Hammond Power Solutions Annual Report 2023

Plain-text annual report

ANNUAL REPORT 2023 Breaking New Ground 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. What’s inside BUSINESS HIGHLIGHTS CORPORATE HIGHLIGHTS SHAREHOLDERS MESSAGE OUR PURPOSE LOOKING AHEAD REVIEW OF OPERATIONS YEAR IN REVIEW MANAGEMENT’S DISCUSSION & ANALYSIS AUDIT REPORT FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3 4 6 8 10 12 16 18 41 44 49 COMPANY INFORMATION 100 1 Annual Report 2023It’s been a groundbreaking year. The term “groundbreaking” has a double meaning. On one hand, it’s about physically breaking the ground to construct something new or expand an existing structure. On the other hand, it signifies starting something innovative or advancing beyond past achievements. After three years of strong growth, we embarked on a bold plan to increase our capacity to meet future demand, with investments across North America. These investments include new construction and the expansion of existing facilities. As we build physical buildings to grow our business, we are also building an organization that will support our progress in innovation, sustainability and corporate responsibility. Over the last couple of years, we’ve undergone substantial changes, giving us more resources to explore new directions, starting with venturing into power quality beyond dry-type transformers. Acquiring complementary technologies is a strategic move to leverage our strong engineering capabilities and extensive reach in distribution and OEM markets. Our goal is to broaden the range of solutions we offer, all while maintaining the high standards of quality, service and ease of business that our customers expect. 2 Hammond Power Solutions2023 Business Highlights HPS kept moving up, seeing growth not only in our usual commercial, industrial, mining and oil and gas markets, but also in the emerging areas of EV charging, data centres and renewables. We kicked off a plan to increase our capacity, aiming to hit a global capacity of over $800 million by the end of 2024 and over $900 million by the end of 2025. Sales kept growing in all areas and markets, especially in the U.S. distribution channel, OEM and private label channels. As we grow, we have to take care to maintain the high service and quality levels that our customers have come to expect. We created a new Power Quality business unit putting even more focus on growth and making new products. At the same time, we continued to develop new products and forming strong partnerships with other companies to make sure this part of our business keeps growing. Sales in India hit a new high, exceeding over $40 million. We continue to see India and Southeast Asia as an area of growth for our liquid-filled business as we work to continuously improve our operations there. 3 Annual Report 20232023 Corporate Highlights Adrian Thomas was appointed as HPS’ new CEO, succeeding Bill Hammond, who took on the role of Executive Chair. With over two decades of experience in the electrical industry, Adrian is a seasoned leader with key positions at General Electric, TMEIC, and Schneider Electric. Recognized for championing diversity, equity and inclusion, Adrian actively participates in various not-for-profit associations, including serving as the President of the European Chamber of Commerce in Canada. Adrian looks forward to continuing to globally expand the company, while maintaining the foundation of innovation and customer dedication that has been paramount at HPS for over a century. 4 Hammond Power SolutionsGroundbreaking corporate communication initiatives Inaugural ESG (“Environmental, Social, Governance”) Report The ESG report signifies a formal commitment to sustainability, marking the commencement of HPS’ efforts to consolidate and report on its initiatives in this vital area. In 2022, the company took a crucial stride by conducting its first formal materiality assessment. This assessment, completed in collaboration with ESG-focused third-party guidance and adhering to the Global Reporting Initiative (“GRI”) and Sustainability Accounting Standards Board (“SASB”) standards, unfolded in three stages: topic identification, prioritization and validation. This strategic move not only informs HPS’ future sustainability endeavours but also shapes and prioritizes the content of the report, emphasizing the company’s dedication to transparency and responsible corporate practices. In July 2023, HPS unveiled a transformative new brand identity, marking a significant milestone as the company embraces a new era of opportunity and New Brand Identity growth. The comprehensive development process involved evaluating the existing brand, gathering input from employees, customers and partners and analysing the company’s future direction. The modernized logo, colour scheme and a future- focused tagline, Energizing Our World, reflects HPS’ commitment to leading in the electrification space. The initiative includes creating sales segments for emerging markets, expanding product solutions, investing in systems and manufacturing capabilities and enhancing positive employee experiences. HPS’ continued focus on employees, customers and communities is integral to delivering global solutions for today’s challenges and tomorrow’s opportunities. 