ELECTRIFICATION
Annual Report 2021
“ Our planet and life are
underpinned by electric
power and the expansion of
electrification is accelerating.
We hear it every day as
companies and countries
globally are looking to
reduce their carbon footprint
through the use
of electrical power. ”
What’s Inside:
Electrification
Business Growth
What Transformers Do
2021 Highlights
Where We’re Headed
Strategic Thinking
CEO’s Message
Review of Operations
1
3
4
6
8
10
13
14
The Numbers
Management’s Discussion
and Analysis
Audit Report
18
20
43
Consolidated Financial Statements
46
Notes to Consolidated
Financial Statements
Company Information
51
100
Passionate People
Electrifying a Better World
Electrification: The action or process of charging something
with electricity; the conversion of a machine or system
to the use of electrical power.
Transformers are the unsung heroes of the
regulated the power all night long stepping
modern world. They function quietly in the
down the 7,200 volts to the 240 volts that
background, working tirelessly, yet rarely
your household electrical service requires.
receiving the praise they deserve for keeping
As you look at your phone to check
society electrified and functioning each and
the weather, the transformers in the data
every day.
centre housing
that critical application
Transformers affect nearly just about
and data play a vital role in the monitoring
every part of our daily lives, reducing or
and metering of operations, ensuring that
increasing the voltage of an alternating
systems are kept up and running to deliver
current in many industries and in many
the information you need on demand. You’ll
applications.
continue to benefit from the functioning
It’s 6:00am and your alarm goes off
of these transformers as you go about
signaling the start of your day. The transformer
your day from your home or away from
on the power line feeding into your home has
home office.
1
ANNUAL REPORT 2021
HPS Electrifies Communities
When you turn the key in your vehicle to
As the world
looks to replace the
head out for groceries at the end of the day,
technologies that use fossil fuels with
you can thank the transformer on the oil rig
technologies
that use electricity, HPS
in the Atlantic that was an integral part in the
is meeting
the electrification demand.
operation to extract, process and store the
Depending on the resources used to generate
petroleum and natural gas that lies in the rock
electricity, electrification can potentially
2
formations beneath the seabed. Or perhaps
reduce carbon dioxide (Co2) emissions from
you have decided to go electric, quietly pulling
the transportation, building and industrial
into the parking lot of the grocery store in
sectors which account for about 63 percent
your electric vehicle and into a spot equipped
of all United States
(“U.S.”) greenhouse
to charge your car while you’re filling up your
gas emissions.1
cart. A series of transformers can be thanked
The combination of our
resilience,
for ensuring that you are getting the right
drive, decades of experience, commitment,
power, right when you need it.
engineering
expertise,
solid
supplier
As the day draws to a close and you dim
relationships, and a broad and unique
the lights to wind down before bed, take a
business perspective gained through our
moment to thank the unsung transformer
diverse products, customers and markets are
heroes that have kept your day electrified –
all key success factors critical to our success
working quietly behind the scenes delivering
in 2022 and beyond.
the power you’ve needed when you needed
it – every time.
1 Source: Electrification 101, Kathryne Cleary, December 2019. Data from EPA “Inventory of US Greenhouse Gas Emissions and
Sinks” (2017)
HAMMOND POWER SOLUTIONS
21Global Locations
1,400
Employees
$380M
Global Sales
~600,000
Units/Year
Business Growth
Sales through our expanded U.S. distributor
pandemic. In addition, we are seeing significant
network have been growing at the highest rate
growth and future opportunities in sectors such
we’ve seen as the U.S. economy recovers from the
as oil and gas, mining, and data centres.
Sales Channel
Geographic Sales
3
12%
Private Label
24%
OEM
64%
Distribution
$18,280
India
$130,184
Canada
$231,738
United States/
Mexico
(in thousands of Canadian dollars)
ANNUAL REPORT 2021 Transformers are
essential/multi-purpose/ubiquitous
in all electrical grids
GENERATION
Transformers step up power for
long distance transmission.
TRANSMISSION
Transmission may require several
transformers based on distance
and voltage.
4
HAMMOND POWER SOLUTIONS COMMERCIAL
Change voltage levels to supply
electrical loads required.
DISTRIBUTION
Electricity is stepped down for
delivery along distribution lines.
RESIDENTIAL
Change voltage levels to
supply electrical loads for
consumption in residential
settings.
INDUSTRIAL
Change voltage levels to
supply electrical loads for
specific equipment.
5
ANNUAL REPORT 2021 2021 Highlights
6
HPS’ ERP System
The implementation of a company-wide Enterprise
Employee Health & Safety
In 2020 and 2021, HPS implemented robust health
Resource Planning (“ERP”) system has allowed
and safety precautions dedicated to providing
HPS to enhance the availability and quality of
a safe working environment for our employees
information accessible to support operational
while continuing to manufacture and serve our
performance,
improve
customer
service,
customers during this volatile, unpredictable time.
supplement strategic decision making and audit
As an essential service, the Company has continued
and control – working toward providing one global,
to remain operational during the entire pandemic
integrated, consistent source of
information
to ensure our customers have the transformers
and data. During Quarter 2, 2021 the ERP
they require to fulfill the many applications they
system went live in our operation in Granby,
are purchased for.
Quebec and represents the Company’s final
operation to be converted to the platform.
HAMMOND POWER SOLUTIONS Data Centres
The global pandemic forced companies to work
EV Charging Stations
To recharge an electric vehicle (“EV”), you treat it
remotely and schools to teach remotely creating
like your smartphone – just plug it in while you’re
more demand for rapid access to information
not using it. EV owners are used to plugging
from data centres. Maintaining the quality and
their vehicles in when they can, as every hour
availability of online services while at the same
adds approximately 40km back into the battery.
time regulating the general increase in demand
Why not have it filling up, while you’re going on
is no simple task. Data centres not only ensure
about your life? One Canadian grocery store chain
that
information technology
(“IT”) companies
knows this, so they have committed to installing
function smoothly but also society in general.
Level 2 EV charging stations in 90 of their locations
HPS transformers are integral to this estimated
integrating HPS transformers to regulate the
$105.6 billion by 2026 – rapid growth industry.1
power for different voltage and power level needs.
7
Hospital Infrastructure Growth
HPS transformers were specified by five of the
largest hospital infrastructure projects in Canada
and the U.S. in 2021. HPS earned a “preferred
supplier” status because of our proven track record
of delivering a high quality product, on time and
within budget – resulting in no down time.
1 www.mordorintelligence.com/industry-reports/service-market-for-data-center
ANNUAL REPORT 2021 Where We’re Headed
8
HPS is in on the ground floor of expanding
As companies refine ways to reach other
energy needs, powering communities
planets, HPS transformers power the
when the load gets too heavy for the
technology and systems
to continue
current infrastructure due to the increase
advancement in these areas.
of internet usage or when they experience
the effects and devastation of extreme
More sustainable technologies that reduce
weather events.
environmental impact are a must for the
future of our planet, HPS is an integral
Potted transformers used in high efficiency
part of the power process of new breaking
solar-powered bridge lighting have been
technology – meeting the specifications of
specified nationally through HPS channels.
the innovators.
These low voltage tough-as-nails units
operate in all conditions keeping the power
We are poised and ready to meet the future
on even when the weather is extreme.
needs of the world’s communities.
HAMMOND POWER SOLUTIONS HPS Provides:
For our Customers
• Compliance with regulatory requirements;
For our Shareholders
• Escalating growth of the distribution channel;
• New product development – including an
• New global customers;
expanded power quality offering;
• Expanded relationships with existing customers;
• Expanded product offering using cast
• Capital investment in North American
resin technology;
manufacturing facilities in Canada, the U.S.,
•
Superior customer service;
• Accurate ship on time; and
India and Mexico;
• Establishment of a state-of-the-art core
• Competitive pricing for our products.
manufacturing facility in Mexico;
• Strong earnings per share, solid cash generation;
and
• Quarterly dividends paid with an attractive yield.
For our Employees
• The tools to facilitate their best work;
•
Space and time for innovation and
development;
•
Safety in the workplace, including heightened
protocols during the COVID-19 pandemic; and
• Ability for remote work, where able, to help
manage school closures and health concerns.
HPS’ strategic vision and operational initiatives
support our industry leadership, operational strength
and financial stability now and into the future.
9
ANNUAL REPORT 2021
Strategic Thinking
Our Purpose
We are passionate people energizing a better world.
Our Vision
To be a leading global supplier of transformers and magnetics within our chosen markets.
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.
Our Strategic Pillars
10
Customers
and Markets
Operational and
Financial Excellence
Drive organic growth through
Achieve operational excellence via
competitive product offering and
continuous improvement and efficiency
unparalleled customer experience, and
plays, and grow revenue / EBITDA with
enhance strategic growth via acquisitions.
opportunistic acquisitions and cost
reduction initiatives.
People
and Culture
Build the next leadership team, and be a
preferred employer due to our clarity of
purpose and employee value proposition.
Sustainability
Design energy-efficient products;
shrink the ecological footprint of our
operations and energize the world
responsibly for generations to come.
HAMMOND POWER SOLUTIONS
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
11
HPS Corporate Sustainability
Our passion for sustainability ensures that the world is energized today for future generations
to come. We commit to designing energy-efficient products; to shrinking the ecological
footprint of our operations; and to developing a workplace which fosters inclusion and
innovation.
Our 5 Pillars of Sustainability
1. Economics
2. People
3. Community
4. Environment
5. Continuous Improvement
ANNUAL REPORT 2021 “ The demand for
our transformers
particularly in
North America
continues to accelerate
and sales volumes
have returned to
pre-pandemic levels. ”
12
HAMMOND POWER SOLUTIONS
To Our Shareholders
We are very pleased to report a strong year of
performance given the challenging and volatile
environment that we faced in 2021.
We delivered sales growth of 18% and earnings
and meet the needs of our customers that made
growth of almost 8% during a year riddled with
the difference. None of this would have been
material shortages and supply chain delays,
possible without the passion, engagement and
unprecedented material cost increases, and an
hard work of our employees. I would like to take
unpredicted resurgence
in business from all
this opportunity to recognize and thank not only
quarters, all the while managing through the
our employees who helped to make 2021 a very
challenges created by two new variant surges of
positive year, but also our valued suppliers who
the COVID-19 pandemic, never losing sight of our
did their best during very difficult times to support
focus on customer service as well as the health
our plants building all of the products we could to
and well-being of our employees.
meet our growth and satisfy our distributors and
It doesn’t seem that long ago when we were
customers.
all dealing with the first wave of the COVID-19
I believe that 2022 will be even better, yet
pandemic as it washed over the world and
unfortunately as I write this, serious geopolitical
13
caused a short but very severe global recession
events
in Eastern Europe are creating new
in 2020. The significant rebound in growth in late
uncertainties while their effects on us and the
2020 which accelerated in 2021 presented both
broader global economy are still speculative. But
opportunities and challenges. The strengths and
as we did in 2020 and 2021, I believe there is no
capabilities that we built across our organization
stronger company in the dry transformer business
over the last decade helped HPS weather these
that can weather these storms than Hammond
storms better than any dry transformer company
Power Solutions. We have a strong momentum
in North America. Our diversity in geography,
carrying us into 2022.
markets, channels and products, as well as being
the biggest in our business, gave Hammond both
tactical and strategic advantages. But through
all of this, it was our focus on doing the best
that we can under difficult circumstances to try
William G. Hammond
CHAIRMAN OF THE BOARD & CHIEF EXECUTIVE OFFICER
ANNUAL REPORT 2021
Review of Operations
Over the last five years, we have built a
business with greater resilience and diversity.
Over the last two years, we have all been
the shortage of containers, shortages of
tested by so many new and unexpected
workers and COVID-19 outbreaks shutting
events. It has been a very challenging time,
ports down, coupled by the sheer volume
and I am hopeful that the worst of this
of things moving around the world again,
pandemic is behind us and we can move
lengthy supply chain delays complicated
onto whatever the new normal looks like.
the situation even more.
After the global recession of 2020, we
Despite all of this, we were able to
were all looking for a better 2021. Business
increase our sales by 18% and our net
in many sectors started to rebound in
earnings by almost 8% over 2020. I am
the last part of 2020 and this momentum
very proud of our performance under the
accelerated into 2021. I don’t think any of
circumstances and feel that we are even
us were expecting the new challenges that
stronger after maneuvering through the
came with the growing economy. Mines,
crucible of the last two years. Much of this
steel mills and factories across the world
is because of the strategic and operational
were shut down during the severe recession
advantages that we have built over the last
of 2020. As the first wave of the COVID-19
decade that can be defined by one word -
pandemic started to pass and the global
diversification. In our business, there is no
economy came to life again, the production
other dry transformer company that has the
of materials and components could not
diversity of geographical markets, multiple
catch up fast enough. These issues became
plants in multiple countries, the diversity
even more evident as growth accelerated
of markets and channels, as well as the
even more in 2021, and if this wasn’t
broadest range of dry transformers, both
challenging enough, costs of everything
custom and standard, of any competitor.
began to increase as well. In fact, we had
In addition to this, we also have a highly
to deal with the greatest inflation we have
engaged and passionate employee culture
experienced in over 40 years. Then on top
focused on doing whatever we can to meet
of this, for a variety of reasons such as
the needs of our distributors and customers.
14
HAMMOND POWER SOLUTIONS
Growth in 2021 came from multiple geographies,
capabilities and participate in the consolidation of the
markets and channels. Our U.S. sales grew by 16.8%,
Mexican transformer industry. We have already seen
in Canada we grew by 19.3%, in India our sales grew
keen interest from distributors, OEMs and building
by 24.4%, and by the end of 2021 we began to sell
developers in working with Hammond – all supported
transformers in Mexico and Latin America. Our U.S.
from our facilities and staff in Monterrey. We see very
distributor channel continued to be a massive growth
sizable potential and growth in the years to come from
engine for HPS. In the last two years we have added
Mexico, Central America, selective countries in South
over 400 new distributor branches across the U.S. – and
America and the Caribbean.
since 2015 we have added close to 2,000. With this
In addition to growth from our traditional markets,
large network of distributors, we have not only increased
we are also starting to see new growth opportunities
our market share but also been able to participate in
from our expansion into power quality. For many years,
new markets and applications as the North American
we designed and built reactors for certain kinds of
economy has come back to life. Much of this growth is
power quality applications. This market has evolved over
the result of the superior service we can provide from
the last decade with the introduction of more active
the largest and broadest inventory of transformers from
product solutions and as a result, we decided to expand
our nine regional warehouses across North America.
our product offering and capabilities to broaden our
With the global economy surging back and the
participation in this growing market. We also recognized
increased consumption of resources, we have also seen
the opportunity to take advantage of our relationships
interest grow in our Original Equipment Manufacturer
and scale in the North American distribution channel
(“OEM”) business late in the year. As part of this growth,
to grow and take market share from two established
we have added a number of new large OEM customers
competitors in this business. One of the ways that we
building data centre systems for the North American
have done this is through the acquisition of a company
market as well as new oil drilling technology being used
called Mesta located near Pittsburgh, Pennsylvania in
in the Middle East.
2021. This small but highly profitable company builds
15
This growth, be it through our distributor channel
a line of specialized active filter systems which will help
or direct to our OEM customers, is coming from a broad
us broaden our power quality experience and product
range of markets. They include new emerging markets
capabilities. They are also involved in producing a line of
like Electric Vehicle (“EV”) recharging, solar and energy
products used in the induction heating business or more
storage, data centers, distribution centers, oil and gas
simply put furnaces that melt silica for the production
pumping, pipeline expansions, mining equipment,
of computer chips. This particular market is very busy
condominium construction, hospitals, transit expansions,
right now given the expansion of chip manufacturing in
new naval ship construction, elevator manufacturers
North America and Europe.
and factory expansions.
Through all of this growth, we have had to deal with
As mentioned earlier in 2021, after a delay of
the greatest inflationary pressures since the 1970’s. This
almost two years caused by the COVID-19 pandemic,
has resulted in multiple and significant cost increases in
HPS started to market and sell our products in Mexico
core steel, copper and aluminum conductors, enclosures,
and Latin America. With three plants in Monterrey
packaging and everything in between that goes into
and a highly engaged and enthusiastic group of
building transformers. During 2021, we
increased
managers and employees, we believe that HPS is well
our prices four times in an effort to recoup our cost
positioned to take advantage of our broad product
increases. Despite these price increases throughout
ANNUAL REPORT 2021
REVIEW OF OPERATIONS
the year, we were at times not able to recover some
remain cautious about investing in new plants until
costs that were rising faster than expected. In the end
we understand and feel more comfortable about how
because of all of this, our gross margins did not grow
the global economy may perform through the current
as much as we would have expected given the higher
uncertainty in the years ahead.
volumes during the year. As an organization however,
We were also very active in a variety of ways
we reacted with greater speed and agility than ever
to
improve the talent and engagement of our
before to these cost increases, projecting them forward
employees across the organization. This included the
as best as possible, and implementing multiple price
implementation of our new HRMS, as well as a new
increases. I firmly believe that our margins would have
leadership development program and broadening the
been more adversely affected if we hadn’t acted with
talent depth across the organization in concert with our
such speed and aggressiveness. I would also like to
formal succession planning process.
recognize the tremendous time and effort of our supply
And in order to improve how we align and manage all
chain employees working with our suppliers to expand
business functions in the Company, we began a project
our allocations, looking for substitute materials and
to design and implement a formal process to drive
components where possible, as well as trying their best
continuous improvement of management and business
to keep the containers of materials and products moving
practices. Corporations that have these management
from Europe and China to North America.
systems in place improved efficiencies, reduced waste
During
the year we made some significant
and costs, improved communication and alignment and
investments
in
systems and equipment across
ultimately drive better customer service and financial
the organization. Like most companies, we had to
performance. We are continuing to design and plan
quickly expand and improve a myriad of capabilities
to roll out an initial version of the Hammond Business
to allow remote working by most of our salaried
System in 2022 before implementing it more fully and
employees. We
invested time and money
into a
across all locations at the beginning of 2023.
16
variety of business system improvements including the
Given our goal of growing sales and expanding our
continued implementation of our global ERP platform
market penetration, we engaged on multiple fronts to
upgrade across all locations, a new Human Resource
try and acquire one or more companies in 2021. One
Management
System,
(“HRMS”),
electrical
and
was a competitor, one was in a different segment of
mechanical design automation, as well as shop floor
the electrical business and one was the power quality
information automation And lastly, we began to evaluate
company called Mesta. We were only successful in
new Customer Relationship Management (“CRM”) tool
acquiring Mesta. But we have recently engaged a U.S.
and price management systems that would improve
M&A firm in 2022 to help us look for and hopefully
the flow of information and decision making across
succeed in acquiring a company and business that will
the Company.
help us grow and further diversify in the decade ahead.
