and the note receivable was settled in the amount of
614,000 Euros (approximately $956,000). As a result, 614,000 Euros of the allowance for doubtful accounts was reversed
and recorded as a recovery in the statement of earnings in general and administrative expenses.
Put and call option
The lease agreement includes a put and call option related to the leased premises, exercisable within 60 days after
September 30, 2023. The call option grants the purchaser an option to purchase the premises for consideration equal
to 2,225,000 Euros (approximately $3,400,000). The put option grants HPS an option to sell the plant to the purchaser
for consideration equal to the initial plant purchase price of 2,225,000 Euros. Under both the call and put option the
plant purchase price will be reduced by 50% of the monthly rent installments received, to a maximum of 375,000
66
HAMMOND POWER SOLUTIONS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2020 and 2019 (tabular amounts in thousands of dollars, except share and per share amounts)
Euros (approximately $573,000). If the purchaser fails to execute the put option, the purchaser will pay 500,000 Euros
(approximately $764,000) in damages. The put and call options expire November 23, 2023.
As at December 31, 2019 consideration receivable consists of:
Lease receivable of 2,208 EUR (2019 – 2,332 EUR), with monthly lease
$ 3,538
$ 3,538
payments of 13 EUR, bearing interest of 1.15% per annum.
December 31, 2020 December 31, 2019
Gross cash entitlement:
Less: unearned finance income
Net lease receivable
(2019 - Note receivable of 1,158 EUR, repayment schedule of 1,158 due
immediately non-interest bearing, secured by the property,
plant and equipment of the VPI business)
Less: allowance for doubtful accounts
(105)
3,433
–
–
(141)
3,397
1,687
(1,687)
$ 3,433
$ 3,397
Less: current portion included within prepaid and other assets
232
217
$ 3,201
$ 3,180
The aggregate amount of principal payments to be received in each of the next four years is as follows:
2021
2022
2023
232
232
2,969
$ 3,433
8.
Property, plant and equipment
Property, plant and equipment compromise owned and leased assets that do not meet the definition of investment
property. Carrying amounts of owned and right-of-use assets are as follows:
Property, plant and equipment owned
Right-of-use assets (note 14)
December 31, 2020 December 31, 2019
$ 23,648
$ 23,415
6,724
9,053
$ 30,372
$ 32,468
67
ANNUAL REPORT 2020
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2020 and 2019 (tabular amounts in thousands of dollars, except share and per share amounts)
Cost
Land
Building
Leaseholds &
Improvements
Machinery
& Equipment
Office
Equipment
Construction
In Progress
& Deposits
Total
Balance at January 1, 2019
$ 4,892
$ 21,207
$ 1,520
$ 58,958
$ 10,972
$ 276
$ 97,825
Additions
Disposals
Transfer to investment property
(note 9)
Effect of movements in
exchange rates
–
–
140
–
(583)
(3,179)
95
–
–
2,089
(7,513)
511
(19)
–
–
(77)
(444)
(33)
(506)
(389)
847
–
–
–
3,682
(7,532)
(3,762)
(1,449)
Balance at December 31, 2019
$ 4,232
$ 17,724
$ 1,582
$53,028
$ 11,075
$ 1,123
$ 88,764
Balance at January 1, 2020
$ 4,232
$ 17,724
$ 1,582
$ 53,028
$ 11,075
$ 1,123
$ 88,764
Additions
Effect of movements in
exchange rates
–
301
325
1,612
489
1,495
4,222
(22)
(46)
(107)
(574)
(106)
–
(855)
Balance at December 31, 2020
$ 4,210
$ 17,979
$ 1,800
$54,066
$ 11,458
$ 2,618
$ 92,131
Accumulated Depreciation
Balance at January 1, 2019
$ –
$ 11,569
$ 1,317
$ 46,095
$ 9,806
$ –
$ 68,787
Depreciation for the year
Disposals
Transfer to investment property
(note 9)
Effect of movements in
exchange rates
–
–
–
–
969
–
103
2,777
(257)
(5,974)
435
(45)
(1,097)
–
–
–
(91)
(30)
(62)
(166)
–
–
–
–
4,284
(6,276)
(1,097)
(349)
Balance at December 31, 2019
$ –
$ 11,350
$ 1,133
$ 42,836
$ 10,030
$ –
$ 65,349
Balance at January 1, 2020
$ –
$ 11,350
$ 1,133
$ 42,836
$ 10,030
$ –
$ 65,349
Depreciation for the year
Effect of movements in
exchange rates
–
–
779
106
2,456
416
(19)
(80)
(444)
(80)
–
–
3,757
(623)
Balance at December 31, 2020
$ –
$ 12,110
$ 1,159
$ 44,848
$ 10,366
$ –
$ 68,483
Carrying amounts
At December 31, 2019
At December 31, 2020
$ 4,232
$ 6,374
$ 449
$ 10,192
$ 1,045
$ 1,123
$ 23,415
$ 4,210
$ 5,869
$ 641
$ 9,218
$ 1,092
$ 2,618
$ 23,648
Depreciation is recorded in the statement of earnings as follows: cost of sales $3,430,000 (2019 – $3,357,000), selling
and distribution $5,000 (2019 – $5,000), general and administrative $322,000 (2019 – $319,000) and discontinued
operations $Nil (2019 – $603,000).
68
HAMMOND POWER SOLUTIONS INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2020 and 2019 (tabular amounts in thousands of dollars, except share and per share amounts)
9.
Investment in properties
Glen Ewing Property
Marnate Property (net of accumulated
depreciation of $942 (2019 - $706))
December 31, 2020
December 31, 2019
$ 1,044
$ 1,044
2,605
2,665
$ 3,649
$ 3,709
Glen Ewing Property
The Group has a 50% ownership interest in a property in Georgetown, Ontario, (referred to as the Glen Ewing Property).
It is a vacant plot of land currently under environmental remediation, and no revenue was derived from it in 2020 or
2019. The property is carried at cost. The estimated fair value of the property as at December 31, 2020 is $1,150,000
(2019 – $1,150,000). The fair value was determined based on independent available market evidence, with reference to
comparable market transactions. The Group’s share of ongoing legal, consulting and remediation costs during the year
was $121,000 (2019 – $109,000).
Marnate Property
The Group owns a property in Marnate, Italy, (referred to as the Marnate Property). As part of the sale transaction of
certain of the assets and liabilities of the Italian company, as outlined in note 23, the purchaser has leased the Marnate
Property for a period of six years at an annual rental amount of 90,000 EUR (approximately $137,000). The operating
expenses for this property were 202,000 EUR (approximately $307,000) in 2020. In 2019, concurrent with the change in
use of the property, the Company reclassified it from an item of property, plant and equipment to an investment property.
Depreciation on the facility was recorded in the statement of earnings as general and administrative expenses in the
amount of $236,000. The estimated fair value of the property as at December 31, 2020 is 2,280,000 Euros (approximately
$3,544,000). The fair value was determined based on independent available market evidence, based on comparable
property sales, by an independent valuator.
10.
Investment in joint venture
The Company has a 55% economic and voting interest in Corefficient. By virtue of the contractual arrangement with National
Material L.P., the other shareholder in Corefficient, decisions about significant, relevant, operating and strategic activities
require the unanimous consent of both parties, and distributions of dividends and returns of capital from Corefficient
are subject to unanimous Corefficient shareholder approval. Accordingly, the Company jointly controls Corefficient and
has treated its investment as a joint arrangement. Corefficient’s principal place of business is in Monterrey, Mexico. The
carrying value of the Company’s interest in Corefficient is as follows:
Cost of investment in joint venture
Cumulative share of loss in investment in joint venture, net of tax
Foreign currency translation differences related to the joint venture
December 31, 2020
December 31, 2019
$ 20,023
$ 20,023
(3,233)
(3,490)
(3,386)
(3,209)
$ 13,300
$ 13,428
During the year the Company made an additional contribution of $nil (2019 – $728,000) and recognized its share of the
income of $153,000 (2019 – $267,000).
69
ANNUAL REPORT 2020 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2020 and 2019 (tabular amounts in thousands of dollars, except share and per share amounts)
Selected financial information relating to Corefficient is as follows:
Cash
Trade and other receivables
Inventories
Other current assets
Total current assets
Non-current assets
Total assets
Current liabilities
Non-current liabilities
Total liabilities
Revenue
Income for the year
December 31, 2020
December 31, 2019
$ 3,553
$ 4,341
8,155
2,932
89
11,286
3,047
118
$ 14,729
$ 18,792
16,425
19,697
$ 31,154
$ 38,489
$ 6,508
$ 12,744
746
1,603
$ 7,254
$ 14,347
2020
2019
$ 56,605
$ 58,423
278
485
Net income for the year ended December 31, 2020 includes depreciation and amortization expense of $3,118,000
(2019 – $2,149,000), net interest expense of $62,000 (2019 – $66,000) and an income tax expense of $nil
(2019 – $3,000) related to Corefficient.