5 Annual Report 2023to our Shareholders We delivered exceptional results in 2023 with record sales of $710 million, up 27% over 2022 and with continued growth across all parts of the business. Organic growth continues in the low double digits in North America and 17% overall for our company. Although inflationary price increases have slowed as commodity prices stabilize, pricing remains resilient as demand continues to stretch industry capacity. We continued to grow our standard product business by expanding our distribution base in the United States (“U.S.”) and through our focus on growing sales in Mexico. The U.S. economy defied the much talked about recession in 2023 and we saw strong growth in this channel. I should mention that growth in Canada was also steady and even accelerated towards the end of the year. India remains strong, with a 85% year-over-year improvement in sales. Quote activity remains strong, with target markets being secondary transmission, renewables, service and multi-pulse drives. In late 2022 we embarked on the largest capital program in company’s history, allocating $52 million to growing manufacturing capacity at our facilities in Mexico, Guelph, Ontario and at our Mesta location in Pittsburgh, PA. Every HPS facility surpassed 2022 shipments in 2023, with our Guelph facility seeing the highest level of growth across our operations. The capacity that we started to add through our capital projects helped us tremendously in achieving these new sales levels, however, the bulk of our announced capital expenditures will be spent during 2024. This added investment will provide us with more than $900 million allowing for continued growth in the coming years. With high levels of growth come challenges, and in 2023 we were challenged in maintaining our exceptional service levels. While our stock levels improved on standard products, in the third quarter we had to readjust our shipping schedule for some of our custom power and original ADRIAN THOMAS CHIEF EXECUTIVE OFFICER 6 Hammond Power SolutionsWe delivered exceptional results in 2023 with record sales of $710 million, up 27% over 2022 and with continued growth across all parts of the business. Global urgency to limit climate impact through electrification combined with the need for electricity to support the world’s growing need for data are driving significant tailwinds benefiting our business. equipment manufacturer (“OEM”) orders due to the high levels of growth that came at a faster rate than anticipated and ahead of our capacity investments. This reschedule impacted many of our customers and we have been focused on catching back up to our reputed performance levels. We thank our customers for their patience and flexibility as our teams worked tirelessly through these scheduling challenges. I hope you noticed our new logo and colour scheme in this annual report, and that you find it contemporary and exciting. I am most thrilled about what it represents to us as a company. It aptly captures our transformer core while indicating multiple accelerations of the transitioning world and our broad mandate of power solutions. With the shift from hydrocarbon to electrical based power systems we are seeing more conversion technologies being added to our electrical systems creating issues with the quality of the power at a time when electricity needs to be even more reliable. We are accelerating our activity in this area by developing solutions that support power quality using both magnetics and power electronics technologies. To better support growth in this area, we have created a new business unit dedicated to profitably growing our sales. As we think of the future, we must also think of how our operations and actions impact this future. To this end, we have continued to make progress on our sustainability journey. We produced our first environmental, social and governance (“ESG”) report and made strides in improving our tracking and reporting capabilities. We are engaging our suppliers to understand their ESG performance and compliance and to share ideas to reduce waste together. We are committed to achieve our 5 sustainability pillars and to embed sustainability actions in all business functions. Hammond Power Solutions is a leading enabler in the global push for electrification. Global urgency to limit climate impact through electrification combined with the need for electricity to support the world’s growing need for data are driving significant tailwinds benefiting our business. I’m very excited how we can use our expertise to contribute to the electrification of our world as a strong, sustainable company that can thrive for decades to come. 7 Annual Report 2023Our purpose Passionate people energizing a better world As the world changes the way we build things, putting more emphasis on clean energy, electric cars and advanced technology like semiconductors, HPS is using its know-how in designing and making transformers to adapt. With a diverse network for getting our products into the market, we’re now part of more groundbreaking projects and serving more customers than ever before. HPS has a track record of leading the industry, being operationally strong, and staying financially stable. This success comes from having a clear plan and taking action to make it happen. With a history spanning over a hundred years, HPS has weathered economic ups and downs by keeping up with new and groundbreaking industries, making strides in growth, innovation and staying strong in the face of challenges. We are proud of how far we have come this year and with our success we can envision an even brighter future. We now have the resources to build a stronger company in terms of our manufacturing capabilities, the technology we use to scale our business up, and the development of our talent base. In the coming years, we intend to build on our strengths as a leading transformer manufacturer, while opening new avenues to grow in power quality and other power conversion solutions. We’re ready to take advantage of the worldwide push for new and innovative electrical systems, showing that we’re here to lead and stay strong even in dynamic times. HPS has a track record of leading the industry, being operationally strong and staying financially stable. 8 Hammond Power SolutionsOur vision To be a leader in the electrification of our world by providing power conversion Our mission We are a talented, aligned, and collaborative team that is agile, engaged, and customer-centric. solutions to our customers while Our strong culture, technical positively impacting social and environmental sustainability. expertise and reliability of execution allows us to meet our customers’ and stakeholders’ needs in an exceptional way. Strategic pillars 1 Customers and Markets Drive organic growth through competitive product offering and unparalleled customer experience and enhance strategic growth via acquisitions. 