In addition to business systems, we also invested in
I would like to point out that we accomplished all
new equipment to expand the capacity of our existing
of the above during a year when we had no choice but
facilities in order to handle the increased growth rate.
to deal with the challenges and uncertainty created by
This included equipment investments in our Walkerton,
this ongoing pandemic. Like all companies, we had to
Ontario plant, our Mexican plants, as well as our
manage through two new COVID-19 pandemic variants
operations in India. Our goal is to maximize the output
that swept across our communities causing higher
from our seven existing North American plants and
absenteeism and ever changing restrictions depending
HAMMOND POWER SOLUTIONS
on the country, province, state and health district you
We are the dominant North American
leader
in
were located in. We happen to have operations in
dry-type transformers, and we are one of the largest and
four countries, two provinces, four states, and eight
most profitable companies in this business worldwide.
local health districts – all with differing policies and
Our superior service, scale and product quality gives
guidelines. I am proud to say that we were successful
us premium pricing power. We have a hard working
in our most important goal of protecting the health and
and passionate employee culture. We are committed
safety of our employees over the last two years, and
to continuous
innovation and
investment
in the
during this time did not have to shut down any of our
transformer business. We have a relentless focus on our
North American plants due to infections. Unfortunately,
customers and their needs. All of this is the foundation
our Indian plants were forced to shut down in 2020
of our industry leading reputation and success.
and 2021 for a period of time due to a country-wide
We are very proud of our performance in 2021
order that closed all companies. Despite all these new
and the Company we have built over the last 21 years.
challenges, we still accomplished so much without ever
Nothing seems easy anymore given what has happened
losing focus on doing whatever we could to service the
just in the last two years, but we remain cautiously
needs of our distributors and customers. This makes
optimistic about our future as we navigate an even
2021 an even more impressive year in my opinion.
more challenging external landscape.
We entered 2022 with great optimism as the
strong momentum of 2021 spilled over into the new
year. Backlog is at the highest levels we have ever
experienced. I believe that we are going to have an
even stronger year of growth in sales and profitability,
but our crystal ball has become a little murkier with the
disturbing events unfolding in Eastern Europe – with
the vast majority of our business disconnected from
the events and impacts of what is currently happening
in Europe. However, the world order has been shaken
by these events and we need to be mindful of how this
situation effects the global economy going forward
particularly in 2023 and 2024.
Over the last five years, we have built a business
with greater resilience and diversity. We are a 105-year-
old company now serving more than 4,000 distributor
branches and OEM customers worldwide – shipping
over 600,000 units a year from our 21 global locations.
We are in the electrification business and our planet
and life are underpinned by electric power. Hammond
will benefit from not only the growth of the traditional
electrical
infrastructure but also new trends
like
expansion of the smart grid, the accelerating move
towards EVs, renewable energy and energy storage.
17
ANNUAL REPORT 2021 Consolidated Sales*
(in thousands of dollars)
Geographic Sales
(in thousands of dollars)
$301,750
$301,750
$314,082
$358,782
$358,782
$322,097
$380,202
U.S.
$174,479 $197,860 $225,709
$198,324 $231,738
Canada
$84,325
$93,641
$116,996
$109,080 $130,184
India
Italy*
$25,722
$22,581
$16,077
$14,693
$18,280
$17,224
2017
2017
2018
2018
2019
2020
2021
* 2017 not restated to reflect discontinued operations
2017
2018
2019
2020
2021
* 2017 not restated to reflect discontinued operations
18
18
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; and
• 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.
HAMMOND POWER SOLUTIONS
Gross Margin %*
25.6%
23.2%
24.5%
27.0%
26.9%
Basic Earnings (Loss)*
Per Share
(in dollars)
$0.53
$(1.10)
$0.99
$1.20
$1.29
2017
2018
2019
2020
2021
2017
2018
2019
2020
2021
* 2017 not restated to reflect discontinued operations
* 2017 not restated to reflect discontinued operations
EBITDA*+
(in thousands of dollars)
Net Operating (Debt)
Cash*+ to Equity
$23,069
$17,915
$28,175
$29,482
$30,114
(0.15)
(0.16)
(0.08)
(0.01)
0.01
19
19
2017
2018
2019
2020
2021
2017
2018
2019
2020
2021
+
* 2017 not restated to reflect discontinued operations
* 2017 not restated to reflect discontinued operations
Non-GAAP financial measure, refer to page 21 of the annual report
Non-GAAP financial measure, refer to page 21 of the annual report
+
HAMMOND POWER SOLUTIONS
ANNUAL REPORT 2021 Management’s Discussion
and Analysis
I am very proud of the overall performance of
our Company during the most challenging global
environment since the Great Depression.
Hammond Power Solutions Inc. (“HPS” or
March 24, 2022. All amounts in this report
the “Company”) is a leader in the design
are expressed in thousands of Canadian
and manufacture of custom electrical
dollars unless otherwise noted. Additional
engineered magnetics, standard electrical
information relating to the Company may
dry-type, cast resin and
liquid filled
be found on SEDAR’s website at www.
transformers.
Advanced
engineering
sedar.com or on the Company’s website at
capabilities, high quality products and fast
www.hammondpowersolutions.com.
responsive service to customers’ needs
have established the Company as a technical
and innovative manufacturer serving the
Caution regarding forward-looking
information
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, 2021 and 2020,
and should be
read
in conjunction
with
the accompanying Consolidated
Financial Statements of the Company
as at December 31, 2021 and 2020,
which have been prepared in accordance
with
International Financial Reporting
Standards
(“IFRS”). This
information
is
based on Management’s knowledge as at
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
20
HAMMOND POWER SOLUTIONS
or assumptions are applied in making forward-looking
operations, EBITDA and Adjusted EBITDA to net
statements, and actual results may differ materially
earnings for the years ended December 31, 2021 and
from those expressed or implied in such statements.
December 31, 2020 is contained within this MD&A.
Important factors that could cause actual results to
Earnings from operations, EBITDA and Adjusted
differ materially from expectations include but are not
EBITDA should not be construed as a substitute for net
limited to: general business and economic conditions
earnings determined in accordance with IFRS.
(including but not limited to currency rates); changes in
“Order bookings” represent confirmed purchase
laws and regulations; legal and regulatory proceedings;
orders for goods or services received from our
and the ability to execute strategic plans. HPS does not
customers. “Backlog” represents all unshipped customer
undertake any obligation to update publicly or to revise
orders. “Book value per share” is the total shareholders’
any of the forward-looking statements contained in
equity divided by the average outstanding shares. The
this document, whether as a result of new information,
terms “earnings from operations”, “EBITDA”, “adjusted
future events or otherwise, except as required by law.
EBITDA”, “order bookings”, “backlog” and “book value per
share” do not have any standardized meaning prescribed
Additional GAAP and Non-GAAP measures
within IFRS and therefore may not be comparable to
This document uses
the
terms
“earnings
from
similar measures presented by other companies.
operations” which represents earnings before finance
The Company’s 2021 consolidated financial
and other costs/(income) and income taxes. “EBITDA”
statements, which
comprise
the
consolidated
is also used and is defined as earnings before interest,
statements of financial position as at December 31,
taxes, depreciation and amortization. Adjusted EBITDA
2021 and December 31, 2020, the consolidated
represents EBITDA adjusted for foreign exchange gain
statements of operations, comprehensive
income,
or loss. Net cash or net indebtedness is defined as the
changes in equity and cash flows for the years ended
bank operating lines of credit net of cash and cash
December 31, 2021 and December 31, 2020, and Notes
equivalents. Net income taxes payable or receiveable is
thereto, have been prepared under IFRS.
21
defined as current income taxes receiveable less current
income taxes payable. Operating earnings, EBITDA
Overview
and Adjusted EBITDA are some of the measures the
With an established global market presence and a focus
Company uses to evaluate the operational profitability.
on market growth, HPS is positioned as a transformer
Net cash or net indebtedness and net income taxes
industry leader providing standard and custom order
payable or receivable are measures the Company uses to
solutions, a broad product offering, market access
evaluate balance sheet strength. The Company presents
through multiple sales channels, outstanding quality
EBITDA to show its performance before interest, taxes
products and exceptional service. The Company’s
and depreciation and amortization. Management
operational initiatives and strategic vision culminate
believes that HPS shareholders and potential investors
to achieve these competitive differentiators. As an
in HPS use additional GAAP and non-GAAP financial
essential service business HPS has been allowed to
measures, such as operating earnings, net cash or net
continue to operate during the global coronavirus
indebtedness, net income taxes payable/receivable,
(“COVID-19”) pandemic. HPS has continued to produce
EBITDA and Adjusted EBITDA in making investment
transformers for our customers throughout the entire
decisions about the Company and to measure its
pandemic period while also supporting and ensuring
operational results. A reconciliation of earnings from
employee safety during this time.
ANNUAL REPORT 2021DOLLARS IN THOUSANDS UNLESS OTHERWISE STATED
MANAGEMENT’S DISCUSSION AND ANALYSIS
Demand for our product is increasing, and in 2021
efficient, diverse transformers and related magnetic
we realized our highest annual revenues in company
products. The Company’s alignment of its operational
history. HPS’ customers and end-users operate in a
initiatives and strategic vision enhances
these
variety of industries and the varying levels of economic
competitive differentiators. HPS has a well-established
activity within those industries will have an impact on
and growing market presence and a focus on continued
HPS’ overall sales. During 2021, we saw activity in the
growth through current and new customers and
project and industrial markets increase, which are sectors
products. The Company has a strong financial footing
that had stalled when the pandemic began in 2020. The
that allows for continued focus on market share growth.
Canadian lockdown imposed in early 2020 and again in
The Company’s broad global footprint provides a
early 2021 impacted several of our markets. While the
gateway to new technologies, customers and markets.
impact of mandated lockdowns in our customer markets
These strengths are important to future revenue and
has diminished, there are lingering impacts as a result of
earnings growth.
supply chain disruptions and rapid inflation.
Technology and know-how obtained through
With our sales dollar increase came continued
acquisitions have allowed the Company to accelerate
market share growth. The Company continued to take
the product research and development program of its
market share in North America, particularly through
cast resin transformer technology, which is now utilized
its North American Electrical Distributor (“NAED”)
in several HPS facilities. The most recent acquisition
channel. In response to rising material and logistic
of Mesta Electronics Inc. has expanded HPS’ offering
costs, we implemented several price increases during
into standard and custom active filter and induction
2021. These increases, coupled with strong organic
heating products. Mesta shares an excellent reputation
growth, lifted sales, bookings and backlog, particularly
for product quality, design and reliability. Mesta not
towards the end of 2021. Other significant drivers of
only expands HPS’ U.S. presence but also broadens our
sales and profitability in 2021 were a sales mix shift
power solutions product offering and manufacturing
22
towards the distribution channel, the effectiveness of
capabilities in power quality solutions.
price increases in our OEM and private label channels,
Looking forward, in an effort to deliver resilient
higher fixed cost absorption, the Canadian Emergency
financial performance, HPS continues to concentrate on
Wage Subsidy (“CEWS”) benefit and cost reductions.
future sales growth, additional gross margin generation
The Company has incurred significant costs related
and operational improvement. Globally in the U.S.,
to COVID-19 to ensure the safety of our employees.
Canada and Asia, HPS is well situated to grow electrical
HPS has been fortunate that there have been a limited
industry market share and it continues to be a leader in
number of cases impacting our employees and their
the markets it serves. In 2021, we began our expansion
families to date. We continue to ensure our efforts do
of sales efforts into Mexico, with the addition of sales
not waiver as the length of the pandemic continues
and marketing resources, and corporate infrastructure
to extend. HPS’ health and safety practices, including
to support this important new market.
remote work where possible, have allowed the Company
The Company continues to build market presence
to continue to operate during the pandemic, ensuring
through its product capabilities, product quality, cost
business continuity and supplying our customers with
effectiveness, service, channel development and
the products they need.
geographical market expansion. Booking rates and
HPS’ history of success is achieved through its
backlog have increased in 2021 and are strong moving
commitment to producing quality, innovative, energy
into 2022. The benefit of the HPS diversified market
HAMMOND POWER SOLUTIONS
approach allows for the capitalization of growth in
$322,097 in 2020, a significant increase of $58,105
expanding market segments, while counterbalancing
or 18.0%.
the impact of cyclical market declines. A portion of
U.S. and Mexico market sales (stated in Canadian
annual sales are derived from major customer projects,
dollars) were $231,738, an increase of $33,414, or
for which exact timing continues to be difficult to
16.8%, compared to 2020 sales of $198,324. U.S. and
predict and will influence quarterly sales fluctuations.
Mexico sales, (stated in U.S. dollars), have increased
Order booking rates continue to grow in strategic
from $147,561 in 2020 to $184,900 in 2021, an
target markets delivering additional market share
increase of $37,339 or 25.3%. Sales were negatively
penetration, new account development and expansion
impacted by the weakening of the U.S. dollar relative
of organic sales.
to the Canadian dollar versus 2020. The average U.S.
The Company maintains a strong and stable balance
to Canadian exchange rate for 2021 was $1.253 versus
sheet and excellent liquidity supported by a committed
$1.343 in 2020, a U.S. dollar weakening of 6.7%. The
credit facility available to
implement
investment
2021 U.S. sales at prior year exchange rates would have
strategies, operational plans and advance growth
been $16,142 or 7.0% higher at $247,880.
initiatives. The Company’s North American credit
The U.S. market experienced significant increases
agreement was renegotiated in 2021 and matures in
in the NAED channel as the Company continues to
June 2026. This agreement provides the Company
add additional distributors to the network. There were
with the resources necessary to continue to grow
also improvements in the specialty, motor control and
and expand.
switchgear markets during 2021.
HPS remains confident in its ability to continue to
Canadian sales were $130,184, an increase of
generate growth – through our strategic vision merged
$21,104 or 19.3% as compared to sales of $109,080
with our operational strategies. Management is aware
in 2020. The Canadian market experienced increases in
of the need to plan and build for the future and is
the NAED, mining and capital equipment markets.
determined to proactively confront the profitability
Indian sales in 2021 were $18,280, an increase
23
pressures presented in the market. The Company is
of $3,587 or 24.4% compared to sales of $14,693 in
persistent in identifying and developing new market
2020. The prior year sales, and the second quarter of
opportunities, which will come from organic and new
2021 were negatively impacted by COVID-19 as the
customer sales expansion, product and technology
pandemic dramatically constrained the Indian market,
development, cost effectiveness, competitive lead-
leading to delays in projects because of government
times and manufacturing flexibility. Our capabilities
imposed lockdowns. 2021 sales benefited from the
are extended through our multi-national operations,
realization of these delayed orders.
which provide expanded market opportunities, allowing
Stated by geographic segment, sales in the U.S. and
HPS to deliver results. The Company’s commitment
Mexico were 61.0% (2020 – 61.6 %), In Canada were
to continuous improvement, cost reduction, improved
34.2% (2020 – 33.9 %) and India accounted for 4.8%
efficiencies and overall cost effectiveness will assist in
(2020 – 4.5 %) of our total sales.
reaching these goals. These strategies will improve and
HPS is dedicated to its growth strategy through our
build revenue and profitability trends.
focus on product development, our capital expenditure
Sales
Sales in 2021 were $380,202 as compared to sales of
program to
increase capacity, vertical
integration
strategies,
geographic diversification,
innovative
research and development projects and our expanded
ANNUAL REPORT 2021DOLLARS IN THOUSANDS UNLESS OTHERWISE STATED
MANAGEMENT’S DISCUSSION AND ANALYSIS
NAED network. Expanded product offerings, the
a number of market and geographical segments. In
addition of new customers, geographically diverse
terms of organic growth, our strategic sales initiatives,
manufacturing facilities and market influence will allow
service, broad distributor footprint, new product
the Company to continue to grow market share globally.
development and low industry inventories have all
The Company experienced significant increases in
supported backlog growth.
North American sales through its established NAED
HPS is sensitive to the volatility and unpredictability
and OEM channels. In the prior year, these markets
of current global economies and the impact that this
were significantly impacted by COVID-19, resulting
could have on booking trends. While several markets
in an overall drop in demand, project deferrals and
are seeing positive quotation and order trends, the
cancellations. HPS continues to grow
its market
Company is very cognizant that it may see some volatility
share through distributor conversions and its custom
and unpredictability in longer term booking rates. Some
transformer capabilities. The ability to continue to
industry-related factors may be contributing to the
expand these segments is a result of new customer
higher booking rates and backlog, such as global supply
additions, organic customer diversity, expanded product
chain constraints and low inventories, and therefore
offerings and geographically diverse manufacturing
may be temporary in nature.
capabilities. HPS is not single-market or industry
dependent and our market diversification strategies
Gross margin
provide a natural business hedge.
The consolidated gross margin rate in 2021 declined
We are committed to consistent quality, competitive
slightly to 26.9% versus 27.0% in 2020, a decrease
product design, expertise
in custom engineered
of 0.1% of sales. The small decline in margin rates is
products and product breadth. These factors combined
significant given the volatile commodity pricing and
with a strong, effective distribution channel and multi-
supply chain challenges experienced during 2021,
national manufacturing capabilities will continue to be a
and the inclusion of higher CEWS benefits in 2020.
24
competitive advantage for the Company and important
The ability to maintain this margin rate is attributed to
to continued revenue growth. HPS prides itself on
favourable sales mix, selling price increases, higher fixed
providing value to our customers.
cost absorption and cost reductions.
Backlog1
The CEWS program provides an employee wage
subsidy for our Canadian entities for periods where
The Company’s December 31, 2021 backlog has
there was a significant decline in Canadian trade sales
increased by a record 58.8% as compared to December
due to the impact of COVID-19. During 2021, the wage
31, 2020 and has increased 25.9% from Quarter 3,
subsidy received for production labour was $2,482 or
2021. The combination of price increases, strong
0.7% of sales (2020 – $5,557 or 1.7% of sales). The
demand in the third and fourth quarters, and delayed
Company did incur additional operating expenses of
shipments due to material availability contributed to
$956 during 2021 (2020 – $1,902) relating to amounts
the record-high backlog. Both the direct and distributor
paid for suspended operational employee wages, non-
channels contributed to higher demand towards the
productive wages support for “at risk” employees,
end of the year, and that demand was compounded by
employee transportation, increased cleaning, sanitation
the realization of price increases implemented over the
and personal protective equipment expenses for the
course of 2021. The increased bookings were across
safety of employees. Excluding the wage subsidy and
1Refer to Non-GAAP financial measures on page 21 of this annual report
HAMMOND POWER SOLUTIONS
COVID-19 related expenses, gross margins increased
social and industrial aspects of the pandemic, combined
from 25.9% in 2020 to 26.6% in 2021.
with an increasing backlog allow for cautious optimism
Sales and margins were impacted by the Company’s
in 2022.
ability to source materials and maintain a continuous
While some growth strategies can have a shorter-
supply to meet demand, which was exacerbated
term dilutive effect on gross margin rates, the Company
by global logistical disruptions. The manufacture of
continues to focus on long-term investment to fuel
transformers requires copper, aluminum and electrical
future growth. Gross margin rates are supported by the
steel. All of these commodities, particularly electrical
maintenance of market prices combined with material
steel, have seen significant price increases driven mainly
procurement and engineering cost reduction initiatives.
by supply constraints. During 2021, there has been a
While the Company has reaped the benefits of higher
heightened awareness of the challenges and strain on
absorption of factory overheads due to the increased
the global supply markets and a focus on ensuring that
sales volume, we continue to implement a number of
materials required for production are received on a
cost reduction and expense management initiatives to
timely basis and when needed.
protect our margin rates.
