Ubiquitous
A N N U A L R E P O R T 2 0 2 2
about us
HAMMOND POWER SOLUTIONS INC.
Hammond Power Solutions Inc. (“HPS” or the
“Company”) enables electrification through its
broad range of dry-type transformers, power
quality products and related magnetics.
HPS’
standard
and
custom-designed
products are essential and ubiquitous in
electrical distribution networks through an
extensive range of end-user applications.
The Company has manufacturing plants in
Canada, the United States (U.S.), Mexico and
India and sells its products around the globe.
HPS shares are listed on the Toronto Stock
Exchange and trade under the symbol HPS.A.
Hammond Power Solutions 1
02
04
06
08
10
12
16
18
43
46
51
100
index
Ubiquitous
Company Strategy
Shareholders Message
2022 Corporate Highlights
Looking Ahead 2023
Review of Operations
Year in Review
22 Global
Locations
Management‘s Discussion & Analysis
1,500 Employees
Canada, United States, Mexico
and India
Audit Report
Financial Statements
Notes to Consolidated Financial
Statements
Company Information
$558M Global
Sales
Consistent decades of growth
~670,000
Units/year
Consistent decades of growth
Annual Report 2022 2
Ubiquitous:
present, appearing,
or found everywhere
Electricity is central to modern
societies and transformers are
ubiquitous.
Transformers are required wherever electrical
power is needed, and one size never fits all.
With an increased focus on renewable energy,
electric vehicles and semiconductors, we are
seeing significant changes in how the world
infrastructure. HPS has cultivated a
builds
depth of expertise in transformer design and
manufacturing, while at the same time building
an enormous distribution network that allows
us to access more projects and customers than
ever before.
Hammond Power Solutions 3
HPS’ strategic vision and operational initiatives have historically
resulted in industry leadership, operational strength and
financial stability. In an uncertain economy, strength and
stability lead to resilience and opportunity.
A company that is strong and resilient is one that is not only
economically secure enough to handle both the expected and the
unexpected and still maintain profitability and control growth, but
also one that has a positive influence, seeks to exceed expectations
and has a lasting impact. HPS at over 100 years young, has a
rich and extensive history of growth, innovation and resilience,
navigating through often difficult and fluctuating economic times
by re-framing challenges into opportunities.
HPS has weathered the decades of time due to a ubiquitous
product, a strong strategic vision, industry leadership, operational
strength and financial stability. Our reputation and capabilities
have led us to a place where we can participate in many end-user
applications, putting us in a strong position to take advantage of
the ever-increasing global investment in electrical infrastructure
allowing us to withstand the test of time.
Annual Report 2022 4
company strategy
Our purpose
We are passionate people energizing
a better world.
Strategic pillars
01
02
03
04
Customers
and Markets
Operational
and Financial
Excellence
People
and Culture
Sustainability
Drive organic growth
Achieve operational
Build the next
through competitive
excellence through
leadership team,
Design energy-efficient
products; shrink the
product offering and
continuous
and be a preferred
ecological footprint
unparalleled
improvement and
employer due to our
customer experience
efficiency plays,
clarity of purpose
and enhance
and grow revenue
and employee value
strategic growth
via acquisitions.
/ EBITDA with
opportunistic
proposition.
of our operations
and energize the
world responsibly for
generations to come.
acquisitions and cost
reduction initiatives.
Hammond Power Solutions 5
Our purpose
We are passionate people energizing
a better world.
Our vision To be a leader in the electrification of our world by
providing power conversion solutions to our customers while positively
impacting social and environmental sustainability.
Our mission We are a talented, aligned, and collaborative team that is
agile, engaged, and customer-centric. Our strong culture, technical expertise and
reliability of execution allows us to meet our customers’ and stakeholders’ needs
in an exceptional way.
Transformers are essential,
multi-purpose and ubiquitous
in all electrical grids.
Commercial
Generation
Transmission
Distribution
Industrial
Residential
Transformers are essential
throughout the power grid.
Starting at
the point of
generation, transformers step
up power for long distance
transmission. Depending on
distance and voltage, several
types of transformers can be
used along the distribution
line to step down delivery.
Commercial,
industrial and
residential end usage require
different voltage
levels
to
supply electrical loads for use
with specific equipment and
consumption.
Annual Report 2022 6
to our Shareholders
We are very proud to report
another strong year of sales
and profit growth to our
shareholders.
We delivered these strong results in the face of significant
unexpected supply chain and economic volatility. Our strong
performance over the last three years is a testament to the
capabilities and strengths we have built over the decades as
well as the intentional strategies to diversify our sales channels
within the transformer market. None of this could have happened
without the tremendous effort and support of our employees in
Canada, the United States (“U.S.”), Mexico, and India.
We have benefited significantly from being the largest
dry-type transformer manufacturer in Canada and the U.S., and
our North American markets are benefiting from several tail
winds. These include the burst of renewable and electric vehicle
(“EV”) recharging projects across the U.S. stimulated by the
Bipartisan Infrastructure Deal, continuing growth of the data
centre market, the re-shoring of manufacturing to the U.S. and
Mexico, and the resurgence in mining of strategic metals and
fertilizer to name a few.
Our plan to grow into the Mexican and Latin America
(“LATAM”) markets and our power quality business has begun
to bear fruit in 2022. We are in the beginning stages, and we
continue to see tremendous opportunity for these areas of growth
as they are a natural extension of our existing business. Our
strong financial performance provides a foundation to expand our
manufacturing capacity and create new efficiencies to support
the growth of our new and traditional business lines for years
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
Hammond Power Solutions
Hammond Power Solutions 7
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
into the future. Internally, we are building a stronger
a close-knit group that enabled many to call it their
organization. We have been focused on leveraging
home for their entire career as well. As the Executive
world-class technology to support our increasingly
Chairman, I look forward to working along side
large and complex business, including our enterprise
our next CEO to ensure a smooth and successful
resource planning
(“ERP”), human
resources
transition and collaboratively shape the long-term
information system (“HRIS”) and other sales support
vision for Hammond Power Solutions.
systems. We have invested in our people, ensuring
We continue to take a conservative approach
that we have the right people in place, with the right
to our growth in 2023 as the global economic
skills to lead us into the future.
landscape continues to work through several years
After 22 years as the CEO, building the company
of uncertainty. In parallel, countries and jurisdictions
that has been in my family for more than a century,
globally are recognizing the long-term benefits of
it is time for me to hand over the day-to-day decision-
electrifying their economies and are continuing to
making process to a leader that will continue to
adopt power sources with a lower carbon footprint.
build the Company with the same commitment to
The
fundamentals of our business are driven
innovation and to our customers that HPS is known
by demand from a broad range of end markets
for. I am extremely proud of the extended Hammond
combined with a diversity of geography and sales
family and what we have accomplished together,
channels. As countries globally continue to electrify
and I look forward to working closely with the
their economies to meet their climate commitments,
next generation of leaders as we shape the strategy
we believe Hammond Power Solutions will play a
that will allow the Hammond brand to continue to
significant role in this global power transition.
grow globally.
HPS has been my home for my entire 45
year working career. This Company may bear the
Hammond family name, but I am very proud that
it was a place for every employee to feel a part of
William G. Hammond
CHAIRMAN OF THE BOARD & CHIEF EXECUTIVE OFFICER
Annual Report 2022
8
2022building blocks of success
2022 corporate highlights
Planned Capital Program Increase
Over the next two years, HPS intends on increasing its planned capital program by approximately
$40 million focused on areas targeted to increase capacity and reduce lead times for low voltage, power
quality and induction heating products. Focused primarily in Mexico and the United States, these investments
are expected to support HPS’ supply chain resilience initiatives.
Hammond Power Solutions 9
Latin America/LATAM
In 2022, HPS expanded aggressively into Mexico as a launching point into the
broader Latin American market. Additional staff, training and marketing support
allowed HPS to sign on new distributors to serve this growing market.
HPS Power Quality Lab
September 2022
Located at HPS headquarters in Guelph,
Ontario, the HPS Power Quality Lab
provides HPS the ability to showcase and
test power quality products to customers.
Customers experience real-time testing
and demonstration of
line side power
quality products such as transformers,
line reactors, active harmonic filters and
passive harmonic filters, as well as load
side products. The lab will primarily be used
to host consultants, distributor specialists,
partners and end users who want to
experience the breadth and capabilities of
HPS power quality products firsthand.
Annual Report 2022 10
2023
looking ahead
Changing the way we
think about the future.
Electrification and renewables show
accelerated
growth with
power
consumption projected to triple by
2050. Electrification is the cheapest
and easiest to
implement
in most
sectors, which also makes it the fastest
growing. HPS’ investments in Power
Quality and Induction Heating open
new avenues of growth for us, allowing
us
to
leverage our manufacturing
infrastructure and distribution network
to grow into the future through new
technologies.
Expand production in Mexico to support
growth in power quality, encapsulated, and low
voltage distribution products.
Support growth of Mesta Induction
Heating business.
Expand manufacturing capacity in
Guelph to support larger power products,
which in turn support targeted growth applications.
Continue to develop our team to cultivate
the next generation of leaders, improve performance
and encourage employee retention.
Formalize our sustainability initiative
with standardized reporting through an
established framework.
Continue to implement world-class
technology to support our growing business.
Hammond Power Solutions 11
growth markets
Data Centres
Growth is driven by new
technologies such as the
internet of things (IoT),
edge computing and 5G.
Continued
Growth
Renewable Energy
Wind and photovoltaic
power are experiencing
exponential growth.
EV Industry/Charging Stations
By 2025, the move from conventional vehicles to
electric vehicles is expected to have a profound effect
on the auto industry with double digit annual growth
rates projected.
Oil and Gas
Continuing to secure
supply while transitioning
to cleaner energy in the
future.
Distribution
Centres
An acceleration of
e-commerce supports the
rise of new warehouses.
Railway
Electrification
Worldwide demand
continues to grow and
remain at high volume.
Building it
Better
Commercial
Infrastructure
Urbanisation, population
growth and economic
expansion to support growth.
Annual Report 2022 12
growth
Review
of Operations
What does the new normal look like after the
world has gone through and come out of the
COVID pandemic? This decade is turning
out to be the most challenging and uncertain
time I’ve ever seen in my 45 years of being
in the electrical industry. And despite all of
the challenges we faced in 2022, Hammond
Power Solutions performed admirably in my
opinion, in fact we delivered the strongest
financial performance of our 22 years of being
a separate public company. I am very proud
of our accomplishments, and believe that
three organizational capabilities in particular
contributed to our success – diversification,
flexibility, and investment.
As 2021 was coming to a close, HPS and
our industry in general were facing shortages
of many materials and components as the
world grappled with production shortfalls and
supply chain disruptions. In fact, we entered
2022 with an allocated and limited supply of
Hammond Power Solutions
13
core steel along with the entire global transformer industry. We
were already concerned about whether we would have enough
core steel from our legacy suppliers to meet the many growth
opportunities we saw in North America – and then Russia invaded
Ukraine. This war and the supply disruptions that occurred as
a result very early in the year created even greater stress and
uncertainty around how much product we could build in 2022.
In addition to this uncertainty, we were hit with a rolling barrage
of cost increases on all materials – core steel in particular. And
on top of this, growth opportunities in existing and new markets
exploded. The magnitude of these three situations was never
built into our 2022 business plan, and we were quickly forced to
pivot and project a new course of direction for the year and how
we were going to get there.
First, our Corporate Supply Chain group did an incredible
job of expanding our global supply base for core steel from
European and Asian producers to not only give us a superior
supply position to many of our competitors but also the ability
to take on new business and grow faster than originally planned.
In addition, because of our dominant industry position as well
as the ability to build products when others couldn’t, we were
able to increase our prices multiple times through the year to
cover constantly rising material costs. This pricing power was
extremely important in order to preserve our profitability when
other manufacturers struggled to do the same.
Our advantage of broad diversification in terms of geography,
channels, markets and products along with our pricing power
helped to propel the biggest year-over-year of growth we have
ever experienced. This robust growth came from a wide variety of
markets including electric vehicle (“EV”) recharging, solar power
generation, energy storage, data centre expansions, oil and gas
developments, mining equipment, silica chip manufacturing as
well as investments in public infrastructure like water treatment,
hospitals and public transit. Several new events also contributed
to this growth momentum in 2022, which we expect will fuel
continuing economic activity in the years ahead. The first one
is the noticeable reshoring of certain manufacturing sectors to
North America in light of increasing geopolitical uncertainty and
risk. These include silica chip production as well as batteries
Annual Report 2022
14
and other products related to manufacturing electric
expectation of driving new sales growth of $30 million
vehicles and their recharging systems. And an even
within the next 5 years.
bigger and unexpected boost to the U.S. economy came
After
three years of
rebuilding our
Indian
at the end of 2021 from the Infrastructure Investment
management team and refocusing our business coming
and Jobs Act signed into law by President Biden
out of the pandemic on more profitable markets, we
which has injected hundreds of billions of dollars into
also delivered the best financial results we have ever
many sectors requiring transformers, including public
seen in this rapidly developing country. Total sales
transportation upgrades, clean water, the electric grid,
almost doubled as we expanded our domestic business
renewable energy and a nationwide network of EV
in industrial sectors like cement manufacturing, food
recharging stations.
and beverage, pharmaceuticals, steel production,
Our biggest growth engine in terms of sales dollars
marine power, hospitals and solar power generation.
in 2022, which serves many of these growing markets,
We also expanded our export business in Bangladesh,
has been our U.S. distributor channel. In 2022 we
Indonesia, the Philippines and the Pacific Islands.
expanded our distributor network by 280 new branches.
We also enjoyed significant growth during our
And since 2020, we have added 989 new branches
first full year from our most recent acquisition Mesta
which have contributed over $8 million in new business
Electronics, Inc. (“Mesta”), with sales more than doubling
just in the last three years as they come on stream.
because of the rapid expansion of silica chip production
Over the last six years we have become the dominant
as well as electric battery manufacturing plants in the
dry transformer supplier to the U.S. distributor channel
U.S. The active power filters that Mesta manufactures
because of our broad portfolio of standard and custom
have also expanded our power quality products and
products, the best training and support tools in our
capabilities that we sell both direct to OEMs as well as
industry, superior stock availability from seven regional
through our distributor channel. This relatively small but
warehouses across the U.S. and our focus on building
well managed company serves as an ideal acquisition
and maintaining strong personal relationships with our
model for HPS to pursue in the future in order to add
distributors. In addition to our distributor channel, an
tuck-in companies that will expand our penetration of
equally robust and important growth engine in 2022
new and adjacent businesses diversifying our sales and
was our Original Equipment Manufacturer (“OEM”)
markets even more.
business. A combination of traditional as well as new
One reason why HPS was able to absorb so
OEM customers in Canada and the U.S. serving sectors
much unexpected growth in 2022 was because of our
like data centre power systems, oil and gas equipment,
manufacturing footprint of eight plants across Canada,
pipelines, mining, water treatment, energy storage and
the U.S. and Mexico. At the end of 2021, we also converted
electrical distribution systems experienced the biggest
one of our plants in India to build a limited range of low
growth in over seven years with backlogs that stretch
voltage distribution transformers for North America.
into 2024. During the year, we also expanded our
This global footprint gave us tremendous flexibility in
sales organization based in Mexico to gradually give
moving products and customer orders from one plant
us the capabilities to serve dry transformer markets in
to another in order to meet delivery dates and to reduce
Mexico, Central America and South America with the
our lead times. But even this hasn’t been enough to
Hammond Power Solutions
15
serve the surging sales and future opportunities that
secure management business system with upgraded
our strategies, channels and industry-reputation are
operating and analytical tools that will help run our
bringing us. During 2022 we increased our investment
business more effectively and efficiently. We also started
in new equipment to expand our capacities at existing
implementing the final parts of our human resource
plants in all four countries. And we are so confident
information system which will improve important areas
about this positive momentum continuing over the rest
like talent and performance management as well as
of this decade, that we announced before the end of
simplify and enhance the employee experience.
the year, a capital investment program to spend over
Last but not least, after 18 months of researching
$40 million in 2023 and 2024 to further increase our
the most relevant and effective ways to measure the
capacities. This program includes the expansions of
environmental footprint of our Company, we launched
two plants, one in the U.S. and one in Mexico, as well
a formal sustainability and Environmental, Social and
as building an entirely new plant in Mexico focused on
Governance (“ESG”) program. For years HPS has
small products including power quality magnetics. Our
been designing and building energy-efficient products
strong balance sheet gives us this flexibility and ability
that shrink the environmental footprint of our industry,
to invest in our organic business which is not only less
and now our ESG program is an important way to
risky but also tends to generate a better return on our
demonstrate our commitment to our employees,
capital.
customers, communities and shareholders of having
During 2022, we also continued to invest in our
the most sustainable products and services possible.
most valuable asset – our employees and culture. We
expanded and launched new training and development
programs across the organization to improve our
management skills. Forty three leaders and supervisors
went through this new program in 2022, and by the end
of 2024 we will have put more than 150 of our current
and future leaders through these skills development
programs. With the help of outside consultants, we
have put significant effort and time into improving
communication down and across the Company in order
to improve the understanding and the alignment of our
employees with both our strategic as well as tactical
direction, and how they can help us get there.
In addition to the above key investment projects,
we implemented a new and full cloud-based upgrade to
our ERP system in all twenty-two locations worldwide.
Inevitably we ran into some initial teething issues given
the scale of this project and launching this new system
all at once everywhere, but in the end, it gives us a more
Annual Report 2022
16
Gross Margin %
23.2%
24.5%
27.0%
26.9%
29.6%
year in review
2018
2019
2020
2021
2022
Consolidated Sales
(in thousands of dollars)
$314,082
$358,782
$358,782
$322,097
$380,202
$558,464
2018
2019
2020
2021
2022
Basic Earnings (Loss)
Per Share
(in dollars)
$(1.10)
$0.99
$1.20
$1.29
$3.79
2018
2019
2020
2021
2022
Hammond Power Solutions EBITDA*
(in thousands of dollars)
17
Net Operating (Debt)
Cash* to Equity
(in thousands of dollars)
$17,915
$28,175
$29,482
$30,114
$69,746
(0.16)
(0.08)
(0.01)
0.01
0.12
2018
2019
2020
2021
2022
2018
2019
2020
2021
2022
* Non-GAAP financial measure,
* Non-GAAP financial measure, refer to page 20 of the annual report
refer to page 20 of the annual report
Geographic Sales
(in thousands of dollars)
U.S. & Mexico
$197,860
$225,709
$198,324
$231,738
$349,710
Canada
India
$93,641
$116,996
$109,080
$130,184
$184,495
$22,581
$16,077
$14,693
$18,280
$24,259
2018
2019
2020
2021
2022
An established global market
presence with a focus
on growth.
Annual Report 2022 18
momentum
Management‘s
Discussion and
Analysis
Hammond Power Solutions Inc. (“HPS” or the
“Company”) enables electrification through its
broad range of dry-type transformers, power
quality products and related magnetics. HPS’
standard and custom-designed products
are essential and ubiquitous
in electrical
distribution networks through an extensive
range of end-user applications. The Company
has manufacturing plants
in Canada, the
United States (“U.S.”), Mexico and India and
sells its products around the globe. HPS shares
are listed on the Toronto Stock Exchange and
trade under the symbol HPS.A.
Hammond Power Solutions – passionate
people energizing a better world.
Hammond Power Solutions 19
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, 2022
and 2021, and should be read
in conjunction with the
accompanying Consolidated Financial Statements of the
Company as at December 31, 2022 and 2021, which have
been prepared in accordance with International Financial
Reporting Standards (“IFRS”). This
information
is based
on Management’s knowledge as at March 23, 2023.
All amounts
in this report are expressed
in thousands
of Canadian dollars unless otherwise noted. Additional
information relating to the Company may be found on SEDAR’s
website at www.sedar.com or on the Company’s website at
www.hammondpowersolutions.com.