2 Operational and Financial Excellence Achieve operational excellence through continuous improvement and efficiency plays, and grow revenue / EBITDA with opportunistic acquisitions and cost reduction initiatives. 3 People and Culture Build the next leadership team, and be a preferred employer due to our clarity of purpose and employee value proposition. 4 Sustainability Design energy-efficient products; shrink the ecological footprint of our operations and energize the world responsibly for generations to come. 9 Annual Report 2023Looking to 2024 In 2024, our commitment to enhancing capacity remains unwavering, with significant milestones anticipated in the coming quarters. The completion of our new factory in Monterrey, Mexico, scheduled for Q2, and the Mesta expansion in Q3 are pivotal steps in this trajectory. Concurrently, we are initiating additional expansion projects in Mexico, geared towards increasing the production capacity for large low voltage distribution transformers. While 2023 focused on stabilization, 2024 marks a strategic shift towards fortifying our newly expanded organization and exploring avenues for the future. As we grow to $1 billion in sales and nearly 2,000 employees, we recognize the need for scalability in both personnel and tools. As part of this vision, we are investing in more software technology to elevate the sophistication of our business operations. Building on our 2021 learning and development program, we are continuing to expand these initiatives. This becomes increasingly crucial as our organization grows and integrates new members. In the upcoming year, our emphasis will be on collaborating more closely with customers, facilitated by a dedicated team focusing on collaborative application development. Additionally, we are committed to augmenting our power quality portfolio through continued product development and strategic partnerships. 10 Hammond Power SolutionsGrowth markets 2024 marks a strategic shift towards fortifying our newly expanded organization and exploring avenues for the future. Data Centres Growth is driven by new technologies such as the internet of things (IoT), edge computing and 5G. 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. Semiconductor Fabrication An essential component of electronic devices, enabling advances in communications and clean energy as well as countless other applications. 11 Annual Report 20232023 Review of Operations Hammond Power Solutions continued to deliver exceptional results with 2023 showing robust growth across all geographies and channels. Financially, the fourth quarter ended with record shipments close to $187 million globally. This represents a 30% increase over the fourth quarter last year and a 27% increase on a year-to-date basis. This is a new record top line that helped us to achieve our margin and profit targets. Despite initial predictions of a recession, the U.S. of power quality, induction heating inverters and other economy contributed to our growth with increased power conversion solutions. A portion of our capital volumes through both distribution and OEM channels. budget is dedicated to expanding our Mesta facility to While the U.S. was the largest driver of our growth in allow for continued growth over the years to come. The North America, Canada grew at 16% on a year-to-date team is also busy developing innovative solutions for the basis. Our focus on Mexico was rewarded this year with market, such as our recently launched sinewave filter, an sales growing at 66% as our team gains traction and essential element in our growing power quality portfolio. awareness with customers. Momentum in our rebranding initiative continues to The India business remains strong, with a 85% year- build. The rebranding captures who we are and where over-year improvement in sales. Quote activity remains we go from here. As the world shifts and becomes very active, with target markets being secondary more electric with more renewables and more non- transmission, renewables, service and multi-pulse linear loads, the need for solutions to support the drive applications. As we plan for a strong future, we many different challenges to our power systems will have made plant and office improvements as well as need to be deployed. Our focus is to bring value to our centralized our employees. customers by leveraging our years of domain expertise Beyond transformers, our Mesta acquisition with collaboration to provide effective and reliable continues to grow as part of Hammond Power Solutions solutions. In keeping with this approach, we have and achieved $18M of sales in 2023. To continue to deployed a new Technical Solutions Group to seek out grow this business and to build a focus on our power opportunities in emerging markets where we can work quality, we have created a new business unit. The new with our customers and our own engineers to help solve business unit will focus on profitably growing our sales customer problems. 12 Hammond Power Solutions With the exceptional growth in the past two years, four years ago we were heavily dependent on a few we are now running all of our factories near full capacity, key suppliers who in some cases provided over 90% of with some fully loaded into the next few quarters. our material supply on key commodities. Today, we are Progress with our previously announced capital plans is focused heavily on de-risking that supply base, working critical to meeting our customers’ expectations. We have to ensure consistency, evaluating and benchmarking a now allocated over $50 million to capacity expansions, more diverse supply base - strengthening our team’s with the bulk of the spending to occur in 2024. Some expertise and knowledge. of the planned investments in Guelph and Mexico have Our logistics and inventory models are also being been completed which have helped us gain capacity evaluated to ensure that our growth is not outpacing