Given the rapid rise in the prices of the commodities
HPS continues to commit resources to its continuous
noted above, HPS has had to increase prices several
improvement program, which will result in implementing
times during 2021 in order to protect our gross margins.
productivity enhancements, cost reductions and lead-
In raising prices, we have been proactive in anticipating
time improvements across the entire organization.
cost increases, judicious in maintaining margins, and
HPS is confident that these actions will enhance future
conscientious of our customer relationships. For some
margin rates and improve profitability and overall
channels, particularly those with longer backlog dates
financial performance.
and lead times, as is the case in our OEM and private
Quotation activity, improving bookings and backlog
label channels, raising prices is more difficult to do in a
since the end of 2020 as well as an encouraging sales
timely way due to the nature of the contracts. Because
outlook support optimism for the future. Looking
25
of that, we believe there was some margin deterioration
ahead, HPS remains cautiously optimistic for the future
during 2021 as we were catching up to cost increases.
as growth will be realized in some markets along with
HPS continues to focus on price realization strategies
a decline in others – underscoring the volatility of
and achievement of cost reductions in an effort to
markets and sales demand. Over the past few years, to
maintain and increase margin rates.
manage the impact of volatility, the Company widened
Fluctuating markets, product mix and the continued
its distributor footprint in North America, expanded
effects of COVID-19 on the current global economy
its Indian market presence, implemented engineering
may still have a short-term impact on financial results.
and material cost reduction initiatives, invested in new
However, through the two years of the pandemic, HPS
product development and broadened manufacturing
was identified as an essential service in all countries that
capabilities. A diversified geographic approach supports
we operate in, and was able to continue to manufacture
anticipated growth from implemented market strategies
with the exception of India. Country-wide lockdowns
and subsequent economic improvement.
impacted HPS’ India location from the end of Quarter
Margin rates can be sensitive to selling price
1 and the majority of Quarter 2 in 2020. Lockdowns
pressures, volatility in commodity costs, customer
were also in place for a month in Quarter 2 during 2021.
mix and geographic blend. The Company continues
Looking forward, the lessening impact of the economic,
to combat competitor short-sighted pricing strategies
ANNUAL REPORT 2021DOLLARS IN THOUSANDS UNLESS OTHERWISE STATED
MANAGEMENT’S DISCUSSION AND ANALYSIS
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 protect and eventually
raise margin rates.
Selling and distribution expenses
• Approximately $1,103 of the increase in the current
year is associated with strategic investments in
people resources and incentive plans. There were
critical roles replaced during 2021 as a large number
of individuals within the organization retired;
• The Mesta acquisition contributed an additional $452
to the general and administrative expenses;
Total selling and distribution expenses were $46,459
for 2021 versus $40,217 in 2020, an increase of $6,242
• Additional
investment
in
information technology
contributed additional expenses of $460 related to
or 15.5%. On a percentage-of-sales basis, total selling
maintenance contracts;
and distribution expense decreased to 12.2% of sales
for 2021 from 12.5% in 2020. The higher sales value for
• The higher share price and additional awards granted
in 2021 has caused the DSU expense to increase
the year resulted in additional commission expense of
$691 from prior year; and
$1,841 and higher freight expense of $2,653 which are
variable selling expenses that naturally fluctuate with
• Higher spending with outside services such as
placement and legal fees account for $1,296 of the
sales changes. The CEWS benefit in 2021 of $352 or
current year increase.
0.1% of sales was lower than the benefit of $766 of 0.2%
in 2020, therefore contributing $414 to the increased
HPS continues to invest in growth while remaining
very cognizant of prudent general and administrative
net expenses. Approximately $980, or 0.3% of selling
expense management.
and distribution expenses increase relates to strategic
investments in people resources as well as increased
Earnings from operations1
incentive plan payments related to higher sales.
26
General and administrative expense
General and administrative expenses in 2021 were
$32,821 compared to $24,736 for 2020, an increase
Earnings from operations improved finishing at $23,151
in 2021, as compared to earnings of $22,041 in 2020 –
an increase of $1,110 or 5.0%. The increase in earnings
from operations is due to higher sales and additional
gross margin dollars, offset by higher selling, distribution,
of $8,085 or 32.7%. On a percentage-of-sales basis
general and administrative expenses.
these costs have increased from 7.7% in 2020 to 8.6%
Earnings from operations are calculated as outlined
in 2021. Key drivers for the current year increase are
in the following table:
as follows:
• During the prior 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;
• The CEWS benefit
related
to general and
administrative employees in 2021 was $649 or 0.2%
of sales and was $1,950 or 0.6% of sales in 2020,
resulting in additional net expenses of $1,310 in 2021
compared to 2020;
1Refer to Non-GAAP financial measures on page 21 of this annual report
Net earnings for the year $ 15,176 $ 14,062
2021
2020
Add:
Income tax expense
6,074
6,904
Finance and other costs
1,901
1,075
Earnings from operations $ 23,151 $ 22,041
HAMMOND POWER SOLUTIONS
Net Finance and other costs
current year earnings before income tax were higher
Net finance and other costs increased $826 from
sales and additional gross margin dollars. These gains
$1,075 in 2020 to $1,901 in 2021. The increase from
were offset by increases in selling, distribution, general
the prior year is a result of a foreign exchange loss in
and administration expenses,
lower government
the current year and a gain in the prior year, as well as
wage subsidy support in the current year, the foreign
higher interest expense and lower income from the joint
exchange loss in 2021 and a gain in 2020, as well as
venture in the current year.
higher interest expense and lower income from the joint
Interest expense for the year-ended December
venture in the current year.
31, 2021 finished at $1,301 as compared to $1,247 in
2020, a small increase of $54. Interest expense includes
all bank fees.
The foreign exchange loss in 2021 of $561 related
primarily to the transactional exchange loss of the
Company’s U.S. dollar trade accounts receivable,
compared to a foreign exchange gain of $123 in
2020. The increase of the foreign exchange expense
for the year is related to the volatility in the exchange
rates during the year – primarily the U.S. dollar which
decreased 6.7% relative to the Canadian dollar in 2021.
As at December 31, 2021, the Company had
outstanding foreign exchange contracts in place to
buy 17,350 Euros (“EUR”) and $23,275 USD – both of
which were implemented as an economic hedge against
translation gains and losses on inter-company loans
as well as $68,500 USD to economically hedge the
U.S. dollar denominated accounts payable in Canadian
HPS operations. The Company also had outstanding
foreign exchange contracts to sell for 34,700 EUR and
$69,757 USD.
Exchange rate volatility is managed by HPS’ foreign
exchange contract hedging program. Details of the
outstanding forward foreign exchange contracts at
December 31, 2021 can be found in note 27 in the
Notes to Consolidated Financial Statements included in
our 2021 Annual Report.
Earnings before income tax
Income taxes
Income tax expense from operations for 2021 was
$6,074 as compared to $6,904 in 2020 – a decrease of
$830 or 12.0%. The consolidated effective tax rate on
earnings from operations for 2021 decreased to 28.6%
versus 32.9% last year – a decrease of 4.3%.
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
27
provision is explained further in note 16 in the Notes to
Consolidated Financial Statements included in our 2021
Annual Report.
Net earnings
Net earnings from operations for 2021 finished at
$15,176 compared to net earnings of $14,062 in 2020,
an increase of $1,114 or 7.9%. The main contributors to
the higher current year earnings before income tax were
higher sales and additional gross margin dollars. These
gains were offset by increases in selling, distribution,
general and administration expenses, lower government
wage subsidy support in the current year, the foreign
exchange loss in 2021 and a gain in 2020, as well as
2021 earnings before income taxes were $21,250 as
higher interest expense and lower income from the joint
compared to earnings of $20,966 in 2020, – growing
venture in the current year. The effective tax rate was
by $284 or 1.4%. The main contributors to the higher
4.3% lower in the current year than prior year.
ANNUAL REPORT 2021DOLLARS IN THOUSANDS UNLESS OTHERWISE STATED
MANAGEMENT’S DISCUSSION AND ANALYSIS
EBITDA1
EBITDA from operations for the year-ended December 31, 2021 was $30,114 versus $29,482 in 2020 – an increase
of $632 or 2.1%. Adjusted for foreign exchange loss/gain, adjusted EBITDA for 2021 was $30,675 versus $29,359 in
2020 – an increase of $1,316 or 4.5%.
EBITDA and adjusted EBITDA are calculated as outlined in the following table:
Net earnings
Add:
Interest expense
Income tax expense
Depreciation and amortization
EBITDA
Add (subtract):
Foreign exchange loss (gain)
Adjusted EBITDA
2021
2020
$
15,176
$
14,062
1,301
6,074
7,563
1,247
6,904
7,269
$
$
30,114
$
29,482
561
(123)
30,675
$
29,359
Summary of quarterly financial information (unaudited)
Fiscal 2021 Quarters
Sales
Net earnings
28
Net earnings per share – basic
Net earnings per share – diluted
Average U.S. to Canadian
exchange rate
Fiscal 2020 Quarters
Sales
Net earnings
Net earnings per share – basic
Net earnings per share – diluted
Average U.S. to Canadian
exchange rate
Q1
80,121
2,298
0.19
0.19
1.268
Q1
88,420
2,148
0.18
0.18
1.339
$
$
$
$
$
$
$
$
$
$
Q2
Q3
Q4
Total
$
$
$
$
$
$
$
$
$
$
88,277
4,689
0.40
0.40
1.231
Q2
75,393
4,420
0.38
0.38
1.391
$
$
$
$
$
$
$
$
$
$
95,526
$ 116,278
$ 380,202
3,948
0.34
0.34
1.257
Q3
78,115
3,462
0.30
0.30
1.335
$
$
$
$
$
$
$
$
$
4,241
0.36
0.35
1.258
$
$
$
$
15,176
1.29
1.28
1.253
Q4
Total
80,169
$ 322,097
4,032
0.34
0.34
1.309
$
$
$
$
14,062
1.20
1.20
1.343
With the exception of Quarter 1, sales increased significantly versus the comparable quarters in 2020. Quarter 2,
1Refer to Non-GAAP financial measures on page 21 of this annual report
HAMMOND POWER SOLUTIONS
2020 was the first quarter where the Company saw sales declines due to the pandemic. A portion of the sales escalation
was due to price increases but the Company has also experienced volume growth over previous quarters. There has
been an upward trend over the past six quarters due to an overall improvement in general economic activity. Sales
in the current year were negatively impacted by the weaker USD exchange and the price increases had a cumulative
impact on sales as 2021 progressed.
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.
Quarter 4, 2021 financial results
Sales
Gross margin rate
Earnings from operations
Exchange loss
Net earnings
Earnings per share – basic
Earnings per share – diluted
Cash provided by operations
Quarter ended
December 31, 2021
Quarter ended
December 31, 2020
$
116,278
27.4%
6,220
129
4,241
0.36
0.35
19,900
$
$
$
$
$
$
$
$
$
$
$
$
$
80,169
28.9%
7,047
401
4,032
0.34
0.34
8,073
29
Sales for the quarter ended December 31, 2021 were $116,278, an increase of $36,109 or 45.0% from the comparative
quarter last year.
Gross margin rates for the fourth quarter have decreased from the same quarter last year by 1.5% from 28.9% in
2020 to 27.4% in 2021. Included in the fourth quarter 2020 gross margin was $1,722 of CEWS (2.15% of sales), and
none in the fourth quarter of 2021. The margin was also impacted by sales mix, market specific pricing, raw material
commodity costs, cost reductions and expense containment.
Total selling and distribution expenses amounted to $14,559 in Quarter 4, 2021 versus $10,202 in Quarter 4,
2020 – an increase of $4,357 or 42.7%. Selling and distribution expenses as a percentage of sales have decreased
to 12.5% in 2021 compared to 12.7% in 2020. The increases were a result of higher commission and freight
variable expenses.
General and administrative expenses as a percentage of sales have increased to 9.5% in 2021 compared to 7.4%
in 2020. General and administrative expenses for Quarter 4, 2021 totaled $11,055, an increase of $5,105 when
compared to Quarter 4, 2020 costs of $5,950. During the prior 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. The Mesta
acquisition contributed an additional $452 to the general and administrative expenses. Additional salary, incentive and
outside service costs and other miscellaneous accruals also account for the increase in the quarter.
ANNUAL REPORT 2021DOLLARS IN THOUSANDS UNLESS OTHERWISE STATED
MANAGEMENT’S DISCUSSION AND ANALYSIS
Quarter 4, 2021 net finance and other costs were
Cash provided from operating activities during
$490 compared to $582 for the same quarter in 2020, a
2021 was $20,447 versus $19,683 in 2020, an increase
decrease of $92 or 15.8%. The Quarter 4, 2021 interest
in cash generated of $764 or 3.9%. This increase in cash
cost increased from $296 in Quarter 4, 2020 to $368
generated from operating activities was due to a lower
in Quarter 4, 2021. Foreign exchange loss in Quarter 4,
increase in non-cash working capital versus 2020. Non-
2021 was $129 compared to a foreign exchange loss of
cash working capital used cash of $4,777 in 2021 versus
$401 in Quarter 4, 2020.
$4,992 in 2020, resulting in a decrease of $215 from
Earnings from operations for the quarter were
2020. The change in non-cash working capital in 2021
$6,220 in 2021 and $7,047 in 2020 a decrease of
was primarily a result of increases in accounts receivable
$827 or 11.7%. Additional gross margin dollars were
and inventory, offset by increases in accounts payable.
offset by higher general, administrative, selling and
Accounts receivable finished the year at $72,004
distribution expenses.
as compared to $53,078 as at December 31, 2020,
Quarter 4, 2021 income tax expense was $1,489 on
an increase of $18,926 – a result of higher sales in
earnings before income taxes of $5,730 (an effective tax
Quarter 4, 2021 compared to Quarter 4, 2020. HPS’
rate1 of 26.0%) as compared to an income tax expense
days sales outstanding ratio remains stable, which can
of $2,433 on income before income taxes of $6,465
be attributed to effective credit policies and tightly
(an effective tax rate1 of 37.6%) in Quarter 4, 2020 – a
managed accounts receivable administration.
decrease of $944.
Inventories finished the year at $62,467 as at
Net income for Quarter 4, 2021 was $4,241
December 31, 2021, versus $49,206 as at December
compared to net income of $4,032 in Quarter 4, 2020 –
31, 2020, an increase of $13,261. The higher inventory
an improvement of $209.
levels in 2021 were attributed to increased sales volume,
Cash provided by operations for Quarter 4, 2021
and the higher cost of raw materials.
was $19,900 versus $8,073 in Quarter 4, 2020 – an
Accounts payable and accrued liabilities, excluding
30
increase of $11,827. The main driver for this change
derivative and share-based compensation liabilities,
was cash generated from working capital of $9,447 for
increased by $29,599 finishing at $73,826 as at
Quarter 4, 2021 versus cash used by working capital of
December 31, 2021 compared to $44,227 at the end
$825 for Quarter 4, 2020, an improvement of $10,272.
of 2020. The change in accounts payable is due to
Overall net operating cash balance1 was $1,638 as
higher sales volumes, higher raw materials costs, higher
at December 31 2021, an improvement of $2,916 as
accruals and the timing of purchases from and payments
compared to a net operating debt balance of $1,278 as
to suppliers.
at December 31, 2020, primarily reflecting improved
Net income taxes payable2 were $1,181 as at
profitability and cash generated from operations.
December 31, 2021, versus net income taxes payable
Capital resources and liquidity
The Company continued to focus on generating cash
from operations, debt management, investment and
liquidity.
of $454 (income taxes receivable of $488 less income
taxes payable of $942) as at December 31, 2020 – a
change of $727 due to changes in the effective tax
rate3.
Cash used in financing activities was $4,257 in
1Overall net operating cash balance is the bank operating lines of credit of $19,267 net of cash and cash equivalents of $20,905. Refer to Non-GAAP
financial measures on page 21 of this annual report.
2Effective tax rate is calculated as the income tax expense divided by the earnings before income taxes
3Net income taxes payable consists of income taxes receivable of $807 less income taxes payable of $1,988. Refer to Non-GAAP financial measures on
page 21 of this annual report.
HAMMOND POWER SOLUTIONS
2021, compared to cash used of $24,184 in 2020, a
capital resources is effectively managed for current and
decrease of $19,927. The change in the balance can
future requirements.
be attributed to repayment from the operating line in
The Company has outstanding capital expenditure
2020 compared to advances on the bank operating
commitments of $483 primarily for manufacturing
lines in 2021.
efficiency improvement projects and capacity expansion.
Cash used in investing activities in 2021 increased
These ongoing projects are in support of future business
$6,167 from $4,747 in 2020 to $10,914 in 2021,
development and growth.
a result of the Mesta acquisition in the amount of
Additional details of our change
in non-cash
$5,032. There was an increase in capital spending for
working capital can be found in note 25 in the Notes
property, plant and equipment of $829 over the prior
to Consolidated Financial Statements contained in our
year, totaling $5,051 in 2021 – compared to $4,222 for
2021 Annual Report.
2020. The Company continues to invest in the areas
of manufacturing processes and capabilities as well as
Credit Agreement
information technology.
Bank operating lines of credit finished the year
at $19,267 as at December 31, 2021, compared to
$16,073 as at December 31, 2020 resulting in an
increase of $3,194 in the year. The Company had
cash and cash equivalent balances of $20,905 as at
December 31, 2021 as compared to $14,795 as at
December 31, 2020.
Overall net operating cash balance1 was $1,638 as
at December 31 2021, an improvement of $2,916 as
compared to a net operating debt balance of $1,278 as
at December 31, 2020, primarily reflecting improved
profitability and cash generated from operations.
All bank covenants were met as at December 31,
2021, and the Company was in compliance with its
During the year, the Company entered into a new
banking agreement, which expires on June 20, 2026,
consisting of a $50,000 U.S. revolving credit facility.
This new agreement provides an additional $10,000
U.S. of credit to HPS. Based on exchange rates in
effect at December 31, 2021, the combined Canadian
dollar equivalent available prior to any utilization of the
facilities was $78,000.
This is an unsecured 5-year committed facility that
provides financing certainty for the future. The new
financing better aligns our Canadian, U.S. and European
31
banking requirements, supports our hedging strategies,
and provides financing for our operational requirements
and capital for our strategic initiatives.
covenants throughout the year.