70
HAMMOND POWER SOLUTIONS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2020 and 2019 (tabular amounts in thousands of dollars, except share and per share amounts)
11.
Intangible assets and goodwill
Intangible assets
Cost
Technology
Customer lists
relationships
and branding
Externally
acquired
software
Total
Balance at January 1, 2019
$
6,600
$
8,957
$
6,416
$
21,973
Additions
Effect of movements in exchange rates
Balance at December 31, 2019
Balance at January 1, 2020
Additions
Effect of movements in exchange rates
$
$
–
(359)
6,241
6,241
–
(122)
$
$
–
(211)
8,746
8,746
–
(87)
$
$
323
(49)
6,690
6,690
713
35
$
$
323
(619)
21,677
21,677
713
(174)
Balance at December 31, 2020
$
6,119
$
8,659
$
7,438
$
22,216
Accumulated Amortization
Balance at January 1, 2019
$
4,631
$
6,404
$
3,628
$
14,663
Amortization for the year
Effect of movements in exchange rates
Balance at December 31, 2019
Balance at January 1, 2020
Amortization for the year
Effect of movements in exchange rates
$
$
145
(231)
4,545
4,545
138
(53)
$
$
487
(141)
6,750
6,750
481
(50)
$
$
465
(42)
4,051
4,051
417
36
$
$
1,097
(414)
15,346
15,346
1,036
(67)
Balance at December 31, 2020
$
4,630
$
7,181
$
4,504
$
16,315
Balance at
At December 31, 2019
At December 31, 2020
$
$
1,696
1,489
$
$
1,996
1,478
$
$
2,639
2,934
$
$
6,331
5,901
Amortization of $342,000 (2019 – $347,000) has been recognized in cost of sales, $131,000 (2019 – $137,000) has been
recognized in selling and distribution, $563,000 (2019 – $549,000) has been recognized in general and administrative and
$nil (2019 – $64,000) has been recorded within discontinued operations.
None of the intangible assets has been internally developed.
Research and development expenses of $704,000 (2019 – $785,000) have been recognized in cost of sales in the
consolidated statements of earnings. No research and development costs have been capitalized (2019 – $nil).
71
ANNUAL REPORT 2020
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2020 and 2019 (tabular amounts in thousands of dollars, except share and per share amounts)
12. Goodwill and impairment testing for cash-generating units
Goodwill
Opening balance
Effect of movements of exchange rates
Ending balance
December 31, 2020
December 31, 2019
$
$
11,309
(401)
10,908
$
$
11,961
(652)
11,309
The Company conducts its annual impairment assessment of goodwill, intangible assets and property, plant and
equipment in the fourth quarter of each year, which corresponds with its annual planning cycle, and whenever
events or changes in circumstances indicate that the carrying amount of an asset or CGU may not be recoverable.
The Company did not identify any triggering events during the course of 2020 indicating that the carrying amount of
its assets and CGUs may not be recoverable, which would require the performance of an impairment test for those
CGUs which did not contain goodwill.
Impairment testing for cash-generating units containing goodwill
The Company has two subsidiaries identified as CGUs that contain goodwill. The CGUs and their respective goodwill
balances are as follows: Delta Transformers Inc. (“Delta”) $2,180,000 (2019 – $2,180,000) and Hammond Power
Solutions Private Limited (“India”) $8,728,000 (2019 – $9,129,000).
For its 2020 annual impairment assessment of CGUs containing goodwill, the Company used cash flow
projections based primarily on its business plan for the following year, and projections for the ensuing four year
period. The Company’s business plan is primarily based on financial projections submitted by its subsidiaries in the
fourth quarter of each year, together with inputs from customer teams. This plan is subjected to reviews by various
levels of management as part of its annual planning cycle, and is approved by the Board of Directors. The values
used in the cash flow projections are based on historical sales, internal growth rate assumptions, and available
market data.
Based on these projections, a five year cash flow forecast was completed and discounted to present-value using
discount rates specific to each CGU ranging from 12.3% – 21.9% (2019 –12.5% - 20.8%) depending on the location
of the CGU. Through the five year cash flow projections, the Company’s model also incorporated year 1 sales growth
rates in the range of 4.7% – 80.3%, which reflects returning to normal production levels post COVID-19 pandemic
as well as manufacturing of a new product line in India. The annual sales growth rates for year 2 to year 5 are in the
range of 2.4% – 39.2% (2019 – year 1 to year 5 – 1.4% – 52.6%) depending on location, the CGUs operating history
and strategic sales growth initiatives. Cash flows beyond the five year period have been extrapolated using terminal
growth rates ranging from 2% – 8% (2019 – 2% – 8%), depending on the geography of the manufacturing unit. This
was then compared to the carrying value of the CGU to determine if there was impairment.
Management’s approach to determining projected revenue includes consideration of current bookings,
committed product line expansions (for which no additional capital expenditure is required), consultation with its
salesforce and historical results. The Company’s process for determining projected gross margin rates includes
consideration of current pricing information from suppliers and historical gross margin rates realized by the
Company. The Company determines the terminal growth rate with reference to published economic data pertaining
to the applicable industry and country in which the cash generating unit operates. The discount rate is determined
with reference to the cash generating unit’s weighted average cost of capital.
While management believes that estimates of future cash flows and discount rates are reasonable, different
assumptions regarding future cash flows or discount rates could materially affect the outcome of the impairment
72
HAMMOND POWER SOLUTIONS INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2020 and 2019 (tabular amounts in thousands of dollars, except share and per share amounts)
test. Management believes that certain reasonable possible changes in the key assumptions on which the recoverable
amounts are based could cause the carrying amount to exceed the recoverable amount in the India CGU. As of
December 31, 2020, a discount rate increase of 2.1% or a 3.5% lower terminal growth rate than the assumptions
utilized would cause the estimated recoverable amount to be equal to the carrying amount for this CGU.
For the Delta Transformers Inc. CGU, management believes that any reasonable possible change in the key
assumptions on which the recoverable amounts are based would not cause the carrying amount to exceed the
recoverable amount.
Upon completion of the 2020 annual impairment assessment of goodwill it was determined that the recoverable
amount of the CGUs exceeded their respective carrying values and no impairment existed at December 31, 2020.
13. Bank operating lines of credit
The Group’s North American current banking agreement, which expires in June 2021, consists of a $40,000,000
U.S. revolving credit facility and a $10,000,000 U.S. delayed draw credit facility. The revolving credit facility can be
drawn in of U.S. Prime borrowings, Canadian Prime borrowings, Canadian Dollar Offered Rate (“CDOR”) borrowings
or London Inter-Bank Offered rate (“LIBOR”) borrowings. The delayed draw facility does not charge any fees on the
unutilized balance. The use of the delayed draw facility needs to be approved by the bank. The draw is available in
a minimum of two tranches of $5,000,000 U.S. each. The facilities are unsecured.
The delayed draw credit facility was unutilized at December 31, 2020 and December 31, 2019. Under the terms
of the facility, the Group pays a commitment fee at rates ranging from 0.30% to 0.40% payable quarterly in arrears,
on the daily amount of the unused portion of the revolving North American commitment.
Interest on the revolving credit lines is dependent on certain financial ratios and ranges from Canadian bank
prime rate minus 0.50% to Canadian bank prime rate for the Canadian dollar denominated revolving credit lines or, if
designated, the bank’s CDOR rate plus 1.25% to 1.75% and from U.S. base rate minus 1.50% to U.S. base rate minus
1.00% for the U.S. dollar denominated revolving credit lines or, if designated, the bank’s LIBOR rate plus 1.25% to 1.75%.
The Group also has a 4,070,000 unsecured Euro facility that matures May 2021 and may be renewed in writing
each year to extend the maturity date for the facility for a further 365 days, subject to approval from the lender. The
facility is comprised of a 3,750,000 Euro revolver and 250,000 Euro overdraft facility, as well as a 70,000 Euro letter
of credit line. The revolver facility bears interest at Euro Interbank Offered Rate (“Euribor”) plus margin of 2.25%
(2019 – plus margin of 1.75%, Euribor on December 31, 2020 – 0.499%, Euribor on December 31, 2019 – 0.249%).