in the second half of 2023. We took over the remaining our capabilities. This year we implemented a new portion of one of our factories in Mexico expanding Northeast warehouse located in Baltimore, which is now our footprint and giving us space to produce more low fully launched using a third party logistics (“3PL”) partner voltage distribution transformers (“LVDT”) as well as and has already improved service levels. The next step large distribution transformers. We are making timely in our warehouse strategy is to look at how we can progress on our new control products plant which will optimize flows to increase customer service levels while be 109,000 square feet dedicated to building control, optimizing inventory and transportation costs. reactors, and potted transformer products. Our supply chain team continues to work to ensure Our rapid growth means we must redefine our a robust and diversified supplier base that can meet our supply chain model. It does not mean throwing out needs. We expect that this diversification will not only all things that work, but re-evaluating risk, exposure, build a more resilient supply chain but will save on costs costs and what is important. As recently as three to as well. 13 Annual Report 2023 The most recent enterprise resource planning Furthermore, we are preparing for the requirements for (“ERP”) system upgrade was completed earlier in 2023 reporting of sustainability risks through the International and was a comprehensive technology upgrade. Other Financial Reporting Standards (“IFRS”) to ensure that we investments in technology included revamping of our can better communicate about sustainability related telecommunications and networking infrastructure to risks and opportunities we face. better align it with our transition to cloud computing We are proud of how far we have come this year providing higher levels of flexibility and security. We and with our success we can envision an even brighter deployed additional cyber security measures as well future. We now have the resources to build a stronger as increased the communication and education of our company in terms of our manufacturing capabilities, the employees around cyber threats. technology we use to scale our business up, and the We plan to continue to invest in our technology tools development of our talent base. In the coming years, we and infrastructure as ways to enhance our productivity intend to build on our strengths as a leading transformer and speed. We will be implementing pricing software in manufacturer, while opening new avenues to grow in 2023 to help manage the vast complexity of pricing in power quality and other power conversion solutions. multiple markets with a broad portfolio of solutions. We wholeheartedly thank all of our employees for As we grow revenues, add capacity and enter new their tremendous efforts during this exciting time, as businesses, we need to attract and retain top talent. well as our shareholders for their support of our vision of Employee engagement has been a strength of ours, the future. and we continue to make investments to support our team members through various programs. In 2023 our employee population grew to just over 1,900 employees worldwide. This increase in hiring put pressure on our onboarding and training capabilities and we saw increased turnover, especially during peak hiring. Adapting quickly, we modified our methods for screening candidates, onboarding and training programs, resulting in a positive trend on new hire retention over the last four months of the year. In 2023, we published our inaugural environmental, social and governance (“ESG”) report for HPS based on 2022 measurements and implemented a set of priorities. This was our first step in formalizing our commitments and making our progress transparent. We continue to focus on our five pillars (People, Community, Environment, Economics, and Continuous Improvement) and we saw both internal improvements as well as improvement to our externally validated EcoVadis score. 14 Hammond Power Solutions Data Centre Transformers Data centres need reliability in their power and users expect 99.99% uptime and consistent access to their data. HPS offers a full line of products to ensure consistent power quality, reduce harmonic distortion and improve power efficiency in data centres. 15 Annual Report 2023Gross Margin % 24.5% 27.0% 26.9% 29.6% 32.5% Year in review 2019 2020 2021 2022 2023 Consolidated Sales (in thousands of dollars) $358,782 $358,782 $322,097 $380,202 $558,464 $710,064 2019 2020 2021 2022 2023 Basic Earnings Per Share (in dollars) $0.99 $1.20 $1.29 $3.79 $5.33 2019 2020 2021 2022 2023 16 Hammond Power SolutionsEBITDA* (in thousands of dollars) Net Operating (Debt) Cash* to Equity $28,175 $29,482 $30,114 $69,746 $95,995 (0.08) (0.01) 0.01 0.12 0.15 2019 2020 2021 2022 2023 2019 2020 2021 2022 2023 * Non-GAAP financial measure, refer to page 19 of the annual report * Non-GAAP financial measure, refer to page 19 of the annual report Geographic Sales (in thousands of dollars) U.S. Canada India 2019 $225,709 $116,996 $16,077 2020 $198,324 $109,080 $14,693 2021 $231,738 $130,184 $18,280 2022 $383,137 $151,058 $24,259 2023 $489,579 $175,619 $44,866 17 Annual Report 2023Management’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 – Energizing our world The following is Management’s Discussion and statements that relate to among other things, Hammond Analysis (“MD&A”) of the Company’s consolidated Power Solutions Inc.’s (the “Corporation” or “HPS”) financial position and performance for the years ended strategies, intentions, plans, beliefs, expectations and December 31, 2023 and 2022, and should be read estimates, in connection with general economic and in conjunction with the accompanying Consolidated business outlook, prospects and trends of the industry, Financial Statements of the Company as at December expected demand for products and services, product 31, 2023 and 2022, which have been prepared in development and the Corporation’s competitive