Hammond Power Solutions S.p.A – Italy
The Company’s liquidity is strong. HPS is well
As part of the VPI asset sale agreement, the lease
funded, with sufficient cash and debt capacity to fund its
agreement relating to the Meledo, Italy building includes
operating activities, investments and strategic growth
a put and call sale option related to the leased premises,
initiatives. The Company has several alternatives to
exercisable within 60 days after September 30, 2023. The
fund future capital requirements, including its existing
call option grants the purchaser an option to purchase
cash position, credit facility, future operating cash flows
the premises from the Company for consideration equal
and debt financing. The Company continually evaluates
to 2,225 EUR. The plant purchase price will be reduced
these options to ensure that the appropriate mix of
by 50% of the monthly rent installments received, to
1Overall net operating cash balance is the bank operating lines of credit of $19,267 net of cash and cash equivalents of $20,905. Refer to Non-GAAP
financial measures on page 21 of this annual report.
ANNUAL REPORT 2021DOLLARS IN THOUSANDS UNLESS OTHERWISE STATED
MANAGEMENT’S DISCUSSION AND ANALYSIS
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.
Accounts payable and accrued liabilities
$
75,669
Capital expenditure purchase commitments
Operating lines of credit
Derivative liability
Lease liabilities
Contingent liabilities
Total
2022
2023
2024
2025
483
–
91
2,762
616
–
–
–
–
–
–
–
–
2,034
595
1,806
298
–
–
–
–
978
–
2026 &
Thereafter
Total
– $ 75,669
–
19,267
–
733
–
483
19,267
91
8,313
1,509
$
79,621 $
2,629 $
2,104
978 $
20,000 $ 105,332
a maximum of 375 EUR (approximately $573). If the
2021 to shareholders of record at the close of business
purchaser does not execute the call option HPS can
on March 18, 2021 – the ex-dividend date was March
exercise its put option which grants HPS an option to
17, 2021. The Quarter 2 dividend was paid on June 29,
sell the plant to the purchaser for consideration equal
2021 to shareholders of record at the close of business
to the same plant purchase price. If the purchaser
on the 22nd day of June 2021 – the ex-dividend date
rejects the put option, the purchaser will pay 500 EUR
was June 21, 2021. The dividend for Quarter 3 was
(approximately $764) as liquidated damages.
paid on September 24, 2021 to shareholders of record
Contingent liabilities
at the close of business on September 17, 2021 –
the ex-dividend date was September 16, 2021. The
In June 2017, the Corporation received notice of an
Quarter 4 dividend was paid on December 17, 2021
32
environmental claim from the owner of a property
to shareholders of record at the close of business
located nearby to a property that was once partially
on December 10, 2021 – the ex-dividend date was
owned by the Corporation. At this time, the Company
December 9, 2021.
feels that there is no merit to the claim.
In 2021, the Company has paid a total cash dividend
Management is not aware of any further contingent
of thirty-four cents ($0.34) per Class A Subordinate
liabilities, other than contingent consideration issued in
Voting Share and thirty-four cents ($0.34) per Class B
connection with the acquisition of Mesta. Refer to
Common Share. In 2020, the Company had paid a total
note 30 to the consolidated financial statements for
cash dividend of thirty-four cents ($0.34) per Class A
additional information.
Subordinate Voting Share and thirty-four cents ($0.34)
per Class B Common Share.
Regular quarterly dividend
The Board of Directors of HPS declared quarterly cash
Controls and procedures
dividend of eight and a half cents ($0.085) per Class A
The Chief Executive Officer and the Chief Financial
Subordinate Voting Share of HPS and of eight and a half
Officer are responsible for establishing and maintaining
cents ($0.085) per Class B Common Share of HPS, for
disclosure controls and procedures and for establishing
each of the quarters of 2021.
and maintaining adequate internal controls over financial
The Quarter 1 dividend was paid on March 25,
reporting. The control framework used in the design of
HAMMOND POWER SOLUTIONS
disclosure controls and procedures and internal control
use a control framework such as the COSO Framework
over financial reporting is the 2013 Internal Control
to design internal controls over financial reporting. As
Integrated Framework issued by the Committee of
well, the threshold for reporting a weakness of internal
Sponsoring Organizations of the Treadway Commission
controls over financial reporting should be of a “material
(“2013 COSO Framework”). Our internal control system
weakness” rather than “reportable deficiency.” HPS
was designed to provide reasonable assurance to our
has designed its internal controls in accordance with
Management and Board of Directors regarding the
the COSO Framework and has carried out retesting in
preparation and fair presentation of published financial
2021, which was completed in the fourth quarter.
statements in accordance with International Financial
As of December 31, 2021 Management, with the
Reporting Standards. All internal control systems, no
supervision and participation of the Chief Executive
matter how well designed, have inherent limitations,
Officer and Chief Financial Officer, assessed the
therefore, even those systems determined to be effective
effectiveness of the Company’s internal control over
can provide only reasonable assurance with respect to
financial reporting. Based on that assessment, the
financial statement preparation and presentation.
Chief Executive Officer and Chief Financial Officer
As at December 31, 2021, the Company conducted
have concluded that the internal controls are effective
an evaluation, under the direction and supervision of
and that there were no material weaknesses in the
the Chief Executive Officer and the Chief Financial
Company’s internal control over financial reporting as of
Officer, of the effectiveness of the design and operation
December 31, 2021.
of our disclosure controls and procedures. Based on
this evaluation, our Chief Executive Officer and Chief
Changes in internal control over financial reporting
Financial Officer have concluded that as of December
and disclosure controls and procedures
31, 2021 such disclosure controls and procedures were
During 2021 there were no material changes identified
operating effectively.
in HPS’ internal controls over financial reporting that
had materially affected, or were reasonably likely to
33
Internal controls over financial reporting
materially affect HPS’ internal control over financial
Management
is responsible for establishing and
reporting. HPS does carry out ongoing improvements to
maintaining adequate internal controls over financial
its internal controls over financial reporting but nothing
reporting. Our internal control system was designed
was considered at a material level.
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.
Subsequent events
Dividends
On March 4, 2022, 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 24, 2022 to shareholders of
record at the close of business on March 16, 2022. The
Canadian Securities Administrators require that
ex-dividend date is March 18, 2022.
companies certify the effectiveness of internal controls
over financial reporting. It also requires a company to
ANNUAL REPORT 2021DOLLARS IN THOUSANDS UNLESS OTHERWISE STATED
MANAGEMENT’S DISCUSSION AND ANALYSIS
Joint venture ownership change
caused by logistics disruptions and global conflicts may
The Company and National Material L.P. (“National”)
interrupt manufacturing production, and therefore affect
have operated the joint venture in Monterray, Mexico
our ability to ship product to customers. These risks are
under the name Corefficient S. de R.L. de C.V. Subsequent
mitigated through strategic supply line agreements and
to year-end, the Company and National have amicably
alliances in place with suppliers.
agreed to divide the operations. In connection with
The cyclical effects and unprecedented rise of
this transaction, HPS will retain certain equipment,
global commodity prices, including prices for copper,
employees, obligations and other financial assets and
aluminum and electrical steel may put margins at risk.
liabilities, and National will withdraw ceratin assets
There is a risk in our ability to recoup the rapid escalating
and capital in exchange for redeeming their ownership
commodity costs through timely and effective selling
interest. The Compnay will operate the retained portion
price increases.
of the joint venture as a wholly owned subsidiary of
the Group. The operation will continue to produce
Other Business Risks
transformer cores to supply the Group’s facilities in
If any of the following risks were to occur they could
Mexico. The Corefficient name will be retained by
materially adversely affect HPS’ financial condition,
National. Further details can be found in note 31 in the
liquidity or results of operations.
Notes to Consolidated Financial Statements included in
our 2021 Annual Report.
Coronavirus (COVID-19) Pandemic
– Business Disruption/Interruption
Risks and uncertainties
Markets, governments and health organizations around
The Company’s goal is to proactively manage risks in
the world have been impacted by the COVID-19
a structured approach in conjunction with strategic
pandemic. COVID-19 has presented a wide range of
planning, with the intent to preserve and enhance
issues and complications for the Company, some of
34
shareholder value. However, as with most businesses,
which the Company is unable to know the full extent.
HPS is subject to a number of marketplace, industry and
Looking forward, while the increase in vaccination
economic-related business risks, which could cause our
levels are climbing, there is a guarded business optimism
results to vary materially from anticipated future results.
but some uncertainty and unpredictability persist on the
The Company is aware of these risks and continually
impacts of the COVID-19 pandemic on the business
assesses the current and potential impacts that they have
climate and governmental and health authorities’
on the business. HPS continuously strives to curtail the
legislation. The full negative financial impact of the
negative impact of these risks through diversification of
unprecedented pandemic will not be fully known until
its core business, market channel expansion, breadth of
the economy fully recovers.
product offering, geographic diversity of its operations
and business hedging strategies.
We may not realize all of the anticipated benefits
of our acquisitions, divestitures, joint ventures or
Market supply and demand impact on commodity prices
strategic initiatives, or these benefits may take
HPS relies on a global supply chain to meet its
longer to realize than expected.
manufacturing needs. We source both raw materials
In order to be profitable, the Company must successfully
and components from our own factories and third party
execute upon its strategic initiatives and effectively
suppliers. Industry supply shortages, including those
manage the resulting changes in its operations. The
HAMMOND POWER SOLUTIONS
Company’s assumptions underlying its strategic plans
legal and operating risks, such as political and economic
may be subjective, the market may react negatively to
instability; prevalence of corruption in certain countries;
these plans, and HPS may not be able to successfully
enforcement of contract and
intellectual property
execute these plans, and even if successfully executed,
rights and compliance with existing and future laws,
its actions may not be effective or may not lead to the
regulations and policies, including those related to
anticipated benefits within the expected time frame.
tariffs, investments, taxation, trade controls, product
These strategic initiatives can include acquisitions
content and performance, employment and repatriation
and joint ventures. To be successful, management
of earnings.
will conduct due diligence to
identify valuation
issues and potential
loss contingencies, negotiate
Our global business translates into conducting
transaction terms, complete complex transactions and
business in various currencies, all of which are
manage post-closing matters such as the integration
subject to fluctuations.
of acquired startup businesses. Management’s due
HPS’ global footprint exposes the Company to
diligence reviews are subject to the completeness and
currency fluctuations and volatility and, at times, has
accuracy of disclosures made by third parties. The
had a significant impact on the financial results of the
Company may incur unanticipated costs or expenses
Company. The Company’s functional currency is the
following a completed acquisition, including post-
Canadian dollar with its operating results reported in
closing asset impairment charges, expenses associated
Canadian dollars. A significant portion of the Company’s
with eliminating duplicate facilities, litigation or other
sales and material purchases are denominated in U.S.
liabilities.
dollars. There is a natural hedge, as sales denominated
Many of the factors that could have an adverse
in U.S. dollars are largely offset by the cost of raw
impact will be outside of management’s control and could
materials purchased from the U.S., and commodities
result in increased costs and decreases in the amount
tied to U.S. dollar pricing. A change in the value of
of expected revenues and diversion of management’s
the Canadian dollar against the U.S. dollar will impact
35
time and attention. Failure to implement an acquisition
earnings, significantly at times. Generally, a lower value
strategy, including successfully integrating acquired
for the Canadian dollar compared to the U.S. dollar will
businesses, could have an adverse effect on our
have a beneficial impact on the Company’s results, while
business, financial condition and result of operations.
a higher value for the Canadian dollar compared to the
U.S. dollar will have a corresponding negative impact on
We sell to customers around the world and have
the Company’s profitability.
global operations and, therefore, are subject to
HPS has partially reduced the impact of foreign
the risks of doing business in many countries.
exchange fluctuations by increasing our U.S. dollar
We do business in a host of countries around the world.
driven manufacturing output, periodically instituting
Approximately 70% of our sales were to customers
price increases to help offset negative changes and
outside of Canada. In addition, a number of our
entering into forward foreign exchange contracts.
manufacturing operations, suppliers and employees
are located in many places around the world. The
Worldwide HPS is subject to, and required to comply
future success of our business depends in large part
with, multiple income and other taxes, regulations and
on growth in our sales in non-Canadian markets. Our
is exposed to uncertain tax liabilities risk.
global operations are subject to numerous financial,
The Company operates and is subject to income tax and
ANNUAL REPORT 2021DOLLARS IN THOUSANDS UNLESS OTHERWISE STATED
MANAGEMENT’S DISCUSSION AND ANALYSIS
other forms of taxation in numerous tax jurisdictions.
business that crosses borders and any changes in the
Taxation laws and rates, which determine taxation
current trade structure could have a material impact
expenses, may vary significantly in different jurisdictions,
for us. HPS’ global footprint will be critical to mitigating
and legislation governing taxation laws and rates is also
any impact for political changes that would modify the
subject to change. Therefore, the Company’s earnings
current trade relationships.
may be impacted by changes in the proportion of
earnings taxed in different jurisdictions, changes in
Our industry is highly competitive.
taxation rates, changes in estimates of liabilities and
HPS faces competition in all of our market segments.
changes in the amount of other forms of taxation. Tax
Current and potential competitors may have greater
structures are subject to review by both domestic and
brand name recognition, more established distribution
foreign taxation authorities. Tax filings are subject to
networks, access to
larger customer bases and
audits, which could materially change the amount of
substantially greater financial, distribution, technical,
current and deferred income tax assets and liabilities.
sales and market, manufacturing and other resources
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
36
instability. Although it is not possible to predict such
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 greater 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
events or their consequences, these events could
remain high in the future.
decrease demand for our products make it difficult or
impossible to deliver our products, or disrupt our global
Our business is highly sensitive to global and regional
material sourcing.
Political uncertainty and potential for changes in the
business environment can lead to legislative changes
that could impact business.
Changing legislative mandates in the countries with
which we do business may result in a number of
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
competitiveness, expand capacity and improve our
geopolitical risks that could be challenging for the
manufacturing flexibility.
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
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 is growing our access
HAMMOND POWER SOLUTIONS
to a variety of domestic and global markets. This will
cyber attacks and viruses on companies’ information
be achieved through our current and new OEM and
infrastructure and technologies. A successful cyber
distributor channels.
attack could result in misappropriation of assets, cause
interruptions to manufacturing and our ability to take
The disruption to businesses that can come from
orders, as well as impact our general productivity.
unpredictable weather can have an impact on sales
This risk is reduced through a number of initiatives to
volume as customer projects can be delayed or
mitigate exposure.
cancelled.
Extreme weather conditions such as heavy rains,
Off-balance sheet arrangements
flooding, snowfall, tornadoes and hurricanes can
The Company has no off-Balance Sheet arrangements,
potentially have a negative impact on the Company’s
other than capital commitments disclosed in note 15
sales trends and booking rates. When these conditions
in the Notes to the Consolidated Financial Statements
are present, the Company may see short-term effects of
contained in our 2021 Annual Report.
such occurrences due to their unpredictability. This may
impact delivery and capacity requirements.
Transactions with related parties
The business practice of extending credit to customers
can lead to a risk of uncollectability.
The Company had transactions with related parties
in 2021, as disclosed in note 23 in the Notes to the
Consolidated Financial Statements contained in our
A substantial portion of the Company’s accounts
2021 Annual Report.
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 Company’s standard payment and delivery
Proposed transactions
The Company had no proposed transactions as at
December 31, 2021. The Company continues to
evaluate potential business expansion initiatives in
37
accordance with its long-term growth strategy.
terms and conditions are offered. The Company’s
Financial instruments
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
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,
contingent consideration and the following derivative
approval from Executive management. Although the
instruments:
Company has historically incurred very low bad debt
expense, the current economic environment conditions
elevate this exposure and the Company’s future
collection rate may differ from its historical experience.
Risk of cyber attack
At December 31, 2021, the Company had
outstanding foreign exchange contracts in place to
buy for 17,350 EUR and $23,275 USD – which were
implemented as an economic hedge against translation
gains and losses on inter-company loans and $68,500
USD to economically hedge the U.S. dollar denominated
Globally there have been increased incidences of outside
accounts payable in the Canadian operations of HPS.
ANNUAL REPORT 2021DOLLARS IN THOUSANDS UNLESS OTHERWISE STATED
MANAGEMENT’S DISCUSSION AND ANALYSIS
The Company also had outstanding foreign exchange
Business Combinations
requires acquirers
to
contracts to sell for 34,700 EUR and $69,757 USD.
recognize the identifiable assets acquired and liabilities
The Company had total outstanding foreign exchange
assumed at fair value. The determination of fair value
contracts in place as at December 31, 2020 for 17,500
requires Management to make estimates around the
EUR and $12,500 USD and 330,000 INR as economic
value an independent third party, under no compulsion
hedges against translation gains and losses on inter-
to act, would pay for an asset acquired or liability
company loans and $46,500 USD to economically
assumed on a standalone basis. Where possible,
hedge the U.S. dollar denominated accounts payable in
Management engages third-party appraisers to assist
the Canadian operations.
in the determination of the fair value of real property
Further details regarding the Company’s financial
acquired. The fair value of acquired intangible assets
instruments and the associated risks are disclosed in
are generally determined using discounted cash flow
note 27 in the Notes to the Consolidated Financial
models and involve the use of cash flow forecasts,
Statements contained in our 2021 Annual Report.
market-based discount rates, and/or market-based
Critical accounting estimates
royalty rates. The fair values of liabilities assumed is
generally based on discounted cash flow models which
The preparation of the Company’s consolidated financial
involve the use of market-based discount rates. The
statements requires Management to make estimates and
development of cash flow forecasts involve the use
assumptions that affect the reported amounts of assets,
of estimates, which may differ from actual cash flows
liabilities, revenues and expenses and the disclosure
realized. Assumptions are involved in the determination
of contingent assets and liabilities. These estimates
of discount rates and royalty rates.
are based upon Management’s historical experience
The Company records a provision for warranties
and various other assumptions that are believed by
based on historical warranty claim information and
Management to be reasonable under the circumstances.
anticipated warranty claims, based on a weighted
38
Such assumptions and estimates are evaluated on an
probability of possible outcomes.
ongoing basis and form the basis for making judgments
The key assumptions made by management in
about the carrying values of assets and liabilities that
recording the provision are i) warranty cost, ii) probability
are not readily apparent from other sources. Actual
of claim, and iii) quantum of units which may be subject
results could differ from these estimates.
to any warranty claim.
The Company conducts its annual impairment
Quantifying
provisions
inherently
involves
assessment of goodwill, intangible assets and property,
judgment, and future events and conditions may
plant and equipment in the fourth quarter of each year,
impact these assumptions. Differences in actual future
which corresponds with its annual planning cycle, and
experience from the assumptions utilized may result in
whenever events or changes in circumstances indicate
a greater or lower warranty cost.
that the carrying amount of an asset or Cash Generating
Unit (“CGU”) may not be recoverable. The Company did
Outstanding share data
not identify any triggering events during the course of
Details of the Company’s outstanding share data as of
2021 indicating that the carrying amount of its assets
December 31, 2021, are as follows:
and CGUs may not be recoverable, which would require
9,011,624
Class A Shares
the performance of an impairment test for those CGUs
2,778,300
Class B Common Shares
which did not contain goodwill.