Caution regarding forward-looking information
This MD&A contains forward-looking statements that involve a
number of risks and uncertainties, including statements that relate
to among other things, HPS’ strategies, intentions, plans, beliefs,
expectations and estimates, and can generally be identified by
the use of words such as “may”, “will”, “could”, “should”, “would”,
“likely”, “expect”, “intend”, “estimate”, “anticipate”, “believe”, “plan”,
“objective” and “continue” and words and expressions of similar
import. Although HPS believes that the expectations reflected
in such forward-looking statements are reasonable, such
statements involve risks and uncertainties, and undue reliance
should not be placed on such statements. Certain material
factors or assumptions are applied in making forward-looking
statements, and actual results may differ materially from those
expressed or implied in such statements. Important factors that
could cause actual results to differ materially from expectations
include but are not limited to: general business and economic
conditions (including but not limited to currency rates); changes
in laws and regulations; legal and regulatory proceedings; and
the ability to execute strategic plans. HPS does not undertake
any obligation to update publicly or to revise any of the forward-
looking statements contained in this document, whether as a
result of new information, future events or otherwise, except as
required by law.
Annual Report 2022DOLLARS IN THOUSANDS UNLESS OTHERWISE STATED 20
MANAGEMENT’S DISCUSSION AND ANALYSIS
Additional GAAP and Non-GAAP measures
do not have any standardized meaning prescribed
This document uses
the
terms “earnings
from
within IFRS and therefore may not be comparable to
operations” which represents earnings before finance
similar measures presented by other companies.
and other costs/(income) and income taxes. “EBITDA”
The Company’s 2022 consolidated
financial
is also used and is defined as earnings before interest,
statements, which
comprise
the
consolidated
taxes, depreciation and amortization. Adjusted EBITDA
statements of financial position as at December 31, 2022
represents EBITDA adjusted for foreign exchange gain
and December 31, 2021, the consolidated statements of
or loss. Net cash or net indebtedness is defined as the
operations, comprehensive income, changes in equity
bank operating lines of credit net of cash and cash
and cash flows for the years ended December 31, 2022
equivalents. Net income taxes payable or receivable is
and December 31, 2021, and Notes thereto, have been
defined as current income taxes receivable less current
prepared under IFRS.
income taxes payable. Operating earnings, EBITDA
and Adjusted EBITDA are some of the measures the
Overview
Company uses to evaluate the operational profitability.
HPS’ strategic vision and operational initiatives have
Net cash or net indebtedness and net income taxes
supported our industry leadership, operational strength
payable or receivable are measures the Company
and financial stability. The combination of our resilience,
uses to evaluate balance sheet strength. The Company
drive, decades of experience, commitment, engineering
presents EBITDA to show its performance before
expertise, solid supplier relationships and a broad
interest, taxes, and depreciation and amortization.
and unique business perspective gained through our
Management believes that HPS shareholders and
diverse products, customers and markets are all key
potential investors in HPS use additional GAAP and
factors critical to our success.
non-GAAP financial measures, such as operating
With an established global market presence and
earnings, net cash or net indebtedness, net income
a focus on market growth, HPS is positioned as a
taxes payable/receivable,
EBITDA and Adjusted
transformer industry leader providing standard and
EBITDA in making investment decisions about the
custom order solutions, a broad product offering, market
Company and to measure its operational results. A
access through multiple sales channels, outstanding
reconciliation of earnings from operations, EBITDA and
quality products and exceptional service. HPS
is
Adjusted EBITDA to net earnings for the years ended
leveraging its expertise in transformer magnetics to
December 31, 2022 and December 31, 2021 is contained
broaden its market presence in terms of the products
within this MD&A. Earnings from operations, EBITDA
it sells, the applications it serves and the geographic
and Adjusted EBITDA should not be construed as a
regions into which it sells its solutions.
substitute for net earnings determined in accordance
Demand for HPS’ products is increasing at a
with IFRS.
rapid rate, and in 2022 HPS realized its highest
“Order bookings” represent confirmed purchase
annual revenues in company history. HPS’ customers
orders for goods or services received from our customers.
and end-users operate in a variety of industries and
“Backlog” represents all unshipped customer orders.
the varying levels of economic activity within those
“Book value per share” is the total shareholders’ equity
industries will have an impact on HPS’ overall sales.
divided by the average outstanding shares. The terms
During the year, we saw activity increase in many of the
“earnings from operations”, “EBITDA”, “adjusted EBITDA”,
markets we serve as COVID-19 pandemic restrictions
“order bookings”, “backlog” and “book value per share”
diminished and economic activity surged due to strong
Hammond Power Solutions
21
electrification tailwinds. Many of the markets that HPS
were, sales growth in the Mexican market which HPS
serves, such as industrial and commercial construction,
entered in 2022, a strong rebound in India which made
utilities, infrastructure, oil and gas, mining, electric
meaningful margin improvements and growth in the
vehicle charging and renewables have all benefitted
Mesta induction heating and harmonic filter business.
from higher-than-normal levels of investment.
HPS’ history of success has been achieved through
HPS sells through distributors and direct to Original
its commitment to producing quality, innovative, energy
Equipment Manufacturer (“OEM”) and private label
efficient, diverse transformers and related magnetic
customers. Sales through distributors tend to be made
products. The Company’s alignment of its operational
up of higher volume, standard product, whereas OEM
initiatives and strategic vision enhances
these
sales tend to be customized and project-oriented sales.
competitive differentiators. HPS has a well-established
HPS believes that its strong focus on developing the
and growing market presence and a focus on continued
distributor channel as well as continuing to support the
growth through current and new customers and
OEM channel with high levels of service and quality
products. The Company has a strong financial footing
have resulted in our growing market share in the
that allows for continued focus on market share growth.
United States (“U.S”).
The Company’s broad global footprint provides a
HPS’ manufacturing capabilities are primarily
gateway to new technologies, customers and markets.
located in North America, with production facilities
These strengths are important to future revenue and
in Canada, the U.S. and Mexico. North American
earnings growth.
production is focused on dry-type transformers, power
Technology and know-how obtained
through
quality products and induction heating products. These
acquisitions have allowed the Company to accelerate
facilities form an integrated supply chain serving the
its cast resin transformer technology product research
Canadian, U.S. and Mexican markets. HPS also has
and development program, which is now utilized in
manufacturing facilities in India, which primarily serves
several HPS facilities. The 2021 acquisition of Mesta
the Indian domestic market with oil-filled transformers.
Electronics, Inc. has expanded HPS’ offering into
HPS saw growth in all of these markets during 2022.
standard and custom active filter and induction heating
One of HPS’ key financial challenges in 2021 and
products. Mesta shares an excellent reputation for
2022 is attributed to rising material costs and supply
product quality, design and reliability. Mesta not only
chain interruptions. Organic growth and supply chain
expands HPS’ U.S. presence but also broadens our
disruptions in 2022 resulted in capacity constraints in
power solutions product offering and manufacturing
some facilities. HPS responded to these challenges
capabilities in power quality solutions. Mesta achieved
by focusing on building a more resilient supply chain
significant revenue and profitability levels in 2022.
and adding capacity where feasible in a short period of
Looking forward, in an effort to deliver resilient
time. In response to rising material and logistic costs,
financial performance, HPS continues to concentrate on
we implemented several price increases during 2021
future sales growth, additional gross margin generation
and 2022 – the full impact of which began to be realized
and operational improvement. Globally in the U.S.,
toward the end of 2022. These increases, coupled
Canada and Asia, HPS is well situated to grow electrical
with strong organic growth, lifted sales, bookings
industry market share and it continues to be a leader in
and backlog, particularly towards the end of 2022,
the markets it serves.
and contributed to significant profit growth. Other
The Company continues to build market presence
significant drivers of sales and profitability in 2022
through its strong customer relationships, product
Annual Report 2022DOLLARS IN THOUSANDS UNLESS OTHERWISE STATED
22
MANAGEMENT’S DISCUSSION AND ANALYSIS
capabilities, product quality, cost effectiveness, service,
compared to 2021 sales of $231,738. U.S. and Mexico
channel development and geographical market
sales, (stated in U.S. dollars), have increased from
expansion. Booking rates and backlog continue to
$184,900 in 2021 to $268,733 in 2022, an increase of
increase in 2022 and are strong moving into 2023. The
$83,833 or 45.3%. Sales were positively impacted by the
benefit of the HPS diversified market approach allows
strengthening of the U.S. dollar relative to the Canadian
for the capitalization of growth in expanding market
dollar versus 2021. The average U.S. to Canadian
segments, while counterbalancing the impact of cyclical
exchange rate for 2022 was $1.301 versus $1.253 in 2021,
market declines.
a U.S. dollar strengthening of 3.8%. The 2022 U.S. sales
The Company maintains a strong and stable
at prior year exchange rates would have been $12,858 or
balance sheet and excellent liquidity supported by
3.7% lower at $336,852.
a committed credit facility available to implement
The U.S. market experienced significant increases in
investment strategies, operational plans and advance
the OEM channel, with higher sales supporting product
growth initiatives. The Company’s North American
data centres, warehousing, industrial manufacturing,
credit agreement was renegotiated in 2021 and matures
mining, electric vehicle charging, renewable energy
in June 2026. This agreement provides the Company
and oil and gas production. Sales in the U.S. distributor
with the resources necessary to continue to grow and
channel also improved due to strong market activity
expand.
and market penetration as additional distributors
HPS remains confident in its ability to continue
continue to be added to the network. There were also
to generate growth – through our strategic vision
improvements in the specialty, motor control and power
merged with our operational strategies. Through
control markets which are partially offset by decreases
HPS’s strategic planning process, the Company is
in switchgear and private branding markets.
identifying and developing new market opportunities,
Canadian sales were $184,495, an increase of
which will come from organic and new customer sales
$54,311 or 41.7% as compared to sales of $130,184 in
expansion, product and
technology development,
2021. The Canadian market experienced increases in
cost effectiveness, competitive
lead-times and
the National Association of Equipment Distributors
manufacturing flexibility. Our capabilities are extended
(“NAED”) and technical services which were partially
through our multi-national operations, which provide
offset by declines in the mining and switch gear markets.
expanded market opportunities, allowing HPS to deliver
Indian sales in 2022 were $24,259, an increase of
results. The Company’s commitment to continuous
$5,979 or 32.7% compared to sales of $18,280 in 2021.
improvement, cost reduction, improved efficiencies and
The improvement of sales year-over-year is a result of a
overall cost effectiveness will assist in reaching these
strong post-pandemic rebound in 2022 as the first half of
goals. These strategies will improve and build revenue
2021 was impacted by government-imposed lockdowns.
and profitability trends.
Sales
Sales in 2022 were $558,464 as compared to sales
of $380,202 in 2021, a significant increase of $178,262
or 46.9%.
U.S. and Mexico market sales (stated in Canadian
dollars) were $349,710, an increase of $117,972, or 50.9%,
As of December 31, 2022 there was a significant order
for $7,596 produced and shipped from India that could
not be recognized given sales terms of freight on board
(“FOB”) destination. These sales will be recognized in
Quarter 1, 2023.
Stated by geographic segment, sales in the U.S.
and Mexico were 62.6 % (2021 – 61.0 %), in Canada were
33.0 % (2021 – 34.2 %) and India accounted for 4.3 %
Hammond Power Solutions
23
(2021 – 4.8 %) of total sales.
integration
strategies, geographic diversification,
Significant increases in North American sales
innovative research and development projects and our
came through established NAED and OEM channels.
expanded NAED network are all key components of this
Distributor conversions and custom
transformer
strategy. Expanded product offerings, the addition of
capabilities continues to contribute to HPS’ market
new customers, geographically diverse manufacturing
share growth. The ability to continue to expand these
facilities and market influence will allow the Company
segments is a result of new customer additions, organic
to continue to grow market share globally and enable
customer diversity, expanded product offerings and
HPS as a leader in its chosen markets.
geographically diverse manufacturing capabilities. In
2022, HPS launched its effort to sell its products into
Backlog
the Mexican market. Although this effort is still in the
The Company’s December 31, 2022 backlog has
beginning stages, HPS grew its sales there to over $5.1
increased by 117.1% as compared to December 31, 2021
million U.S. dollars in 2022.
and has increased 13.3% from Quarter 3, 2022. The
In July 2021, HPS acquired the Mesta business,
combination of price increases and strong demand in
which makes active harmonic filters (“AHF”), and
the third and fourth quarters contributed to the record-
induction heating products (“IH”). AHF were an
high backlog. Both the direct and distributor channels
important addition to our power quality portfolio and IH
contributed to higher demand towards the end of the
are used in the manufacture of silicon carbide. Sales
year. The increased bookings were across a number
for Mesta for 2022, stated in Canadian dollars, reached
of market and geographical segments. As the backlog
$14,507 (2021 - $1,042) and $11,148 (2021 - $820) stated
grows, product lead times are extended and the timing
in U.S. dollars. Mesta was a strong contributor to the
of shipments in the backlog become more uncertain –
overall increase in sales.
in some cases extending to later in the year and beyond.
During 2022, the Company
implemented two
HPS is sensitive to the volatility and unpredictability
price increases, which were necessary to offset rapidly
of current global economies and the impact that this
increasing costs in commodities (copper, aluminum,
could have on booking trends. While several markets
insulation, carbon electrical steel), freight and other
are seeing positive quotation and order trends, the
components critical to manufacturing transformers.
Company is very cognizant that it may see some volatility
HPS began to see the full effect of those increases in
and unpredictability in longer term booking rates. Some
2022, which is a significant driver of the increase over
industry-related factors may be contributing to the
the prior year. The cost increases were mainly the result
higher booking rates and backlog, such as global supply
of continued supply chain constraints, which continued,
chain constraints and low inventories and therefore may
to some degree, throughout 2022. HPS continues to
be temporary in nature.
monitor material input prices and while a significant
decrease in overall costs is not evident at this time,
Gross margin
such a change could prompt lower prices in order to
The consolidated gross margin rate in 2022 increased
remain competitive.
to 29.6% versus 26.9% in 2021, an increase of 2.7% of
HPS continues to be dedicated to its growth
sales. The improvement in the margin rate is attributed
strategy. The Company’s focus on product development,
to favourable sales mix, selling price increases, higher
capital expenditures to
increase capacity, vertical
fixed cost absorption and cost reductions.
Annual Report 2022DOLLARS IN THOUSANDS UNLESS OTHERWISE STATED
24
MANAGEMENT’S DISCUSSION AND ANALYSIS
Gross margins were affected by the sales mix,
The Company’s ability to source materials and
which was favourable throughout the course of 2022.
maintain a continuous supply to meet demand,
Higher distribution sales, which typically have higher
exacerbated by global
logistical disruptions, has
gross margins, but also higher selling costs contributed
a significant
impact on sales and margins. The
to higher margins. Stronger Mesta sales also resulted in
manufacture of transformers requires copper, aluminum
margin improvement. In addition, HPS saw significant
and electrical steel.
All of these commodities,
margin improvements in the Indian business.
particularly electrical steel, have seen significant price
During 2022, HPS estimates an organic volume
increases driven mainly by supply constraints. The
increase of 10.0%-11.0%. This increase, along with
second half of 2022 saw less volatility in pricing. Given
similar organic increases in 2021, resulted in some
the challenges and strain on the global supply markets
facilities operating close or at capacity. This volume
HPS has heightened the focus on ensuring that materials
increase resulted in higher fixed overhead leverage and
required for production are received on a timely basis
as a result, higher gross margins.
and when needed.
In the interest of protecting gross margins, HPS
Fluctuating markets and product mix may still have
increased prices several times during 2021 and
a short-term impact on financial results. The global
2022. In the raising of prices, the Company has been
impact of the COVID-19 pandemic has impacted HPS’
proactive in anticipating cost increases, judicious in
results over the past two years. Looking forward, the
maintaining margins and conscientious of our customer
lessening impact of the economic, social and industrial
relationships. For some channels, particularly those
aspects of the pandemic, combined with an increasing
with longer backlog dates and lead times as is the
backlog, offset by indicators of a looming recession,
case in our OEM and private label channels, raising
allow for cautious optimism into 2023.
prices is more difficult to do in a timely way due to the
Quotation activity, improving bookings and backlog
nature of the contracts. The Company believes that
since the end of 2020 as well as an encouraging sales
some margin deterioration occurred during 2021 as we
outlook support optimism for the future. Looking ahead,
were catching up to cost increases. In Quarter 1, 2022
HPS remains cautiously optimistic for the future as
sales and margins were strong with relative stability in
growth will be realized in some markets along with
underlying commodity costs, culminating in a strong
a decline in others – underscoring the volatility of
gross margin. By contrast, Quarter 2, 2022 prices
markets and sales demand. Over the past few years to
were once again lagging the cost increases brought
manage the impact of volatility, the Company widened
on by global supply disruptions. Two additional price
its distributor footprint in North America, expanded
increases were implemented in 2022. These price
its Indian market presence, implemented engineering
increases partially affected Quarter 3, 2022 sales and
and material cost reduction initiatives, invested in new
fully impacted product sold in Quarter 4, 2022. While
product development and broadened manufacturing
there remains higher than normal volatility in costs, we
capabilities. A diversified geographic approach supports
have seen a positive impact on margins, in the latter
anticipated growth from implemented market strategies
half of 2022. Some material input costs stabilized while
and subsequent economic improvement.
others continued to increase due to underlying inflation.
While some growth strategies can have a shorter-
Hammond Power Solutions
25
term dilutive effect on gross margin rates, the Company
continues to focus on long-term investment to fuel
General and administrative expense
future growth. Gross margin rates are supported by the
General and administrative expenses in 2022 were
maintenance of market prices combined with material
$43,481 compared to $32,821 for 2021, an increase of
procurement and engineering cost reduction initiatives.
$10,660 or 32.5%. On a percentage-of-sales basis these
While the Company has reaped the benefits of higher
costs have decreased from 8.6% in 2021 to 7.8% in 2022.
absorption of factory overheads due to the increased
Key drivers for the current year increase are as follows:
sales volume, we continue to implement a number of
• The CEWS benefit
related
to general and
cost reduction and expense management initiatives to
administrative employees in 2021 was $649 or 0.1% of
protect our margin rates. HPS continues to commit
sales, there was no CEWS wage support recorded in
resources to its continuous improvement program, which
2022;
will result in implementing productivity enhancements,
• Approximately $3,805 of the increase in the current
cost reductions and lead-time improvements across the
year is associated with strategic investments in
entire organization.
people resources and incentive plans. There were
Margin rates can be sensitive to selling price
critical roles replaced during 2021 as a large number
pressures, volatility in commodity costs, customer
of individuals within the organization retired;
mix and geographic blend. HPS’ focus during the year
• The Mesta acquisition contributed an additional $854
has been on execution of its selling price realization
to the general and administrative expenses;
strategies and achievement of cost reductions in an
• Additional general and administrative expenses of
effort to protect margin rates.
$1,252 relate to the new infrastructure in Mexico;
• Additional
investment
in
information technology
Selling and distribution expenses
contributed additional expenses of $1,734 related to
Total selling and distribution expenses were $62,263
maintenance contracts;
for 2022 versus $46,459 in 2021, an increase of $15,804
• The higher share price and additional awards granted
or 34.0%. On a percentage-of-sales basis, total selling
in Quarter 1, 2022 has caused the DSU expense to
and distribution expense decreased to 11.1% of sales
increase $973 from prior year;
for 2022 from 12.2% in 2021. The higher sales value for
• Bad debt expense has increased $877 in 2022 over
the year resulted in additional commission expense of
2021, $344 of this increase is relating to a specific
$6,838 and higher freight expense of $5,309 which are
customer, remainder of the increase is a general
variable selling expenses that naturally fluctuate with
provision and not representative of a pervasive
sales changes. The Canadian Emergency Wage Subsidy
problem; and
(“CEWS”) benefit in 2021 was $352 or 0.1% of sales,
• Contingent consideration related to the Mesta
there was no CEWS wage support recorded in 2022.
acquisition
increased general and administrative
Approximately $1,366, or 0.2% of selling and distribution
expenses $940,000.
expenses increase relates to strategic investments in
HPS continues to invest in growth while remaining
people resources, as well as increased incentive plan
very cognizant of prudent general and administrative
payments related to higher sales and profits.
expense management.