position. accordance with IFRS Accounting Standards (“IFRS”). Forward-looking statements can generally be identified This information is based on Management’s knowledge by the use of words such as “may”, “will”, “could”, as at March 27, 2024. All amounts in this report are “should”, “would”, “likely”, “expect”, “intend”, “estimate”, expressed in thousands of Canadian dollars unless “anticipate”, “believe”, “plan”, “objective” and “continue” otherwise noted. Additional information relating to and words and expressions of similar import. Although the Company may be found on SEDAR’s website at the Corporation believes that the expectations reflected www.sedarplus.ca or on the Company’s website at in such forward-looking statements are reasonable, www.hammondpowersolutions.com. such statements involve risks and uncertainties, and undue reliance should not be placed on such statements. Caution regarding forward-looking information This MD&A contains forward-looking statements that Certain material factors or assumptions are applied in making forward-looking statements, and actual results involve a number of risks and uncertainties, including may differ materially from those expressed or implied 18 Hammond Power Solutionsin such statements. Important factors that could cause expected or estimated in such statements. Accordingly, actual results to differ materially from expectations readers should not place undue reliance on forward- include but are not limited to: general business and looking information. economic conditions (including but not limited to risks related to foreign currency fluctuations and changing interest rates); risks associated with the Corporation’s Additional GAAP and Non-GAAP measures from the This document uses “earnings terms business environment (such as risks associated with operations” which represents earnings before finance the financial condition of the oil and gas, mining and and other costs/(income) and income taxes. “EBITDA” infrastructure project business); geopolitical risks; is also used and is defined as earnings before interest, climate related risks; changes in laws and regulations; taxes, depreciation and amortization. Adjusted EBITDA operational risks (such as risks related to existing represents EBITDA adjusted for foreign exchange and developing new products and services; doing gain or loss and share based compensation. This business with partners and suppliers; product sales definition has changed in 2023 due to the significant and performance; legal and regulatory proceedings; value associated with share based compensation dependence on certain customers and suppliers; during the year. Comparative figures have also been costs associated with raw materials, products and presented. Net cash or net indebtedness is defined as services; human resources; and the ability to execute the bank operating lines of credit net of cash and cash strategic plans. The Corporation does not undertake equivalents. Net income taxes payable or receivable is any obligation to update publicly or to revise any of the defined as current income taxes receivable less current forward-looking statements contained in this document, income taxes payable. Operating earnings, EBITDA whether as a result of new information, future events or and Adjusted EBITDA are some of the measures the otherwise, except as required by law. Company uses to evaluate the operational profitability. This forward-looking information represents our Net cash or net indebtedness and net income taxes views as of the date of this MD&A and such information payable or receivable are measures the Company should not be relied upon as representing our views as uses to evaluate balance sheet strength. The Company of any date subsequent to the date of this MD&A. We presents EBITDA to show its performance before interest, have attempted to identify important factors that could taxes, and depreciation and amortization. Management cause actual results, performance or achievements believes that HPS shareholders and potential investors to vary from those current expectations or estimated, in HPS use additional GAAP and non-GAAP financial expressed or implied by the forward-looking information. measures, such as operating earnings, net cash or net However, there may be other factors that cause results, indebtedness, net income taxes payable/receivable, performance or achievements not to be as expected EBITDA and Adjusted EBITDA in making investment or estimated and that could cause actual results, decisions about the Company and to measure its performance or achievements to differ materially from operational results. A reconciliation of earnings from current expectations. operations, EBITDA and Adjusted EBITDA to net earnings There can be no assurance that forward-looking for the years ended December 31, 2023 and December information will prove to be accurate, as actual results 31, 2022 is contained within this MD&A. Earnings from and future events could differ materially from those operations, EBITDA and Adjusted EBITDA should not be 19 Annual Report 2023DOLLARS IN THOUSANDS UNLESS OTHERWISE STATED MANAGEMENT’S DISCUSSION AND ANALYSIS construed as a substitute for net earnings determined in data centers, mining, electric vehicle charging and accordance with IFRS Accounting Standards. renewables. Many of these markets have all benefitted “Order bookings” represent confirmed purchase from higher-than-normal levels of investment. orders for goods or services received from our With an established global market presence and customers. “Backlog” represents all unshipped customer a focus on market growth, HPS is positioned as a orders. Customer orders in order bookings and backlog transformer industry leader, providing standard and may not have confirmed ship dates, as the customer custom order solutions, a broad product offering, may not know the date at which it would like to take market access through multiple sales channels, delivery at the time of placing the order. A significant outstanding quality products