11,789,924
Total Class A and B Shares
HAMMOND POWER SOLUTIONS
There have been no material changes to the outstanding
Cloud computing arrangement costs
share data as of the date of this report.
On April 28, 2021 the IFRS Interpretations Committee
issued a final agenda decision on cloud computing
New accounting pronouncements
arrangements. The agenda aimed to clarify guidance
IBOR – Phase 2 (Amendments to IFRS 9, IAS 39,
on how customers should account for implementation
IFRS 7, IFRS 4 and IFRS 16)
costs incurred in a software-as-a-service arrangement.
In August 2020, the IASB issued Phase 2 amendments,
This further builds upon the March 2019 agenda
which amended the requirements in IFRS 9, IAS 39,
which distinguished hosting arrangements in which
IFRS 7, IFRS 4, and IFRS 16, principally addressing the
the customer receives a software intangible asset from
following areas:
those that do not, and therefore are service contracts.
• modification of a financial asset or a financial
The Company adopted this agenda decision on a
liability;
• modification of a lease;
• additional reliefs for hedging relationships;
• new disclosures; and
• effective date and transition.
retrospective basis. The adoption of the amendments did
not have a material impact on the financial statements.
New accounting pronouncements to be adopted
The International Accounting Standards Board has
The Company adopted the amendments in its
issued the following Standards, Interpretations and
financial statements for the annual period beginning on
Amendments to Standards that are not yet effective,
January 1, 2021. The adoption of the amendments
have not yet been adopted by the Group and are not
did not have a material impact on the consolidated
expected to have a material impact on the consolidated
financial statements.
financial statements.
The Group
intends to adopt the
following
COVID-19-related rent concessions
amendments in its financial statements for the annual
(Amendments to IFRS 16)
period beginning on January 1, 2022:
39
In May 2020, the IASB issued COVID-19-related
• Property, Plant and Equipment – Proceeds before
rent concessions, which amended
IFRS 16. The
Intended Use (Amendments to IAS 16);
2020 amendments introduced an optional practical
• Onerous Contracts – Cost of Fulfilling a Contract
expedient that simplifies how a lessee accounts for rent
(Amendments to IAS 37);
concessions that are a direct consequence of COVID-19,
• Reference
to
the
Conceptual
Framework
only if certain conditions are met. Under the practical
(Amendments to IFRS 3); and
expedient, a lessee is not required to assess whether
• Annual Improvements to IFRS Standard 2018-2020.
eligible rent concessions are lease modifications, instead
The following amendments are effective for the
accounting for them in accordance with other applicable
annual period beginning on January 1, 2023:
guidance.
• Classification of Liabilities as Current or Non-Current
The Company adopted the amendments in its
(Amendments to IAS 1);
financial statements for the annual period beginning
• Definition of accounting estimates (Amendments to
on January 1, 2021. The adoption of the amendments
IAS 8);
did not have any impact on the consolidated financial
• Disclosure
initiative
–
accounting
policies
statements.
(Amendments to IAS 1 and IFRS Practice Statement 2
Making Materiality Judgments); and
ANNUAL REPORT 2021DOLLARS IN THOUSANDS UNLESS OTHERWISE STATED
MANAGEMENT’S DISCUSSION AND ANALYSIS
• Deferred tax related to assets and liabilities arising
o Designing energy efficient products;
from a single transaction (Amendments to IAS 12
o Shrinking our ecological footprint; and
Income Taxes).
o Energizing the world in a responsible way for the
The Group is evaluating the impact of adoption.
generations to come.
The Group intends to adopt the following amendment
The demand for our transformers particularly in
once an effective date has been announced:
North America continues to accelerate and sales volumes
• Sale or Contribution of Assets Between an Investor
have returned to pre-pandemic levels. While we have
and its Associate or Joint Venture.
seen improvements in business activity and demand,
we have also experienced rapidly rising commodity
Strategic direction and outlook
costs as well as supply shortages. Based on the
HPS has a rich and extensive history of growth,
combination of these factors, the Company expects to
innovation and resilience. The Company has navigated
see continued growth in revenues. It is difficult to know
through difficult and fluctuating economic times,
for how long higher commodity prices will be sustained,
increased globalization, adapted to changes in customers
in particular those for grain-oriented electrical steel,
and markets and has experienced significant advances
but at this time there are few indicators that would
in technology. HPS has framed these challenges as
indicate that these costs will come down during the
opportunities and developed strategies to address
first half of the year. It has been, and is, HPS’ objective
these rapid changes.
to maintain gross margins in the face of rising prices.
The Company is confronting these challenges
We will continue to do so in the future.
and continuously building our strategic advantage by
During 2021, we added over 200 new distributors
focusing on:
and began to put the infrastructure in place to support
• Developing our Customers and Markets by:
our growth initiative into Mexico. We believe that
o Driving organic growth through continuing to
Mexico has strong potential for us as a sales market
40
develop our NAED channel;
due to its proximity to our manufacturing locations and
o Offering competitive products,
including an
our ability to leverage existing people, product, and
expanding product quality offering;
supply chain.
o Providing unparalleled service to our customers;
The most recent acquisition of Mesta Electronics
and
Inc. has expanded HPS’ offering into standard and
o Growing through strategic acquisitions.
custom active filter and induction heating products.
• Achieving Operational and Financial Excellence by:
Mesta shares an excellent reputation for product quality,
o Driving continuous improvement;
design and reliability. Mesta not only expands HPS’
o Improving efficiency by investing in equipment,
U.S. presence but also broadens our power solutions
people and technology; and
product offering and manufacturing capabilities in
o Optimizing the efficiency of our global manufacturing
power quality solutions.
footprint.
Our Canadian entities received a government
• Developing our People and Culture by:
subsidy for eligible wages in Quarter 2, 3 and 4, 2020
o Building our leadership team for the future;
and Quarter 1, 2, and 3, 2021 which supported our
o Developing our people to perform; and
Canadian staff employment. Despite lower sales volumes
o Making HPS a preferred employer.
and a high degree of uncertainty during 2020 and 2021,
• Building a Sustainabilty Program by
we were able to protect Canadian jobs as a result of
HAMMOND POWER SOLUTIONS
the subsidy. The Company has implemented robust
investing in equipment and machinery that will allow us
health and safety precautions dedicated to providing
to keep up with future demand and allow us to optimize
a safe working environment for our employees while
our manufacturing capabilities at our various locations.
continuing to manufacture and serve our customers
We are also investing in business technology that will
during this volatile, unpredictable time. Where able,
help us become more efficient and provide us with the
the Company has provided tools to allow employees to
data that we need to improve our business.
work remotely to assist with managing school closures
The Company continues to have a strong reputation
and health concerns.
of being an industry leader and is both operationally and
The implementation of our ERP system has allowed
financially strong. HPS is well positioned to meet the
HPS to enhance the availability and quality of information
evolving needs of our traditional markets while becoming
accessible to support operational performance, improve
a leading player in a growing number of other market
customer service, supplement strategic decision making
sectors. We continue to be focused on escalation of
and audit and control. During Quarter 2, 2021 the ERP
market share, improved sales growth from new product
system went live in our operation in Granby, Quebec.
development, geographic diversification, productivity
This implementation project began in Quarter 1, 2020
gains, cost reduction and capacity flexibility.
and represents the Company’s final operation to be
HPS’ strategic vision and operational initiatives
converted to our ERP platform. The consolidation to the
have supported our industry leadership, operational
ERP platform is an important step towards providing
strength and financial stability. The combination of our
one global, integrated, consistent source of information
resilience, drive, decades of experience, commitment,
and data.
engineering expertise, solid supplier relationships and a
During 2021, the Company implemented a new
broad and unique business perspective gained through
Human Resource Management System,
(“HRMS”)
our diverse products, customers and markets are all key
platform to move the Company to a common payroll
success factors critical to our success.
and human resource system. This platform will enhance
The Company has provided shareholders with strong
41
our
internal communications, create efficiencies,
earnings per share, solid cash generation and quarterly
improve controls, incorporate additional career planning
dividends paid with an attractive yield. To continue this
and allow for better data analysis. This implementation
trend HPS is focused on sales development, continued
project began in Quarter 1, 2021 and went live on
NAED channel expansion, product development, and
January 1, 2022.
bringing quality and value to all that we produce. Our
HPS has modern manufacturing facilities throughout
strategic initiatives and focused plans will continue to
the world and this continues to be enhanced through
allow HPS to grow and expand.
our committed capital investment. As we grow, we are
ANNUAL REPORT 2021DOLLARS IN THOUSANDS UNLESS OTHERWISE STATED
Selected Annual and Quarterly Information
(tabular amounts in thousands of dollars)
Annual Information (1)
2017
2018
2019
2020
2021
Sales
Earnings from operations
EBITDA
Net earnings (loss)
Total assets
Non-current liabilities
Total liabilities
Total shareholders’ equity attributable
to equity holders of the Company
Operating debt, net of cash
Cash provided by operations
Basic earnings (loss) per share
Diluted earnings (loss) per share
Dividends declared and paid
Average exchange rate (USD$=CAD$)
Book value per share
301,750
314,082
358,792
322,097
380,202
14,470
23,069
6,114
192,449
3,641
77,438
114,848
(16,983)
1,032
0.53
0.52
2,809
1.298
9.80
2020
13,779
17,915
(12,917)
205,527
2,528
96,793
20,543
28,175
11,607
214,953
11,271
105,186
22,041
29,482
14,062
23,151
30,114
15,176
189,394
235,099
8,329
75,478
7,104
109,097
108,734
109,767
113,916
126,002
(17,056)
6,474
(1.10)
(1.10)
2,818
1.294
9.26
(9,326)
17,810
0.99
0.99
3,287
1.327
9.36
(1,278)
19,683
1.20
1.20
3,993
1.343
9.70
2021
1,638
20,447
1.29
1.28
4,009
1.253
10.69
Quarterly Information
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Sales
88,420
75,393
78,115
80,169
80,121
88,277
95,526
116,278
Earnings from operations
42
EBITDA
Net earnings
Total assets
3,033
5,678
2,148
6,514
8,447
4,420
5,447
7,466
3,462
7,047
7,891
4,032
3,402
5,349
2,298
7,620
8,694
4,689
5,909
7,378
3,948
6,220
8,693
4,241
212,929
197,895
203,443
189,394
192,395
208,865
221,549
235,757
Non-current liabilities
9,729
9,039
8,558
8,329
7,546
7,018
6,486
7,104
Total liabilities
97,156
81,375
87,215
75,478
77,559
91,691
98,951
109,097
Total shareholders’ equity
attributable to equity
holders of the Company
115,773
116,520
116,228
113,916
114,836
117,174
122,598
126,002
Operating debt, net of cash
(18,356)
(12,906)
(4,790)
(1,278)
(11,754)
(14,392)
(15,399)
1,638
Cash (used) provided by
operations
Basic earnings per share
Diluted earnings per share
Dividends declared and paid
Average exchange rate
(USD$=CAD$)
(6,038)
7,229
10,419
8,073
(6,854)
0.18
0.18
998
0.38
0.38
999
0.30
0.30
998
0.34
0.34
998
0.19
0.19
(29)
0.40
0.40
7,430
19,900
0.34
0.34
0.36
0.35
1,002
1,002
1,002
1,002
1.339
1.391
1.335
1.309
1.268
1.231
1.257
1.258
Book value per share
9.86
9.92
9.90
9.70
9.78
9.94
10.4
10.69
(1) Balances for 2017 not restated to reflect discontinued operations
HAMMOND POWER SOLUTIONS 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 six 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
Richard C. Vollering
Corporate Secretary
& Chief Financial Officer
March 24, 2022
43
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, 2021 and end of December 31, 2020
• the consolidated statements of operations for the years then ended
• the consolidated statements of comprehensive income for the years then ended
• the consolidated statements of changes in equity for the years then ended
• the consolidated statements of cash flows for the years then ended
• and notes to the consolidated financial statements, including a summary of significant accounting policies
(Hereinafter referred to as the “financial statements”).
In our opinion, the accompanying financial statements present fairly, in all material respects, the consolidated financial
position of the Entity as December 31, 2021 and December 31, 2020, 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
ANNUAL REPORT 2021
statements for the year ended December 31, 2021. These matters were addressed in the context of our audit of the financial
statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
We have determined the matters described below to be the key audit matters to be communicated in our auditors’ report.
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 $12,766 thousand, of which,
$8,527 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 gross margin rate assumptions by using average actual growth
rates realized in previous years to assess the 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.
44
Other Information
Management is responsible for the other information. Other information comprises:
• The information included in Management’s Discussion and Analysis filed with the relevant Canadian Securities Commissions.
• The information, other than the financial statements and the auditors’ report thereon, included in a document entitled “Annual
Report 2021”.
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 filed with the relevant Canadian Securities
Commissions and the Annual Report 2021 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,
HAMMOND POWER SOLUTIONS
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.
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.
• Responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion.
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
• 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.
45
• 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 24, 2022
Waterloo, Canada
ANNUAL REPORT 2021
Consolidated Statements of Financial Position
(in thousands of dollars)
As at
December 31, 2021
December 31, 2020
Assets
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
$
20,905
$
72,004
62,467
807
3,515
159,698
2,779
30,960
3,294
13,279
2,370
10,503
12,216
14,795
53,078
49,206
488
2,687
120,254
3,201
30,372
3,649
13,300
1,809
5,901
10,908
75,401
69,140
$
235,099
$
189,394
Bank operating lines of credit (note 13)
$
Accounts payable and accrued liabilities (notes 17, 21 and 27)
Income taxes payable
Provisions (note 20)
46
Current portion of lease and other liabilities (notes 14, and 30)
$
19,267
75,760
1,988
1,850
3,128
16,073
46,179
942
1,811
2,144
Total current liabilities
Non-current liabilities
Provisions (note 20)
Deferred tax liabilities (note 16)
Long-term portion of lease and other liabilities (notes 14 and 30)
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 31)
Total liabilities and shareholders’ equity
See accompanying Notes to Consolidated Financial Statements.
On behalf of the Board:
$
101,993
$
67,149
342
401
6,361
7,104
$
109,097
$
14,886
2,432
2,109
106,575
126,002
317
836
7,176
8,329
75,478
14,491
2,498
1,519
95,408
113,916
$
235,099
$
189,394
William G. Hammond
Chairman of the Board & Chief Executive Officer
David J. FitzGibbon
Chairman Audit Committee
HAMMOND POWER SOLUTIONS
Consolidated Statements of Operations
Years ended December 31, 2021 and 2020 (in thousands of dollars except for per share)
Sales (note 21)
Cost of sales (note 5 and 22)
Gross margin
Selling and distribution (note 22)
General and administrative (note 22)
Earnings from operations
Finance and other costs
Interest expense
Foreign exchange loss (gain)
Share of income of investment in joint venture, net of tax
(note 10)
Other
Net finance and other costs
2021
2020
$
380,202
$
322,097
277,771
102,431
46,459
32,821
$
79,280
$
23,151
1,301
561
(61)
100
1,901
235,103
86,994
40,217
24,736
64,953
22,041
1,247
(123)
(153)
104
1,075
Earnings before income taxes
21,250
20,966
Income tax expense (recovery) (note 16):
Current
Deferred
Net earnings
Earnings per share (note 18)
Basic earnings per share
Diluted earnings per share
See accompanying Notes to Consolidated Financial Statements.
7,110
(1,036)
6,074
47
7,827
(923)
6,904
15,176
$
14,062
1.29
1.28
$
$
1.20
1.20
$
$
$
ANNUAL REPORT 2021DOLLARS IN THOUSANDS UNLESS OTHERWISE STATED Consolidated Statements
of Comprehensive Income
Years ended December 31, 2021 and 2020 (in thousands of dollars)
2021
2020
Net earnings
$
15,176
$
14,062
Other comprehensive income (loss)
Items that will be recognized within profit and loss:
Foreign currency translation differences for foreign operations
Other comprehensive income (loss), net of income tax
590
590
Total comprehensive income
$
15,766
$
(5,920)
(5,920)
8,142
See accompanying Notes to Consolidated Financial Statements.
48
HAMMOND POWER SOLUTIONS Consolidated Statements of Changes in Equity
Years ended December 31, 2021 and 2020 (in thousands of dollars)
SHARE
CAPITAL
CONTRIBUTED
SURPLUS
AOCI*
RETAINED
EARNINGS
TOTAL
SHAREHOLDERS’
EQUITY
Balance as 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
Balance at December 31, 2020
Balance at January 1, 2021
Total comprehensive income for the period
Net income
Other comprehensive (loss) income
Foreign currency translation differences related
to joint venture (note 10)
Foreign currency translation differences
Total other comprehensive income
Total comprehensive income for the period
Transactions with owners, recorded directly
in equity
Dividends to equity holders (note 17)
Stock options exercised (note 17)
Total transactions with owners
Balance at December 31, 2021
*AOCI – Accumulated other comprehensive income
See accompanying Notes to Consolidated Financial Statements.
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
14,062
14,062
(281)
(5,639)
(5,920)
(5,920)
–
–
–
14,062
–
–
(3,993)
(3,993)
(281)
(5,639)
(5,920)
8,142
(3,993)
(3,993)
$ 14,491
$ 14,491
$
$
2,498
$
1,519
$ 95,408
$
113,916
2,498
$
1,519
$ 95,408
$
113,916
–
–
–
–
–
–
–
–
–
–
–
–
395
395
(66)
(66)
–
15,176
15,176
(82)
672
590
590
–
–
–
–
–
–
(82)
672
590
49
15,176
15,766
(4,009)
–
(4,009)
(4,009)
329
(3,680)
$ 14,886
$
2,432
$
2,109
$ 106,575
$
126,002
ANNUAL REPORT 2021DOLLARS IN THOUSANDS UNLESS OTHERWISE STATED
Consolidated Statements of Cash Flows
Years ended December 31, 2021 and 2020 (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,
right-of-use assets and investment properties
Amortization of intangible assets
Gain on disposal of right to use asset
Provisions
Interest expense
Income tax expense
Unrealized (gain) loss on derivatives
Share-based compensation expense
Change in non-cash working capital (note 25)
Cash generated from operating activities
Income tax paid
Net cash provided from operating activities
Cash flows from investing activities
Repayment of note and lease receivable
Acquisition (note 30)
50
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 (note 17)
Cash dividends paid (note 17)
Net advances (repayments) of bank operating lines of credit
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
Cash acquired in business combination (note 30)
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
$
See accompanying Notes to Consolidated Financial Statements.