Annual Report 2022DOLLARS IN THOUSANDS UNLESS OTHERWISE STATED
26
MANAGEMENT’S DISCUSSION AND ANALYSIS
Earnings from operations1
were implemented as a hedge against translation gains
Earnings from operations improved, finishing at $59,441
and losses on inter-company loans as well as $72,000
in 2022, as compared to earnings of $23,151 in 2021
USD to hedge the U.S. dollar denominated accounts
– an increase of $36,290 or 156.8%. The increase in
payable in Canadian HPS operations. The Company
earnings from operations is due to higher sales and
also had outstanding foreign exchange contracts to sell
additional gross margin dollars, offset by higher selling,
for 34,700 EUR and $61,189 USD.
distribution, general and administrative expenses.
Exchange rate volatility is managed by HPS’ foreign
Earnings from operations are calculated as outlined
exchange contract hedging program. Details of the
in the following table:
outstanding forward foreign exchange contracts at
Net earnings for the year
$ 44,828
$
15,176
to Consolidated Financial Statements included in our
2022
2021
December 31, 2022 can be found in note 27 in the Notes
Add:
2022 Annual Report.
Income tax expense
Finance and other costs
12,341
2,272
6,074
1,901
Earnings from operations $ 59,441
$ 23,151
Net Finance and other costs
Net finance and other costs increased $371 from $1,901
in 2021 to $2,272 in 2022. The increase from the prior
year is a result of a foreign exchange gain in the current
year and a loss in the prior year, as well as higher
interest expense and additional expenses related to the
acquisition of the Company’s portion of the previous
Earnings before income tax
2022 earnings before income taxes were $57,169 as
compared to earnings of $21,250 in 2021 – growing by
$35,919 or 169.0%. 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 expense and no government wage
subsidy support in the current year.
joint venture Corefficient.
Income taxes
Interest expense for the year-ended December
Income tax expense from operations for 2022 was
31, 2022 finished at $1,596 as compared to $1,301 in
$12,341 as compared to $6,074 in 2021 – an increase of
2021, an increase of $295. Interest expense includes all
$6,267 or 103.2%. The consolidated effective tax rate2 on
bank fees.
earnings from operations for 2022 decreased to 21.6%
The foreign exchange gain in 2022 of $96 related
versus 28.6% last year – a decrease of 7.0%.
primarily to the transactional exchange gain on
The large decline in the effective tax rate for 2022
the Company’s U.S. dollar (“USD”) trade accounts
relates to the deferred tax asset generated by the
receivable, compared to a foreign exchange loss of $561
improved profitability of Corefficent during 2022, after
in 2021. The change of the foreign exchange expense for
the business combination date of February 28, 2022.
the year is related to the volatility in the exchange rates
The Company’s deferred tax assets and liabilities
during the year – primarily the U.S. dollar.
are related to temporary differences in various tax
As at December 31, 2022, the Company had
jurisdictions, primarily reserves and allowances, which
outstanding foreign exchange contracts in place for
are not deductible in the current year. A difference in
17,350 Euros (“EUR”) and $23,275 USD – both of which
the carrying value of property, plant and equipment and
1 Refer to Non-GAAP financial measures on page 20 of this annual report
2 Effective tax rate is calculated as the income tax expense divided by the earnings before income taxes.
Hammond Power Solutions
27
intangible assets for accounting purposes and for tax purposes is a result of business combination accounting and
a different basis of depreciation utilized for tax purposes. The Company’s income tax provision is explained further in
note 16 in the Notes to Consolidated Financial Statements included in our 2022 Annual Report.
Net earnings
Net earnings for 2022 finished at $44,828 compared to net earnings of $15,176 in 2021, an increase of $29,652 or 195.4%.
The main contributors to the higher current year net earnings were higher sales and additional gross margin dollars.
These gains were offset by increases in selling, distribution, general and administration expenses, no government
wage subsidy support in the current year and the lower effective tax rate in 2022.
EBITDA
EBITDA for the year-ended December 31, 2022 was $69,746 versus $30,114 in 2021 – an increase of $39,632 or 131.6%.
Adjusted for foreign exchange loss/gain, adjusted EBITDA for 2022 was $69,650 versus $30,675 in 2021 – an increase
of $38,975 or 127.1%.
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 (gain) loss
Adjusted EBITDA
2022
2021
$
44,828
$
15,176
1,596
12,341
10,981
69,746
$
(96)
69,650
$
1,301
6,074
7,563
30,114
561
30,675
$
$
Annual Report 2022DOLLARS IN THOUSANDS UNLESS OTHERWISE STATED
28
MANAGEMENT’S DISCUSSION AND ANALYSIS
Summary of quarterly financial information (unaudited)
Fiscal 2022 Quarters
Sales
Net earnings
Net earnings per share – basic
Net earnings per share – diluted
Average U.S. to Canadian
exchange rate
Fiscal 2021 Quarters
Sales
Net earnings
Net earnings per share – basic
Net earnings per share – diluted
Average U.S. to Canadian
exchange rate
Q1
127,782
8,569
0.72
0.72
1.267
Q1
80,121
2,298
0.19
0.19
1.268
Q2
137,476
6,505
0.55
0.55
1.276
Q2
88,277
4,689
0.40
0.40
1.231
Q3
148,953
11,531
0.97
097
1.305
Q3
95,526
3,948
0.34
0.34
1.257
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Q4
144,253
18,223
1.55
1.53
1.358
Q4
116,278
4,241
0.36
0.35
1.258
$
$
$
$
$
$
$
$
$
$
Total
558,464
44,828
3.79
3.77
1.301
Total
380,202
15,176
1.29
1.28
1.253
$
$
$
$
$
$
$
$
$
$
HPS sales have increased quarter-over-quarter for the past two years. The increase in sales is a function of
increased pricing, additional market share and volume and additional sales related to a full year of Mesta, which was
acquired in July 2021. There has been an upward trend over the past eight quarters due to an overall improvement in
general economic activity. Sales in the current year were positively impacted by the stronger U.S. dollar exchange.
Higher sales have translated into additional profits as the additional volumes absorb more factory expenses than
in the prior year.
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.
Hammond Power Solutions
Quarter 4, 2022 financial results
Sales
Gross margin rate
Earnings from operations
Exchange (gain) loss
Net earnings
Earnings per share – basic
Earnings per share – diluted
Cash provided by operations
29
Quarter ended
December 31, 2022
Quarter ended
December 31, 2021
$
$
$
$
$
$
$
144,253
34.4%
20,369
(847)
18,223
1.55
1.53
1,837
$
$
$
$
$
$
$
116,278
27.4%
6,220
129
4,241
0.36
0.35
19,900
Sales for the quarter ended December 31, 2022 were $144,253, an increase of $27,975 or 24.1% from the comparative
quarter last year. Sales were higher mainly due to price increases, higher exchange rates and higher volumes in the
U.S. distributor and OEM channels.
Gross margin rates for the fourth quarter have increased from the same quarter last year by 7.0% from 27.4% in
2021 to 34.4% in 2022. The gross margin in the quarter was higher than what would be expected primarily due to
inventory adjustments, and a favourable sales mix.
Total selling and distribution expenses amounted to $16,071 in Quarter 4, 2022 versus $14,559 in Quarter 4, 2021
– an increase of $1,512. Selling and distribution expenses as a percentage of sales have decreased to 11.1% in 2022
compared to 12.5% in 2021, a decrease of 1.4% of sales. The increases were a result of higher commission and freight
variable expenses.
General and administrative expenses as a percentage of sales have decreased to 9.2% in 2022 compared to 9.5%
in 2021. General and administrative expenses for Quarter 4, 2022 totaled $13,207, an increase of $2,152 when compared
to Quarter 4, 2021 costs of $11,055. The Mesta acquisition expenses, new infrastructure in Mexico and additional salary
and incentive costs also account for the increase in the quarter.
Quarter 4, 2022 net finance and other costs were $367 compared to $490 for the same quarter in 2021, a decrease
of $123 or 25.1%. The Quarter 4, 2022 interest cost increased from $368 in Quarter 4, 2021 to $536 in Quarter 4, 2022.
Foreign exchange gain in Quarter 4, 2022 was $847 compared to a foreign exchange loss of $129 in Quarter 4, 2021.
Earnings from operations for the quarter were $20,369 in 2022 and $6,220 in 2021, an increase of $14,149. Additional
gross margin dollars were offset by higher general, administrative, selling and distribution expenses.
Quarter 4, 2022 income tax expense was $1,779 on earnings before income taxes of $20,002 (an effective tax rate of
8.9%) as compared to an income tax expense of $1,489 on income before income taxes of $5,730 (an effective tax rate
of 26.0%) in Quarter 4, 2021. The lower Quarter 4, 2022 effective tax rate is result of a significant deferred tax assets
at year-end. The deferred tax adjustment relates to the deferred tax asset generated by the improved profitability of
Corefficient during 2022, after the business combination date of February 28, 2022.
Annual Report 2022DOLLARS IN THOUSANDS UNLESS OTHERWISE STATED
30
MANAGEMENT’S DISCUSSION AND ANALYSIS
Net income for Quarter 4, 2022 was $18,223
December 31, 2022, versus $62,467 as at December 31,
compared to net income of $4,241 in Quarter 4, 2021 –
2021, an increase of $43,886. The higher inventory levels
an improvement of $13,982.
in 2022 were attributed to increased sales volume, and
Cash provided by operations for Quarter 4, 2022 was
the higher cost of raw materials. Mesta and Corefficient
$5,352 versus $19,900 in Quarter 4, 2021 – a decrease
account for $11,912 of the increase in inventory for 2022.
of $14,548. The main driver for this change was cash
Accounts payable and accrued liabilities, excluding
used for working capital of $22,858 for Quarter 4, 2022
derivative and share-based compensation liabilities,
versus cash generated by working capital of $9,447 for
increased by $21,292 finishing at $92,025 as at December
Quarter 4, 2021, a decline of $32,305.
31, 2022 compared to $70,733 at the end of 2021. The
Overall net operating cash balance1 was $21,972
change in accounts payable is due to higher sales
as at December 31 2022, an improvement of $20,334
volumes, higher raw materials costs, higher accruals
as compared to a net operating debt balance of
and the timing of purchases from and payments to
$1,638 as at December 31, 2021, primarily reflecting
suppliers.
improved profitability.
Net income taxes payable2 were $347 (income
taxes receivable of $1,995 less income taxes payable
Capital resources and liquidity
of $2,342) as at December 31, 2022, versus net income
The Company continued to focus on generating cash
taxes payable of $1,181 (income taxes receivable of $807
from operations, debt management,
investment
less income taxes payable of $1,988) as at December 31,
and liquidity.
2021 – a change of $834 due to changes in the effective
Cash provided from operating activities during 2022
tax rate.
was $37,013 versus $20,447 in 2021, an increase in cash
Cash used in financing activities was $22,303
generated of $16,566 or 81.0%. This increase in cash
in 2022, compared to cash used of $4,257 in 2021, an
generated from operating activities was due to higher
increase of $18,046. The change in the balance can be
profitability, offset by an increase in non-cash working
attributed to repayment from the operating line in 2022
capital versus 2021. Non-cash working capital used
compared to advances on the bank operating lines
cash of $19,539 in 2022 versus $4,777 in 2021, resulting
in 2021.
in an increase of $14,762 from 2021. The change in non-
Cash used in investing activities in 2022 increased
cash working capital in 2022 was primarily a result
$1,760 from $10,914 in 2021 to $12,674 in 2022. The prior
of
increases
in
inventory offset by
increases
in
year value included the Mesta acquisition in the amount
accounts payable and deferred revenue.
of $5,032 and the current year value included payments
Accounts receivable finished the year at $86,701
to National related to Corefficient. There was an increase
as compared to $72,004 as at December 31, 2021,
in capital spending for property, plant and equipment
an increase of $14,697 – a result of higher sales in
of $3,595 over the prior year, totaling $8,646 in 2022 –
Quarter 4, 2022 compared to Quarter 4, 2021. HPS’
compared to $5,051 for 2021. The Company continues
days sales outstanding ratio remains stable, which
to invest in the areas of manufacturing processes and
can be attributed to effective credit policies and tightly
capabilities as well as information technology.
managed accounts receivable administration.
Bank operating lines of credit finished the year at
Inventories finished the year at $106,353 as at
$6,154 as at December 31, 2022, compared to $19,267
1 Overall net operating cash balance is the bank operating lines of credit of $6,154 net of cash and cash equivalents of $28,126
2 Net income taxes payable consists of income taxes payable of $2,342 less income taxes receivable of $1,995 .
Hammond Power Solutions
31
as at December 31, 2021 resulting in a decrease of
to Consolidated Financial Statements contained in our
$13,113 in the year. The Company had cash and cash
2022 Annual Report.
equivalent balances of $28,126 as at December 31, 2022
as compared to $20,905 as at December 31, 2021.
Overall net operating cash balance was $21,972
as at December 31 2022, an improvement of $20,334
as compared to a net operating debt balance of $1,638
as at December 31, 2021, primarily reflecting improved
profitability and cash generated from operations.
All bank covenants were met as at December 31,
2022, and the Company was in compliance with its
covenants throughout the year.
The Company’s liquidity is strong. HPS is well
funded, with sufficient cash and debt capacity to fund its
operating activities, investments and strategic growth
initiatives. The Company has several alternatives to
fund future capital requirements, including its existing
cash position, credit facility, future operating cash flows
and debt financing. The Company continually evaluates
these options to ensure that the appropriate mix of
capital resources is effectively managed for current and
future requirements.
The Company has outstanding capital expenditure
commitments of $3,484. These planned capital
investments are focused on areas targeted to increase
capacity and reduce
lead times for
low voltage,
power quality and induction heating products. These
investments are also expected to support HPS’ supply
chain resilience initiatives. HPS intends to focus the
capital program primarily in Mexico and the United
States. In Mexico, HPS is planning to set up an
approximately 80,000 square foot small products facility,
while also adding equipment to existing facilities there.
HPS also expects to expand its manufacturing capacity
at the Mesta location in Pennsylvania, USA, as well as
its facility in Guelph, Ontario.
Additional details of our change in non-cash
working capital can be found in note 25 in the Notes
Joint venture
The Company 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, with HPS
retaining certain equipment, employees, obligations
and other financial assets and liabilities, and National
withdrawing certain assets and capital in exchange for
redeeming their ownership interest. The Corefficient
name was also retained by National. The operation
continues to produce transformer cores to supply the
Group’s facilities in Mexico.
Total consideration
received by National
in
connection with this transaction was $10,809 comprised
of inventory valued at $1,705, property, plant and
equipment valued at $5,589 and a note payable in the
amount of $3,515, repayable in six equal installments,
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.
As a result of this transaction, the Company now
owns 100% of the equity and voting interests of the
former Corefficient (referred to here as “Corefficient”)
and continues to operate the entity as a wholly owned
subsidiary of the Group. As the Company has acquired
control of Corefficient, the transaction constitutes a
business combination. The Company measured the
fair value of its previously held interest in Corefficient
immediately prior to obtaining control and determined
it to be equivalent to its carrying value and continued
the business within Hammond Power Solutions Latin
America S. de R.L. de C.V.
Annual Report 2022DOLLARS IN THOUSANDS UNLESS OTHERWISE STATED
32
MANAGEMENT’S DISCUSSION AND ANALYSIS
The allocation of the fair value of the acquired business is as follows:
(in thousands of dollars)
Cash
Accounts receivable
Inventories and other assets
Property, plant and equipment
Deferred future tax asset
Assets
Current liabilities
Fair value of business acquired
Contractual obligations
$
3,393
16,513
1,459
5,317
2,431
$ 29,113
$ (15,900)
$ 13,213
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
$
92,025
Capital expenditure purchase commitments
Operating lines of credit
Derivative liability
Lease liabilities
Contingent consideration
Total
2023
2024
2025
2026
3,484
6,154
276
3,198
1,509
–
–
–
–
–
–
–
–
2,979
1,337
2,090
–
–
–
–
–
733
–
2027 &
Thereafter
Total
– $
92,025
–
–
–
103
–
3,484
6,154
276
9,103
2,846
$
106,646 $
4,316 $ 2,090
$ 733 $
103 $
113,888
Hammond Power Solutions S.p.A – Italy
As part of the Vacuum Pressure Impregnated (VPI) asset sale agreement, the lease agreement relating to the Meledo,
Italy building includes a put and call sale option related to the leased premises, exercisable within 60 days after
September 30, 2023. The call option grants the purchaser an option to purchase the premises from the Company
for consideration equal to 2,225 Euros (“EUR”). The plant purchase price will be reduced by 50% of the monthly rent
installments received, to a maximum of 375 EUR (approximately $513). If the purchaser does not execute the call option
HPS can exercise its put option which grants HPS an option to sell the plant to the purchaser for consideration equal to
the same plant purchase price. If the purchaser rejects the put option, the purchaser will pay 500 EUR (approximately
$685) as liquidated damages.
Contingent liabilities
In June 2017, the Corporation received notice of an environmental claim from the owner of a property located nearby
to a property that was once partially owned by the Corporation. At this time, the Company feels that there is no merit
to the claim.
Hammond Power Solutions
33
Management is not aware of any further contingent
disclosure controls and procedures and for establishing
liabilities, other than contingent consideration issued in
and maintaining adequate internal controls over financial
connection with
the acquisition of Mesta and
reporting. The control framework used in the design of
Corefficient. Refer to note 30 to the Consolidated
disclosure controls and procedures and internal control
Financial Statements for additional information.
over financial reporting is the 2013 Internal Control
Integrated Framework issued by the Committee of
Regular quarterly dividend
Sponsoring Organizations of the Treadway Commission
The Board of Directors of HPS declared quarterly cash
(“2013 COSO Framework”). Our internal control system
dividend of eight and a half cents ($0.085) per Class A
was designed to provide reasonable assurance to our
Subordinate Voting Share of HPS and of eight and a half
Management and Board of Directors regarding the
cents ($0.085) per Class B Common Share of HPS, for
preparation and fair presentation of published financial
the first quarter of 2022. The Board of Directors of HPS
statements in accordance with International Financial
declared quarterly cash dividend of ten cents ($0.10)
Reporting Standards. All internal control systems, no
per Class A Subordinate Voting Share of HPS and ten
matter how well designed, have inherent limitations,
cents ($0.10) per Class B Common Share of HPS, for the
therefore, even those systems determined to be effective
second, third and fourth quarters of 2022
can provide only reasonable assurance with respect to
The Quarter 1 dividend was paid on March 24, 2022
financial statement preparation and presentation.
to shareholders of record at the close of business on
As at December 31, 2022, the Company conducted
March 17, 2022 – the ex-dividend date was March 16,
an evaluation, under the direction and supervision
2022. The Quarter 2 dividend was paid on June 28, 2022
of the Chief Executive Officer and the Chief Financial
to shareholders of record at the close of business on the
Officer, of the effectiveness of the design and operation
21st day of June 2022 – the ex-dividend date was June 21,
of our disclosure controls and procedures. Based on
2022. The dividend for Quarter 3 was paid on September
this evaluation, our Chief Executive Officer and Chief
23, 2022 to shareholders of record at the close of
Financial Officer have concluded that as of December
business on September 16, 2022 – the ex-dividend date
31, 2022 such disclosure controls and procedures were
was September 15, 2022. The Quarter 4 dividend was
operating effectively.
paid on December 15, 2022 to shareholders of record
at the close of business on December 8, 2022 – the ex-
Internal controls over financial reporting
dividend date was December 7, 2022.