Hammond Power Solutions Private Limited maintains an additional demand credit facility for an unsecured
working capital loan up to 375,000,000 INR (2019 – 375,000,000 INR) consisting of the sub-facilities of a 131,000,000
INR (2019 – 131,000,000 INR) short-term working capital demand loan, a 244,000,000 INR (2019 – 244,000,000
INR) facility for bank guarantees. The demand loan bears interest at a MCLR + 2.5% and the bank guarantees are
at a rate of 1.0%. As at December 31, 2020, there was $nil Canadian dollar equivalent of Rupees drawn against
the working capital demand loan (2019 – $nil). At December 31, 2020 there was nil INR (2019 – nil INR) drawings
against the bank guarantees.
Based on exchange rates in effect at December 31, 2020, the combined Canadian dollar equivalent available
across all facilities, prior to any utilization of the facilities was $76,477,000 (2019 – $77,737,000).
As at December 31, 2020, the Canadian dollar equivalent outstanding under the U.S. dollar revolving credit line
was $11,215,000, consisting of $7,577,000 Canadian dollars drawn and $3,638,000 U.S. dollars drawn (2019 –
$28,145,000 – consisting of $17,546,000 Canadian dollars drawn and $10,599,000 U.S. dollars drawn). As well,
$4,858,000 (2019 – $4,552,000) Canadian dollar equivalent of Euros was outstanding under the Euro facility, and
$nil (2019 – $nil) Canadian dollar equivalent of Indian rupees under the Rupee facility. Amounts drawn on the
facility have been recognized as current liabilities based on the Company’s anticipated repayment plans.
73
ANNUAL REPORT 2020
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2020 and 2019 (tabular amounts in thousands of dollars, except share and per share amounts)
14. Lease assets and liabilities
Lease assets
The Group leases many assets including buildings, vehicles and office equipment. Information about leases for
which the Group is a lessee is presented below.
Balance at January 1, 2019
$
Additions
Depreciation
Effect of movement in
exchange rates
Balance at December 31, 2019
Balance at January 1, 2020
$
$
Additions
Disposals
Depreciation
Effect of movement in
exchange rates
Balance at
December 31, 2020
Buildings
Vehicles
Office
Equipment
$
$
$
8,539
1,471
(1,529)
22
8,503
8,503
–
–
(1,909)
(407)
$
$
$
470
366
(315)
2
523
523
343
(15)
(313)
(9)
$
$
$
49
–
(23)
1
27
27
–
–
(18)
(1)
Total
9,058
1,837
(1,867)
25
9,053
9,053
343
(15)
(2,240)
(417)
$
6,187
$
529
$
8
$
6,724
Certain building leases maintained by the Group contain renewal options. Where practicable, the Group seeks
to include extension options in new leases to provide operational flexibility. The majority of the Group’s lease
payments related to its production facilities located in Mexico. The first renewal option commenced in May 2020,
with annual lease payments of $621,000, and is for a five-year term. The Group retains rights to renew this lease
for 3 successive 5-year periods. The Group’s lease on its second Mexican production facility expires in March
2023 and carries annual lease payments of $581,000. The Group holds a right to renew this lease for one four-year
period following the expiry of the current lease term. The extension options held are exercisable only by the Group
and not by the lessors. The Group assesses at lease commencement whether it is reasonably certain to exercise
the options.
74
HAMMOND POWER SOLUTIONS INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2020 and 2019 (tabular amounts in thousands of dollars, except share and per share amounts)
Lease liabilities
Maturity analysis – contractual undiscounted cash flows
December 31, 2020
December 31, 2019
Less than one year
One to five years
More than five years
Total undiscounted lease liabilities
Less: effect of discounting
$ 2,719
$ 2,602
7,017
705
9,318
696
$ 10,441
$ 12,616
$ (1,121)
$ (1,212)
Lease liabilities included in the statement of financial position
$ 9,320
$ 11,404
Current
Non-current
Amounts recognized in statement of operations
Interest on lease liabilities
Amounts recognized in statement of cash flows
Payment of lease liabilities
15. Commitments
$ 2,144
$ 2,237
$ 7,176
$ 9,167
Year Ended
December 31, 2020
Year Ended
December 31, 2019
$ 330
$ 325
Year Ended
December 31, 2019
Year Ended
December 31, 2019
$ 2,650
$ 2,431
December 31, 2020 December 31, 2019
Capital expenditure commitments
$ 1,029
$ 80
16.
Income taxes
Income tax expense
Current tax expense
Current period
Deferred tax expense (recovery)
Origination and reversal of temporary differences
Decrease in tax rate
2020
2019
$
7,827
$
6,425
(924)
1
(923)
(579)
36
(543)
Total income tax expense
$
6,904
$
5,882
75
ANNUAL REPORT 2020
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2020 and 2019 (tabular amounts in thousands of dollars, except share and per share amounts)
Reconciliation of effective tax rate
Net earnings
Income tax expense
Earnings before income taxes
Income tax (recovery) using the
Company’s domestic tax rate
Effect of tax rates in foreign jurisdictions
Decrease in tax rate
Non-deductible expenses/non-taxable
income
Reduced rate for active business and
manufacturing and processing
Losses for which no deferred tax asset
was recognized
Dividend withholding tax
Other
2020
2020
2019
2019
$ 14,062
6,904
$ 20,966
8,282
(2,522)
–
90
39.50%
(12.03%)
0.00%
0.43%
39.50%
(10.36%)
0.20%
2.23%
(2.69%)
(564)
(4.25%)
(1.40%)
6.11%
3.01%
(294)
1,281
631
3.56%
3.72%
(0.97%)
$ 11,607
5,882
$ 17,489
6,908
(1,811)
36
390
(744)
623
650
(170)
32.93%
$
6,904
33.63%
$
5,882
Unrecognized temporary differences
At December 31, 2020, pre-tax temporary differences of $80,250,000 (2019 – $96,643,000) 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. The tax liability in the event the Company were to sell these investments
would be $10,031,000 (2019– $12,080,000) based on current tax rates.
Deferred tax assets have not been recognized in respect of the following items:
Tax losses
Basis difference in subsidiary
Financial interests deductible in a future period
Expected credit losses
Inventory provisions
2020
2019
$ 13,777
$ 12,458
31,361
3,381
–
332
37,356
2,875
900
361
$ 48,851
$ 53,950
76
HAMMOND POWER SOLUTIONS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2020 and 2019 (tabular amounts in thousands of dollars, except share and per share amounts)
The tax losses, financial interests deductible, expected credit losses and inventory provisions carry forward
indefinitely and relate to HPS S.p.A and Continental Transformers s.r.l. The basis difference in subsidiary, when
realized, will provide the Company a capital loss that carries forward indefinitely. The benefit of these items has not
been reflected in the consolidated financial statements as it is uncertain as to whether the Company will be able to
utilize the deductions.
Recognized deferred tax assets and liabilities
Deferred tax assets and liabilities are attributable to the following:
Assets
Liabilities
2020
2019
2020
2019
Property, plant and equipment
$ 849
$ 766
$ (4,075)
$ (4,763)
Intangible assets
Scientific research and experimental development
Inventories
Long-term lease and note receivable
Loans and borrowings
Employee benefits
Unrealized losses (gains) on forward contracts and
foreign-currency denominated loans
payable/receivable
Provisions and tax reserves
Tax loss carry-forwards
Charitable donation carry-forwards
Basis difference in subsidiary
Tax assets (liabilities)
Set off of tax
4
44
291
–
2,414
340
201
1,964
2,035
–
1,448
9,590
–
9
228
–
3,123
233
728
1,465
1,151
–
1,127
8,830
(641)
(32)
–
(767)
(46)
–
(3,636)
(2,974)
–
(160)
–
(153)
(71)
(2)
–
–
–
–
(2)
–
–
–
(8,617)
(8,705)
(7,781)
(6,886)
7,781
6,886
Net tax assets (liabilities)
$ 1,809
$ 1,944
$ (836)
$ (1,819)
77
ANNUAL REPORT 2020
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2020 and 2019 (tabular amounts in thousands of dollars, except share and per share amounts)
Movement in temporary differences during the year ended December 31, 2020
Balance
December 31, 2019
Recognized
in retained
earnings
Recognized in
profit or loss
Recognized
in other
comprehensive
income
Balance
December 31,
2020
Property, plant and equipment
$ 3,997
$ –
$ (771)
$ –
$ 3,226
Intangible assets
Scientific research and experimental
development
Inventories
Long-term lease and note receivable
Loans and borrowings
Employee benefits
Unrealized gains on forward contracts
and foreign-denominated loans
payable/receivable
Provisions and tax reserves
Tax loss carry-forwards
Basis difference in subsidiary
Foreign exchange
Income tax expense
767
37
(228)
2,974
(3,123)
(80)
(728)
(1,463)
(1,151)
(1,127)
–
–
–
–
–
–
–
–
–
–
(130)
(49)
(63)
662
709
(100)
598
(499)
(884)
(321)
–
–
–
–
–
–
–
–
–
–
637
(12)
(291)
3,636
(2,414)
(180)
(130)
(1,962)
(2,035)
(1,448)
$ (125)
$ –
$ (848)
$ –
$ (973)
$ (75)
$ (923)
78
HAMMOND POWER SOLUTIONS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2020 and 2019 (tabular amounts in thousands of dollars, except share and per share amounts)
Movement in temporary differences during the year ended December 31, 2019:
Balance
December 31,
2018
Recognized
in retained
earnings
Recognized in
profit or loss
Recognized
in other
comprehensive
income
Balance
December 31,
2019
Property, plant and equipment
$ 2,011
$ 1,686
$ 300
$ –
$ 3,997
Intangible assets
Scientific research and experimental
development
Inventories
Long-term lease and note receivable
Loans and borrowing
Employee benefits
Unrealized gains on forward contracts
and foreign-denominated loans
payable/receivable
Provisions and tax reserves
Tax loss carry-forwards
Basis difference in subsidiary
Charitable donation carry-forwards
882
59
(234)
3,245
–
(14)
(752)
(1,779)
(858)
(1,467)
(3)
–
–
–
–
(2,325)
–
–
–
–
–
–
(115)
(22)
6
(271)
(798)
(66)
24
316
(293)
340
3
–
–
–
–
–
–
–
–
–
–
–
767
37
(228)
2,974
(3,123)
(80)
(728)
(1,463)
(1,151)
(1,127)
–
$ 1,090
$ (639)
$ (576)
$ –
$ (125)
$ 33
$ (543)
Foreign exchange
Income tax expense
17. Share capital
(a)
Authorized:
Unlimited number of special shares, discretionary dividends, non-voting, redeemable and retractable.