2021
2020
$
15,176
$
14,062
(61)
6,092
1,471
–
433
1,301
6,074
(89)
1,210
31,607
(4,777)
26,830
(6,383)
20,447
185
(5,032)
(5,051)
(1,016)
(10,914)
329
(4,009)
3,194
(1,047)
(2,724)
(4,257)
578
256
6,110
14,795
20,905
$
(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
14,795
HAMMOND POWER SOLUTIONS 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 is primarily 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.
(a)
Basis of preparation
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 24, 2022.
(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. Assets acquired and
liabilities assumed in connection with business combinations are recorded based on their fair values at the
date of acquisition, and contingent consideration granted concurrent with a business combination is recognized
initially at fair value, with subsequent measurement occurring at fair value. Changes in the fair value of contingent
51
consideration are recorded either through the statement of operations, or through equity, depending on the
characteristics of the consideration granted.
(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
statement of operations. 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 (“CDN”), 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.
For the years ended December 31, 2021 and 2020 (tabular amounts in thousands of dollars, except share and per share amounts)ANNUAL REPORT 2021
Canadian and Subsidiary Operations
Functional Currency
Canada
United States
Mexico
Mexico – Corefficient
Italy
India
Canadian dollar
U.S. dollar
Mexican Peso
U.S. dollar
Euro
Rupee
($)
($ USD)
(Pesos)
($ USD)
(EU €)
(INR)
(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
52
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.
Management 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 Group’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
HAMMOND POWER SOLUTIONS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2021 and 2020 (tabular amounts in thousands of dollars, except share and per share amounts)
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.
Identification of acquired assets and liabilities
IFRS 3, Business Combinations, requires acquirers to recognize, separately from goodwill, the identifiable assets
acquired and liabilities assumed. The identification of acquired assets and liabilities involves judgment.
(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.
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
53
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.
Determination of fair value of acquired long-lived assets, intangible assets, and assumed liabilities
IFRS 3, Business Combinations, requires acquirers to recognize the identifiable assets acquired and liabilities
assumed at fair value. The determination of fair value requires Management to make estimates around the value
an independent third party, under no compulsion to act, would pay for an asset acquired or liability assumed on
For the years ended December 31, 2021 and 2020 (tabular amounts in thousands of dollars, except share and per share amounts)ANNUAL REPORT 2021
a standalone basis. Where possible, Management engages third-party appraisers to assist in the determination
of the fair value of real property acquired. The fair value of acquired intangible assets are generally determined
using discounted cash flow models and involve the use of cash flow forecasts, market-based discount rates,
and/or market-based royalty rates. The fair values of liabilities assumed is generally based on discounted cash
flow models which involve the use of market-based discount rates. The development of cash flow forecasts
involve the use of estimates, which may differ from actual cash flows realized. Assumptions are involved in the
determination of discount rates and royalty rates.
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 judgment, 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-
54
owned subsidiaries:
• Hammond Power Solutions, Inc.
• Hammond Power Solutions, S.A. de C.V.
• Montran S.A. de C.V.
• Delta Transformers Inc.
• Hammond Power Solutions Private Limited
•
Continental Transformers s.r.l.
• Hammond Power Solutions S.p.A.
• Mesta Electronics, Inc.
• Hammond Power Solutions Latin America S.A de C.V.
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.
HAMMOND POWER SOLUTIONS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2021 and 2020 (tabular amounts in thousands of dollars, except share and per share amounts)
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.
(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
55
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.
•
Contingent consideration issued in connection with a business combination that meets the definition of a
financial liability is initially recognized at fair value at the acquisition date and is subsequently re-measured
at fair value at the end of each reporting period.
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.
For the years ended December 31, 2021 and 2020 (tabular amounts in thousands of dollars, except share and per share amounts)ANNUAL REPORT 2021
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 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.
56
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
HAMMOND POWER SOLUTIONS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2021 and 2020 (tabular amounts in thousands of dollars, except share and per share amounts)
For the years ended December 31, 2021 and 2020 (tabular amounts in thousands of dollars, except share and per share amounts)
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
10-20 years
4-14 years
5-15 years
Amortization methods, useful lives and residual values are reviewed at each 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.
(g)
Business Combinations and Goodwill
The Group accounts for business combinations using the acquisition method when the acquired set of activities
and assets meets the definition of a business and control is transferred to the Group. In determining whether a
57
particular set of activities and assets is a business, the Group assesses whether the set of assets and activities
acquired includes, at a minimum, an input and substantive process and whether the acquired set has the ability
to produce outputs.
The consideration transferred in the acquisition is generally measured at fair value, as are the identifiable
net assets acquired. Any gain on a bargain purchase is recognised in profit or loss immediately. Transaction costs
are expensed as incurred, except if related to the issue of debt or equity securities
Any contingent consideration is measured at fair value at the date of acquisition. If an obligation to pay
contingent consideration that meets the definition of a financial instrument is classified as equity, then it is
not re-measured and settlement is accounted for within equity. Otherwise, other contingent consideration is
remeasured at fair value at each reporting date and subsequent changes in the fair value of the contingent
consideration are recognised in profit or loss.
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, and is tested for impairment at
ANNUAL REPORT 2021
least annually and upon the occurrence of an indication of impairment.
The impairment tests are performed at the 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, 2021.
(h)
Investment properties
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 and the Italian Marnate properties, at historical 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
58
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
HAMMOND POWER SOLUTIONS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2021 and 2020 (tabular amounts in thousands of dollars, except share and per share amounts)
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.
(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
59
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 maintains 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. The DSU liability is included within accrued liabilities.
For the years ended December 31, 2021 and 2020 (tabular amounts in thousands of dollars, except share and per share amounts)ANNUAL REPORT 2021
(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;
• 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.
60
• 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. As a result, 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
HAMMOND POWER SOLUTIONS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2021 and 2020 (tabular amounts in thousands of dollars, except share and per share amounts)
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.
(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
61
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.
For the years ended December 31, 2021 and 2020 (tabular amounts in thousands of dollars, except share and per share amounts)ANNUAL REPORT 2021
(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
62
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.
(u) New accounting pronouncements adopted during the period
IBOR – Phase 2 (Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16)
In August 2020, the IASB issued Phase 2 amendments, which amended the requirements in IFRS 9, IAS 39, IFRS
7, IFRS 4, and IFRS 16, principally addressing the following areas:
• modification of a financial asset or a financial liability;
• modification of a lease;
• additional reliefs for hedging relationships;
• new disclosures; and
• effective date and transition.
HAMMOND POWER SOLUTIONS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2021 and 2020 (tabular amounts in thousands of dollars, except share and per share amounts)
The Company adopted the amendments in its financial statements for the annual period beginning on
January 1, 2021. The adoption of the amendments did not have a material impact on the consolidated
financial statements.
COVID-19-related rent concessions (Amendments to IFRS 16)
In May 2020, the IASB issued COVID-19-Related Rent Concessions, which amended IFRS 16. The 2020
amendments introduced an optional practical expedient that simplifies how a lessee accounts for rent concessions
that are a direct consequence of COVID-19, only if certain conditions are met. Under the practical expedient, a
lessee is not required to assess whether eligible rent concessions are lease modifications, instead accounting for
them in accordance with other applicable guidance.
The Company adopted the amendments in its financial statements for the annual period beginning
on January 1, 2021. The adoption of the amendments did not have any impact on the consolidated
financial statements.
Cloud computing arrangement costs
On April 28, 2021 the IFRS Interpretations Committee issued a final agenda decision on cloud computing
arrangements. The agenda aimed to clarify guidance on how customers should account for implementation
costs incurred in a software-as-a-service arrangement. This further builds upon the March 2019 agenda which
distinguished hosting arrangements in which the customer receives a software intangible asset from those that
do not, and therefore are service contracts.
The Company adopted this agenda decision on a retrospective basis. The adoption of the amendments did
not have a material impact on the financial statements.
(v) New accounting pronouncements
63
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); and
• Annual Improvements to IFRS Standard 2018-2020.
The following amendments are effective for the annual period beginning on January 1, 2023:
• Classification of Liabilities as Current or Non-Current (Amendments to IAS 1);
• Definition of accounting estimates (Amendments to IAS 8);
• Disclosure initiative – accounting policies (Amendments to IAS 1 and IFRS Practice Statement 2 Making
Materiality Judgements); and
• Deferred tax related to assets and liabilities arising from a single transaction (Amendments to IAS 12
Income Taxes).
For the years ended December 31, 2021 and 2020 (tabular amounts in thousands of dollars, except share and per share amounts)ANNUAL REPORT 2021
The Group is evaluating the impact of adoption. 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, 2021
December 31, 2020
$
$
67,359 $
4,645
72,004 $
49,129
3,949
53,078
Trade accounts receivable is presented net of expected credit losses of $2,359,000 (December 31, 2020 –
$2,577,000).
A continuity of the Group’s allowance for doubtful accounts is as follows:
Opening balance
Additional allowances
Writeoffs
Adjustments
5.
Inventories
64
Raw materials
Work in progress
Finished goods
December 31, 2021
December 31, 2020
$
2,577
$
2,997
214
(6)
494
(25)
(426)
(889)
$
2,359
$
2,577
December 31, 2021
December 31, 2020
$
30,731
$
19,002
4,206
1,867
27,530
28,337
$
62,467
$
49,206
Raw materials and changes in finished goods, and work in progress recognized as cost of sales during the year
amounted to $276,850,000 (2020 – $234,395,000). In addition, during the year, write-downs in the amount of
$23,000 were recognized (2020 – reversal of write-downs $4,000). Inventories carried at net realisable value as
at December 31, 2021 were $1,054,000 (December 31, 2020 – $821,000).
6. Prepaid and other assets
Prepaid expenses
Fair value of derivative
Current portion of long-term lease and note receivable (note 7)
December 31, 2021
December 31, 2020
$
$
3,121
$
2,455
180
214
–
232
3,515
$
2,687
HAMMOND POWER SOLUTIONS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2021 and 2020 (tabular amounts in thousands of dollars, except share and per share amounts)
7.
Long-term lease and note receivable
Concurrent with the disposal of the VPI product line in 2017, the Group entered into a lease 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 October 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.
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 (“EUR”) (approximately $3,305,000). 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 EUR. 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 EUR (approximately $557,000). If the purchaser fails to complete the acquisition of
the leased premises upon the exercise of the put option by the Company and pay the required consideration, the
purchaser will pay 500,000 EUR (approximately $743,000) in liquidated damages. Management has determined
that ownership of the leased premises is reasonably certain to be tranferred by virtue of the put and call options
and accordingly has accounted for the lease as a finance lease. The put and call options expire November 23, 2023.
As at December 31, 2021 consideration receivable consists of:
December 31, 2021
December 31, 2020
65
Lease receivable of 2,083 EUR (2020 – 2,208 EUR), with monthly lease
payments of 13 EUR, bearing interest of 1.15% per annum.
Gross cash entitlement:
Less: unearned finance income
Net lease receivable
Less: current portion included within prepaid and other assets
$
3,057
$
(64)
2,993
214
$
2,779
$
The aggregate amount of principal payments to be received in each of the next two years is as follows:
2022
2023
$
3,538
(105)
3,433
232
3,201
214
2,779
2,993
For the years ended December 31, 2021 and 2020 (tabular amounts in thousands of dollars, except share and per share amounts)ANNUAL REPORT 2021
8.
Property, plant and equipment
Property, plant and equipment comprise 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, 2021 December 31, 2020
$
$
25,152 $
5,808
30,960 $
23,648
6,724
30,372
Land
Buildings
Leaseholds &
Improvements
Machinery &
Equipment
Office
Equipment
Construction
in Progress
& Deposits
Total
Cost
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
Balance at January 1, 2021
$ 4,210
$17,979
$ 1,800
$54,066
$ 11,458
$ 2,618
$ 92,131
Acquisition (note 30)
Additions
Disposal
Effect of movements in
exchange rates
–
–
–
–
564
–
–
106
–
8
2,067
(671)
–
–
486
1,828
–
–
8
5,051
(671)
(12)
(25)
(41)
(263)
(45)
(93)
(479)
66
Balance at December 31, 2021 $ 4,198
$18,518
$ 1,865
$55,207
$ 11,899
$ 4,353
$ 96,040
Accumulated Depreciation
Balance at January 1, 2020
$
Depreciation for the year
Effect of movements in
exchange rates
Balance at December 31, 2020 $
Balance at January 1, 2021
$
Depreciation for the year
Disposal
Effect of movements in
exchange rates
Balance at December 31, 2021 $
Carrying amounts
–
–
–
–
–
–
–
–
–
$11,350
$ 1,133
$42,836
$ 10,030
$
779
106
2,456
416
(19)
(80)
(444)
(80)
$12,110
$ 1,159
$44,848
$ 10,366
$12,110
$ 1,159
$44,848
$ 10,366
$
$
816
–
121
–
2,183
(667)
436
–
(10)
(34)
(401)
(39)
$ 12,916
$ 1,246
$45,963
$ 10,763
$
–
–
–
–
–
–
–
–
–
$ 65,349
3,757
(623)
$ 68,483
$ 68,483
3,556
(667)
(484)
$ 70,888
At December 31, 2020
$ 4,210
$ 5,869
$
641
$ 9,218
$ 1,092
$ 2,618
$ 23,648
At December 31, 2021
$ 4,198
$ 5,602 $
619
$ 9,244
$ 1,136
$ 4,353
$ 25,152
HAMMOND POWER SOLUTIONS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2021 and 2020 (tabular amounts in thousands of dollars, except share and per share amounts) Depreciation is recorded in the statement of earnings as follows: cost of sales $3,198,000 (2020 – $3,430,000),
selling and distribution $nil (2020 – $5,000) and general and administrative $358,000 (2020 – $322,000).
Right of use 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.
Buildings
Vehicles
Office
Equipment
Total
Balance at January 1, 2020
$
8,503
$
523
$
27
$
9,053
Additions
Disposal
Depreciation
Effect of movements in exchange rates
Balance at December 31, 2020
Balance at January 1, 2021
Additions
Depreciation
Effect of movements in exchange rates
–
–
(1,909)
(407)
343
(15)
(313)
(9)
$
$
6,187
$
529
$
6,187
$
529
$
853
(1,668)
(135)
299
(290)
(3)
–
–
(18)
(1)
8
8
$
$
44
(16)
–
Balance at December 31, 2021
$
5,237
$
535
$
36
$
343
(15)
(2,240)
(417)
6,724
6,724
1,196
(1,974)
(138)
5,808
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
67
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.
9.
Investment in properties
Glen Ewing Property
Marnate Property (net of accumulated
depreciation of $1,415 (2020 - $1,360))
December 31, 2021
December 31, 2020
$
$
1,044
$
1,044
2,250
3,294
$
2,605
3,649
For the years ended December 31, 2021 and 2020 (tabular amounts in thousands of dollars, except share and per share amounts)ANNUAL REPORT 2021
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 2021 or 2020. The property is carried at cost. The estimated fair value of the property as at December 31,
2021 is $1,150,000 (2020 – $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 $139,000 (2020 – $121,000).
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 in 2019, the purchaser has leased the Marnate
Property for a period of five years at an annual rental amount of 90,000 EUR (approximately $134,000). The
operating expenses for this property were 169,000 EUR (approximately $251,000) in 2021 and 202,000 EUR
(approximately $307,000) in 2020. Depreciation on the facility was recorded in the statement of earnings as
general and administrative expenses in the amount of $163,000 (2020 – $236,000). The estimated fair value
of the property as at December 31, 2021 is 1,566,000 EUR (approximately $2,250,000). 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
68
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
December 31, 2021
December 31, 2020
$
20,023
$
20,023
Cumulative share of loss in investment in joint venture, net of tax
(3,172)
(3,233)
Cumulative foreign currency translation differences related to the
joint venture
(3,572)
(3,490)
$
13,279
$
13,300
During the year the Company made no additional contributions (2020 – $nil) and recognized its share of income
of $61,000 (2020 – $153,000).
HAMMOND POWER SOLUTIONS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2021 and 2020 (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, 2021
December 31, 2020
$
1,741
$
17,933
3,224
217
3,553
8,155
2,932
89
$
23,115
$
14,729
13,659
$
36,774
$
$
12,905
$
–
$
12,905
$
16,425
31,154
6,508
746
7,254
2021
2020
$
67,908
$
56,605
113
278
Net income for the year ended December 31, 2020 includes depreciation and amortization expense of
$2,893,000 (2020 – $3,118,000), net interest expense of $14,000 (2020 – $62,000) and an income tax expense
of $nil (2020 – $nil) related to Corefficient.
69
For the years ended December 31, 2021 and 2020 (tabular amounts in thousands of dollars, except share and per share amounts)ANNUAL REPORT 2021
11.
Intangible assets
Intangible assets
Cost
Technology
and Patents
Customer lists,
relationships
and branding
Externally
acquired
software
Total
Balance at January 1, 2020
$
6,241 $
8,746 $
6,690 $
21,677
Additions
Effect of movements in exchange rates
Balance at December 31, 2020
Balance at January 1, 2021
Acquisition (note 30)
Additions
Effect of movements in exchange rates
$
$
–
(122)
–
(87)
713
35
713
(174)
6,119 $
8,659 $
7,438 $
22,216
6,119 $
8,659 $
7,438 $
22,216
1,710
–
(53)
3,374
–
(27)
–
1,016
(1)
5,084
1,016
(81)
Balance at December 31, 2021
$
7,776 $
12,006 $
8,453 $
28,235
Accumulated Amortization
Balance at January 1, 2020
Amortization for the year
Effect of movements in exchange rates
Balance at December 31, 2020
70
Balance at January 1, 2021
Amortization for the year
Effect of movements in exchange rates
$
4,545 $
6,750 $
4,051 $
15,346
$
$
138
(53)
481
(50)
417
36
1,036
(67)
4,630 $
7,181 $
4,504 $
16,315
4,630 $
7,181 $
4,504 $
16,315
216
(27)
833
(26)
422
(1)
1,471
(54)
Balance at December 31, 2021
$
4,819 $
7,988 $
4,925 $
17,732
Balance at
At December 31, 2020
At December 31, 2021
$
$
1,489 $
1,478 $
2,934 $
5,901
2,957 $
4,018 $
3,528 $
10,503
Amortization of $617,000 (2020 – $342,000) has been recognized in cost of sales, $123,000 (2020 – $131,000)
has been recognized in selling and distribution and $731,000 (2020 – $563,000) has been recognized in general
and administrative.
None of the intangible assets has been internally developed.
Research and development expenses of $945,000 (2020 – $704,000) have been recognized in cost of
sales in the consolidated statements of earnings. No research and development costs have been capitalized
(2020 – $nil).
HAMMOND POWER SOLUTIONS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2021 and 2020 (tabular amounts in thousands of dollars, except share and per share amounts)
12. Goodwill and impairment testing for cash-generating units
Goodwill
Opening balance
Addition (note 30)
Effect of movements of exchange rates
Ending balance
December 31, 2021
December 31, 2020
$
10,908
$
11,309
1,422
(114)
–
(401)
$
12,216
$
10,908
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 2021 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 three subsidiaries identified as CGUs that contain goodwill. The CGUs and their respective
goodwill balances are as follows: Delta Transformers Inc. $2,180,000 (2020 – $2,180,000), Hammond Power
Solutions Private Limited (“India”) $8,527,000 (2020 – $8,728,000) and Mesta Electronics Inc. $1,509,000.