Management
is responsible
for establishing and
In 2022, the Company has paid a total cash dividend
maintaining adequate internal controls over financial
of thirty-eight and a half cents ($0.385) per Class A
reporting. Our internal control system was designed
Subordinate Voting Share and thirty-eight and a half
to provide reasonable assurance to our Management
cents ($0.385) per Class B Common Share. In 2021, the
and Board of Directors regarding the preparation and
Company had paid a total cash dividend of thirty-four
fair presentation of published financial statements
cents ($0.34) per Class A Subordinate Voting Share and
in accordance with International Financial Reporting
thirty-four cents ($0.34) per Class B Common Share.
Standards. All internal control systems, no matter how
Controls and procedures
those systems determined to be effective can provide
The Chief Executive Officer and the Chief Financial
only reasonable assurance with respect to financial
Officer are responsible for establishing and maintaining
statement preparation and presentation.
well designed, have inherent limitations. Therefore, even
Annual Report 2022DOLLARS IN THOUSANDS UNLESS OTHERWISE STATED
34
MANAGEMENT’S DISCUSSION AND ANALYSIS
Canadian Securities Administrators require that
to shareholders of record at the close of business on
companies certify the effectiveness of internal controls
March 16, 2023. The ex-dividend date is March 15, 2023.
over financial reporting. It also requires a company to
use a control framework such as the COSO Framework
Risks and uncertainties
to design internal controls over financial reporting. As
The Company’s goal is to proactively manage risks in
well, the threshold for reporting a weakness of internal
a structured approach in conjunction with strategic
controls over financial reporting should be of a “material
planning, with the intent to preserve and enhance
weakness” rather than “reportable deficiency.” HPS has
shareholder value. However, as with most businesses,
designed its internal controls in accordance with the
HPS is subject to a number of marketplace, industry and
COSO Framework and has carried out retesting in 2022,
economic-related business risks, which could cause our
which was completed in the fourth quarter.
results to vary materially from anticipated future results.
As of December 31, 2022 Management, with the
The Company is aware of these risks and continually
supervision and participation of the Chief Executive
assesses the current and potential impacts that they have
Officer and Chief Financial Officer, assessed the
on the business. HPS continuously strives to curtail the
effectiveness of the Company’s internal control over
negative impact of these risks through diversification of
financial reporting. Based on that assessment, the
its core business, market channel expansion, breadth of
Chief Executive Officer and Chief Financial Officer
product offering, geographic diversity of its operations
have concluded that the internal controls are effective
and business hedging strategies.
and that there were no material weaknesses in the
Company’s internal control over financial reporting as
Market supply and demand impact on
of December 31, 2022.
commodity prices
HPS relies on a global supply chain to meet its
Changes in internal control over financial
manufacturing needs. The Company sources both
reporting and disclosure controls and
raw materials and components from our own factories
procedures
and third-party suppliers. Industry supply shortages
During 2022 there were no material changes identified
including
those caused by
logistics disruptions
in HPS’ internal controls over financial reporting that
and global conflicts, may
interrupt manufacturing
had materially affected or were reasonably likely to
production, therefore affecting our ability to ship product
materially affect HPS’ internal control over financial
to customers. The Company attempts to mitigate these
reporting. HPS does carry out ongoing improvements to
risks through strategic supply line agreements.
its internal controls over financial reporting, but nothing
The cyclical effects and unprecedented rise of
was considered at a material level.
global commodity prices, including prices for copper,
Subsequent events
Dividends
On March 7, 2023, the Company declared a dividend
of twelve and a half cents ($0.125) per Class A
subordinate voting shares of HPS and a quarterly cash
aluminum and electrical steel may put margins at
risk. There is a risk in our ability to recoup the rapid
escalating commodity costs through timely and effective
selling price increases. Conversely, there is a risk that
decreasing commodity costs will create competitive
price pressure in our market, forcing prices down and
dividend of twelve and a half cents ($0.125) per Class
reducing our gross margins.
B common shares of HPS payable on March 23, 2023
Hammond Power Solutions
35
Other business risks
of acquired startup businesses. Management’s due
If any of the following risks were to occur, they could
diligence reviews are subject to the completeness
materially adversely affect HPS’ financial condition,
and accuracy of disclosures made by third parties.
liquidity or results of operations.
The Company may
incur unanticipated costs or
Risk of cyber attack
expenses following a completed acquisition, including
post-closing asset
impairment charges, expenses
Globally
there have been
increased
incidences
associated with eliminating duplicate facilities, litigation
of outside cyber attacks and viruses on companies’
or other liabilities.
information
infrastructure and
technologies. A
Many of the factors that could have an adverse
successful cyber attack could result in misappropriation
impact will be outside of management’s control and
of assets, cause interruptions to manufacturing and
could result in increased costs and decreases in
our ability to take orders, as well as impact our general
the amount of expected revenues and diversion of
productivity. This risk is reduced through a number of
management’s time and attention. Failure to implement
initiatives to mitigate exposure, including a transition to
an acquisition
strategy,
including
successfully
cloud-based applications, periodic risk assessments,
integrating acquired businesses, could have an adverse
and more robust practices around employee training
effect on our business, financial condition and result
and awareness and system updates.
of operations.
We may not realize all of the anticipated benefits
We sell to customers around the world and have
of our acquisitions, divestitures, joint ventures
global operations and, therefore, are subject to
or strategic initiatives, or these benefits may
the risks of doing business in many countries.
take longer to realize than expected.
HPS does business in a host of countries around
In order to be profitable, the Company must successfully
the world. Approximately 70% of our sales are to
execute upon its strategic initiatives and effectively
customers outside of Canada. In addition, several of our
manage the resulting changes in its operations. The
manufacturing operations, suppliers and employees
Company’s assumptions underlying
its strategic
are
located
in many places around
the world.
initiatives may be subjective, the market may react
The future success of our business depends in large
negatively to these plans and HPS may not be able to
part on growth in our sales in non-Canadian markets.
successfully execute these plans. Even if successfully
Our global operations are subject to numerous financial,
executed, the initiatives may not be effective or may
legal and operating risks, such as political and economic
not lead to the anticipated benefits within the expected
instability; prevalence of corruption in certain countries;
time frame.
enforcement of contract and
intellectual property
HPS’ strategic initiatives can include acquisitions
rights; and compliance with existing and future laws,
and joint ventures. To be successful, management
regulations and policies, including those related to
will conduct due diligence
to
identify valuation
tariffs, investments, taxation, trade controls, product
issues and potential loss contingencies, negotiate
content and performance, employment and repatriation
transaction terms, complete complex transactions and
of earnings.
manage post-closing matters such as the integration
Annual Report 2022DOLLARS IN THOUSANDS UNLESS OTHERWISE STATED
36
MANAGEMENT’S DISCUSSION AND ANALYSIS
Our global business translates into conducting
taxation rates, changes in estimates of liabilities and
business in various currencies, all of which are
changes in a number of other forms of taxation. Tax
subject to fluctuations.
structures are subject to review by both domestic and
HPS’ global
footprint exposes
the Company
to
foreign taxation authorities. Tax filings are subject to
currency fluctuations and volatility and, at times, has
audits, which could materially change the amount of
had a significant impact on the financial results of the
current and deferred income tax assets and liabilities.
Company. The Company’s functional currency is the
Canadian dollar with its operating results reported in
Canadian dollars. A significant portion of the Company’s
sales and material purchases are denominated in U.S.
dollars. There is a natural hedge, as sales denominated
in U.S. dollars are largely offset by the cost of raw
materials purchased from the U.S. and commodities
tied to U.S. dollar pricing. A change in the value of
the Canadian dollar against the U.S. dollar will impact
earnings, significantly at times. Generally, a lower value
for the Canadian dollar compared to the U.S. dollar will
have a beneficial impact on the Company’s results,
while a higher value for the Canadian dollar compared
to the U.S. dollar will have a corresponding negative
impact on the Company’s profitability.
HPS has partially reduced the impact of foreign
exchange fluctuations by increasing our U.S. dollar
driven manufacturing output, periodically instituting
price increases to help offset negative changes and
entering into forward foreign exchange contracts.
Worldwide HPS is subject to, and required to
comply with, multiple income and other taxes,
regulations and is exposed to uncertain tax
liabilities risk.
The Company operates and is subject to income tax and
other forms of taxation in numerous tax jurisdictions.
Taxation laws and rates, which determine taxation
expenses, may vary significantly in different jurisdictions,
and legislation governing taxation laws and rates is also
subject to change. Therefore, the Company’s earnings
may be impacted by changes in the proportion of
earnings taxed in different jurisdictions, changes in
We face the potential harms of natural disasters,
pandemics, acts of war, terrorism, international
conflicts or other disruptions to our operations.
Our business depends on the movement of goods
around
the world. Natural disasters, pandemics,
acts or threats of war or terrorism,
international
conflicts, political instability and the actions taken by
governments could cause damage to or disrupt our
business operations, our suppliers or our customers
and could create economic instability. Although it is not
possible to predict such events or their consequences,
these events could decrease demand for our products
make it difficult or impossible to deliver our products or
disrupt our global 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 several geopolitical
risks that could be challenging for the Company. The
impact of these political changes can be difficult to
predict and can have a pervasive impact on the global
business climate. Changes in political leaders can
impact trade relations as well as taxes and/or duties.
HPS’ current structure includes a significant amount
of business that crosses borders and any changes in
the current trade structure could have a material impact
for us. HPS’ global footprint will be critical to mitigating
any impact for political changes that would modify the
current trade relationships.
Hammond Power Solutions
37
Our industry is highly competitive.
The disruption to businesses that can come from
HPS faces competition in all of our market segments.
unpredictable weather can have an impact on
Current and potential competitors may have greater
sales volume as customer projects can be
brand name recognition, more established distribution
delayed or cancelled.
networks, access to
larger customer bases and
Extreme weather conditions such as heavy rains,
substantially greater financial, distribution, technical,
flooding, snowfall, tornadoes and hurricanes can
sales and market, manufacturing and other resources
potentially have a negative impact on the Company’s
than HPS does. As a result, those competitors may
sales trends and booking rates. When these conditions
have advantages relative to HPS; including stronger
are present, the Company may see short-term effects of
bargaining power with suppliers that may result in more
such occurrences due to their unpredictability. This may
favourable pricing, the ability to secure supplies at time
impact delivery and capacity requirements.
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
remain high in the future.
The business practice of extending credit to
customers can lead to a risk of uncollectability.
A substantial portion of the Company’s accounts
receivable are with customers in manufacturing sectors
and are subject to credit risks normal to those industries.
The Company’s expansion into emerging markets
increases credit risk. This risk is partially mitigated by
management’s credit policy under which each new
Our business is highly sensitive to global and
customer is analysed individually for creditworthiness
regional economic conditions in the industries
before the Company’s standard payment and delivery
we serve.
terms and conditions are offered. The Company’s
Current global economic conditions
influence the
review includes external ratings, if they are available,
Company’s
focus, direction, strategic
initiatives
financial statements, credit agency information, industry
and financial performance. To address the current
information and in some cases bank references. Sale
uncertainty, we are focusing our efforts on projects
limits are established for each customer and reviewed
that will increase our market reach, advance our cost
quarterly. Any sales exceeding those limits require
competitiveness, expand capacity and improve our
approval from Executive management. Although the
manufacturing flexibility.
Company has historically incurred very low bad debt
The Company believes
that being an agile
expense, the current economic environment conditions
organization will hold even greater importance in
elevate this exposure and the Company’s future
its ability to respond quickly to both unexpected
collection rate may differ from its historical experience.
opportunities and challenges. HPS’ management
believes that the key to expanding our market share is
Coronavirus (COVID-19) pandemic – business
growing our access to a variety of domestic and global
disruption/interruption
markets. This will be achieved through our current and
new OEM and distributor channels.
Markets, governments and health organizations around
the world have been impacted by the COVID-19
pandemic. The COVID-19 pandemic has presented
Annual Report 2022DOLLARS IN THOUSANDS UNLESS OTHERWISE STATED
38
MANAGEMENT’S DISCUSSION AND ANALYSIS
a wide range of issues and complications for the
implemented as a hedge against translation gains and
Company, some of which the Company is unable to
losses on inter-company loans as well as $72,000 USD
know the full extent.
to hedge the U.S. dollar denominated accounts payable
Looking
forward
there
is guarded business
in Canadian HPS operations. The Company also had
optimism, as some uncertainty and unpredictability
outstanding foreign exchange contracts to sell for
persists on the impacts of the COVID-19 pandemic
34,700 EUR and $61,189 USD.
on the business climate and governmental and health
Further details regarding the Company’s financial
authorities’ legislation. The full negative financial impact
instruments and the associated risks are disclosed
of the unprecedented pandemic will not be fully known
in note 27 in the Notes to the Consolidated Financial
until the economy fully recovers.
Statements contained in our 2022 Annual Report.
Off-balance sheet arrangements
Critical accounting estimates
The Company has no off-Balance Sheet arrangements,
The preparation of the Company’s consolidated financial
other than capital commitments disclosed in note 15
statements requires Management to make estimates
in the Notes to the Consolidated Financial Statements
and assumptions that affect the reported amounts
contained in our 2022 Annual Report.
of assets, liabilities, revenues and expenses and the
Transactions with related parties
estimates are based upon Management’s historical
The Company had transactions with related parties
experience and various other assumptions that are
in 2022, as disclosed in note 23 in the Notes to the
believed by Management to be reasonable under the
Consolidated Financial Statements contained in our
circumstances.
disclosure of contingent assets and liabilities. These
2022 Annual Report.
Proposed transactions
Such assumptions and estimates are evaluated
on an ongoing basis and form the basis for making
judgements about the carrying values of assets and
The Company had no proposed transactions as at
liabilities that are not readily apparent from other
December 31, 2022. The Company continues to evaluate
sources. Actual results could differ from these estimates.
potential business expansion initiatives in accordance
The Company conducts its annual impairment
with its long-term growth strategy.
assessment of goodwill, intangible assets and property,
Financial instruments
plant and equipment in the fourth quarter of each year,
which corresponds with its annual planning cycle, and
The Company’s
financial
instruments consist of
whenever events or changes in circumstances indicate
cash and cash equivalents, accounts receivable,
that the carrying amount of an asset or Cash Generating
long-term
lease receivable, note receivable, bank
Unit (“CGU”) may not be recoverable. The Company
operating lines of credit, accounts payable and accrued
did not identify any triggering events during the course
liabilities, contingent consideration and the following
of 2022 indicating that the carrying amount of its assets
derivative instruments.
and CGUs may not be recoverable, which would require
As at December 31, 2022, the Company had
the performance of an impairment test for those CGUs
outstanding foreign exchange contracts in place for
which did not contain goodwill.
17,350 EUR and $23,275 USD – both of which were
Business Combinations requires acquirers
to
Hammond Power Solutions
39
recognize the identifiable assets acquired and liabilities
There have been no material changes to the outstanding
assumed at fair value. The determination of fair value
share data as of the date of this report.
requires Management to make estimates around the
value an independent third party, under no compulsion
New accounting pronouncements
to act, would pay for an asset acquired or liability
The Group adopted the following amendments in its
assumed on a standalone basis. Where possible,
financial statements for the annual period beginning on
Management engages third-party appraisers to assist
January 1, 2022. The adoption of the amendments did
in the determination of the fair value of real property
not have a material impact on the consolidated financial
acquired. The fair value of acquired intangible assets
statements.
are generally determined using discounted cash flow
• Property, Plant and Equipment – Proceeds before
models and involve the use of cash flow forecasts,
Intended Use (Amendments to IAS 16);
market-based discount rates, and/or market-based
• Onerous Contracts – Cost of Fulfilling a Contract
royalty rates. The fair values of liabilities assumed is
(Amendments to IAS 37);
generally based on discounted cash flow models which
• Reference
to
the
Conceptual
Framework
involve the use of market-based discount rates. The
(Amendments to IFRS 3); and
development of cash flow forecasts involves the use
• Annual Improvements to IFRS Standard 2018-2020.
of estimates, which may differ from actual cash flows
realized. Assumptions are involved in the determination
New accounting pronouncements to be adopted
of discount rates and royalty rates.
The International Accounting Standards Board has
The Company records a provision for warranties
issued the following Standards, Interpretations and
based on historical warranty claim information and
Amendments to Standards that are not yet effective,
anticipated warranty claims, based on a weighted
have not yet been adopted by the Group and are not
probability of possible outcomes.
expected to have a material impact on the consolidated
The key assumptions made by management
financial statements.
in recording the provision are i) warranty cost, ii)
The following amendments are effective for the
probability of claim, and iii) quantum of units which may
annual period beginning on January 1, 2023:
be subject to any warranty claim.
• Insurance contracts (IFRS 17 and amendments to
Quantifying
provisions
inherently
involves
IFRS 17);
judgement, and future events and conditions may
• Definition of accounting estimates (Amendments to
impact these assumptions. Differences in actual future
IAS 8);
experience from the assumptions utilized may result in
• Disclosure
initiative
–
accounting
policies
a greater or lower warranty cost.
(Amendments to IAS 1 and IFRS Practice Statement
2 Making Materiality Judgements);
Outstanding share data
• Deferred tax related to assets and liabilities arising
Details of the Company’s outstanding share data as of
from a single transaction (Amendments to IAS 12
December 31, 2022, are as follows:
Income Taxes); and
9,056,624
Class A Shares
The following amendments are effective for the annual
2,778,300
Class B Common Shares
period beginning on January 1, 2024:
11,834,924
Total Class A and B Shares
• Classification of liabilities as current or non-current
Annual Report 2022DOLLARS IN THOUSANDS UNLESS OTHERWISE STATED
40
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Amendments to IAS 1) and Non-current liabilities
o Energizing the world in a responsible way for
with covenants (Amendments to IAS 1); and
the generations to come.
• Lease liability in a sale and leaseback (Amendments
The demand for our transformers particularly
to IFRS 16).
in North America continues to accelerate and sales
volumes have returned to pre-pandemic levels. While
Strategic direction and outlook
we have seen improvements in business activity and
HPS has a rich and extensive history of growth,
demand, we have also experienced rapidly rising
innovation and resilience. The Company has navigated
commodity costs as well as supply shortages. Based on
through difficult and
fluctuating economic times,
the combination of these factors, the Company expects
increased globalization, adapted
to changes
in
to see continued growth in revenues. It has been, and
customers and markets and has experienced significant
is, HPS’ objective to maintain gross margins in the face
advances
in technology. HPS has
framed these
of rising prices. We will continue to do so in the future.
challenges as opportunities and developed strategies
We continue to add new distributors and have
to address these rapid changes.
implemented additional
infrastructure
in place to
The Company is confronting these challenges
support our growth initiative into Mexico. We believe
and continuously building our strategic advantage by
that Mexico has strong potential for us as a sales market
focusing on:
due to its proximity to our manufacturing locations and
• Developing our Customers and Markets by:
our ability to leverage existing people, product, and
o Driving organic growth through continuing to
supply chain.
develop our NAED channel;
The most recent acquisition of Mesta has expanded
o Offering competitive products, including an
HPS’ offering into standard and custom active filter and
expanding product quality offering;
induction heating products. Mesta shares an excellent
o Providing unparalleled service to our customers;
reputation for product quality, design and reliability.
and
Mesta not only expands HPS’ U.S. presence but also
o Growing through strategic acquisitions.
broadens our power solutions product offering and
• Achieving Operational and Financial Excellence by:
manufacturing capabilities in power quality solutions.
o Driving continuous improvement;
Mesta’s results for 2022 contributed to both the increase
o
Improving efficiency by investing in equipment,
in revenue as well as the increase in profits.
people and technology; and
As of January 1, 2022, the Company went live with
o Optimizing
the efficiency of our global
a new human resources information system (“HRIS”) in
manufacturing footprint.
order to move the Company to a common payroll and
• Developing our People and Culture by:
human resource system. This platform has enhanced
o Building our leadership team for the future;
our
internal communications, created efficiencies,
o Developing our people to excel and thrive; and
improved controls,
incorporated additional career
o Making HPS a preferred employer.
planning and allows for better data analysis.