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. Annual dividends on the Class B common shares may not exceed the annual dividends on
the Class A subordinate voting shares, no par value.
(b)
Issued:
December 31, 2020
December 31, 2019
8,966,624 Class A subordinate voting shares (2019 – 8,966,624)
$
14,484
$
14,484
2,778,300 Class B common shares (2019 – 2,778,300)
7
7
11,744,924 Total A and B shares (2019 – 11,744,924)
$
14,491
$
14,491
During the year ended December 31, 2020 there were no stock options exercised. During the year ended December 31, 2019,
45,000 Class A shares were issued upon exercise of stock options, resulting in cash proceeds of $290,000 and a transfer of
$49,000 from contributed surplus.
During 2019, the company purchased and cancelled 40,800 Class A shares under a normal course issuer bid at a cost of
79
ANNUAL REPORT 2020
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2020 and 2019 (tabular amounts in thousands of dollars, except share and per share amounts)
$316,000 of which $65,000, $12,000, $239,000 was applied against share capital, contributed surplus and retained earnings
respectively. The normal course issuer bid was completed in Quarter 3, 2019. There was no share repurchase transactions
during 2020.
The following dividends were declared and paid by the Company:
34 cents per Class A subordinate voting shares (2019 – 28 cents)
$ 3,048
$ 2,509
34 cents per Class B common shares (2019 – 28 cents)
945
778
December 31, 2020
December 31, 2019
$ 3,993
$ 3,287
(c)
Stock option plan
The Company uses a stock option plan to attract and retain key employees, officers and directors. Shareholders have
approved a maximum of 1,200,000 Class A shares for issuance under the Stock Option Plan, with the maximum reserved
for issuance to any one person at 5% of the Class A shares outstanding calculated immediately prior to the time of the
grant. As per the Stock Option Plan, the Board of Directors may, at its sole discretion, determine the time during which the
options shall vest and the method of vesting, or that no vesting restriction shall exist. The stock option exercise price is
the price of the Company’s common shares on the Toronto Stock Exchange at closing for the day prior to the grant date
on which the Class A shares traded. The period during which an option will be outstanding shall be 7 years, or such other
time fixed by the Board of Directors, subject to earlier termination upon the option holder ceasing to be a director, officer
or employee of the Company. Options issued under the plan are non-transferable unless specifically provided in the Stock
Option Plan. Any option granted, which is cancelled or terminated for any reason prior to exercise, shall become available
for future stock option grants. All options are to be settled by physical delivery of shares.
There were no options granted for the year ended December 31, 2020, or the year ended December 31, 2019.
Options outstanding and exercisable as at December 31, 2020:
December 31, 2020
December 31, 2019
Weighted
average
exercise price
Weighted
average
exercise price
Outstanding, beginning of year
330,000
$
Number of
options
Exercised
Cancelled
Expired
0
(10,000)
(130,000)
Outstanding, end of year
190,000
$
7.99
–
6.20
10.00
6.77
Number of
options
509,000
$
(45,000)
(15,000)
(119,000)
330,000
$
8.32
6.43
9.17
9.74
7.99
$
Exercise
price
7.50
6.62
6.20
Number
of
options
outstanding
65,000
55,000
70,000
190,000
Options outstanding
Weighted
average
remaining
contractual
life (years)
Weighted
average
exercise
price
Options exercisable
Number
of
options
exercisable
Weighted
average
exercise
price
0.2
1.2
2.2
1.2
$
7.50
6.62
6.20
6.77
65,000
55,000
70,000
190,000
$
7.50
6.62
6.20
7.99
80
HAMMOND POWER SOLUTIONS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2020 and 2019 (tabular amounts in thousands of dollars, except share and per share amounts)
Terms and conditions of the stock option plan
Options grants detailed below vest as follows:
• Options granted to directors vest immediately.
• Options granted to officers and senior management vest evenly over two or three years from the grant date,
with one-half of the grant vesting immediately for grants with a two-year vesting period, and one-third of the
grant vesting immediately for grants with a three-year vesting period.
The contractual life of the options granted below is seven years from the grant date.
Option Grant Date
March 13, 2014
March 12, 2015
March 10, 2016
Number of
Options
Recipients
65,000
Board of Directors, Officers and Senior Management
55,000
Board of Directors and Officers
70,000
Board of Directors and Officers
Total stock options outstanding
190,000
(d) Deferred Share Units
Under the Company’s DSU Plan, participants may elect to defer compensation and receive DSUs equal to the value
of the deferred compensation. The first DSUs were issued in March 2017. The number of DSUs was determined by
dividing the amount of deferred compensation by the fair market value (“FMV”) of DSUs, defined in the DSU Plan as the
weighted average closing price of HPS shares for the five business days immediately preceding the relevant date. Upon
the occurrence of the redemption event, which could include ceasing to hold any position in the Company and/or any
subsidiary or upon death of the participant, the affected participant will be entitled to receive a lump sum cash payment,
net of applicable withholding taxes, equal to the product of number of DSUs held by that participant and the FMV on the
date of the redemption event. The DSUs do not contain any vesting conditions or forfeiture provisions, as they are issued
in exchange for deferred compensation, nor are they performance based. Under the DSU Plan, outstanding DSUs as at the
record date are increased by the dividend rate whenever dividends are paid to shareholders.
The movement in DSUs for the years ended December 31, 2019 and 2020 is as follows:
Balance at January 1, 2019
DSUs Issued
DSUs redeemed
Balance at December 31, 2019
Balance at January 1, 2020
DSUs Issued
DSUs redeemed
DSUs forfeited
Balance at December 31, 2020
Number of DSUs
Closing Share Price
69,151
$
61,447
(9,027)
121,571
$
5.70
–
7.65
7.68
Number of DSUs
Closing Share Price
121,571
$
65,905
(14,788)
(12,154)
160,534
$
7.68
6.99
6.24
7.17
8.47
An expense of $518,000 (2019 – $367,000) was recorded in general and administrative expenses. The liability of
$1,360,000 (2019 – $934,000) related to these DSUs is included in accounts payable and accrued liabilities.
81
ANNUAL REPORT 2020
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2020 and 2019 (tabular amounts in thousands of dollars, except share and per share amounts)
18. Earnings per share
The computations for basic and diluted earnings per share from continuing operations are as follows:
(earnings in thousands of dollars)
Basic earnings per share from continuing operations
$
1.20
$
Calculated as:
2020
2019
1.13
Net Earnings attributable to the equity holders of the Company from
continuing operations
$
14,062
$
13,306
Weighted average number of shares outstanding
11,744,924
11,735,495
Fully diluted earnings per share from continuing operations
$
1.20
$
1.13
Calculated as:
Net Earnings attributable to the equity holders of the Company from
continuing operations
$
14,062
$
13,306
Weighted average number of shares outstanding including effects of
11,748,360
11,755,662
dilutive potential ordinary shares
Reconciliation of weighted average number of shares outstanding:
Weighted average number of shares outstanding used to calculate basic
earnings per share
Adjustment for dilutive effect of stock option plan
11,744,924
11,735,495
3,436
20,167
Weighted average number of shares outstanding used to calculate diluted
11,748,360
11,755,662
earnings per share
As at December 31, 2020, 120,000 options (2019 – 195,000) are excluded from the diluted average number of shares
calculation as their effect would have been anti-dilutive.