For its 2021 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.
71
The values used in the cash flow projections are based on historical sales, internal growth rate assumptions and
available market data.
India
Based on the Company’s projections, a five year cash flow forecast was completed and discounted to present-
value using discount rate of 20.0% (2020 – 21.9%). Through the five year cash flow projections, the Company’s
model also incorporated year 1 sales growth rates of 82.3%, which reflects returning to normal production
levels post the COVID-19 pandemic as well as the manufacturing of a new product line in India. The annual
sales growth rates for year 2 to year 5 are in the range of 10.5% – 36.2% (2020 – year 1 to year 5 – 6.0% –
80.3%) based on the CGUs operating history and strategic sales growth initiatives. Cash flows beyond the five
year period have been extrapolated using terminal growth rate of 8% (2020 – 8%). This was then compared
to the carrying value of the CGU to determine if there was impairment.
For the years ended December 31, 2021 and 2020 (tabular amounts in thousands of dollars, except share and per share amounts)ANNUAL REPORT 2021
Delta
Based on the Company’s projections, a five year cash flow forecast was completed and discounted to present-
value using discount rate of 12.3% (2020 – 12.3%). Through the five year cash flow projections, the Company’s
model also incorporated year 1 sales growth rates of 19.9% which reflects returning to normal production
levels post COVID-19 pandemic. The annual sales growth rates for year 2 to year 5 are 3.0% (2020 – year 1 to
year 5 – 2.4% – 5.3%) based on the CGUs operating history and strategic sales growth initiatives. Cash flows
beyond the five year period have been extrapolated using terminal growth rate of 2% (2020 – 2%). This was
then compared to the carrying value of the CGU to determine if there was impairment.
Mesta
Based on the Company’s projections, a five year cash flow forecast was completed and discounted to present-
value using discount rate of 26.8%. Through the five year cash flow projections, the Company’s model also
incorporated annualized year 1 sales growth rates of 304%. The annual sales growth/contraction rates for
year 2 to year 5 range from 15.4% to 5.0% based on the CGUs operating history and strategic sales growth
initiatives. Cash flows beyond the five year period have been extrapolated using terminal growth rate of 3%.
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
72
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
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, 2021, a discount rate increase of 4.8% or a 8.2% lower terminal growth rate than the
assumptions utilized would cause the estimated recoverable amount to be equal to the carrying amount for this
CGU (December 31, 2020 – a discount rate increase of 2.1% or a 3.5% lower terminal growth rate).
For the Delta Transformers Inc. and Mesta Electronics Inc. CGUs, 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 2021 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, 2021.
HAMMOND POWER SOLUTIONS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2021 and 2020 (tabular amounts in thousands of dollars, except share and per share amounts) 13. Bank operating lines of credit
The Group’s North American current banking agreement, which expires in June 2026, consists of a $50,000,000
U.S. revolving credit facility. The revolving credit facility can be drawn in U.S. Prime borrowings, Canadian Prime
borrowings, Canadian Dollar Offered Rate (“CDOR”) borrowings or the London Inter-Bank Offered rate (“LIBOR”)
benchmark replacement rate borrowings. The facilities are unsecured.
Interest on the revolving credit lines is dependent on certain financial ratios and ranges from Canadian bank
prime rate to Canadian bank prime rate plus 0.04% for the Canadian dollar denominated revolving credit lines
or, if designated, the bank’s CDOR rate plus 1.40% to 1.90% and the Canadian overdraft loans at Canadian bank
prime rate; and from U.S. base rate minus 1.00% to U.S. base rate minus 0.50% for the U.S. dollar denominated
revolving credit lines or, USD overdraft loan at USD prime minus 1.00%.
The Group also has a 4,070,000 EUR unsecured Euro facility that matures June 2026 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 EUR revolver and 250,000 EUR overdraft facility, as well
as a 70,000 EUR letter of credit line. The revolver facility bears interest at 1.75% plus the relevant Market
Index (2020 – plus margin of 2.25%, Euribor on December 31, 2021 – 0.499%, Euribor on December 31, 2020
– 0.499%).
Hammond Power Solutions Private Limited maintains an additional demand credit facility for an unsecured
working capital loan up to 515,000,000 INR (2020 – 375,000,000 INR) consisting of the sub-facilities of a
90,000,000 INR (2020 – 131,000,000 INR) short-term working capital demand loan, a 425,000,000 INR (2020
– 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, 2021, there was $nil Canadian dollar equivalent of Rupees
drawn against the working capital demand loan (2020 – $nil). As at December 31, 2021 there was $4,481 INR
(2020 – nil INR) drawings against the bank guarantees.
Based on exchange rates in effect at December 31, 2021, the combined Canadian dollar equivalent available
73
across all facilities, prior to any utilization of the facilities was $77,788,000 (2020 – $76,477,000).
As at December 31, 2021, the Canadian dollar equivalent outstanding under the U.S. dollar revolving credit
facility was $14,777,000, consisting of $12,598,000 Canadian dollars drawn and the Canadian equivalent of
$2,179,000 U.S. dollars drawn (2020 – $11,215,000 – consisting of $7,577,000 Canadian dollars drawn and the
Canadian equivalent of $3,638,000 U.S. dollars drawn). As well, $4,490,000 (2020 – $4,858,000) Canadian dollar
equivalent of Euros was outstanding under the Euro facility, and $nil (2020 – $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.
For the years ended December 31, 2021 and 2020 (tabular amounts in thousands of dollars, except share and per share amounts)ANNUAL REPORT 2021
14.
Lease and other long-term liabilities
Lease liabilities
Contingent consideration (note 30)
Current
Non-Current
Right of use liability maturity analysis –
contractual undiscounted cash flows
Less than one year
One to five years
More than five years
Total undiscounted lease liabilities
Less: effect of discounting and foreign exchange
Lease liabilities included in the statement of financial position
Current
Non-current
December 31, 2021
December 31, 2020
$
$
7,980
$
9,320
1,509
9,489
$
3,128
6,361
–
9,320
2,144
7,176
December 31, 2021
December 31, 2020
$
$
$
$
$
$
2,762
5,457
94
8,313
(333)
7,980
2,512
5,468
$
$
$
$
$
$
2,719
7,017
705
10,441
(1,121)
9,320
2,144
7,176
Amounts recognized in statement of operations
Year Ended
December 31, 2021
Year Ended
December 31, 2020
74
Interest on lease liabilities
$
254
$
330
Amounts recognized in statement of cash flows
Year Ended
December 31, 2021
Year Ended
December 31, 2020
Payment of lease liabilities
$
2,724
$
2,650
15. Commitments
December 31, 2021 December 31, 2020
Capital expenditure commitments
$
483
$
1,029
HAMMOND POWER SOLUTIONS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2021 and 2020 (tabular amounts in thousands of dollars, except share and per share amounts) 16.
Income taxes
Income tax expense
Current tax expense
Current period
Deferred tax recovery
2021
2020
$
7,110
$
7,827
Origination and reversal of temporary differences
Decrease in tax rate
(1,071)
35
(1,036)
Total income tax expense
$
6,074
$
(924)
1
(923)
6,904
Reconciliation of effective tax rate
2021
2021
2020
2020
$
15,176
$
14,062
Net earnings
Income tax expense
Earnings before income taxes
Income tax expense using the Company’s
domestic tax rate
Effect of tax rates in foreign jurisdictions
Decrease in tax rate
Non-deductible expenses/non-taxable
39.50%
(12.49%)
0.16%
6,074
21,250
8,394
(2,654)
34
39.50%
(12.03%)
0.00%
income
0.23%
49
0.43%
Reduced rate for active business and
manufacturing and processing
Losses for which no deferred tax asset was
recognized
Basis difference in subsidiary
Dividend withholding tax
Other
(1.81%)
(385)
(2.69%)
(564)
2.29%
0.15%
0.00%
0.55%
487
(1.40%)
32
–
117
–
6.11%
3.01%
28.58% $
6,074
32.93% $
(294)
–
1,281
631
6,904
6,904
20,966
8,282
(2,522)
–
90
75
For the years ended December 31, 2021 and 2020 (tabular amounts in thousands of dollars, except share and per share amounts)ANNUAL REPORT 2021
Unrecognized temporary differences
At December 31, 2021, pre-tax temporary differences of $94,347,000 (2020 – $80,250,000) 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 $11,793,000 (2020 – $10,031,000) 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
Warranty provisions
Inventory provisions
December 31, 2021 December 31, 2020
$
13,529
$
32,831
3,309
115
434
13,777
31,361
3,381
–
332
$
50,218
$
48,851
The tax losses, financial interests deductible, warranty provisions 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.
76
HAMMOND POWER SOLUTIONS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2021 and 2020 (tabular amounts in thousands of dollars, except share and per share amounts) Recognized deferred tax assets and liabilities
Deferred tax assets and liabilities are attributable to the following:
Property, plant and equipment
$
811
$
849 $
(3,552)
$ (4,075)
Assets
Liabilities
2021
2020
2021
2020
4
(555)
(641)
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 denominated loans
payable/receivable
Provisions and tax reserves
Tax loss carry-forwards
Basis difference in subsidiary
Tax assets (liabilities)
Set off of tax
Net tax assets (liabilities)
91
44
225
–
1,950
593
274
2,263
2,164
1,339
9,754
44
291
–
2,414
340
201
1,964
2,035
1,448
9,590
(36)
–
(3,402)
–
(159)
(77)
(4)
–
–
(7,785)
7,384
(32)
–
(3,636)
–
(160)
(71)
(2)
–
–
(8,617)
7,781
(7,384)
(7,781)
$
2,370 $
1,809 $
(401) $
(836)
77
For the years ended December 31, 2021 and 2020 (tabular amounts in thousands of dollars, except share and per share amounts)ANNUAL REPORT 2021 Movement in temporary differences during the year ended December 31, 2021:
Balance
December 31, 2020
Recognized in
retained earnings
Recognized in
profit or loss
Recognized
in other
comprehensive
income
Balance
December 31, 2021
Property, plant and equipment
$
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
637
(12)
(291)
3,636
(2,414)
(180)
(130)
(1,962)
(2,035)
(1,448)
78
Foreign exchange
Income tax expense
$
(973) $
–
–
–
–
–
–
–
–
–
–
–
–
$
(485) $
(173)
4
66
(234)
464
(254)
(67)
(297)
(129)
109
$
$
$
(996) $
(40)
(1,036)
–
–
–
–
–
–
–
–
–
–
–
–
$
$
2,741
464
(8)
(225)
3,402
(1,950)
(434)
(197)
(2,259)
(2,164)
(1,339)
(1,969)
HAMMOND POWER SOLUTIONS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2021 and 2020 (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
$
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)
$
(125) $
–
–
–
–
–
–
–
–
–
–
–
–
$
(771) $
(130)
(49)
(63)
662
709
(100)
598
(499)
(884)
(321)
$
$
$
(848) $
(75)
(923)
–
–
–
–
–
–
–
–
–
–
–
–
$
$
3,226
637
(12)
(291)
3,636
(2,414)
(180)
(130)
(1,962)
(2,035)
(1,448)
(973)
79
For the years ended December 31, 2021 and 2020 (tabular amounts in thousands of dollars, except share and per share amounts)ANNUAL REPORT 2021 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:
9,011,624 Class A subordinate voting shares (2020 – 8,966,624)
2,778,300 Class B common shares (2020 – 2,778,300)
11,789,924 Total A and B shares (2020 – 11,744,924)
December 31, 2021
December 31, 2020
$
$
14,879
$
14,484
7
7
14,886
$
14,491
During the year ended December 31, 2021, 45,000 Class A shares were issued upon exercise of stock options,
resulting in cash proceeds of $329,000 and a transfer of $66,000 from contributed surplus. During the year
ended December 31, 2020 there were no stock options exercised.
The following dividends were declared and paid by the Company:
34 cents per Class A subordinate voting shares (2020 – 34 cents)
34 cents per Class B common shares (2020 – 34 cents)
December 31, 2021
December 31, 2020
$
$
3,064
$
945
4,009
$
3,048
945
3,993
80
(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, 2021, or the year ended December 31, 2020.
HAMMOND POWER SOLUTIONS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2021 and 2020 (tabular amounts in thousands of dollars, except share and per share amounts) Options outstanding and exercisable as at December 31, 2021:
December 31, 2021
December 31, 2020
Number of
options
Weighted
average
exercise price
Number of
options
Weighted
average
exercise price
Outstanding, beginning of year
190,000
$
Exercised
Cancelled
Expired
(45,000)
(10,000)
(20,000)
Outstanding, end of year
115,000
$
6.77
7.30
7.50
7.50
6.36
330,000
$
–
(10,000)
(130,000)
190,000 $
7.99
–
6.20
10.00
6.77
Options outstanding
Options exercisable
Exercise price
6.62
6.20
Number
of options
outstanding
45,000
70,000
115,000
Weighted
average
remaining
contractual life
(years)
Weighted
average
exercise price
Number
of options
exercisable
Weighted
average
exercise price
0.2
1.2
0.8 $
6.62
6.20
6.36
45,000
70,000
115,000 $
6.62
6.20
6.36
Terms and conditions of the stock option plan
Options grants detailed below vest as follows:
• Options granted to directors vest immediately.
81
• 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 12, 2015
March 10, 2016
Number of
options Recipients
45,000
Board of Directors and Officers
70,000
Board of Directors and Officers
Total stock options outstanding
115,000
For the years ended December 31, 2021 and 2020 (tabular amounts in thousands of dollars, except share and per share amounts)ANNUAL REPORT 2021
(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, 2020 and 2021 is as follows:
Balance at January 1, 2020
DSUs issued
DSUs redeemed
DSUs forfeited
Balance at December 31, 2020
82
Balance at January 1, 2021
DSUs issued
DSUs redeemed
Balance at December 31, 2021
Number of
DSUs
Closing Share
Price
121,571
$
65,905
(14,788)
(12,154)
160,534
$
8.47
6.99
6.24
7.17
8.47
Number of
DSUs
Closing Share
Price
160,534
$
61,799
(20,941)
8.47
9.20
7.41
201,392
$
11.99
An expense of $1,210,000 (2020 – $518,000) was recorded in general and administrative expenses. The liability
of $2,346,000 (2020 – $1,360,000) related to these DSUs is included in accounts payable and accrued liabilities.
HAMMOND POWER SOLUTIONS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2021 and 2020 (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 net earnings are as follows: (earnings in thousands
of dollars)
Basic earnings per share
Calculated as:
Net earnings attributable to the equity holders of the Company
Weighted average number of shares outstanding
Fully diluted earnings per share
Calculated as:
Net earnings attributable to the equity holders of the Company
2021
1.29 $
2020
1.20
15,176 $
14,062
11,778,674
11,744,924
1.28
$
1.20
15,176
$
14,062
$
$
$
$
Weighted average number of shares outstanding including effects of
11,824,822
11,748,360
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
11,778,674
11,744,924
46,148
3,436
Weighted average number of shares outstanding used to calculate
diluted earnings per share
11,824,822
11,748,360
As at December 31, 2021, nil options (2020 – 120,000) are excluded from the diluted average number of
83
shares calculation as their effect would have been anti-dilutive.
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 $1,748,000 (2020 – $1,655,000) matches the employee contributions. The Group’s contributions related
to its defined contribution pension plans are recorded as follows: $1,313,000 (2020 – $1,240,000) in cost
of sales, $216,000 (2020 – $205,000) in selling and distribution, and $219,000 (2020 – $210,000) in general
and administrative.
For the years ended December 31, 2021 and 2020 (tabular amounts in thousands of dollars, except share and per share amounts)ANNUAL REPORT 2021 20. Provisions
Warranties Site restoration
Benefits Restructuring
$
229
$
947
$
Balance at January 1, 2020
$
620
$
Provisions made during the
1,439
199
257
period
Provisions used during the
(392)
(225)
period
Recovery of provisions
Balance at December 31, 2020
Balance at January 1, 2021
Provisions made during the
$
$
period
–
1,667
1,667
161
$
$
–
231
231
130
$
$
61
(60)
–
230
230
142
$
$
Provisions used during the
(110)
(145)
(114)
period
Total
1,995
1,757
–
(855)
(1,532)
$
$
(92)
–
–
–
–
(92)
2,128
2,128
433
(369)
Balance at December 31, 2021
$
1,718
$
216
$
258
$
–
$
2,192
Current portion
Non-current portion
$
$
1,718
–
$
$
71
145
$
$
61
197
$
$
–
–
$
$
1,850
342
Warranties
The provision for warranties relates mainly to transformers sold during the years ended December 31, 2021 and
December 31, 2020. 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.
84
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 related to severance, termination benefits and closure costs in respect of the closure
of the Italian operations.
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.
HAMMOND POWER SOLUTIONS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2021 and 2020 (tabular amounts in thousands of dollars, except share and per share amounts) 21. Sales
Sales have been captured based on the geography of where the product was sold, as follows:
Canada
United States and Mexico
India
2021
2020
$
130,184
$
109,080
231,738
18,280
198,324
14,693
$
380,202
$
322,097
As at December 31, 2021 the Group had contract liabilities of $5,027,000 (2020 – $204,000) included in
accounts payable and accrued liabilities.
As disclosed in note 30, during the year the Group acquired Mesta Electronics Inc. (“Mesta”). From time
to time, Mesta will require certain customers to advance payment prior to the satisfaction of performance
obligations, which generally occurs at a point in time, upon the assumption of ownership of the transformer
ordered by the customer.
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 pandemic. In 2020 and 2021, 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 $2,482,000, selling and distribution $352,000 and general and administrative $649,000 for a total of
$3,483,000. In 2020, the subsidy amounts relating to the year were recorded as a reduction in expenses as
85
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.
23. Related party transactions
Related parties
William G. Hammond, Chief Executive Officer and Chairman of the Company, directly and indirectly, through
Arathorn Investments Inc., beneficially owns 2,778,300 (2020 – 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
921,808 (2020 – 1,065,191) Class A subordinate voting shares of the Company, representing approximately
10.2% (2020 – 11.9%) of the issued and outstanding Class A subordinate voting shares of the Company and as
a result controls the Company. William G. Hammond owns all of the issued and outstanding shares of Arathorn
Investments Inc. Total dividends paid during the year, directly and indirectly to William G. Hammond were
$1,283,000 (2020 – $1,306,000).