• Building a Sustainability Program by
At the end of 2022 an extensive upgrade to our
o Designing energy efficient products;
enterprise resource planning (“ERP”) system to a cloud
o Shrinking our ecological footprint; and
based format went live. The upgrade allows for better
Hammond Power Solutions
41
software manufacturer support as well as speed and
dividends paid with an attractive yield. To continue this
flexibly a cloud based system can provide. This upgrade
trend HPS is focused on sales development, continued
was completed for all HPS facilities.
distributor channel expansion, product development,
HPS has modern manufacturing facilities throughout
and bringing quality and value to all that we produce.
the world, and this continues to be enhanced through
Our strategic initiatives and focused plans will continue
our committed capital investment. As we grow, we are
to allow HPS to grow and expand.
investing in equipment and machinery that will allow us
HPS’ strategic vision and operational initiatives
to keep up with future demand and allow us to optimize
have supported our industry leadership, operational
our manufacturing capabilities at our various locations.
strength and financial stability. The combination of our
We are also investing in business technology that will
resilience, drive, decades of experience, commitment,
help us become more efficient and provide us with the
engineering expertise, solid supplier relationships and a
data that we need to improve our business.
broad and unique business perspective gained through
With a focus on growth and advancement, HPS
our diverse products, customers and markets are all key
intends to increase its planned capital program by
success factors critical to our success.
approximately $40 million over two years. These planned
capital investments are focused on areas targeted
to increase capacity and reduce lead times for low
voltage, power quality and induction heating products.
These investments are also expected to support HPS’
supply chain resilience initiatives. HPS intends to focus
the capital program primarily in Mexico and the U.S..
In Mexico, HPS is planning to set up an approximately
80,000 square foot small products facility, while also
adding equipment to existing facilities there. HPS also
expects to expand its manufacturing capacity at the
Mesta location in Pennsylvania, USA, as well as its
facility in Guelph, Ontario.
The Company continues to have a strong reputation
of being an industry leader and is both operationally
and financially strong. HPS is well positioned to meet
the evolving needs of our traditional markets while
becoming a leading player in a growing number of
other market sectors. We continue to be focused on
escalation of market share, improved sales growth from
new product development, geographic diversification,
productivity gains, cost reduction and capacity flexibility.
The Company has provided shareholders with strong
earnings per share, solid cash generation and quarterly
Annual Report 2022DOLLARS IN THOUSANDS UNLESS OTHERWISE STATED
42
Selected Annual and Quarterly Information
(tabular amounts in thousands of dollars)
Annual Information
2018
2019
2020
2021
2022
Sales
Earnings from operations
EBITDA
Net (loss) earnings
Total assets
Non-current liabilities
Total liabilities
Total shareholders’ equity attributable
to equity holders of the Company
Operating debt, net of cash
Cash provided by operations
Basic (loss) earnings per share
Diluted (loss) earnings per share
Dividends declared and paid
Average exchange rate (USD$=CAD$)
Book value per share
314,082
13,779
17,915
(12,917)
205,527
2,528
96,793
108,734
(17,056)
6,474
(1.10)
(1.10)
2,818
1.294
9.26
358,792
20,543
28,175
11,607
214,953
11,271
105,186
109,767
(9,326)
17,810
0.99
0.99
3,287
1.327
9.36
322,097
380,202
558,464
22,041
29,482
14,062
189,394
8,329
75,478
113,916
(1,278)
19,683
1.20
1.20
3,993
1.343
9.70
23,151
30,114
15,176
59,441
69,746
44,828
235,099
302,673
7,104
8,101
109,097
125,779
126,002
176,894
1,638
20,447
1.29
1.28
4,009
1.253
10.69
21,972
37,013
3.79
3.77
4,556
1.301
15.00
Quarterly Information
Sales
Earnings from operations
EBITDA
Net earnings
Total assets
Q1
80,121
3,402
5,349
2,298
2021
Q2
Q3
Q4
Q1
2022
Q2
Q3
Q4
88,277
95,526
116,278
127,782
137,476
148,953
144,253
7,620
8,694
4,689
5,909
7,378
3,948
6,220
8,693
4,241
12,658
10,046
16,118
20,369
14,458
12,225
18,970
24,093
8,569
6,505
11,531
18,223
192,395
208,865
221,549
235,099
253,340
283,852
315,864
302,673
Non-current liabilities
Total liabilities
7,546
77,559
7,018
91,691
6,486
7,104
6,170
5,793
6,640
8,101
98,951
109,097
119,565
140,791
152,187
125,779
Total shareholders’ equity
attributable to equity
holders of the Company
114,836
117,174
122,598
126,002
133,775
143,061
163,677
176,894
Operating debt, net of cash
(11,754)
(14,392)
(15,399)
1,638
(905)
9,542
21,843
5,352
Cash (used) provided by
operations
Basic earnings per share
Diluted earnings per share
Dividends declared and paid
Average exchange rate
(USD$=CAD$)
Book value per share
(6,854)
0.19
0.19
1,002
1.268
9.78
(29)
0.40
0.40
1,002
1.231
9.94
7,430
19,900
0.34
0.34
1,002
1.257
10.40
0.36
0.35
1,002
1.258
10.69
537
0.72
0.72
1,006
1.267
11.39
14,623
16,501
1,837
0.55
0.55
1,183
1.276
12.13
0.97
0.97
1,184
1.305
13.88
1.55
1.53
1,183
1.358
15.00
Hammond Power Solutions 43
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 judgements 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 judgement 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 23, 2023
Independent Auditor’s Report
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, 2022 and end of December 31, 2021
• 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, 2022 and December 31, 2021, and its consolidated financial performance and its consolidated cash
flows for the years then ended in accordance with International Financial Reporting Standards (IFRS).
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those
standards are further described in the “Auditor’s Responsibilities for the Audit of the Financial Statements” section of our
auditor’s report.
We are independent of the 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 judgement, were of most significance in our audit of the financial
Annual Report 2022
44
statements for the year ended December 31, 2022. These matters were addressed in the context of our audit of the financial
statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
We have determined the matters described below to be the key audit matters to be communicated in our auditor’s report.
Evaluation of the 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 $12,024 thousand, of which,
$8,226 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
judgement 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.
Other Information
Management is responsible for the other information. Other information comprises:
• The information included in Management’s Discussion and Analysis filed with the relevant Canadian Securities Commissions.
• The information, other than the financial statements and the auditor’s report thereon, included in a document entitled
“Annual Report 2022”.
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 2022 as at the date of this auditor’s report. If, based on the work we have performed on this
other information, we conclude that there is a material misstatement of this other information, we are required to report that fact in
the auditor’s report.
We have nothing to report in this regard.
Responsibilities of Management and Those Charged with Governance for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance with International
Financial Reporting Standards (IFRS), and for such internal control as management determines is necessary to enable the
preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible for assessing the Entity’s ability to continue as a going concern,
Hammond Power Solutions
45
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.
Auditor’s Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian
generally accepted auditing standards will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably
be expected to influence the economic decisions of users taken on the basis of the financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgement 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 auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our
opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events
or conditions may cause the Entity to cease to continue as a going concern.
• Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the
financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
• Communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit
and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
• Provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding
independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our
independence, and where applicable, related safeguards.
• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the
Group Entity to express an opinion on the financial statements. We are responsible for the direction, supervision and performance
of the group audit. We remain solely responsible for our audit opinion.
• Determine, from the matters communicated with those charged with governance, those matters that were of most significance in
the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our
auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances,
we determine that a matter should not be communicated in our auditor’s report because the adverse consequences of doing so
would reasonably be expected to outweigh the public interest benefits of such communication.
Chartered Professional Accountants,
Licensed Public Accountants
The engagement partner of the audit resulting in this auditors
report is R. Alexander Dilts
March 23, 2023
Waterloo, Canada
Annual Report 2022
46
Consolidated Statements of Financial Position
(in thousands of dollars)
Assets
Current assets
Cash and cash equivalents
Accounts receivable (note 4)
Inventories (note 5)
Income taxes receivable
Prepaid expenses and other assets (notes 6 and 7)
Total current assets
Non-current assets
Long-term lease (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
Bank operating lines of credit (note 13)
Accounts payable and accrued liabilities (notes 17 and 27)
Deferred revenue (note 21)
Income taxes payable
Provisions (note 20)
Current portion of lease and other liabilities (notes 14 and 27)
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 27)
Total non-current liabilities
Total liabilities
Shareholders’ Equity
Share capital (note 17)
Contributed surplus
Accumulated other comprehensive income
Retained earnings
Total shareholders’ 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:
As at
December 31, 2022
December 31, 2021
$
$
$
$
$
$
$
$
$
$
28,126
86,701
106,353
1,995
6,948
230,123
-
41,742
3,121
-
8,013
7,650
12,024
72,550
302,673
6,154
92,301
10,607
2,342
1,840
4,434
117,678
979
117
7,005
8,101
125,779
15,240
2,376
12,431
146,847
176,894
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
75,401
235,099
19,267
70,733
5,027
1,988
1,850
3,128
101,993
342
401
6,361
7,104
109,097
14,886
2,432
2,109
106,575
126,002
$
302,673
$
235,099
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, 2022 and 2021 (in thousands of dollars except for per share amounts)
47
Sales (note 21)
Cost of sales (notes 5 and 22)
Gross margin
Selling and distribution (notes 22 and 27)
General and administrative (note 22)
Earnings from operations
Finance and other costs
Interest expense
Foreign exchange (gain) loss
Share of income of investment in joint venture, net of tax
(note 10)
Other (note 27)
Net finance and other costs
2022
2021
$
558,464
$
380,202
393,279
165,185
62,263
43,481
$
105,744
$
59,441
1,596
(96)
(4)
776
2,272
277,771
102,431
46,459
32,821
79,280
23,151
1,301
561
(61)
100
1,901
Earnings before income taxes
57,169
21,250
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.
15,234
(2,893)
12,341
44,828
$
7,110
(1,036)
6,074
15,176
3.79
3.77
$
$
1.29
1.28
$
$
$
Annual Report 2022 48
Consolidated Statements of Comprehensive Income
Years ended December 31, 2022 and 2021 (in thousands of dollars)
Net earnings
Other comprehensive income
Items that will be recognized within profit and loss:
Foreign currency translation differences for foreign operations
Other comprehensive income, net of income tax
2022
2021
$
44,828
$
15,176
10,322
10,322
590
590
Total comprehensive income
$
55,150
$
15,766
See accompanying Notes to Consolidated Financial Statements.
Hammond Power Solutions 49
Consolidated Statements of Changes in Equity
Years ended December 31, 2022 and 2021 (in thousands of dollars)
SHARE
CAPITAL
CONTRIBUTED
SURPLUS
AOCI*
RETAINED
EARNINGS
TOTAL
SHAREHOLDERS’
EQUITY
Balance at January 1, 2021
$
14,491
$
2,498
$
1,519
$ 95,408
$
113,916
Total comprehensive income for the period
Net income
Other comprehensive 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
Balance at January 1, 2022
Total comprehensive income for the period
Net income
Other comprehensive income
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
–
–
–
–
–
–
–
–
–
–
–
–
395
395
(66)
(66)
–
15,176
15,176
(82)
672
590
590
–
–
–
–
–
–
(82)
672
590
15,176
15,766
(4,009)
–
(4,009)
(4,009)
329
(3,680)
$
$
14,886
14,886
$
$
2,432
2,432
$
$
2,109
2,109
$ 106,575
$ 106,575
$
$
126,002
126,002
–
–
–
–
–
–
–
–
–
–
354
354
(56)
(56)
–
44,828
44,828
10,322
10,322
10,322
–
–
–
–
–
44,828
(4,556)
–
(4,556)
10,322
10,322
55,150
(4,556)
298
(4,258)
Balance at December 31, 2022
$
15,240
$
2,376
$
12,431
$ 146,847
$
176,894
*AOCI – Accumulated other comprehensive income
See accompanying Notes to Consolidated Financial Statements.
Annual Report 2022
50
Consolidated Statements of Cash Flows
Years ended December 31, 2022 and 2021 (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
Provisions
Interest expense
Income tax expense
Unrealized loss (gain) on derivatives
Share-based compensation expense
Change in non-cash working capital (note 25)
Cash generated from operating activities
Income tax paid
Cash provided from operating activities
Cash flows from investing activities
Repayment of note and lease receivable
Acquisition (notes 10 and 30)
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 (repayments) advances of bank operating lines of credit
Interest paid
Payment of lease liabilities (note 14)
Payment of contingent consideration (note 30)
Cash used in financing activities
Foreign exchange on cash and cash equivalents held in a
foreign currency
Cash acquired in business combination (notes 10 and 30)
Increase 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.
2022
2021
$
44,828
$
15,176
(4)
7,196
3,785
419
1,596
12,341
276
2,183
72,620
(19,539)
53,081
(16,068)
37,013
173
(3,515)
(8,646)
(686)
(12,674)
298
(4,556)
(13,113)
(1,277)
(3,004)
(651)
(22,303)
1,792
3,393
7,221
20,905
28,126
$
(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
Hammond Power Solutions 51
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2022 and 2021 (tabular amounts in thousands of dollars, except share and per share amounts)
1.
Reporting entity
Hammond Power Solutions Inc. (“HPS” or “the Company”) is a corporation domiciled in Canada. The address
of the Company’s registered office is 595 Southgate Drive, Guelph, Ontario. The Company’s Class A subordinate
voting shares are listed on the Toronto Stock Exchange and trade under the symbol HPS.A.
The consolidated financial statements of the Company comprise the Company and its subsidiaries
(together referred to as the “Group” and individually as “Group entities”). The Group primarily is involved in the
design and manufacture of custom electrical magnetics, cast resin, custom liquid filled distribution and power
transformers and standard electrical transformers, serving the electrical and electronic industries. The Group
has manufacturing plants in Canada, the United States (“U.S.”), Mexico and India.
2.
Basis of preparation
(a) Statement of compliance
These consolidated financial statements have been prepared in accordance with International Financial
Reporting Standards (“IFRS”), and were approved by the Board of Directors on March 23, 2023.
(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
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, 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.
Annual Report 2022
52
Canadian and Subsidiary Operations
Functional Currency
Hammond Power Solutions Inc.
Delta Transformers Inc.
Hammond Power Solutions, Inc.
Mesta Electronics Inc.
Canadian dollar
($)
U.S. dollar
($ USD)
Hammond Power Solutions Latin America S. de R.L. de C.V.
Hammond Power Solutions S. A. de C.V.
Mexican Peso
(Pesos)
Montran S.A. de C.V.
Hammond Power Solutions S.p.A.
Continental Transformers s.r.l.
Hammond Power Solutions Private Limited
(d) Use of estimates and judgements
Euro
Rupee
(EU €)
(INR)
The preparation of the consolidated financial statements in conformity with IFRS requires Management to make
judgements, 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 judgements in applying accounting policies
The following are the critical judgements, apart from those involving estimations, that Management has made
in the process of applying the Group’s accounting policies and that have the most significant effects on the
amounts recognized in the consolidated financial statements.
Cash generating units
As indicated in note 3(g) and 3(k); the Group conducts its impairment tests at the individual asset level or, where
the recoverable amount cannot be determined for an individual asset, or for goodwill, at the cash generating unit
(“CGU”) level. The Group defines its CGUs based on the way it monitors and derives economic benefits from the
acquired goodwill and intangibles. A cash-generating unit is the smallest group of assets that generates cash
inflows that are largely independent of the cash inflows from other assets or groups of assets. The identification
of a cash-generating unit involves judgement.
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
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2022 and 2021 (tabular amounts in thousands of dollars, except share and per share amounts)Hammond Power Solutions
53
the value of a right-of-use asset and lease liability, IFRS 16 requires the Group to determine the lease payments
to be made over the initial term of the lease, including renewal options which are reasonably certain to be
exercised. Such payments are then discounted based on the interest rate implicit in the lease or the Group’s
incremental borrowing rate. In determining the initial lease term, Management makes an assessment of the
renewal periods available to the Group within each lease and evaluates the likelihood and corresponding time
horizon of available renewal options. Such assessments involve judgement 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
judgement. 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 judgement.
(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 policies provided in note 3(g) and 3(k). Performing
impairment testing requires management to determine the estimated recoverable amount of the relevant cash-
generating units on the basis of projected future cash flows using internal business plans or forecasts, and
discounting these cash flows to appropriately reflect the time value of money.
The key assumptions made by management in deriving the recoverable amount are i) projected revenue, ii)
projected gross margin rates, iii) terminal growth rates, and iv) the discount rate.
Impairment assessments inherently involve judgement 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.
For the years ended December 31, 2022 and 2021 (tabular amounts in thousands of dollars, except share and per share amounts)Annual Report 2022
54
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
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 judgement, and future events and conditions may impact these
assumptions. Differences in actual future experience from the assumptions utilized may result in a greater or
lower warranty cost. For further information on the Group’s provisions, refer to note 20.
3.
Summary of significant accounting policies
The accounting policies set out below have been applied consistently to all periods presented in these
consolidated financial statements and by all Group entities.
(a) Basis of consolidation
The consolidated financial statements include the accounts of Hammond Power Solutions Inc. and its wholly-
owned subsidiaries:
•
•
Hammond Power Solutions, Inc.
Hammond Power Solutions, S.A. de C.V.
• 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. de R.L. 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
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2022 and 2021 (tabular amounts in thousands of dollars, except share and per share amounts)Hammond Power Solutions
55
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.
Prior to obtaining control during the year, the Company held a 55% equity interest in the Corefficient joint
venture (“Corefficient”). The Company applied the equity method of accounting for its investment in Corefficient
on the basis that it did not have the power to direct the key activities of the joint venture Corefficient. Under the
equity method of accounting, interests in joint ventures are initially recognized in the Consolidated Statements
of Financial Position at initial cost and adjusted thereafter to recognize the Group’s share of profits or losses
and movements in other comprehensive income in the income statement and in other comprehensive income
respectively. Effective February 28, 2022, the Company and the joint venturer have agreed to divide the
operations. As a result of this transaction, the Company now owns 100% of the equity and voting interests of
the entity and continued the business within Hammond Power Solutions Latin America S. de R.L. de C.V. and
continues to operate the entity as a wholly owned subsidiary.
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 lease are classified as assets at amortized cost and are
measured using the effective interest rate method. Interest income is recorded in the consolidated
statement of operations, as applicable.
•
Accounts payable, accrued liabilities and bank operating lines of credit are classified as other financial
liabilities and are measured at amortized cost using the effective interest rate method. Interest expense is
recorded in the consolidated statement of operations, as applicable.
•
Derivatives are initially recognized at fair value on the date a derivative contract is entered into and are
subsequently re-measured to their fair value at the end of each reporting period. The accounting for
subsequent changes in fair value depends on whether the derivative is designated as a hedging instrument,
and if so, the nature of the item being hedged and the type of hedge relationship designated. The Group has
not historically designated such items as hedging instruments and accordingly changes in fair value are
recorded through the statement of operations.
For the years ended December 31, 2022 and 2021 (tabular amounts in thousands of dollars, except share and per share amounts)Annual Report 2022
56
•
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, with changes recognized through the statement
of operations.
All financial instruments are required to be measured at fair value on initial recognition, plus, in the case
of a financial asset or financial liability not at fair value through profit or loss, transaction costs that are directly
attributable to the acquisition or issue of the financial asset or financial liability.
Transaction costs of financial assets and financial liabilities carried at fair value through profit or loss are
expensed in profit or loss. Financial assets with embedded derivatives are considered in their entirety when
determining whether their cash flows are solely payment of principal and interest.