82
HAMMOND POWER SOLUTIONS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2020 and 2019 (tabular amounts in thousands of dollars, except share and per share amounts)
The computations for basic and diluted loss per share from discontinued operations are as follows:
Basic loss per share from discontinued operations
$
–
$
2020
2019
(0.14)
Calculated as:
Net loss attributable to the equity holders of the Company from
discontinued operations
Weighted average number of shares outstanding
Fully diluted loss per share from discontinued operations
Calculated as:
Net loss attributable to the equity holders of the Company from
discontinued operations
$
$
$
–
$
(1,699)
11,744,924
11,735,495
–
$
(0.14)
–
$
(1,699)
Weighted average number of shares outstanding including effects of
11,744,924
11,735,495
dilutive potential ordinary shares
Reconciliation of weighted average number of shares outstanding:
Weighted average number of shares outstanding used to calculate basic
earnings per share
Adjustment for dilutive effect of stock option plan
11,744,924
11,735,495
–
–
Weighted average number of shares outstanding used to calculate diluted
11,744,924
11,735,495
earnings per share
Basic earnings per share
Calculated as:
2020
$
1.20
$
2019
0.99
Net Earnings attributable to the equity holders of the Company
$
14,062
$
11,607
Weighted average number of shares outstanding
11,744,924
11,735,495
Fully diluted earnings per share
Calculated as:
Net Earnings attributable to the equity holders of the Company
$
$
1.20
$
0.99
14,062
$
11,607
Weighted average number of shares outstanding including effects of
11,748,360
11,755,662
dilutive potential ordinary shares
Reconciliation of weighted average number of shares outstanding:
Weighted average number of shares outstanding used to calculate basic
earnings per share
Adjustment for dilutive effect of stock option plan
11,744,924
11,735,495
3,436
20,167
Weighted average number of shares outstanding used to calculate diluted
11,748,360
11,755,662
earnings per share
83
ANNUAL REPORT 2020
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2020 and 2019 (tabular amounts in thousands of dollars, except share and per share amounts)
19. Pension plans
Defined contribution plan:
The Group has defined contribution pension plans that are available to virtually all of its Canadian employees with eligible
employee contributions based on 2.00% – 6.75% of annual earnings. The Group’s contributions of $1,655,000 (2019 –
$1,586,000) matches the employee contributions. The Group’s contributions related to its defined contribution pension
plans are recorded as follows: $1,240,000 (2019 – $1,190,000) in cost of sales, $205,000 (2019 – $197,000) in selling
and distribution, and $210,000 (2019 – $199,000) in general and administrative.
20. Provisions
Warranties
Site restoration
Benefits
Restructuring
Total
Balance at January 1, 2019
$ 581
$ 178
$ 296
$ 6,232
$ 7,287
Provisions made during the period
Provisions used during the period
Recovery of provisions (note 24)
807
(768)
–
130
(109)
–
19
(86)
–
947
(4,197)
(2,035)
1,903
(5,160)
(2,035)
Balance at December 31, 2019
$ 620
$ 199
$ 229
$ 947
$ 1,995
Balance at January 1, 2020
$ 620
$ 199
$ 229
$ 947
$ 1,995
Provisions made during the period
Provisions used during the period
1,439
(392)
(note 24)
Recovery of provisions (note 24)
–
257
(225)
–
61
(60)
–
–
(855)
1,757
(1,532)
(92)
(92)
Balance at December 31, 2020
$ 1,667
$ 231
$ 230
$ –
$ 2,128
Current portion
$ 1,667
$ 86
$ 58
$ –
$ 1,811
Non-current portion
$ –
$ 145
$ 172
$ –
$ 317
Warranties
The provision for warranties relates mainly to transformers sold during the years ended December 31, 2020 and
December 31, 2019. The provision is based on estimates made from historical warranty data associated with similar
products and claims experience. The Group expects to incur most of the liability over the next year.
Site restoration
The Group has committed to undertaking a joint remediation plan for the Glen Ewing property with the owner of an
adjoining industrial property and the co-owner of the property. The Group has recorded a liability for its estimated portion
of the joint remediation.
Benefits
The benefit provision relates to statutory pension and leave benefits related to the India facility. Substantially all of this
benefit is long-term.
Restructuring charges
The restructuring charges relate to estimated severance, termination benefits and closure costs in respect of the closure
of the Italian operations. Such costs are anticipated to be settled within the following year. See note 24 for details.
84
HAMMOND POWER SOLUTIONS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2020 and 2019 (tabular amounts in thousands of dollars, except share and per share amounts)
21. Sales
Canada
United States and Mexico
India
Italy – discontinued operations
2020
2019
$
109,080
$
116,996
198,324
14,693
322,097
–
225,709
16,077
358,782
281
$
322,097
$
359,063
As at December 31, 2020 the Company had contract liabilities of $204,000 (2019 – $268,000) included in accounts
payable and accrued liabilities.
22. Government assistance
The Government of Canada implemented the Canada Emergency Wage Subsidy program (“CEWS”) that provides a
subsidy of up to 75% of eligible remuneration paid by an eligible entity that experienced significant revenue declines
due to the COVID-19 global pandemic. In 2020, the Company has qualified for subsidy payments. The subsidy amounts
relating to the year have been recorded as a reduction in expenses as follows: cost of sales $5,557,000, selling and
distribution $776,000 and general and administrative $1,950,000 for a total of $8,283,000.
85
ANNUAL REPORT 2020
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2020 and 2019 (tabular amounts in thousands of dollars, except share and per share amounts)
23. Discontinued operations
In December 2018, the Company closed the Italian operations due to low sales volume and a weak economy. Prior to
this, the Italian operation was not previously classified as a discontinued operation. The 2019 consolidated statements
of operations have been presented for the years ended to show the discontinued operation separately from continuing
operations.
The 2020 Italy operations consist of an investment property which continues to be presented within continuing
operations.
Revenue
Cost of sales
Gross loss
Selling and distribution
General and administrative
Impairment of goodwill, intangibles and plant and equipment
Restructuring charges (recovery)
Loss from operations
Interest income
Loss on disposition of assets
Loss from discontinued operations before tax
Income tax
Loss from discontinued operations, net of tax
$
2019
281
1,461
(1,180)
225
335
–
(728)
(1,012)
–
(687)
(1,699)
–
$
(1,669)
In November 2019, the Group entered into an agreement to sell the inventory and certain equipment of the Italian
operation, and for the purchaser to assume certain of the employee obligations and lease the manufacturing facility from
the Group. Cash consideration paid to the Group in connection with the transaction was 1,086,000 EUR (approximately
$1,583,000 Canadian dollars). The transaction resulted in a loss on disposition in the amount of $687,000, calculated
as follows:
Total consideration
Property, plant and equipment
Inventory
Employee liabilities
Carrying value of net assets sold
Loss on disposition
86
Candian dollar values
$ 1,583
$ 1,539
885
(154)
$ 2,270
$ 687
HAMMOND POWER SOLUTIONS INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2020 and 2019 (tabular amounts in thousands of dollars, except share and per share amounts)
Cash flows from discontinued operations
Cash flows from discontinued operations, are included within the following components of the Statements of
Cash Flows:
Net cash used in operating activities
Net cash generated by investing activities
Net cash used in financing activities
24. Restructuring charges
2019 activity
$
2019
(643)
1,460
–
During 2019 additional information regarding restructuring costs was identified related to the closure of the Italian
operations, as outlined below. The following table highlights the amounts charged to expense for the twelve month period
ending December 31, 2019:
Cancellation and closure costs
Expected credit loss – VAT Receivable
Restructuring Charges
$
$
947
360
1,307
The amount of the cancellation and closure costs have been included in provisions in the amount of $947,000.
2020 activity
During 2020 the cancellation and closure costs of $855,000 were paid and $92,000 of the provision was reversed into
income to bring the provision balance to nil. The expected credit loss related to the VAT receivable continues to be
provided for and is included in the net accounts receivable value in the amount of $339,000.