and exceptional service. percentage of order bookings could be cancelled by HPS is leveraging its expertise in transformer magnetics customers without penalty, provided HPS has not to broaden its market presence in terms of the products commenced purchasing or production for that order. it sells, the applications it serves and the geographic “Book value per share” is the total shareholders’ equity regions into which it sells its solutions. divided by the average outstanding shares. The terms HPS sells through distributors and direct to Original “earnings from operations”, “EBITDA”, “adjusted EBITDA”, Equipment Manufacturer (“OEM”) and private label “order bookings”, “backlog” and “book value per share” customers. Sales through distributors tend to be made do not have any standardized meaning prescribed up of higher volume, standard and modified standard within IFRS and therefore may not be comparable to product, with some custom projects, whereas OEM similar measures presented by other companies. sales are mainly customized and project-oriented sales. The Company’s 2023 consolidated financial HPS believes that its focus on developing the distributor statements, which comprise the consolidated channel as well as continuing to support the OEM statements of financial position as at December 31, 2023 channel with high levels of service and quality, have and December 31, 2022, the consolidated statements of supported our growth trajectory and created a more operations, comprehensive income, changes in equity sustainable sales profile by expanding our reach. and cash flows for the years ended December 31, 2023 HPS’ manufacturing capabilities are primarily located and December 31, 2022, and Notes thereto, have been in North America, with production facilities in Canada, the prepared under IFRS Accounting Standards. U.S. and Mexico. North American production is focused on dry-type transformers, power quality products and Overview Demand for HPS’ products increased at a rapid rate in induction heating products. These facilities form an integrated supply chain serving the Canadian, U.S. and 2023, and in the year-ended December 31, 2023 HPS Mexican markets. HPS also has manufacturing facilities realized its highest annual revenues in company history. in India, which primarily serves the Indian domestic and HPS’ customers and end-users operate in a variety of Southeast Asian markets with oil-filled transformers. industries and the varying levels of economic activity HPS experienced growth in all of these markets in 2023. within those industries will have an impact on HPS’ HPS’ management team is proud of its commitment overall sales. During the year, we saw activity increase to producing quality, innovative, energy efficient, in many of the markets we serve, such as industrial diverse transformers and related magnetic products. and commercial construction, utilities, infrastructure, The Company’s alignment of its operational initiatives 20 Hammond Power Solutions and strategic vision enhances these competitive One of HPS’ key advantages is its strong market access, differentiators. HPS has a well-established and growing which it can leverage to broaden its scope and scale of market presence and a focus on continued growth the solutions we offer our customers. through current and new customers and products. During 2023, after 22 years of serving as Chief The Company has a strong financial footing that Executive Officer (“CEO”), William (Bill) Hammond allows for continued focus on market share growth. retired and assumed the role of Executive Chair on The Company’s broad global footprint provides a July 31, 2023. Bill was succeeded by Adrian Thomas, gateway to new technologies, customers and markets. who was appointed CEO on July 31, 2023. Adrian is a These strengths are important to future revenue and highly experienced professional with over 20 years of earnings growth. experience in the electrical and automation industry. On Technology and know-how obtained through December 31, Bill resigned his position as Executive Chair acquisitions have allowed the Company to accelerate and effective January 1, 2024, solely holds the position sales in new markets. The acquisition of Mesta of Chair of the Board. Adrian’s depth of experience in the Electronics Inc. has expanded HPS’ offering into standard electrical industry will lead HPS to continue to grow. and custom active filter and induction heating products. HPS’ strategic vision and operational initiatives have Mesta shares an excellent reputation for product quality, supported our industry leadership, operational strength design and reliability. Mesta not only expands HPS’ and financial stability. The combination of our resilience, U.S. presence but also broadens our power solutions drive, decades of experience, commitment, engineering product offering and manufacturing capabilities. Mesta expertise, solid supplier relationships and a broad and achieved significant revenue and profitability levels in unique business perspective gained through our diverse 2023. products, customers and markets are all key factors As HPS advanced through 2023, certain markets, critical to our success. such as commercial and industrial construction, began the year with strong bookings and shipments. These Sales bookings began to stabilize late in the year. Other markets, such as data centres, while a relatively small Geography 2023 2022 (Adjusted**) $ Change % Change part of our overall sales, continued to grow at a high rate throughout the year. Overall, bookings and backlog that grew strongly in the beginning of the year began to stabilize late in the year. HPS remains confident in its ability to continue to generate growth – through our strategic vision U.S. & Mexico* 489,579 383,137 106,442 Canada 175,619 151,058 24,561 27.8% 16.3% India Total 44,866 24,269 20,597 84.9% 710,064 558,464 151,600 27.1% merged with our operational strategies. Through HPS’ * When stated in U.S. dollars, U.S. and Mexico sales have increased from $294,137 strategic planning process, the Company is identifying in 2022 to $362,651 in 2023, an increase of $68,514 or 23.3%. and developing new market opportunities, which will come from organic and new customer sales expansion, ** The 2022 sales values by geography have been adjusted from previously reported amounts due to a misclassification by geography. The previously disclosed comparative values in Canada was $33,437 less than the adjusted product and technology development, cost effectiveness, value, the previously disclosed values in U.S. and Mexico was $33,427 more than competitive lead-times and manufacturing flexibility. the adjusted value, and India was $10 more than the adjusted value. 