Financial assets that are held within a business model whose objective is to collect the contractual cash
flows, and that have contractual cash flows that are solely payments of principal and interest on the principal
outstanding are generally measured at amortized cost at the end of the subsequent accounting periods.
The Group assesses all information available, including, on a forward-looking basis, the expected credit
losses associated with its assets carried at amortized cost. The impairment methodology applied depends on
whether there has been a significant increase in credit risk. To assess whether there is a significant increase in
credit risk, the Group compares the risk of a default occurring on the asset as at the reporting date with the risk
of default as at the date of initial recognition based on all information available, and reasonable and supportive
forward-looking information. For trade receivables only, the Group applies the simplified approach as permitted
by IFRS 9 which requires expected lifetime losses to be recognized from initial recognition of receivables.
(c) Cash and cash equivalents
Cash and cash equivalents include cash and short-term deposits with maturities of three months or less.
(d) Property, plant and equipment
Property, plant and equipment are shown in the statement of financial position at their historical cost. Cost
includes expenditure that is directly attributable to the acquisition of the asset. The cost of self-constructed
assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the
assets to a working condition for their intended use, the costs of dismantling and removing the items and
restoring the site on which they are located, and borrowing costs on qualifying assets. Purchased software that
is integral to the functionality of the related equipment is capitalized as part of that equipment.
When parts of an item of property, plant and equipment have different useful lives, they are accounted for
as separate items (major components) of property, plant and equipment.
Depreciation is provided on components that have homogenous useful lives by using the straight-line
method so as to depreciate the initial cost down to the residual value over the estimated useful lives.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2022 and 2021 (tabular amounts in thousands of dollars, except share and per share amounts)Hammond Power Solutions
57
The estimated useful lives for the current and comparative periods are as follows:
•
•
Buildings
14-30 years
Leaseholds and improvements
lesser of 5 years and lease term
• Machinery and equipment
• Office equipment
•
Land is not depreciated
4-10 years
4-10 years
Depreciation methods, useful lives and residual values are reviewed at each financial year-end and adjusted
if appropriate.
Assets included in construction-in-progress are not depreciated until the assets are available for use. Idle
assets that are available for use are depreciated.
(e)
Intangible assets other than goodwill
Intangible assets that are acquired either separately or in a business combination are recognized when they are
identifiable and can be reliably measured. Intangible assets are considered to be identifiable if they arise from
contractual or other rights, or if they are separable (i.e. they can be disposed of either individually or together
with other assets). Intangible assets comprise finite life intangible assets.
Finite life intangible assets are those for which there is an expectation of obsolescence that limits their
useful economic life or where the useful life is limited by contractual or other terms. They are amortized over the
shorter of their contractual or useful economical lives.
The estimated useful lives for the current and comparative periods are as follows:
• Customer lists and relationships
15 years
•
•
•
Technology and other patents
10-20 years
Software and other
Branding
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.
For the years ended December 31, 2022 and 2021 (tabular amounts in thousands of dollars, except share and per share amounts)Annual Report 2022
58
(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
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.
For an acquisition achieved in stages, under which the Group did not previously control an investee but
subsequently obtains control, the carrying value of the Group’s investment is remeasured to fair value immediately
prior to the business combination, with any gain or loss reflected through the statement of operations.
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 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, 2022.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2022 and 2021 (tabular amounts in thousands of dollars, except share and per share amounts)Hammond Power Solutions
59
(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 applied the equity method of accounting for its investment in the joint venture. Under the equity
method of accounting, interests in joint ventures are initially recognized in the Consolidated Statements of
Financial Position at initial cost and adjusted thereafter to recognize the Group’s share of profits or losses
and movements in other comprehensive income in the income statement and in other comprehensive income
respectively. When the Group’s share of losses in a joint venture equals or exceeds its interest in the joint
venture, the Group does not recognize further losses unless it has incurred obligations or made payments on
behalf of the joint venture.
Unrealized gains or transactions between the Group and its joint venture were eliminated to the extent of
the Group’s interest in the joint venture. Unrealized losses were also eliminated unless the transaction provides
evidence of impairment of the assets transferred.
(j)
Inventories
Inventories are valued at the lower of cost and net realizable value.
The cost of inventories is based on the first-in first-out principle and includes expenditures incurred in
acquiring the inventories, production or conversion costs and other costs incurred in bringing them to their
existing location and condition. In the case of manufactured inventories and work in progress, cost includes an
appropriate share of production overheads based on normal operating capacity.
Net realizable value is the estimated selling price in the ordinary course of business, less the estimated
costs of completion and selling expenses.
When circumstances which previously caused inventories to be written down to their net realizable value
no longer exist, the previous impairment is reversed.
(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.
For the years ended December 31, 2022 and 2021 (tabular amounts in thousands of dollars, except share and per share amounts)Annual Report 2022
60
(l)
Share-based payment transactions
Stock option plan
The Group has a stock-based compensation plan, which is described in note 17. The Group accounts for all
stock-based payments using the fair value based method.
Under the fair value based method, compensation cost for stock options and direct awards of stock is
measured at fair value at the grant date. Compensation cost is recognized in earnings on a straight-line basis
over the relevant vesting period, with a corresponding amount recorded in contributed surplus. The amount
recognized as an expense, is adjusted to reflect the number of awards for which the related services are expected
to be met. Upon exercise of a stock option, share capital is recorded at the sum of the proceeds received and the
related amount of contributed surplus.
Deferred share unit plan
The Company 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. The number of DSUs issued to each holder are increased as dividends on
common shares are paid to compensate the holders for dividends paid on a quarterly basis, while the DSUs
are outstanding.
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.
(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.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2022 and 2021 (tabular amounts in thousands of dollars, except share and per share amounts)Hammond Power Solutions
61
Notwithstanding the above, no provision is recorded until such time a valid expectation by those affected
by the plan has been raised.
(n) Revenue
The Group recognizes revenue using a 5-step approach:
• Step 1: Identify the contract(s) with a customer.
• Step 2: Identify the performance obligations in the contract.
• Step 3: Determine the transaction price.
• Step 4: Allocate the transaction price to the performance obligations in the contract.
• Step 5: Recognize revenue when (or as) the Group satisfies a performance obligation.
The Group considers a performance obligation satisfied when “control” of the goods or services underlying
the particular performance obligation is transferred to the customer. A performance obligation represents a
good and service (or a bundle of goods or services) that is distinct or a series of distinct goods or services
that are substantially the same. The Group typically satisfies its performance obligation upon shipment of its
transformers. Any required testing or compliance requirements will have been satisfied prior to shipment of
the transformer. Payment is typically due within 30 days of shipment, with limited customers being granted
extended terms of up to 60 days. 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
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.
For the years ended December 31, 2022 and 2021 (tabular amounts in thousands of dollars, except share and per share amounts)Annual Report 2022
62
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
into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for
contributions to defined contribution pension plans, are recognized as an employee benefit expense in profit or
loss in the periods in which services are rendered by employees.
Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the
related service is provided. A liability is recognized for the amount expected to be paid under short-term cash
bonus or profit-sharing plans if the Group has a present legal or constructive obligation to pay this amount as a
result of past service provided by the employee and the obligation can be estimated reliably.
(q) Finance income and finance costs
Finance income and finance costs comprise interest income, interest expense on borrowings, foreign
currency losses (including changes in fair value of derivative foreign currency financial instruments measured
at fair value through profit and loss), the Group’s share of income or losses arising from its investment in joint
ventures and other finance costs.
Foreign currency gains and losses are reported on a net basis.
(r)
Earnings per share
The Group presents basic and diluted earnings per share (“EPS”) data for its common shares. Basic EPS is
calculated by dividing net earnings of the Group by the weighted average number of common shares outstanding
during the reporting period. Diluted EPS are computed similar to basic EPS except that the weighted average
shares outstanding are increased to include additional shares from the assumed exercise of stock options,
if dilutive. The number of additional shares is calculated by assuming that outstanding stock options were
exercised and that proceeds from such exercises along with any unamortized stock-based compensation were
used to acquire common shares at the average market price during the year.
(s) Leases
The Group recognizes a right-of-use asset and a lease liability at the lease commencement date. The right-
of-use asset is initially measured at cost, and subsequently at cost less any accumulated depreciation and
impairment losses, and adjusted for certain remeasurements of the lease liability.
The lease liability is initially measured at the present value of the lease payments that are not paid at the
commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily
determined, the Group’s incremental borrowing rate. Generally, the Group uses its incremental borrowing rate
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2022 and 2021 (tabular amounts in thousands of dollars, except share and per share amounts)Hammond Power Solutions
63
as the discount rate. The group applies a single discount rate to the portfolio of leases with reasonably similar
characteristics.
The lease liability is subsequently increased by the interest cost on the lease liability and decreased by lease
payments made. It is remeasured when there is a change in future lease payments arising from a change in an
index or rate, a change in the estimate or the amount expected to be payable under a residual value guarantee,
or as appropriate, changes in the assessment of whether a purchase or extension option is reasonably certain
to be exercised or a termination option is reasonably certain not to be exercised.
The Group does not recognize right-of-use assets and lease liabilities for contracts that have a lease term
of 12 months or less or are low-value assets (under $5,000).
(t) Government assistance
The Group recognizes government assistance in the statement of operations on a systematic basis over the
periods in which the entity recognises expenses for the related costs for which the assistance is intended
to compensate.
(u) New accounting pronouncements adopted during the period
The Group adopted the following amendments in its financial statements for the annual period beginning on
January 1, 2022. The adoption of the amendments did not have a material impact on the consolidated financial
statements.
• Property, Plant and Equipment – Proceeds before Intended Use (Amendments to IAS 16);
• Onerous Contracts – Cost of Fulfilling a Contract (Amendments to IAS 37);
•
•
Reference to the Conceptual Framework (Amendments to IFRS 3);
Annual Improvements to IFRS Standard 2018-2020.
(v) New accounting pronouncements
The International Accounting Standards Board has issued the following Standards, Interpretations and
Amendments to Standards that are not yet effective, have not yet been adopted by the Group and are not
expected to have a material impact on the consolidated financial statements.
The following amendments are effective for the annual period beginning on January 1, 2023:
•
Insurance contracts (IFRS 17 and amendments to IFRS 17);
•
•
•
Definition of accounting estimates (Amendments to IAS 8);
Disclosure initiative – accounting policies (Amendments to IAS 1 and IFRS Practice Statement 2
Making Materiality Judgements);
Deferred tax related to assets and liabilities arising from a single transaction (Amendments to IAS 12
Income Taxes); and
The following amendments are effective for the annual period beginning on January 1, 2024:
•
•
Classification of liabilities as current or non-current (Amendments to IAS 1) and Non-current liabilities
with convenants (Amendments to IAS 1); and
Lease liability in a sale and leaseback (Amendments to IFRS 16).
For the years ended December 31, 2022 and 2021 (tabular amounts in thousands of dollars, except share and per share amounts)Annual Report 2022
64
4.
Accounts receivable
Trade accounts receivable
Value added tax receivable
Other receivables
December 31, 2022 December 31, 2021
$
75,147 $
6,602
4,952
$
86,701
$
67,359
1,066
3,579
72,004
Trade accounts receivable is presented net of expected credit losses of $2,806,000 (December 31, 2021 –
$2,359,000).
A continuity of the Group’s allowance for doubtful accounts is as follows:
Opening balance
Additional allowances
Writeoffs
Adjustments
5. Inventories
Raw materials
Work in progress
Finished goods
December 31, 2022
December 31, 2021
$
2,359
$
2,577
837
(37)
(353)
$
2,806
$
214
(6)
(426)
2,359
December 31, 2022
December 31, 2021
$
51,773
$
3,154
51,426
$
106,353
$
30,731
4,206
27,530
62,467
Raw materials and changes in finished goods, and work in progress recognized as cost of sales during the
year amounted to $391,317,000 (2021 – $276,850,000). In addition, during the year, reversal of write-downs in the
amount of $78,000 were recognized (2021 – write-downs of $23,000). Inventories carried at net realisable value
as at December 31, 2022 were $485,000 (December 31, 2021 – $1,054,000).
6. Prepaid and other assets
Prepaid expenses
Fair value of derivative
Current portion of long-term lease and note receivable (note 7)
December 31, 2022
December 31, 2021
$
$
4,109
$
–
2,839
6,948
$
3,121
180
214
3,515
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2022 and 2021 (tabular amounts in thousands of dollars, except share and per share amounts)Hammond Power Solutions
65
7.
Long-term lease
Concurrent with the disposal of a product line in 2017, the Group entered into a lease agreement for one of its
manufacturing facilities in Italy, under which the purchaser has 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 (approximately $3,047,000). The put option grants HPS an option to sell the plant to the
purchaser for consideration equal to the initial plant purchase price of 2,225,000 Euros. Under both the call and put
option the plant purchase price will be reduced by 50% of the monthly rent installments received, to a maximum of
375,000 Euros (approximately $513,000). 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 Euros (approximately $685,000) in liquidated damages. Management has determined that ownership of
the leased premises is reasonably certain to be transferred 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, 2022 consideration receivable consists of:
December 31, 2022
December 31, 2021
Lease receivable of 1,957 EUR (2021 – 2,083 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
$
2,867
$
(28)
2,839
2,839
$
–
$
3,057
(64)
2,993
214
2,779
The aggregate amount of principal payments are expected to be received in the next year.
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 asset
December 31, 2022 December 31, 2021
$
$
34,789 $
6,953
41,742 $
25,152
5,808
30,960
For the years ended December 31, 2022 and 2021 (tabular amounts in thousands of dollars, except share and per share amounts)Annual Report 2022
66
Cost
Land
Buildings
Leaseholds &
Improvements
Machinery &
Equipment
Office
Equipment
Construction
in Progress &
Deposits
Total
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)
Balance at December 31, 2021
$ 4,198
$ 18,518
$
1,865
$ 55,207
$ 11,899
$ 4,353
$ 96,040
Balance at January 1, 2022
$ 4,198
$ 18,518
$
1,865
$ 55,207
$ 11,899
$ 4,353
$ 96,040
Acquisition (note 10)
Additions (transfers)
Disposal
Effect of movements in
exchange rates
-
-
-
-
1,180
-
-
335
-
4,713
7,405
(54)
131
1,237
(16)
-
(1,511)
-
4,844
8,646
(70)
(16)
(47)
222
2,280
231
194
2,864
Balance at December 31, 2022
$ 4,182
$ 19,651
$ 2,422
$ 69,551
$ 13,482
$ 3,036
$ 112,324
Accumulated Depreciation
Balance at January 1, 2021
$
Depreciation for the year
Disposal
Effect of movements in
exchange rates
Balance at December 31, 2021
Balance at January 1, 2022
Depreciation for the year
Disposal
Effect of movements in
exchange rates
$
$
Balance at December 31, 2022
$
–
–
–
–
–
–
–
–
–
–
$
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
$
$ 12,916
$
1,246
$ 45,963
$ 10,763
$
826
-
(17)
128
-
2,908
(52)
703
(15)
190
1,795
181
$ 13,725
$
1,564
$ 50,614
$ 11,632
$
–
–
–
–
–
–
–
–
–
–
$ 68,483
3,556
(667)
(484)
$ 70,888
$ 70,888
4,565
(67)
2,149
$ 77,535
Carrying amounts
At December 31, 2021
At December 31, 2022
$ 4,198
$ 5,602
$
619
$ 9,244
$
1,136 $ 4,353 $ 25,152
$ 4,182 $ 5,926 $
858 $ 18,937 $
1,850
$ 3,036 $ 34,789
Depreciation is recorded in the statement of earnings as follows: cost of sales $4,098,000 (2021 – $3,198,000),
selling and distribution $nil (2021 – $nil) and general and administrative $467,000 (2021 – $358,000).
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2022 and 2021 (tabular amounts in thousands of dollars, except share and per share amounts)Hammond Power Solutions
67
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
Balance at January 1, 2021
$
6,187
$
Additions
Depreciation
Effect of movements in exchange rates
Balance at December 31, 2021
Balance at January 1, 2022
Additions
Disposal
Depreciation
Effect of movements in exchange rates
Office
Equipment
$
8
$
44
(16)
–
529
299
(290)
(3)
853
(1,668)
(135)
$
$
5,237
$
535
$
36
$
5,237 $
535 $
36 $
3,527
(466)
(2,159)
390
145
(47)
(273)
43
–
–
(15)
–
21
$
Total
6,724
1,196
(1,974)
(138)
5,808
5,808
3,672
(513)
(2,447)
433
6,953
Balance at December 31, 2022
$
6,529
$
403
$
Certain building leases maintained by the Group contain renewal options. Where practicable, the Group seeks
to include extension options in new leases to provide operational flexibility. The majority of the Group’s lease
payments related to its production facilities located in Mexico. The first renewal option commenced in May
2020, with annual lease payments of $621,000, and is for a five-year term. The Group retains rights to renew
this lease for 3 successive 5-year periods. The Group’s lease on its second Mexican production facility expires
March 31, 2023 and carries annual lease payments of $581,000. The Group is in negotiations with the lessor
to extend this lease. 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 $1,624 (2021 - $1,415))
December 31, 2022
December 31, 2021
$
$
1,044
$
1,044
2,077
3,121
$
2,250
3,294
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 2022 or 2021. The property is carried at cost. The estimated fair value of the property as at December
31, 2022 is $1,150,000 (2021 – $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 $148,000 (2021 – $139,000).
For the years ended December 31, 2022 and 2021 (tabular amounts in thousands of dollars, except share and per share amounts)Annual Report 2022
68
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 $131,000). The
operating expenses for this property were 225, 000 EUR (approximately $326,000) in 2022 and 169,000 EUR
(approximately $251,000) in 2021. Depreciation on the facility was recorded in the statement of earnings as
general and administrative expenses in the amount of $184,000 (2021 - $163,000). The estimated fair value of
the property as at December 31, 2022 is 1,566,000 Euros (approximately $2,272,000). The fair value was
determined based on independent available market evidence, based on comparable property sales, by an
independent valuator.
10. Corefficient
The Company 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. (“Corefficient “). Effective February 28, 2022, the Company and National
have agreed to divide the operations, with HPS retaining certain equipment, employees, obligations, and other
financial assets and liabilities, and National withdrawing certain assets and capital in exchange for redeeming
their ownership interest. The Corefficient name was also retained by National. The operation continues to
produce transformer cores to supply the Group’s facilities in Mexico.
Total consideration received by National in connection with this transaction was $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 installments, due monthly commencing March 2022.
As a result of this transaction, the Company now owns 100% of the equity and voting interests of the former
Corefficient (referred to here as “Corefficient”) and continued the business within Hammond Power Solutions
Latin America S. de R.L. de C.V. and continues to operate the entity as a wholly owned subsidiary of the Group.
As the Company has acquired control of the former joint venture, the transaction constitutes a business
combination. The Company has measured the fair value of its previously held interest in Corefficient immediately
prior to obtaining control and determined it to be equivalent to its carrying value.
The allocation of the fair value of the acquired business is as follows:
Cash
Accounts receivable and other assets
Inventories
Property, plant and equipment
Deferred future tax asset
Assets
Current liabilities
Fair value of acquired business
$
$
$
$
3,393
16,513
1,459
5,317
2,431
29,113
15,900
13,213
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2022 and 2021 (tabular amounts in thousands of dollars, except share and per share amounts)Hammond Power Solutions 69
The accounts receivable balance of $13,928,000, included in Accounts receiveable and other assets above, is
presented net of expected credit losses of $293,000. The contractual cash flows not expected to be collected is $nil.
Included in the Group’s consolidated results to February 28, 2022, the date of acquisition, the Group’s share
of income of investment in joint venture of $4,000 (2021 - $61,000).