25. Related party transactions
Related parties
Arathorn Investments Inc. beneficially owns 2,778,300 (2019 – 2,778,300) Class B common shares of the Company,
representing 100% of the issued and outstanding Class B common shares of the Company and 1,065,191 (2019 –
1,063,152) Class A subordinate voting shares of the Company, representing approximately 11.9% (2019 – 11.9%) of the
issued and outstanding Class A subordinate voting shares of the Company and as a result controls the Company. All
of the issued and outstanding shares of Arathorn Investments Inc. are owned by William G. Hammond, Chief Executive
Officer and Chairman of the Company. Total dividends paid during the year, directly and indirectly to William G. Hammond
were $1,306,000 (2019 – $1,075,000).
87
ANNUAL REPORT 2020
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2020 and 2019 (tabular amounts in thousands of dollars, except share and per share amounts)
Key management personnel compensation
Key management personnel include the Company’s directors and members of the executive management team.
Compensation awarded to key management is as follows:
Salaries and benefits
Share-based awards
26. Personnel expenses
2020
2019
$ 2,809
$ 2,308
518
367
$ 3,327
$ 2,675
2020
2019
Wages and salaries
$
57,246
$
58,972
Group portion of government pension and
employment pension and employment benefits
Contributions to defined contribution plans
16,636
1,655
$
75,537
$
27. Change in operating working capital
The table below depicts the receipt of (use of) cash for working capital purposes by the Company:
Accounts receivable
Inventories
Prepaid expenses and other assets
Accounts payable and accrued liabilities
Provisions
Foreign exchange
2020
$
10,926
$
1,720
(15)
(11,115)
(947)
(5,561)
$
(4,992)
$
16,314
1,586
76,872
2019
5,006
(2,290)
(384)
119
(5,160)
(3,665)
(6,374)
88
HAMMOND POWER SOLUTIONS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2020 and 2019 (tabular amounts in thousands of dollars, except share and per share amounts)
28. Segment disclosures
The Company operates in a single operating segment, being a manufacturer of transformers. The Company and its subsidiaries
operate in Canada, the United States, Mexico, Italy and India. Inter-segment sales are made at fair market value.
Geographic Segments
Sales
Canada
United States and Mexico
India
Italy – discontinued operations
Property, plant and equipment and right-of-use assets – net
Canada
United States
Mexico
Italy
India
Investment in properties
Canada
Italy
Investment in joint venture
Mexico
Intangibles, net
Canada
Italy
India
Goodwill
Canada
India
2020
2019
$
109,080
$
116,996
198,324
14,693
322,097
–
225,709
16,077
358,782
281
322,097
$
359,063
15,981
$
17,667
7,767
3,929
75
2,620
30,372
$
1,044
$
2,605
3,649
$
6,769
5,183
95
2,754
32,468
1,044
2,665
3,709
13,300
$
13,428
3,593
$
8
2,300
5,901
$
2,180
$
8,728
10,908
$
3,641
17
2,673
6,331
2,180
9,129
11,309
$
$
$
$
$
$
$
$
$
$
89
ANNUAL REPORT 2020
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2020 and 2019 (tabular amounts in thousands of dollars, except share and per share amounts)
29. Financial instruments
Fair value
The fair value of the Group’s financial instruments measured at fair value has been segregated into three levels. Fair
value of assets and liabilities included in Level 1 are determined by reference to quoted prices in active markets for
identical assets and liabilities. Fair value of assets and liabilities included in Level 2 include valuations using inputs other
than quoted prices for which all significant inputs are observable, either directly or indirectly. Fair value of assets and
liabilities included in Level 3 valuations are based on inputs that are unobservable and significant to the overall fair value
measurement.
The Group’s financial instruments measured at fair value consist of foreign exchange forward contracts with a fair
value of a net liability of $1,952,000 (2019 – net liability of $1,392,000) and are included in Level 2 in the fair value
hierarchy. To determine the fair value of the contracts, Management used a valuation technique in which all significant
inputs were based on observable market data. There have been no transfers between levels in 2020 or 2019. The gains
and losses from these contracts are grouped with foreign exchange gain on the statement of operations.
The carrying values of cash and cash equivalents, accounts receivable, bank operating lines of credit, and accounts
payable and accrued liabilities and other liabilities approximate their fair value due to the relatively short period to maturity
of the instruments. The Group’s note receivable is valued at the present value of the future receipts and has a fair
value of $nil due to collection concerns. The lease receivable is valued at the present value of the future receipts which
approximates the fair value
Derivative instruments
The Group has entered into forward foreign exchange contracts in order to reduce the Company’s exposure to changes
in the exchange rate of the U.S. dollar, Euro, Mexican Peso and Indian Rupee as compared to the Canadian dollar. At
December 31, 2020, the Company had outstanding forward foreign exchange contracts to buy and sell the following
contracts, all with maturity dates in January 2021.
Buy/Sell
Buy Currency
Selling Currency
Amount of Buy
BUY
BUY
BUY
BUY
BUY
EUR
EUR
USD
USD
USD
CAD
USD
CAD
INR
MXN
Buy/Sell
Sell Currency
Buying Currency
SELL
SELL
SELL
SELL
SELL
USD
EUR
EUR
USD
USD
MXN
CAD
USD
CAD
INR
Currency
11,800
5,700
83,500
8,949
12,657
Amount of
Sell Currency
25,000
23,600
11,400
46,500
4,529
Traded
Rate
1.5540
1.2210
1.2704 - 1.3099
73.0300 - 74.4800
19.892
Traded
Rate
19.9260 – 20.1420
1.5541-1.5550
1.1846 – 1.2221
1.2702
72.8500
90
HAMMOND POWER SOLUTIONS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2020 and 2019 (tabular amounts in thousands of dollars, except share and per share amounts)
At December 31, 2019, the Company has outstanding forward foreign exchange contracts to buy and sell the following
contracts, all with maturity dates in January 2020.
Buy/Sell
Buy Currency
Selling Currency
Amount of Buy
BUY
BUY
BUY
BUY
BUY
EUR
EUR
USD
USD
USD
CAD
USD
CAD
INR
MXN
Currency
9,200
8,000
104,000
9,198
12,357
Buy/Sell
Buy Currency
Selling Currency
Amount of Buy
SELL
SELL
SELL
SELL
SELL
USD
EUR
EUR
USD
USD
MXN
CAD
USD
CAD
INR
Currency
24,000
18,400
16,000
52,000
4,634
Traded
Rate
1.4562
1.1212
1.2990 - 1.3306
71.4200 - 72.0900
18.9440
Traded
Rate
18.9898 - 19.5083
1.4574 - 1.4682
1.1041 - 1.1222
1.2985
71.2000
As at December 31, 2020 the Group has recognized a net unrealized loss of $1,952,000 representing the fair value of these
forward foreign exchange contracts, comprised of an obligation recognized within accounts payable and accrued liabilities.
As at December 31, 2019 the Group recognized a net unrealized loss of $1,392,000, comprised of obligation recognized
within accounts payable and accrued liabilities.
Financial risk management
The Group is exposed to a variety of financial risks by virtue of its activities: market risk (including currency risk, interest
rate risk and commodity price risk) credit risk and liquidity risk. The overall risk management program focuses on the
unpredictability of financial markets and seeks to minimize potential adverse effects on financial performance. There
were no changes to types of risk arising from the Group’s financial instruments from the previous period.
Risk management is carried out by the finance department under the guidance of the Board of Directors. This
department identifies and evaluates financial risks in close cooperation with management. The finance department is
charged with the responsibility of establishing controls and procedures to ensure that financial risks are mitigated.
Currency risk
The Group operates internationally and is exposed to foreign exchange risk from various currencies, primarily U.S.
dollars, Mexican Pesos, the Euro and the Indian Rupee. Foreign exchange risk arises mainly from U.S. dollar denominated
purchases in Canada and Canadian sales to the U.S. as well as recognized financial assets and liabilities denominated
in foreign currencies. The Company manages its foreign exchange risk by having geographically diverse manufacturing
facilities and purchasing U.S. dollar raw materials in Canada. The Company also monitors forecasted cash flows in
foreign currencies and attempts to mitigate the risk by entering into forward foreign exchange contracts. Forward
foreign exchange contracts are only entered into for the purposes of managing foreign exchange risk and not for
speculative purposes.