21 Annual Report 2023DOLLARS IN THOUSANDS UNLESS OTHERWISE STATED MANAGEMENT’S DISCUSSION AND ANALYSIS U.S. and Mexico sales were positively impacted 24.8% (2022 – 33.0 %) and India accounted for 6.3% by the strengthening of the U.S. dollar relative to the (2022 – 4.3 %) of total sales. Canadian dollar versus 2022. The average U.S. to Significant increases in North American sales came Canadian exchange rate for 2022 was $1.350 versus through established distributor and OEM channels. $1.301 in 2022, a U.S. dollar strengthening of 3.8%. The While the number of distributors added during the year 2023 U.S. sales at prior year exchange rates would have was modest, we did experience strong growth within been $17,473 or 3.7% lower at $472,106. existing distributors. Custom projects through the The U.S. market experienced significant increases distribution channel rose during the year, driven by the in the OEM channel, with higher sales supporting data heightened demand experienced by our customers and centres, warehousing, industrial manufacturing, mining, in line with the industry tailwinds similar to those being electric vehicle charging, renewable energy and oil and experienced by HPS. gas production. Sales in the U.S. distributor channel also 2023 was another year of significant growth in improved due to strong market activity and market terms of pricing increases and organic growth. Of the penetration as additional distributors continue to be 27% growth in sales, we estimate that 17% is due to added to the network. There were also improvements organic growth when Mesta and India are included, 7% in the specialty, motor control, power control and private was due to price increases held over from 2022, and 3% branding markets. was due to a strengthened U.S. dollar in 2023. Sales from the Mesta Electronics LLC (“Mesta”) business are included in U.S. sales. Sales for Mesta for 2023, stated in Canadian dollars, were $18,497 Backlog The Company’s December 31, 2023 backlog increased versus $14,507 in 2022, an increase of $3,990 or 27.5%, by 19.9% as compared to December 31, 2022 and has contributing to the overall increase in sales. The Mexico decreased 3.2% from Quarter 3, 2023. During the market continued to grow in 2023 contributing sales of second half of the year, commercial construction and $8,507, stated in U.S. dollars, an increase of $3,382 or industrial markets began to moderate in their growth 66.0% from 2022 sales of $5,125. profile, while our capacity additions allowed us to ship The Canadian market experienced increases more backlog than previous quarters. As the backlog in commercial construction, EV charging, and data stabilizes, product lead times are no longer being pushed centre projects. out and remain steady. The backlog tenor is longer for The improvement of India sales year-over-year large project driven, mostly custom, product, which can is a result of general economic conditions as well as be over one year for some factories. For those factories recognition of a significant order for $7,596 produced focused on standard product, the backlog does not and shipped from India that could not be recognized at generally extend beyond six to eight weeks. the end of 2022 given sales terms of freight on board The general economic outlook and economic (“FOB”) destination. These sales were recognized in activity within certain sectors can cause volatility in Quarter 1, 2023. A significant part of the growth in India backlog. Standard product tends to track closely to is through exports to other Southeast Asian countries. general business investment, macroeconomic growth Stated by geographic segment, sales in the U.S. rates and electro-industry growth rates while custom and Mexico were 68.9% (2022 – 62.7%), in Canada were products are more dependent on sectoral investment 22 Hammond Power Solutions trends. Backlog represents a customer’s intent to buy, conscientious of our customer relationships. Key but as not all orders in the backlog have firm ship dates, inputs to our products include electrical steel, copper, and in cases where work has not begun, many can be aluminum, insulation, carbon steel, resin and fiberglass, cancelled without penalty. Gross margin The consolidated gross margin in 2023 increased to as well as labour and overheads. While some of these inputs fluctuated and even eased during 2023, labour and overhead costs continued to increase, which may necessitate future price increases. Given past 32.5% versus 29.6% in 2022, an increase of 2.9% of sales. challenges and the strain on the global supply markets, The improvement in gross margin is the result of better HPS has heightened the focus on ensuring that materials operating leverage due to high factory throughput, required for production are received on a timely basis stabilizing cost inputs, a higher proportion of Mesta and and when needed. power quality sales, and margin improvements in India. The Company continues to focus on long-term Higher gross margins were achieved in all channels investment to fuel future sales and margin growth. and regions and are supported by high demand for the Gross margin rates are supported by the maintenance Company’s products. Margin rates can be sensitive to of market prices combined with material procurement selling price pressures, volatility in commodity costs, and engineering cost reduction