The agreement includes a contingent consideration element relating to unrecognized tax loss carryforwards
generated by Corefficient, underwhich if the Company is able to utilize the losses following the business
combination, the Company must pay National 45% of the tax savings realized, to a maximum of $837,000. As at
the acquisition date, the fair value of the consideration was determined to be $nil.
The acquisition costs incurred related to this transaction during the year were $177,000 which were included
in general and administrative expense.
Included in the Group’s consolidated results for the twelve months ended December 31, 2022, is revenue of
$5,191,000 and net earnings of $2,828,000 recognized by Corefficient from the date of acquisition to December
31, 2022. If the Company had acquired Corefficient effective January 1, 2022, the revenue would have been
approximately $5,191,000 and there would have been net income of $2,834,000. The revenue for the consolidated
group would have been approximately $558,464,000 and net income of the consolidated group would have
been $44,834,000.
11.
Intangible assets
Intangible assets
Cost
Balance at January 1, 2021
Acquisition (note 30)
Additions
Technology
and Patents
Customer lists,
relationships
and branding
Externally
acquired
software
$
6,119
$
8,659
$
7,438 $
Total
22,216
5,084
1,016
(81)
Effect of movements in exchange rates
Balance at December 31, 2021
Balance at January 1, 2022
Additions
Effect of movements in exchange rates
$
$
1,710
–
(53)
7,776
7,776
–
33
3,374
–
(27)
–
1,016
(1)
$
$
12,006
12,006
$
$
8,453
$
28,235
8,453
$
28,235
–
(311)
686
(45)
686
(323)
Balance at December 31, 2022
$
7,809 $
1,695 $
9,094 $
28,598
For the years ended December 31, 2022 and 2021 (tabular amounts in thousands of dollars, except share and per share amounts)Annual Report 2022
70
Accumulated Amortization
Balance at January 1, 2021
Amortization for the year
Effect of movements in exchange rates
Balance at December 31, 2021
Balance at January 1, 2022
Amortization for the year
Effect of movements in exchange rates
$
4,630 $
7,181 $
4,504 $
$
$
216
(27)
833
(26)
422
(1)
4,819 $
7,988 $
4,925 $
4,819 $
7,988 $
4,925 $
304
(33)
872
(493)
2,610
(44)
16,315
1,471
(54)
17,732
17,732
3,786
(570)
Balance at December 31, 2022
$
5,090 $
8,367 $
7,491 $
20,948
Balance at
At December 31, 2021
At December 31, 2022
$
$
2,957 $
4,018 $
3,528 $
2,719 $
3,328 $
1,603 $
10,503
7,650
Amortization of $2,704,000 (2021 – $617,000) has been recognized in cost of sales, $120,000 (2021 – $123,000)
has been recognized in selling and distribution and $961,000 (2021 – $731,000) has been recognized in general
and administrative.
None of the intangible assets has been internally developed.
Research and development expenses of $425,000 (2021 –$945,000) have been recognized in cost of sales
in the consolidated statements of earnings. No research and development costs have been capitalized
(2021 – $nil).
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, 2022
December 31, 2021
$
$
12,216
$
–
(192)
12,024
$
10,908
1,422
(114)
12,216
The Company conducts its annual impairment assessment of CGUs which contain goodwill, as well as any
corresponding acquired long-lived assets including 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 2022 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.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2022 and 2021 (tabular amounts in thousands of dollars, except share and per share amounts)Hammond Power Solutions 71
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. (“Delta”) $2,180,000 (2021 – $2,180,000), Hammond
Power Solutions Private Limited (“India”) $8,226,000 (2021 – $8,527,000) and Mesta Electronics Inc. (“Mesta”)
$1,618,000 (2021 – $1,509,000).
For its 2022 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 the Company’s annual planning cycle, and is approved by the Board
of Directors. The values used in the cash flow projections are based on historical sales, internal growth rate
assumptions, and available market data.
India
Based on the Company’s projections, a five year cash flow forecast was completed and discounted to present-
value using discount rate of 18.8% (2021 - 20.0%). Through the five year cash flow projections, the Company’s
model also incorporated year 1 sales growth rates of 44.3% (2021 – 82.3%), which reflects additional growth
in manufacturing of a product line that was new for 2022 in India. The annual sales growth rates for year 2 to
year 5 are in the range of -9.1% – 19.0% (2021 – year 2 to year 5 – 10.5% – 36.2%) 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% (2021– 8%).
Delta
Based on the Company’s projections, a five year cash flow forecast was completed and discounted to present-
value using discount rate of 16.6% (2021 –12.3%). Through the five year cash flow projections, the Company’s
model also incorporated year 1 sales growth rates of 16.9% (2021 – 19.9%). The annual sales growth rates
for year 2 to year 5 are 2.4% - 3.9% (2021 – year 2 to year 5 – 3.0%) 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% (2021 – 2%).
Mesta
Based on the Company’s projections, a five year cash flow forecast was completed and discounted to
present-value using discount rate of 27.4 % (2021 – 26.8 %). Through the five year cash flow projections,
the Company’s model also incorporated annualized year 1 sales growth rate of 83.0 % (2021 - 304 %). The
annual sales growth rates for year 2 to year 5 are 3% (2021 – 5 % – 15.4 %) 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% (2021 – 3.0 %). This was then compared to the carrying value of the CGU to
determine if there was impairment.
For the years ended December 31, 2022 and 2021 (tabular amounts in thousands of dollars, except share and per share amounts)Annual Report 2022
72
Management’s approach to determining projected revenue includes consideration of current bookings,
committed product line expansions (for which no additional capital expenditure is required), consultation with
its salesforce and historical results. The Company’s process for determining projected gross margin rates
includes consideration of current pricing information from suppliers and historical gross margin rates realized
by the Company. The Company determines the terminal growth rate with reference to published economic data
pertaining to the applicable industry and country in which the cash generating unit operates. The discount rate
is determined with reference to the cash generating unit’s weighted average cost of capital.
While management believes that estimates of future cash flows and discount rates are reasonable, different
assumptions regarding future cash flows or discount rates could materially affect the outcome of the impairment
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, 2022, a discount rate increase of 7.6% or an 8.7% 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, 2021 – a discount rate increase of 4.8% or an 8.2% lower terminal growth rate).
For the Delta and Mesta 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 annual impairment assessment it was determined that the recoverable amount of the
CGUs exceeded their respective carrying values and no impairment existed as at December 31, 2022.
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 plus 0.0% to Canadian bank prime rate plus 0.4% 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 Euro revolver and 250,000 Euro overdraft facility, as well as a
70,000 EUR letter of credit line. The revolver facility bears interest at 2.25% plus the relevant Market Index (2021
– plus margin of 2.25%, Euribor on December 31, 2021 – 1.75%, Euribor on December 31, 2021 – 0.499%).
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2022 and 2021 (tabular amounts in thousands of dollars, except share and per share amounts)Hammond Power Solutions
73
Hammond Power Solutions Private Limited maintains an additional demand credit facility for an unsecured
working capital loan up to 515,000,000 Indian Rupee (INR”) (2021 – 515,000,000 INR) consisting of the sub-
facilities of a 40,000,000 INR (2021 – 90,000,000 INR) short-term working capital demand loan, a 475,000,000
INR (2021 – 425,000,000 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, 2022, there was $nil Canadian dollar equivalent
of Rupees drawn against the working capital demand loan (2021 – $nil). As at December 31, 2022 there was
265,106,000 INR, Canadian equivalent $4,347,000 (2021 – 263,604,000 INR, Canadian equivalent $4,481,000)
drawings against the bank guarantees.
Based on exchange rates in effect at December 31, 2022, the combined Canadian dollar equivalent available
across all facilities, prior to any utilization of the facilities was $82,122,000 (2021 – $77,788,000).
As at December 31, 2022, the Canadian dollar equivalent outstanding under the U.S. dollar revolving credit
facility was $1,531,000, consisting of $1,531,000 Canadian dollars drawn and the Canadian equivalent of $nil
U.S. dollars drawn (2021 – $14,777,000 – consisting of $12,598,000 Canadian dollars drawn and the Canadian
equivalent of $2,179,000 U.S. dollars drawn). As well, $4,623,000 (2021 – $4,490,000) Canadian dollar equivalent
of Euros was outstanding under the Euro facility, and $nil (2021 – $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, 2022 and 2021 (tabular amounts in thousands of dollars, except share and per share amounts)Annual Report 2022 74
14. Lease and other long-term liabilities
Lease liabilities
Contingent consideration (note 27)
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
Amounts recognized in statement of operations
December 31, 2022
December 31, 2021
$
$
8,593
$
2,846
11,439
$
4,434
7,005
7,980
1,509
9,489
3,128
6,361
December 31, 2022
December 31, 2021
$
$
$
$
$
$
3,198
$
5,905
-
9,103
(510)
8,593
2,925
5,668
$
$
$
$
$
2,762
5,457
94
8,313
(333)
7,980
2,512
5,468
Year Ended
December 31, 2022
Year Ended
December 31, 2021
Interest on lease liabilities
$
232
$
254
Amounts recognized in statement of cash flows
Year Ended
December 31, 2022
Year Ended
December 31, 2021
Payment of lease liabilities
$
3,004
$
2,724
15. Commitments
December 31, 2022
December 31, 2021
Capital expenditure commitments
$
3,484
$
483
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2022 and 2021 (tabular amounts in thousands of dollars, except share and per share amounts)Hammond Power Solutions 16.
Income taxes
Income tax expense
Current tax expense
Current period
Deferred tax recovery
75
2022
2021
$
15,234
$
7,110
Origination and reversal of temporary differences
Decrease in tax rate
(2,894)
1
(2,893)
Total income tax expense
$
12,341
$
(1,071)
35
(1,036)
6,074
Reconciliation of effective tax rate
2022
2022
2021
2021
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%
(12.82%)
0.00%
$
44,828
$
12,341
57,169
22,582
(7,328)
1
39.50%
(12.49%)
0.16%
15,176
6,074
21,250
8,394
(2,654)
34
income
(0.50%)
(284)
0.23%
49
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
(1.89%)
(1,081)
(1.81%)
(385)
(4.05%)
(2,314)
0.00%
0.84%
0.50%
-
478
287
2.29%
0.15%
0.00%
0.55%
487
32
–
117
21.58% $
12,341
28.58% $
6,074
Unrecognized temporary differences
At December 31, 2022, pre-tax temporary differences of $127,871,000 (2021 – $94,347,000) 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 $15,984,000 (2021– $11,793,000) based on current tax rates.
For the years ended December 31, 2022 and 2021 (tabular amounts in thousands of dollars, except share and per share amounts)Annual Report 2022
76
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
Provisions
December 31, 2022
December 31, 2021
$
9,561
$
30,688
4,552
1,201
13,529
32,831
3,309
549
$
46,002
$
50,218
The financial interests deductible, provisions and $9,453,000 of tax losses carry forward indefinitely and relate
to HPS S.p.A. and Continental Transformers s.r.l. The tax losses of $108,000 carry forward to 2023 and relate to
Montran S.A. de C.V. The basis difference in subsidiary, when realized, will provide the Company a capital loss
that carries forward indefinitely. The benefit of these items has not been reflected in the consolidated financial
statements as it is uncertain as to whether the Company will be able to utilize the deductions.
Recognized deferred tax assets and liabilities
Deferred tax assets and liabilities are attributable to the following:
Assets
2022
Property, plant and equipment
$
1,166 $
Intangible assets
Scientific research and experimental
development
Inventories
Long-term lease
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)
2021
811
91
44
225
–
1,950
593
274
2,263
2,164
1,339
9,754
(7,384)
Liabilities
2022
2021
$
(3,539) $
(3,552)
(468)
(555)
(17)
–
(3,832)
–
(161)
(2)
–
–
–
(8,019)
7,902
(36)
–
(3,402)
–
(159)
(77)
(4)
–
–
(7,785)
7,384
(401)
415
44
653
–
1,833
1,445
184
3,299
5,140
1,736
15,915
(7,902)
$
8,013 $
2,370 $
(117) $
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2022 and 2021 (tabular amounts in thousands of dollars, except share and per share amounts)Hammond Power Solutions 77
Movement in temporary differences during the year ended December 31, 2022:
Balance
December 31, 2021
Recognized in
retained earnings
Recognized in
profit or loss
Recognized
in other
comprehensive
income
Balance
December 31, 2022
Property, plant and equipment
$
2,741
$
(392)
$
24
$
Intangible assets
Scientific research and
experimental development
Inventories
Long-term lease
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
464
(8)
(225)
3,402
(1,950)
(434)
(197)
(2,259)
(2,164)
(1,339)
–
–
–
–
–
–
–
(255)
(1,799)
–
(411)
(19)
(428)
430
117
(850)
15
(785)
(1,177)
(397)
$
(1,969) $
(2,446) $
(3,481) $
$
$
588
(2,893)
Movement in temporary differences during the year ended December 31, 2021:
–
–
–
–
–
–
–
–
–
–
–
–
$
$
2,373
53
(27)
(653)
3,832
(1,833)
(1,284)
(182)
(3,299)
(5,140)
(1,736)
(7,896)
For the years ended December 31, 2022 and 2021 (tabular amounts in thousands of dollars, except share and per share amounts)Annual Report 2022 78
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
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)
$
(973) $
–
–
–
–
–
–
–
–
–
–
–
–
Foreign exchange
Income tax expense
17.
Share capital
(a) Authorized:
$
(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)
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.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2022 and 2021 (tabular amounts in thousands of dollars, except share and per share amounts)Hammond Power Solutions 79
(b) Issued:
9,056,624 Class A subordinate voting shares (2021 – 9,011,624)
2,778,300 Class B common shares (2021 2,778,300)
11,834,924 Total A and B shares (2021 – 11,789,924)
December 31, 2022
December 31, 2021
$
$
15,233
$
14,879
7
7
15,240
$
14,886
During the year ended December 31, 2022, 45,000 Class A shares were issued upon exercise of stock options,
resulting in cash proceeds of $298,000 and a transfer of $56,000 from contributed surplus. 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.
The following dividends were declared and paid by the Company:
38.5 cents per Class A subordinate voting shares (2021 – 34 cents)
38.5 cents per Class B common shares (2021 – 34 cents)
December 31, 2022
December 31, 2021
$
$
$
3,486
1,070
4,556
$
3,064
945
4,009
(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, 2022, or the year ended December 31, 2021.
Options outstanding and exercisable as at December 31, 2022:
December 31, 2022
December 31, 2021
Number of
options
Weighted
average
exercise price
Number of
options
Weighted
average
exercise price
Outstanding, beginning of year
Exercised
Cancelled
Expired
115,000
$
(45,000)
–
–
6.36
6.62
–
–
190,000
$
(45,000)
(10,000)
(20,000)
Outstanding, end of year
70,000
$
6.20
115,000
$
6.77
7.30
7.50
7.50
6.36
For the years ended December 31, 2022 and 2021 (tabular amounts in thousands of dollars, except share and per share amounts)Annual Report 2022 80
Options outstanding
Options exercisable
Exercise price
$
6.20
Number
of options
outstanding
70,000
Weighted
average
remaining
contractual life
(years)
Weighted
average
exercise price
Number
of options
exercisable
Weighted
average
exercise price
1 $
6.20
70,000 $
6.20
Terms and conditions of the stock option plan
Options grants detailed below vest as follows:
• Options granted to directors vest immediately.
• Options granted to officers and senior management vest evenly over two or three years from the grant date,
with one-half of the grant vesting immediately for grants with a two-year vesting period, and one-third of the
grant vesting immediately for grants with a three-year vesting period.
The contractual life of the options granted below is seven years from the grant date.
Option grant date
March 10, 2016
Total stock options outstanding
(d) Deferred Share Units
Number of
options Recipients
Board of Directors and Officers
70,000
70,000
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.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2022 and 2021 (tabular amounts in thousands of dollars, except share and per share amounts)Hammond Power Solutions
The movement in DSUs for the years ended December 31, 2021 and 2022 is as follows:
81
Balance at January 1, 2021
DSUs issued
DSUs redeemed
Balance at December 31, 2021
Balance at January 1, 2022
DSUs issued
DSUs redeemed
Balance at December 31, 2022
Number of
DSUs
Closing Share
Price
160,534
$
61,799
(20,941)
201,392
$
8.47
9.20
7.41
11.99
Number of
DSUs
Closing Share
Price
201,392
$
44,152
(31,569)
213,975
$
11.99
12.49
11.91
20.12
An expense of $2,183,000 (2021 – $1,210,000) was recorded in general and administrative expenses. The liability
of $4,153,000 (2021 $2,346,000) related to these DSUs is included in accounts payable and accrued liabilities.
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
Weighted average number of shares outstanding including effects of
dilutive potential ordinary shares
Reconciliation of weighted average number of shares outstanding:
Weighted average number of shares outstanding used to calculate
$
$
$
$
2022
3.79
$
2021
1.29
44,828 $
11,833,674
15,176
11,778,674
3.77
$
1.28
44,828
$
11,876,359
15,176
11,824,822
basic earnings per share
Adjustment for dilutive effect of stock option plan
11,833,674
42,685
11,778,674
46,148
Weighted average number of shares outstanding used to calculate
diluted earnings per share
11,876,359
11,824,822
As at December 31, 2022, nil options (2021 – nil) are excluded from the diluted average number of shares
calculation as their effect would have been anti-dilutive.
For the years ended December 31, 2022 and 2021 (tabular amounts in thousands of dollars, except share and per share amounts)Annual Report 2022 82
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 $1,764,000 (2021 – of $1,748,000) matches the employee contributions. The Group’s contributions related
to its defined contribution pension plans are recorded as follows: $1,309,000 (2021 – $1,313,000) in cost of
sales, $222,000 (2021 – $216,000) in selling and distribution, and $233,000 (2021 - $219,000) in general
and administrative.
20. Provisions
Balance at January 1, 2021
Provisions made during the
period
Provisions used during the
period
Balance at December 31, 2021
Balance at January 1, 2022
Provisions made during the
period
Provisions used during the
period
Balance at December 31, 2022
Current portion
Non-current portion
Warranties
Warranties
Site
restoration
Benefits and
incentives
Total
$
1,667
$
231
$
230
$
2,128
161
130
142
433
(110)
1,718
$
1,718 $
188
(230)
1,676 $
1,676 $
–
$
$
$
$
$
$
(145)
216
$
216 $
(114)
258
$
258 $
130
(149)
779
(91)
197 $
946 $
52 $
145 $
112
$
834 $
(369)
2,192
2,192
1,097
(470)
2,819
1,840
979
The provision for warranties relates mainly to transformers sold during the years ended December 31, 2022 and
December 31, 2021. The provision is based on estimates made from historical warranty data associated with
similar products and claims experience. The Group expects to incur most of the liability over the next year.
Site restoration
The Group has committed to undertaking a joint remediation plan for the Glen Ewing property with the owner
of an adjoining industrial property and the co-owner of the property. The Group has recorded a liability for its
estimated portion of the joint remediation.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2022 and 2021 (tabular amounts in thousands of dollars, except share and per share amounts)Hammond Power Solutions 83
Benefits and incentives
The benefit provision relates to statutory pension and leave benefits related to the India facility. Substantially
all of this benefit is long-term. An incentive agreement dependent on revenue achievements was entered into in
2022 given Mesta’s strong performance, scheduled to be paid in February 2024.
21. Sales and deferred revenue
Sales have been captured based on the geography of where the product was sold, as follows:
Canada
United States and Mexico
India
2022
2021
$
184,495
$
349,710
24,259
130,184
231,738
18,280
$
558,464
$
380,202
Movements in the Group’s contract liabilities (deferred revenue) was as follows:
Opening balance
Revenue recognized
Increase in contract liabilities
Ending balance
2022
5,027
$
(5,027)
10,607
10,607
$
$
$
2021
204
(204)
5,027
5,027
From time to time, the Company 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
During 2020 and 2021, the Government of Canada implemented the Canada Emergency Wage Subsidy
program (“CEWS”) that provided 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 2021, the Company has qualified for
subsidy payments. The subsidy amounts relating to 2021 was 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.