91
ANNUAL REPORT 2020
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2020 and 2019 (tabular amounts in thousands of dollars, except share and per share amounts)
The following table represents the Group’s balance sheet exposure to currency risk as at December 31, 2020:
U.S. Dollars
Mexican Pesos
Euros
Indian Rupees
Cash
$ 5,928
$ 10,639
2020
2019
2020
852
2019
2020
2019
2020
2019
3,680
€ 1,526
€ 1,717
187,323
71,670
Accounts receivable
20,526
28,575
24,377
26,387
831
1,238
227,817
289,551
Long-term lease
receivable
Bank operating lines
of credit
–
–
(4,622)
(8,160)
–
–
–
–
2,208
2,332
(3,074)
(3,144)
–
–
–
–
Accounts payable
(13,373)
(19,507)
(9,612)
(10,376)
Lease obligation
(6,836)
(8,170)
–
–
(88)
–
(359)
(111,871)
(93,427)
–
(6,317)
(9,295)
Net exposure
$ 1,623
$ 3,377
15,617
19,691
€ 1,403
€ 1,784
296,952
258,499
A one cent ($0.01) decline in the Canadian dollar against the U.S dollar as at December 31, 2020 would have decreased
net earnings by $119,000 and increased equity by $22,000. This analysis assumes that all other variables, in particular
interest rates, remained constant. Inversely, a one cent ($0.01) increase in the Canadian dollar against the U.S. dollar as
at December 31, 2020 would have had an equal but opposite effect.
A one cent ($0.01) decline in the Canadian dollar against the Euro as at December 31, 2020 would have decreased
net earnings by $47,000 and increased equity by $21,000. Inversely, a one cent ($0.01) increase in the Canadian dollar
against the Euro as at December 31, 2020 would have had an equal but opposite effect.
A one cent ($0.01) decline in the Canadian dollar against the Indian Rupee as at December 31, 2020 would have
increased net earnings and equity by $54,000. Inversely, a one cent ($0.01) increase in the Canadian dollar against the
Indian Rupee as at December 31, 2020 would have had an equal but opposite effect.
A one cent ($0.01) decline in the Canadian dollar against the Peso as at December 31, 2020 would have decreased net
earnings by $2,000 and increased equity by $10,000. Inversely, a one cent ($0.01) increase in the Canadian dollar against
the Peso as at December 31, 2020 would have had an equal but opposite effect.
Credit risk
Credit risk arises from the possibility that the Group’s customers and counter parties may experience difficulty and
be unable to fulfill their contractual obligations. The Group manages this risk by applying credit procedures whereby
analyses are performed to control the granting of credit to its customer and counter parties based on their credit rating.
As at December 31, 2020, the Group’s accounts receivable are not subject to significant concentrations of credit risk. The
long-term lease receivable is subject to credit risk, which is mitigated by the security of the related plant. The Company’s
maximum exposure to credit risk associated with the Group’s financial instruments is limited to their carrying amount.
The Group’s exposure to customer credit risk is influenced mainly by the individual characteristics of each customer.
However, management also considers the factors that may influence the credit risk of its customer base, including the
default risk associated with the industry and country in which customers operate.
Management has a credit policy under which each new customer is analysed individually for creditworthiness before
the Group’s standard payment and delivery terms and conditions are offered. The Group’s review includes external
ratings, if they are available, financial statements, credit agency information, industry information and in some cases
bank references. Sale limits are established for each customer and reviewed quarterly. Any sales exceeding those limits
require approval from Executive management.
The Group limits its exposure to credit risk from trade receivables by establishing a reasonable payment period. Many
of the Group’s customers have been transacting with the Group for a number of years, and none of these customers’
92
HAMMOND POWER SOLUTIONS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2020 and 2019 (tabular amounts in thousands of dollars, except share and per share amounts)
balances have been written off or are credit-impaired at the reporting date.
In monitoring customer credit risk, customers are grouped according to their credit characteristics, including their
geographic location, industry, trading history with the Group and existence of previous financial difficulties.
An allowance account for accounts receivable is used to record impairment losses unless the Group is satisfied that
no recovery of the amount owing is possible; at which point the amounts are considered to be uncollectible and are
written off against the specific accounts receivable amount attributable to a customer. The number of days outstanding
of an individual receivable balance is the key indicator for determining whether an account is at risk of being impaired.
Expected credit losses are required to be measured through a loss allowance at an amount equal to the 12-month
expected credit losses or full lifetime expected credit losses. The Group has used past due information to determine
that there have been no significant increases in credit risk since initial recognition. There are balances in excess of 30
days past due but the Group does not presume that credit risk has increased given the characteristics of the Group’s
customers, the industries in which they operate, the customer payment track records and the nature of the products the
Group sells.
During the year, the expected credit losses for trade accounts receivables decreased $420,000 (2019 – increased
$516,000), for which a recovery (2019 – expense) was recognized in general and administrative expenses. The aging of
accounts receivable and the related allowance is as follows:
December 31, 2020
December 31, 2019
Not past due
Past due 0-30 days
Past due 31-120 days
Past due more than 120 days
Gross
Allowance
Gross
Allowance
$ 35,192
$ –
$ 43,287
$ –
10,461
6,405
3,597
–
–
2,577
11,251
6,991
5,472
–
–
2,997
$ 55,655
$ 2,577
$ 67,001
$ 2,997
Credit risk
The carrying amount of financial assets representing the maximum exposure to credit risk at the reporting date was:
Cash and cash equivalents
Accounts receivable
Lease receivable
Carrying Amount
December 31, 2020
December 31, 2019
$
$
14,795
$
53,078
3,433
71,306
$
23,371
64,004
3,397
90,772
93
ANNUAL REPORT 2020
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2020 and 2019 (tabular amounts in thousands of dollars, except share and per share amounts)
The maximum exposure to credit risk for accounts receivable at the reporting date by geographic region was:
Canada
United States
Mexico
Italy
India
Interest rate risk
Carrying Amount
December 31, 2020
December 31, 2019
$
19,711
$
26,297
1,561
268
5,241
$
53,078
$
17,435
36,987
1,818
827
6,937
64,004
Interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because of changes in market
interest rates. Financial assets and financial liabilities with variable interest rates expose the Group to cash flow interest
rate risk. Changes in market interest rates also directly affect cash flows associated with the Group’s bank operating lines
of credit that bear interest at floating interest rates.
The Group manages its interest rate risk by minimizing the bank operating lines of credit balances by applying excess
funds while maintaining the liquidity necessary to conduct operations on a day-to-day basis as well as actively monitoring
interest rates. A 1% increase or decrease in interest rates as at December 31, 2020 would increase or decrease net
earnings by approximately $161,000 (2019 – $327,000) respectively.
Commodity price risk
A large component of the Group’s cost of sales is comprised of copper and steel, the costs of which can vary significantly
with movements in demand for these resources and other macroeconomic factors. To manage its exposure to changes
in commodity prices, the Group will enter into supply contracts with certain suppliers, and from time to time will enter
into forward commodity purchase contracts. As at December 31, 2020, no forward commodity purchase contracts were
outstanding (2019 – none).
Liquidity risk
Liquidity risk is the risk that the Group will not be able to meet its obligations as they become due.
The Group manages its liquidity risk by forecasting cash flows from operations and anticipated investing and financing
activities. Senior Management is also actively involved in the review and approval of planned expenditures.
94
HAMMOND POWER SOLUTIONS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2020 and 2019 (tabular amounts in thousands of dollars, except share and per share amounts)
The following are the carrying amounts and related contractual maturities of the Group’s financial liabilities:
December 31, 2020
Carrying amount
1 year or less
1-2 years
2-5 years
Bank operating lines of credit
$ 16,073
$ 16,073
$ –
Accounts payable and accrued liabilities
Derivative liabilities
44,227
1,952
44,227
1,952
–
–
–
–
–
$ 62,252
$ 62,252
$ –
$ –
December 31, 2019
Carrying amount
1 year or less
1-2 years
2-5 years
Bank operating lines of credit
$ 32,697
$ –
$ 32,697
Accounts payable and accrued liabilities
Derivative liabilities
54,824
1,392
54,824
1,392
–
–
–
–
–
$ 88,913
$ 56,216
$ 32,697
$ –
95
ANNUAL REPORT 2020
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2020 and 2019 (tabular amounts in thousands of dollars, except share and per share amounts)
Reconciliation of movements of liabilities to cash flows arising from financing activities.