For the years ended December 31, 2021 and 2020 (tabular amounts in thousands of dollars, except share and per share amounts)ANNUAL REPORT 2021
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
24. Personnel expenses
2021
$
$
3,511
$
1,210
4,721
$
2020
2,809
518
3,327
2021
2020
Wages and salaries
$
60,492
$
57,246
Group portion of government pension and employment pension and
employment benefits
Contributions to defined contribution plans
15,467
1,748
$
77,707 $
16,636
1,655
75,537
25. Change in operating working capital
The table below depicts the receipt of (use of) cash for working capital purposes by the Group:
86
Accounts receivable
Inventories
Prepaid expenses and other assets
Accounts payable and accrued liabilities
Provisions
Settlement of derivatives
Foreign exchange
2021
2020
$
(18,836) $
(12,705)
(666)
29,349
(369)
(1,952)
402
$
(4,777) $
10,926
1,720
(15)
(11,115)
(947)
–
(5,561)
(4,992)
HAMMOND POWER SOLUTIONS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2021 and 2020 (tabular amounts in thousands of dollars, except share and per share amounts) 26. 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 and India. Inter-segment sales are made at fair
market value.
Geographic Segments
Sales
Canada
United States and Mexico
India
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
United States
Italy
India
Goodwill
Canada
United States
India
2021
2020
130,184 $
231,738
18,280
380,202 $
109,080
198,324
14,693
322,097
15,091 $
8,686
3,439
–
3,744
30,960 $
1,044 $
2,250
3,294 $
15,981
7,767
3,929
75
2,620
30,372
1,044
2,605
3,649
13,279 $
13,300
3,856 $
3,593
4,664
–
1,983
10,503 $
2,180 $
1,509
8,527
12,216 $
–
8
2,300
5,901
2,180
–
8,728
10,908
87
$
$
$
$
$
$
$
$
$
$
$
For the years ended December 31, 2021 and 2020 (tabular amounts in thousands of dollars, except share and per share amounts)ANNUAL REPORT 2021 27. 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 and
contingent consideration issued in conjunction with a business combination. The forward foreign exchange
contracts have a fair value of a net asset of $89,000 as at December 31, 2021 (2020 – net liability of $1,952,000)
and are included in Level 2 in the fair value hierarchy. The contingent consideration liability is valued at $1,509,000
as at December 31, 2021 (2020 - $nil) and is included in Level 3 of the fair value hierarchy. To determine
the fair value of the forward foreign exchange 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 2021
or 2020. The gains and losses from these contracts are grouped with foreign exchange gain on the statement
of operations.
The contingent consideration is comprised of two components:
• Employee performance – $1,211,000
To determine the fair value of the contingent consideration, Management calculated the present value of the
expected future payments of four installments of approximately $316,000, discounted using a risk-adjusted
discount rate of 3.5%. These payments will be made starting January 2022. Management considers the risk
88
of non-payment to be low. The estimated fair value would increase (decrease) if:
°
the risk-adjusted discount rate were lower (higher)
• Revenue achievement - $298,000
To determine the fair value of the contingent consideration, Management calculated the fair value of the
liability based on the present value of the expected payment and a probability weighted formula, discounted
using a risk-adjusted discount rate of 2.5%. The estimated fair value would increase (decrease) if:
°
°
the risk-adjusted discount rate were lower (higher)
the ultimate revenue achievement were lower (higher) than the initial probability weighting
There have been no transfers between levels in 2021.
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 lease receivable is valued at the present value of the future
receipts which approximates the fair value.
HAMMOND POWER SOLUTIONS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2021 and 2020 (tabular amounts in thousands of dollars, except share and per share amounts)
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, 2021, the Company had outstanding forward foreign exchange contracts to
buy and sell the following contracts, all with maturity dates in January 2022.
Buy/Sell
Buy Currency
Selling Currency
Amount of Buy
Currency
BUY
BUY
BUY
BUY
BUY
EUR
EUR
USD
USD
USD
CAD
USD
CAD
INR
MXN
12,050
5,300
68,500
8,477
14,798
Buy/Sell
Sell Currency
Buying Currency
Amount of Buy
Currency
SELL
SELL
SELL
SELL
SELL
USD
EUR
EUR
USD
USD
MXN
CAD
USD
CAD
INR
29,000
24,100
10,600
36,500
4,257
Traded
Rate
1.4390
1.1385
1.2620 – 1.2652
74.7100 – 74.8800
20.530
Traded
Rate
20.6100 – 20.9530
1.4288 – 1.4391
1.1298 – 1.1385
1.2614
74.4700
At December 31, 2020, the Company has outstanding forward foreign exchange contracts to buy and sell the
following contracts, all with maturity dates in January 2021.
89
Buy/Sell
Buy Currency
Selling Currency
Amount of Buy
Currency
BUY
BUY
BUY
BUY
BUY
EUR
EUR
USD
USD
USD
CAD
USD
CAD
INR
MXN
11,800
5,700
83,500
8,949
12,657
Buy/Sell
Buy Currency
Selling Currency
Amount of Buy
Currency
SELL
SELL
SELL
SELL
SELL
USD
EUR
EUR
USD
USD
MXN
CAD
USD
CAD
INR
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
For the years ended December 31, 2021 and 2020 (tabular amounts in thousands of dollars, except share and per share amounts)ANNUAL REPORT 2021 As at December 31, 2021 the Group has recognized a net unrealized gain of $89,000 representing the fair
value of these forward foreign exchange contracts, comprised of an asset of $180,000 included with prepaid
expenses and other assets, and a liability of $91,000 included within accounts payable and accrued liabilities.
As at December 31, 2020 the Group recognized a net unrealized loss of $1,952,000, 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
90
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.
The following table represents the Group’s balance sheet exposure to currency risk as at December 31, 2021:
U.S. Dollars
Mexican Pesos
Euros
Indian Rupees
Cash
$ 12,855 $
5,928
2021
2020
2021
2,323
2020
2021
2020
2021
2020
852
€
1,072
€ 1,526
10,871
187,323
Accounts receivable
31,109
20,526
17,650
24,377
443
831
223,097
227,817
Long-term lease
receivable
Bank operating lines
of credit
–
–
(1,724)
(4,622)
–
–
–
–
2,083
2,208
(3,072)
(3,074)
–
–
–
–
Accounts payable
(23,226)
(13,373)
(14,265)
(9,612)
Lease obligation
(5,967)
(6,836)
Contingent
consideration
1,194
–
–
–
–
–
(18)
–
–
(88)
(223,205)
(111,871)
–
(3,504)
(6,317)
–
–
–
Net exposure
$11,853 $
1,623
5,708
15,617
€
508
€ 1,403
7,259
296,952
HAMMOND POWER SOLUTIONS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2021 and 2020 (tabular amounts in thousands of dollars, except share and per share amounts)
A one cent ($0.01) decline in the Canadian dollar against the U.S dollar as at December 31, 2021 would have
decreased net earnings by $105,000 and increased equity by $149,000. 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, 2021 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, 2021 would have
decreased net earnings by $46,000 and increased equity by $8,000. Inversely, a one cent ($0.01) increase in the
Canadian dollar against the Euro as at December 31, 2021 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, 2021 would
have increased net earnings and equity by $1,000. Inversely, a one cent ($0.01) increase in the Canadian dollar
against the Indian Rupee as at December 31, 2021 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, 2021 would have
decreased net earnings by $4,000 and increased equity by $4,000. Inversely, a one cent ($0.01) increase in the
Canadian dollar against the Peso as at December 31, 2021 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, 2021, 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
91
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’ 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.
For the years ended December 31, 2021 and 2020 (tabular amounts in thousands of dollars, except share and per share amounts)ANNUAL REPORT 2021
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 $218,000 (2020 –
decreased $420,000), for which a recovery (2020 – recovery) was recognized in general and administrative
expenses. The aging of accounts receivable and the related allowance is as follows:
December 31, 2021
December 31, 2020
Gross
Allowance
Gross
Allowance
$
48,820 $
– $
35,192 $
18,716
5,963
864
–
10,461
1,495
864
6,405
3,597
$
74,363 $
2,359 $
55,655 $
–
–
–
2,577
2,577
Not past due
Past due 0-30 days
Past due 31-120 days
Past due more than 120 days
Credit risk:
The carrying amount of financial assets representing the maximum exposure to credit risk at the reporting
92
date was:
Cash and cash equivalents
Accounts receivable
Lease receivable
Carrying Amount
December 31, 2021 December 31, 2020
$
$
20,905 $
72,004
2,993
95,902 $
14,795
53,078
3,433
71,306
HAMMOND POWER SOLUTIONS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2021 and 2020 (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, 2021
December 31, 2020
$
25,097 $
39,546
1,257
334
5,770
19,711
26,297
1,561
268
5,241
$
72,004 $
53,078
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, 2021 would
increase or decrease net earnings by approximately $193,000 (2020 – $161,000) 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
93
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, 2021, no forward
commodity purchase contracts were outstanding (2020 – 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.
For the years ended December 31, 2021 and 2020 (tabular amounts in thousands of dollars, except share and per share amounts)ANNUAL REPORT 2021
The following are the carrying amounts and related anticipated contractual maturities of the Group’s financial
liabilities:
December 31, 2021
Carrying
amount
1 year or less
1-2 years
2-5 years
Bank operating lines of credit
$
19,267 $
19,267 $
–
$
Accounts payable and
accrued liabilities
Contingent consideration
Derivative liabilities
75,669
1,509
91
75,669
616
91
–
595
–
$
96,536 $
95,643 $
595 $
–
–
298
–
298
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 $
– $
–
–
–
–
94
HAMMOND POWER SOLUTIONS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2021 and 2020 (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
activities:
LIABILITIES
EQUITY
Bank
Operating
Lines of Credit
Lease
Liabilities
Contingent
Consideration
Share
Capital
Retained
Earnings
Total
Balance January 1, 2021
$
16,073 $
9,320
$
-
$
14,491
$ 95,408 $ 135,292
Advances of bank operating
lines of credit, net
Interest payments
Exercise of stock options
Cash dividends paid
Repayment of lease liability
Total changes from financing
3,194
(1,301)
-
-
-
–
254
-
-
(2,724)
-
-
-
-
–
-
329
-
-
–
-
-
(4,009)
-
3,194
(1,047)
329
(4,009)
(2,724)
cash flows
$
1,893
$
(2,470) $
–
$
329
$
(4,009) $
(4,257)
Other changes
Liability-related
Interest expense
Foreign exchange
Non-cash additions to lease
liabilities
Non-cash additions to
contingent consideration
(note 30)
Total liability-related other
1,301
–
–
–
–
(65)
1,195
–
8
–
–
1,501
–
–
–
–
–
–
–
–
1,301
(57)
1,195
1,501
95
changes
$
1,301
$
1,130
$
1,509
$
–
$
–
$
3,940
Equity-related
Exercise of stock options
Net income
Total equity-related other
changes
$
–
–
–
Balance December 31, 2021 $
19,267
–
–
–
7,980
$
$
$
$
–
–
–
1,509
66
–
–
66
15,176
15,176
$
$
66
$
15,176
$
15,242
14,886
$ 106,575
$ 150,217
For the years ended December 31, 2021 and 2020 (tabular amounts in thousands of dollars, except share and per share amounts)ANNUAL REPORT 2021
LIABILITIES
EQUITY
Bank
Operating
Lines of Credit
Lease
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)
Total changes from financing cash flows
$
(17,541) $
(2,650) $
Other changes:
Liability-related
Interest expense
Foreign exchange
Non-cash additions to lease liabilities
917
–
–
330
(107)
343
Total liability-related other changes
$
917
$566
$
Equity-related
Net income
Total equity-related other changes
96
Balance December 31, 2020
28. Capital risk management
–
–
16,073
$
$
–
–
9,320
$
$
$
$
–
–
-
–
–
–
–
–
–
–
–
14,491
–
–
(3,993)
–
(16,624)
(917)
(3,993)
(2,650)
$
(3,993) $
(24,184)
–
–
–
–
1,247
(107)
343
$
1,483
14,062
14,062
14,062
$
14,062
95,408
$ 135,292
$
$
$
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, 2021.
The following table sets out the Group’s capital quantitatively at the following reporting dates:
HAMMOND POWER SOLUTIONS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2021 and 2020 (tabular amounts in thousands of dollars, except share and per share amounts)
Cash and cash equivalents
Bank operating lines of credit
Lease liabilities
Contingent consideration
Share capital
Contributed surplus
Retained earnings
December 31, 2021
December 31, 2020
$
20,905
$
(19,267)
(7,980)
(1,509)
14,886
2,432
106,575
14,795
(16,073)
(9,320)
–
14,491
2,498
95,408
$
116,042
$
101,799
29. 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.
97
(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.
(d)
Investment properties
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.
30. Acquisition:
On July 23, 2021, Hammond Power Solutions Inc. completed the acquisition of Mesta Electronics Inc. (“Mesta”)
in the U.S., acquiring a 100% equity ownership. Mesta is involved in the design and manufacture of standard
and custom active filter and induction heating products.
For the years ended December 31, 2021 and 2020 (tabular amounts in thousands of dollars, except share and per share amounts)ANNUAL REPORT 2021 Mesta’ annual revenues for 2019 and 2020 have ranged from approximately $4,178,000 - $6,430,000. The
Company will operate as Mesta Electronics Inc., a subsidiary of HPS.
Mesta not only expands HPS’ U.S. presence but broadens our product offering and manufacturing capabilities
in power quality solutions. Management feels that by building on the strengths of both companies, this acquisition
will enhance HPS’ market share, and performance going forward.
The purchase price has been allocated as follows:
Cash
Accounts receivable
Inventories and other assets
Property, plant and equipment
Intangibles (note 14)
Goodwill (note 12)
Assets
Current liabilities
Total purchase consideration
Satisfied as follows (in thousands of dollars):
Cash
Accounts payable
Contingent consideration
98
$
$
$
$
$
$
256
90
556
8
5,084
1,422
7,416
(831)
6,585
5,032
52
1,501
6,585
The acquisition was accounted for using the purchase method whereby identified assets acquired and liabilities
assumed were recorded at their estimated fair values as of the date of acquisition. The excess of the purchase
price over such fair value was recorded as goodwill, which represents the expected synergies to be realized
from Mesta’s complementary products. The goodwill recognized is anticipated to be fully deductible for income
tax purposes.
The transaction includes a contingent liability component for employee performance during the two years
following the closing for up to $1,264,000. The liability has been valued at $1,205,000 and is due in quarterly
installments of equal amounts payable to the selling shareholders.
The transaction includes a second contingent consideration component of up to $1,000,000, payable 45 days
after the third anniversary of the closing date. This liability payment is contingent on management achieving
certain revenue targets, and has been recognized at $296,000, based on the Company’s assessment of the
likelihood of achievement of these targets.
Both contingent liabilities have been recorded as a liability as of December 31, 2021.
The acquisition costs incurred related to this transaction during the year were $174,000 which were included
in general and administrative expense.
HAMMOND POWER SOLUTIONS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2021 and 2020 (tabular amounts in thousands of dollars, except share and per share amounts) Included in the Group’s consolidated results for the twelve months ended December 31, 2021, is revenue
of $1,042,000 and net earnings of $81,000 recognized by Mesta from the date of acquisition to December 31,
2021. If the Company had acquired Mesta effective January 1, 2021, the revenue would have been approximately
$1,865,000 and there would have been net loss of approximately $8,000. The revenue of the consolidated
group would have been approximately $381,025,000 and net income of the consolidated group would have
been $15,087,000.
31. Subsequent events
Joint Venture Ownership Change
As disclosed in note 1, the Company and and National Material L.P. (“National”) have operated the joint venture
in Monterrey, Mexico under the name Corefficient S. de R.L. de C.V. Effective February 28, 2022, the Company
and National have amicably agreed to divide the operations. In connection with the transaction, HPS will retain
certain equipment, employees, obligations, and other financial assets and liabilities, and National will withdraw
certain assets and capital in exchange for redeeming their ownership interest. After effecting the transaction,
the Company will own 100% of the equity and voting interests of Corefficient and will continue to operate the
entity as a wholly owned subsidiary of the Group. The operation will continue to produce transformer cores to
supply the Groups’s facilities in Mexico. The Corefficient name will be retained by National.
As the Company has acquired control of Corefficient, the transaction constitutes a business combination.
Total consideration received by National in connection with this transaction is $10,809,000, comprised of
inventory valued at $1,705,000 property, plant and equipment valued at $5,589,000 and a note payable in the
amount of $3,515,000 repayable in six equal instalments, due monthly commencing March 2022.
The agreement calls for adjustments to the consideration in respect of possible realization of certain tax
attributes by March 2023.
The initial accounting for the business combination is not yet complete and accordingly a preliminary
99
purchase price allocation has not been included within these consolidated financial statements. The Company
is evaluating the recognition and measurement of possible contingent consideration, as well as the fair-value of
the Company’s ownership interest immediately prior to the transaction, which may involve the use of third-party
valuation specialists. Accordingly, certain disclosures otherwise required under IFRS 3, Business Combinations,
have not been included within these financial statements.
Dividends
On March 4, 2022, 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 24, 2022 to shareholders of record at the close of business on March 16, 2022.
The ex-dividend date is March 18, 2022.
For the years ended December 31, 2021 and 2020 (tabular amounts in thousands of dollars, except share and per share amounts)ANNUAL REPORT 2021
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
Mesta Electronics, Inc.
11020 Parker Drive,
North Huntington, Pennsylvania 15642
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
Brossard, Québec J4Y 0C4
100
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.
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 12, 2022
1:30 p.m. (EASTERN STANDARD TIME)
Via teleconference
Audio Conference Details:
Calling from Canada or the United States:
1-800-207-0148 United States, Brooklyn and International 1-646-828-8082
Participant Code: 610283
HAMMOND POWER SOLUTIONS
Corporate Information
Corporate Officers and
Directors
Stock Exchange Listing
Toronto Stock Exchange (TSX)
Trading Symbol: HPS.A
William G. Hammond *
Chairman of the Board and
Chief Executive Officer
Richard C. Vollering
Corporate Secretary and
Chief Financial Officer
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
Registrar and Transfer Agent
Computershare Investor Share
Services Inc.
100 University Avenue
Toronto, Ontario
Canada M5J 2Y1
Auditors
KPMG LLP
115 King Street South
Waterloo, Ontario N2J 5A3
Legal Representation
Dentons Canada LLP
77 King Street West, Suite 400
Toronto Dominion Centre
Toronto, Ontario M5K 0A1
Banking Institution
JP Morgan Chase
Bank N.A. 66 Wellington Street West,
Suite 4500
Toronto, Ontario M5K 1E7
Investor Relations
Contact: David Feick,
Investor Relations
Phone: 519.822.2441 x453
Email:
ir@hammondpowersolutions.com
The Hammond Museum of Radio
is one of North America’s
101
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 2021
DOLLARS IN THOUSANDS UNLESS OTHERWISE STATED
HAMMONDPOWERSOLUTIONS.COMYOU DON’T KNOW WHAT’S GOING TO HAPPEN IN BUSINESS A YEAR FROM NOW... SO YOU HAVE TO BE FLEXIBLE AND ADAPTABLE, AND THAT’S WHAT WE TRY TO DO