No subsidy amounts were recorded in 2022.
For the years ended December 31, 2022 and 2021 (tabular amounts in thousands of dollars, except share and per share amounts)Annual Report 2022
84
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 (2021 – 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 924,802 (2021
– 921,808) Class A subordinate voting shares of the Company, representing approximately 10.2% (2021 – 10.2%)
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 $1,432,000
(2021 – $1,283,000).
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
2022
3,499
$
2,183
5,682
$
2021
3,511
1,210
4,721
$
$
2022
2022
Wages and salaries
$
69,624
$
60,492
Group portion of government pension and employment pension and
employment benefits
Contributions to defined contribution plans
17,731
1,763
$
89,118 $
15,467
1,748
77,707
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2022 and 2021 (tabular amounts in thousands of dollars, except share and per share amounts)Hammond Power Solutions
85
25. Change in operating working capital
The table below depicts the receipt of (use of) cash for working capital purposes by the Group:
Accounts receivable
Inventories
Prepaid expenses and other assets
Accounts payable and accrued liabilities
Deferred revenue
Provisions
Settlement of derivatives
Foreign exchange
2022
2021
$
1,552 $
(42,427)
(870)
13,038
5,580
(470)
89
3,969
(18,836)
(12,705)
(666)
24,526
4,823
(369)
(1,952)
402
$
(19,539) $
(4,777)
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
India
Investment in properties
Canada
Italy
2022
2021
184,495 $
349,710
24,259
558,464 $
15,458 $
8,992
12,718
4,574
41,742 $
1,044 $
2,077
3,121 $
130,184
231,738
18,280
380,202
15,091
8,686
3,439
3,744
30,960
1,044
2,250
3,294
$
$
$
$
$
$
For the years ended December 31, 2022 and 2021 (tabular amounts in thousands of dollars, except share and per share amounts)Annual Report 2022 86
Investment in joint venture
Mexico
Intangibles, net
Canada
United States
India
Goodwill
Canada
United States
India
27. Financial instruments
Fair value
2022
2021
- $
13,279
1,588 $
4,400
1,662
7,650 $
2,180
$
1,618
8,226
12,024 $
3,856
4,664
1,983
10,503
2,180
1,509
8,527
12,216
$
$
$
$
$
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 liability of $276,000 as at December 31, 2022 (2021 – net asset of $89,000) and
are included in Level 2 in 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. The gains and losses from these contracts are grouped with foreign exchange gain on the statement
of operations. The contingent consideration liability is valued at $2,846,000 as at December 31, 2022 (2021 -
$1,509,000) and is included in Level 3 of the fair value hierarchy. There have been no transfers between levels in
2022 or 2021. The gains and losses from these contracts are grouped with foreign exchange gain on the statement
of operations.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2022 and 2021 (tabular amounts in thousands of dollars, except share and per share amounts)Hammond Power Solutions The contingent consideration is comprised of three components:
Current
Non-current
Balance at December 31, 2021
Current
Non-current
Balance at December 31, 2022
• Employee performance
Employee
performance
Revenue
achievement
Deferred
tax losses
$
$
$
$
$
$
$
616
595
1,211
672
–
672
$
–
$
298
298
–
1,337
1,337
$
$
$
$
$
$
–
–
–
837
–
837
$
87
Total
616
893
1,509
1,509
1,337
2,846
To determine the fair value of the contingent consideration, Management calculated the present value of the
expected future payments of four installments of approximately $325,000, discounted using a risk-adjusted
discount rate of 3.5%. Two of the payments were made starting January 2022 for a total of $651,000 paid
to date. Management considers the risk of non-payment to be low. The estimated fair value would increase
(decrease) if:
°
the risk-adjusted discount rate were lower (higher)
• Revenue achievement
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%. Management considers the risk of repayment to be low.
The estimated fair value would increase (decrease) if:
°
the risk-adjusted discount rate were lower (higher)
• Deferred tax asset – unused tax losses
To determine the fair value of the contingent consideration, Management assessed the probability of
realization of future tax losses based on the current year profitability of the entity and expected future
forecasted earnings. It was determined that all available losses will be expected to be realized, for which
the benefit component for National’s 45% realization of certain tax losses. As of December 31, 2022 it was
determined to be probable that sufficient future taxable profit will be available against which the unused tax
losses can be recovered and utilized. The future tax asset value related to these losses was $1,861,000 and a
corresponding liability to National of $837,000.
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.
The employee performance and revenue achievement increases of $940,000 were recorded in general and
administrative expenses. The deferred tax asset value of $837,000 was recorded in other expenses.
For the years ended December 31, 2022 and 2021 (tabular amounts in thousands of dollars, except share and per share amounts)Annual Report 2022
88
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, 2022, the Company had outstanding forward foreign exchange contracts to
buy and sell the following contracts, all with maturity dates in January 2023.
The employee performance and revenue achievement increases were recorded in general and administrative
expenses. The deferred tax asset value was recorded in other expenses.
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
72,000
7,405
16,467
Buy/Sell
Sell Currency
Buying Currency
Amount of Buy
Currency
SELL
SELL
SELL
SELL
SELL
EUR
EUR
USD
USD
USD
CAD
USD
CAD
INR
MXN
24,100
10,600
36,000
3,689
21,500
Traded
Rate
1.4485
1.0700
1.3374 - 1.3543
81.6400 – 82.5900
19.5400
Traded
Rate
1.3942 – 1.4502
1.0434 – 1.0715
1.3538
82.4000
19.5010 – 19.6200
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2022 and 2021 (tabular amounts in thousands of dollars, except share and per share amounts)Hammond Power Solutions 89
At December 31, 2021, the Company has 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
Buy Currency
Selling Currency
Amount of Buy
Currency
SELL
SELL
SELL
SELL
SELL
EUR
EUR
USD
USD
USD
CAD
USD
CAD
INR
MXN
24,100
10,600
36,500
4,257
29,000
Traded
Rate
1.4390
1.1385
1.2620 - 1.2652
74.7100 - 74.8800
20.530
Traded
Rate
1.4288-1.4391
1.1298 – 1.1385
1.2614
74.4700
20.6100 – 20.9530
As at December 31, 2022 the Group has recognized a net unrealized expense of $276,000 representing the fair
value of these forward foreign exchange contracts, comprised of a liability of $276,000 included within accounts
payable and accrued liabilities. As at December 31, 2021 the Group recognized a net unrealized gain of $89,000,
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.
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.
For the years ended December 31, 2022 and 2021 (tabular amounts in thousands of dollars, except share and per share amounts)Annual Report 2022
90
Currency risk:
The Group operates internationally and is exposed to foreign exchange risk from various currencies, primarily
U.S. dollars, Mexican Pesos, the Euro and the Indian Rupee. Foreign exchange risk arises mainly from U.S.
dollar denominated purchases in Canada and Canadian sales to the U.S. as well as recognized financial assets
and liabilities denominated in foreign currencies. The Company manages its foreign exchange risk by having
geographically diverse manufacturing facilities and purchasing U.S. dollar raw materials in Canada. The Company
also monitors forecasted cash flows in foreign currencies and attempts to mitigate the risk by entering into
forward foreign exchange contracts. Forward foreign exchange contracts are only entered into for the purposes
of managing foreign exchange risk and not for speculative purposes.
The following table represents the Group’s balance sheet exposure to currency risk as at December 31, 2022:
U.S. Dollars
Mexican Pesos
Euros
Indian Rupees
2022
2021
Cash
$
12,023
$
12,855
Accounts receivable
41,666
31,109
Long-term lease
receivable
Bank operating lines
of credit
Accounts payable
Lease obligation
Contingent
consideration
–
–
–
(1,724)
(18,003)
(6,506)
(5,967)
(2,100)
(1,194)
2022
14,881
16,072
–
–
2021
2022
2021
2022
2,323
€
675
€
1,072
338,036
2021
10,871
443
262,828
223,097
17,650
–
–
575
1,957
2,083
(3,063)
(3,072)
–
–
–
–
(23,226)
(16,464)
(14,265)
(160)
(18)
(346,452)
(223,205)
–
–
–
–
–
–
–
–
(773)
(3,504)
–
–
Net exposure
$
(27,080) $
11,853
14,489
5,708
€
(16)
€ 508
253,639
7,259
A one cent ($0.01) decline in the Canadian dollar against the U.S dollar as at December 31, 2022 would have
decreased net earnings by $487,000 and increased equity by $352,000. 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, 2022 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, 2022 would have
decreased net earnings by $42,000 and impacted equity by $nil. Inversely, a one cent ($0.01) increase in the
Canadian dollar against the Euro as at December 31, 2022 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, 2022 would
have increased net earnings and equity by $42,000. Inversely, a one cent ($0.01) increase in the Canadian dollar
against the Indian Rupee as at December 31, 2022 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, 2022 would have
decreased net earnings by $14,000 and increased equity by $9,000. Inversely, a one cent ($0.01) increase in the
Canadian dollar against the Peso as at December 31, 2022 would have had an equal but opposite effect.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2022 and 2021 (tabular amounts in thousands of dollars, except share and per share amounts)Hammond Power Solutions
91
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, 2022, the Group’s accounts receivable are not subject to significant
concentrations of credit risk. The long-term lease receivable is subject to credit risk, which is mitigated by
the security of the related plant. The Company’s maximum exposure to credit risk associated with the Group’s
financial instruments is limited to their carrying amount.
The Group’s exposure to customer credit risk is influenced mainly by the individual characteristics of each
customer. However, management also considers the factors that may influence the credit risk of its customer
base, including the default risk associated with the industry and country in which customers operate.
Management has a credit policy under which each new customer is analysed individually for creditworthiness
before the Group’s standard payment and delivery terms and conditions are offered. The Group’s review includes
external ratings, if they are available, financial statements, credit agency information, industry information and
in some cases bank references. Sale limits are established for each customer and reviewed quarterly. Any sales
exceeding those limits require approval from Executive management.
The Group limits its exposure to credit risk from trade receivables by establishing a reasonable payment
period. Many of the Group’s customers have been transacting with the Group for a number of years, and none
of these customers’ balances have been written off or are credit-impaired at the reporting date.
In monitoring customer credit risk, customers are grouped according to their credit characteristics, including
their geographic location, industry, trading history with the Group and existence of previous financial difficulties.
An allowance account for accounts receivable is used to record impairment losses unless the Group is
satisfied that no recovery of the amount owing is possible; at which point the amounts are considered to be
uncollectible and are written off against the specific accounts receivable amount attributable to a customer. The
number of days outstanding of an individual receivable balance is the key indicator for determining whether an
account is at risk of being impaired.
Expected credit losses are required to be measured through a loss allowance at an amount equal to the
12-month expected credit losses or full lifetime expected credit losses. The Group has used past due information
to determine that there have been no significant increases in credit risk since initial recognition. There are
balances in excess of 30 days past due but the Group does not presume that credit risk has increased given
the characteristics of the Group’s customers, the industries in which they operate, the customer payment track
records and the nature of the products the Group sells.
For the years ended December 31, 2022 and 2021 (tabular amounts in thousands of dollars, except share and per share amounts)Annual Report 2022
92
During the year, the expected credit losses for trade accounts receivables increased $447,000 (2021 –
decreased $218,000), for which an expense (2021 – recovery) was recognized in general and administrative
expenses. The aging of accounts receivable and the related allowance is as follows:
December 31, 2022
December 31, 2021
Gross
Allowance
Gross
Allowance
$
63,877
$
– $
48,820 $
20,035
3,505
2,090
–
716
2,090
18,716
5,963
864
$
89,507
$
2,806 $
74,363 $
–
–
1,495
864
2,359
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
date was:
Cash and cash equivalents
Accounts receivable
Lease receivable
Carrying Amount
December 31, 2022
December 31, 2021
$
$
28,126 $
86,701
2,839
117,666 $
20,905
72,004
2,993
95,902
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2022 and 2021 (tabular amounts in thousands of dollars, except share and per share amounts)Hammond Power Solutions The maximum exposure to credit risk for accounts receivable at the reporting date by geographic region was:
93
Canada
United States
Mexico
Italy
India
Interest rate risk:
Carrying Amount
December 31, 2022
December 31, 2021
$
23,050 $
55,390
7,705
553
3
25,097
39,546
1,257
334
5,770
$
86,701 $
72,004
Interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because of changes
in market interest rates. Financial assets and financial liabilities with variable interest rates expose the Group to
cash flow interest rate risk. Changes in market interest rates also directly affect cash flows associated with the
Group’s bank operating lines of credit that bear interest at floating interest rates.
The Group manages its interest rate risk by minimizing the bank operating lines of credit balances by applying
excess funds while maintaining the liquidity necessary to conduct operations on a day-to-day basis as well as
actively monitoring interest rates. A 1% increase or decrease in interest rates as at December 31, 2022 would
increase or decrease net earnings by approximately $62,000 (2021 – $193,000) respectively.
Commodity price risk:
A large component of the Group’s cost of sales is comprised of copper and steel, the costs of which can vary
significantly with movements in demand for these resources and other macroeconomic factors. To manage its
exposure to changes in commodity prices, the Group will enter into supply contracts with certain suppliers, and
from time to time will enter into forward commodity purchase contracts. As at December 31, 2022, no forward
commodity purchase contracts were outstanding (2021 – 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, 2022 and 2021 (tabular amounts in thousands of dollars, except share and per share amounts)Annual Report 2022
94
The following are the carrying amounts and related anticipated contractual maturities of the Group’s financial
liabilities:
December 31, 2022
Carrying
amount
1 year or less
1-2 years
2-5 years
Bank operating lines of credit
$
6,154 $
6,154
$
– $
Accounts payable and
accrued liabilities
Contingent consideration
Derivative liabilities
92,862
2,846
276
92,862
1,509
276
–
1,337
–
$
101,301 $
99,964
$
1,337 $
–
–
–
–
–
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
70,642
1,509
91
70,642
616
91
–
595
–
$
91,509 $
90,616 $
595 $
–
–
298
–
298
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2022 and 2021 (tabular amounts in thousands of dollars, except share and per share amounts)Hammond Power Solutions 95
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, 2022
$
19,267
$
7,980
$
1,509
$
14,886
$
106,575
$
150,217
(13,113)
–
(1,596)
–
–
–
–
–
233
–
–
(3,004)
–
(651)
86
–
–
–
–
–
–
298
–
–
–
–
–
–
(4,556)
–
(13,113)
(651)
(1,277)
298
(4,556)
(3,004)
$
(14,709)
$
(2,771) $
(565)
$
298
$
(4,556) $
(22,303)
1,596
–
–
–
–
–
–
108
3,199
590
(513)
–
154
–
–
–
–
1,748
–
–
–
–
–
–
–
$
–
–
–
–
–
–
–
–
44,828
1,596
262
3,199
590
(513)
1,748
$
6,882
56
44,828
$
$
44,828
146,847
$
$
44,884
179,680
changes
$
1,596
$
3,384
$
1,902
$
Equity-related
Exercise of stock options
Net income
Total equity-related other
changes
Balance December 31, 2022
$
$
–
–
–
6,154
$
$
–
–
–
8,593
$
$
–
–
–
2,846
$
$
56
–
56
15,240
Advances of bank operating
lines of credit, net
Payment of contingent
consideration
Interest payments
Exercise of stock options
Cash dividends paid
Repayment of lease liability
Total changes from
financing cash flows
Other changes
Liability-related
Interest expense
Foreign exchange
Non-cash additions to lease
liabilities
Non-cash disposal to lease
liabilities (note 10)
Non-cash disposal to lease
liabilities (note 10)
Non-cash additions to
contingent consideration
(note 30)
Total liability-related other
For the years ended December 31, 2022 and 2021 (tabular amounts in thousands of dollars, except share and per share amounts)Annual Report 2022
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 cash flows
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
96
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
3,194
(1,301)
–
–
–
–
254
–
–
(2,724)
–
–
–
–
–
–
–
329
–
–
–
–
–
(4,009)
–
3,194
(1,047)
329
(4,009)
(2,724)
$
1,893
$
(2,470) $
–
$
329
$
(4,009) $
(4,257)
1,301
–
–
–
–
(65)
1,195
–
8
–
–
1,501
–
–
–
–
–
$
–
–
–
–
–
–
15,176
1,301
(57)
1,195
1,501
$
3,940
66
15,176
$
$
15,176
106,575
$
$
15,176
150,217
other changes
$
1,301
$
1,130
$
1,509
$
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
14,886
28. Capital risk management
The Group’s objective is to maintain a strong capital base so as to maintain investor, creditor and market
confidence and to sustain future business development. The Group includes cash, bank operating lines, long-
term debt and equity, comprising of share capital, contributed surplus and retained earnings in the definition of
capital. The Group is not subject to externally imposed capital requirements and there has been no change with
respect to the overall capital risk management strategy during the year ended December 31, 2022.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2022 and 2021 (tabular amounts in thousands of dollars, except share and per share amounts)Hammond Power Solutions
97
The following table sets out the Group’s capital quantitatively at the following reporting dates:
Cash and cash equivalents
Bank operating lines of credit
Lease liabilities
Contingent consideration
Share capital
Contributed surplus
Retained earnings
December 31, 2022
December 31, 2021
$
28,126
$
(6,154)
(8,593)
(2,846)
15,240
2,376
146,847
$
174,996
$
20,905
(19,267)
(7,980)
(1,509)
14,886
2,432
106,575
116,042
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.
(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.
For the years ended December 31, 2022 and 2021 (tabular amounts in thousands of dollars, except share and per share amounts)Annual Report 2022 98
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.
Mesta’ annual revenues for 2019 and 2020 ranged from approximately $4,178,000 - $6,430,000.
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
$
$
$
$
$
$
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 component for employee performance during the two years following
the closing for up to $1,267,000 (2021 – $1,264,000). Two payments have been made under this component for
a total of $651,000. The remaining liability has been valued at $672,000 (2021 – $1,205,000) and is due in two
remaining quarterly installments of equal amounts payable to the remaining selling shareholders.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2022 and 2021 (tabular amounts in thousands of dollars, except share and per share amounts)Hammond Power Solutions 99
The transaction includes a second contingent consideration component of up to $1,337,000 (2021 –
$1,257,500), payable 45 days after the third anniversary of the closing date. The liability payment is contingent on
management achieving certain revenue targets, and has been recognized at $1,337,000 (2021 – $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, 2022.
The acquisition costs incurred related to this transaction during 2021 were $174,000 which were included in
general and administrative expense.
Included in the Group’s consolidated results for the twelve months ended December 31, 2022, is revenue of
$14,407,000 and net earnings of $7,365,000. Revenue of $1,042,000 and net earnings of $81,000 was 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
Dividends
On March 7, 2023, the Company declared a dividend of twelve and a half cents ($0.125) per Class A subordinate
voting shares of HPS and a quarterly cash dividend of twelve and half cents ($0.125) per Class B common shares
of HPS payable on March 30, 2023 to shareholders of record at the close of business on March 23, 2023. The
ex-dividend date is March 22, 2023.
For the years ended December 31, 2022 and 2021 (tabular amounts in thousands of dollars, except share and per share amounts)Annual Report 2022
100
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
India
Hammond Power Solutions
Private Limited
Plot No.6A, Phase-1, IDA Pashamylaram,
Patancheru Mandal, Sangreddy District,
Telangana, India 502307
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
Mexico
Hammond Power Solutions Latin
America 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
Annual General Meeting of Shareholders to be held:
Thursday, May 11, 2023
1:30 p.m. (EST)
Cutten Fields (The Cutten Room)
190 College Avenue East
Guelph, Ontario N1H 6L3
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
120 Victoria Street South,
Kitchener, ON N2G 0E1
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
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 2022
HAMMONDPOWERSOLUTIONS.COMTHE BEST WAY TO PREDICT THE FUTURE IS TO CREATE IT