The following is a reconciliation between the opening and closing balances for liabilities arising from financing activites:
Liabilities
Equity
Bank Operating
Lease
Lines of Credit
Liabilities
Share
Capital
Retained
Earnings
Total
Balance January 1, 2020
$ 32,697
$ 11,404
$ 14,491
$ 85,339
$ 143,931
Advances of bank operating
lines of credit
Interest payments
Cash dividends paid
Repayment of lease liability
(16,624)
(917)
–
–
–
–
(2,650)
–
–
–
–
–
–
(3,993)
–
(16,624)
(917)
(3,993)
(2,650)
Total changes from financing
$ (17,541)
$ (2,650)
$ –
$ (3,993)
$ (24,184)
Other changes
Liability-related
Interest expense
Foreign exchange
Non-cash additions to
lease liabilities
Total liability-related
other changes
Equity-related
Net income
Total equity-related
other changes
917
–
–
330
(107)
343
–
–
–
–
–
–
1,247
(107)
343
$ 917
$ 566
$ –
$ –
$ 1,483
–
–
–
14,062
14,062
$ –
$ –
$ 14,062
$ 14,062
Balance December 31, 2020
$ 16,073
$ 9,320
$ 14,491
$ 95,408
$ 135,292
96
HAMMOND POWER SOLUTIONS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2020 and 2019 (tabular amounts in thousands of dollars, except share and per share amounts)
Liabilities
Equity
Bank Operating
Lease
Lines of Credit
Liabilities
Share
Capital
Retained
Earnings
Total
Balance January 1, 2019
$ 32,601
$ 11,657
$ 14,217
$ 79,218
$ 137,693
Implementation of accounting
standard
–
–
–
(1,960)
(1,960)
Adjusted balance January 1, 2019
$ 32,601
$ 11,657
$ 14,217
$ 77,258
$ 135,733
Advances of bank operating
lines of credit
Interest payments
Proceeds from issue of
share capital
Share repurchase
Cash dividends paid
Repayment of lease liability
96
(1,420)
–
–
–
–
–
(325)
–
–
(2,431)
–
–
290
(77)
–
–
–
–
–
(239)
(3,287)
–
96
(1,745)
290
(316)
(3,287)
(2,431)
Total changes from financing
$ (1,324)
$ (2,756)
$ 213
$ (3,526)
$ (7,393)
Other changes
Liability-related
Interest expense
Non-cash additions to
lease liabilities
Total liability-related
other changes
Equity-related
Share repurchase
Exercise of stock options
Net income
Total equity-related
other changes
1,420
–
–
1,853
–
–
–
–
1,420
1,853
$ 1,420
$ 1,853
$ –
$ –
$ 3,273
–
–
–
–
–
–
12
49
–
–
–
12
49
11,607
11,607
$ –
$ 61
$ 11,607
$ 11,668
Balance December 31, 2019
$ 32,697
$ 10,754
$ 14,491
$ 85,339
$ 143,281
97
ANNUAL REPORT 2020 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2020 and 2019 (tabular amounts in thousands of dollars, except share and per share amounts)
30. Capital risk management
The Group’s objective is to maintain a strong capital base so as to maintain investor, creditor and market confidence
and to sustain future business development. The Group includes cash, bank operating lines, long-term debt and equity,
comprising of share capital, contributed surplus and retained earnings in the definition of capital. The Group is not
subject to externally imposed capital requirements and there has been no change with respect to the overall capital risk
management strategy during the year ended December 31, 2020.
The following table sets out the Group’s capital quantitatively at the following reporting dates:
Cash and cash equivalents
Bank operating lines of credit
Lease liabilities
Share capital
Contributed surplus
Retained earnings
December 31, 2020
December 31, 2019
$
14,795
$
23,371
(16,073)
(9,320)
14,491
2,498
95,408
(32,697)
(11,404)
14,491
2,498
85,339
$
101,799
$
81,598
31. Determination of fair values
A number of the Group’s accounting policies and disclosures require the determination of fair value, for both financial and
non-financial assets and liabilities. Fair values have been determined for measurement and/or disclosure purposes based
on the following methods. When applicable, further information about the assumptions made in determining fair values
is disclosed in the Notes specific to that asset or liability.
(a) Derivatives
The fair value of forward exchange contracts is based on valuations obtained from third parties, based on observable
market inputs.
Fair values reflect the credit risk of the instrument and include adjustments to take account of the credit risk of the
Group entity and counterparty when appropriate.
(b)
Non-derivative financial assets
The fair value of the lease receivable is calculated based on the present value of future principal and interest cash flows,
discounted at the market rate of interest at the reporting date.
(c)
Share-based payment transactions
The fair value of DSUs is determined in accordance with the DSU Plan, which uses the average closing price for HPS
shares for the five trading days immediately preceding the relevant date.
98
HAMMOND POWER SOLUTIONS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2020 and 2019 (tabular amounts in thousands of dollars, except share and per share amounts)
(d)
Investment property
The fair values of the investment properties are based on available market evidence as determined by third party valuators
using comparable property sale transactions and is considered to be valued at Level 3 of the fair value hierarchy.
32. Subsequent events
Dividends
On March 5, 2021, the Company declared a dividend of eight and a half cents ($0.085) per Class A subordinate voting
shares of HPS and a quarterly cash dividend of eight and a half cents ($0.085) per Class B common shares of HPS
payable on March 25, 2021 to shareholders of record at the close of business on March 18, 2021. The ex-dividend date
is March 17, 2021.
99
ANNUAL REPORT 2020
HPS Offices, Manufacturing Facilities
and Warehouse Locations
Canada
Hammond Power Solutions Inc.
Corporate Head Office
595 Southgate Drive
Guelph, Ontario N1G 3W6
15 Industrial Road
Walkerton, Ontario N0G 2V0
10 Tawse Place
Guelph, Ontario N1H 6H9
Delta Transformers Inc.
795 Industriel Boul.
Granby, Quebec J2G 9A1
3850 place de Java
Suite 200
India
Hammond Power Solutions
Private Limited
2nd Floor
Icon Plaza, H. No. 5-2/222/IP/B
Allwyn X-Roads
Miyapur, Hyderabad – 500049
Italy
Hammond Power Solutions S.p.A.
Via Amedeo Avogadro 26
10121 Torino, Italy
at R & P Legal
Mexico
Hammond Power Solutions S.A.
de C.V.
Mexico
Corefficient, S. de R.L. de C.V.
Ave. Avante #840
Parque Industrial Guadalupe
Guadalupe, Nuevo León, México
C.P. 67190
United States
Hammond Power Solutions, Inc.
1100 Lake Street
Baraboo, Wisconsin 53913
17715 Susana Road
Compton, California 90224
6550 Longley Lane, Suite 135
Reno, Nevada 89511
Brossard, Québec J4Y 0C4
Ave. Avante #810
Parque Industrial Guadalupe
Guadalupe, Nuevo Leon, C.P. 67190
Monterrey, Mexico
Ave. Avante #900
Parque Industrial Guadalupe
Guadalupe, Nuevo Leon, C.P. 67190
Monterrey, Mexico
Annual General Meeting of Shareholders to be held:
Thursday, May 13, 2021
1:30 p.m. (Eastern Standard Time)
Via Teleconference
Audio Conference details:
Calling from Canada or the United States: 1-800-309-1256
United States, Brooklyn and International : 1-929-477-0414
Participant Code: 345658
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100
Corporate Information
Corporate Officers and
Directors
William G. Hammond *
Chairman of the Board and
Chief Executive Officer
Chris R. Huether
Corporate Secretary and
Chief Financial Officer
Donald H. MacAdam *+
Director
Grant C. Robinson *+
Director
David J. FitzGibbon *+
Director
Dahra Granovsky *+
Director
Fred M. Jaques *+
Director
Anne Marie Turnbull *+
Director
David M. Wood *+
Director
* Corporate Governance Committee
+ Audit and Compensation Committee
Stock Exchange Listing
Legal Representation
Toronto Stock Exchange (TSX)
Trading Symbol: HPS.A
Registrar and Transfer Agent
Dentons Canada LLP
77 King Street West, Suite 400
Toronto Dominion Centre
Toronto, Ontario M5K 0A1
Computershare Investor Share
Banking Institution
Services Inc.
100 University Avenue
Toronto, Ontario
Canada M5J 2Y1
Auditors
KPMG LLP
115 King Street South
Waterloo, Ontario N2J 5A3
JP Morgan Chase
Bank N.A. 66 Wellington Street West,
Suite 4500
Toronto, Ontario M5K 1E7
Investor Relations
Contact: Dawn Henderson,
Manager Investor Relations
Phone: 519.822.2441 x414
Email:
ir@hammondpowersolutions.com
The Hammond Museum
of Radio is one of North America’s
premiere wireless museums. It is
home to thousands of receivers and
transmitters dating back to the turn
of the century. The museum is open
regular business hours Monday to
Friday; evenings and weekends by
special appointment.
Tours can be arranged by calling:
519-822-2441 x 590
ANNUAL REPORT 2020
101
HAMMONDPOWERSOLUTIONS.COMTHE HUMAN CAPACITY FOR BURDEN IS LIKE BAMBOO – FAR MORE FLEXIBLE THAN YOU’D EVER BELIEVE AT FIRST GLANCE.