initiatives. The Company customer mix and geographic blend. Margins in the has reaped the benefits of higher absorption of factory fourth quarter were higher than the previous three overheads due to increased sales volume. Purchasing quarters due to inventory adjustments resulting from the at scale, continuous improvement programs, a focus on annual physical count in conjunction with adjustments higher-margin solutions and products, and maintaining to inventory reserves. flexible manufacturing capabilities will all contribute to During 2023, HPS estimated an organic volume the ability to maintain and improve margins over time. increase of 17%, including India and Mesta. This increase, along with organic increases in 2022, resulted in some facilities operating close or at capacity. This volume Selling and distribution expenses Total selling and distribution expenses were $76,283 for increase resulted in higher fixed overhead leverage and 2023 versus $62,263 in 2022, an increase of $14,020 as a result, higher gross margins. or 22.5%. On a percentage-of-sales basis, total selling Gross margins were affected by the sales mix, and distribution expenses decreased to 10.7% of sales which was favourable throughout the course of 2023. for 2023 from 11.1% in 2022. The higher sales value for Higher distribution sales, which typically have higher the year resulted in additional commission expense gross margins, but also higher selling costs contributed of $4,028, higher freight expense of $5,268 and to higher margins. Stronger Mesta sales also resulted additional warehouse costs of $421, which are variable in margin improvement and in addition, HPS saw selling expenses that naturally fluctuate with sales significant margin improvements in the Indian business changes. Approximately $1,376, or 0.2% of the selling due to favourable pricing. and distribution expenses increase relates to strategic In the interest of protecting gross margins the investments in people resources as well as increased Company has been proactive in anticipating cost incentive plan payments related to higher sales increases, judicious in maintaining margins and and profits. 23 Annual Report 2023DOLLARS IN THOUSANDS UNLESS OTHERWISE STATED MANAGEMENT’S DISCUSSION AND ANALYSIS General and administrative expense General and administrative expenses in 2023 were Net Finance and other costs Net finance and other costs increased $455 from $68,007 compared to $43,481 for 2022, an increase of $2,272 in 2022 to $2,727 in 2023. The increase from the $24,526 or 56.4%. On a percentage-of-sales basis these prior year is a result of a foreign exchange loss in the costs have increased from 7.8% in 2022 to 9.6% in 2023. current year and a gain in the prior year, as well as lower Key drivers for the current year increase are as follows: interest expense. • Approximately $3,679 of the increase in the current Interest expense for the year-ended December year is associated with strategic investments in people 31, 2023 finished at $1,320 as compared to $1,596 in resources; 2022, a decrease of $276. Interest expense includes all • Higher share price and additional awards granted in bank fees. Quarter 1, 2023 caused the share based compensation The foreign exchange loss in 2023 of $1,280 expense to increase $15,950 from prior year; related primarily to the transactional exchange loss • Incentive related to the Mesta acquisition increased on the Company’s U.S. dollar (“USD”) trade accounts general and administrative expenses $634; and receivable, compared to a foreign exchange gain of $96 • An additional $1,114 more was spent on travel expenses in 2022. The change of the foreign exchange expense as a result of increased business. for the year is related to the volatility in the exchange HPS continues to invest in growth while remaining rates during the year – primarily the U.S. dollar. very cognizant of prudent general and administrative As at December 31, 2023, the Company had expense management. outstanding foreign exchange contracts in place for 14,500 Euros (“EUR”) and $12,658 USD – both of which Earnings from operations1 Earnings from operations improved, finishing at $86,721 were implemented as a hedge against translation gains and losses on inter-company loans as well as $45,000 in 2023, as compared to earnings of $59,441 in 2022 – an USD to hedge the U.S. dollar denominated accounts increase of $27,280 or 45.9%. The increase in earnings payable in Canadian HPS operations. The Company from operations is due to higher sales and additional also had outstanding foreign exchange contracts to sell gross margin dollars offset by higher selling, distribution, for $16,656 USD. 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 as at Net earnings for the year $ 63,399 $ 44,828 to Consolidated Financial Statements included in our 2023 2022 December 31, 2023 can be found in note 27 in the Notes Add: 2023 Annual Report. Income tax expense 20,595 Finance and other costs 2,727 12,341 2,272 Earnings from operations $ 86,721 $ 59,441 1 Refer to Non-GAAP financial measures on page 20 of this annual report 24 Hammond Power Solutions Earnings before income tax 2023 earnings before income taxes were $83,994 as compared to earnings of $57,169 in 2022 – growing by $26,825 or 46.9%. The main contributors to the higher current year earnings before income tax were higher sales and additional gross margin dollars. These gains were offset by increases in selling, distribution, general and administration expenses. Income taxes Income tax expense from operations for 2023 was $20,595 as compared to $12,341 in 2022 – an increase of $8,254 or 66.9%. The consolidated effective tax rate on earnings from operations for 2023 was 24.5% versus 21.6% last year – an increase of 2.9%. The increase is primarily due to future tax assets recognized in 2022. The Company’s deferred tax assets and liabilities are related to temporary differences in various tax jurisdictions, primarily reserves and allowances, which are not deductible in the current year. A difference in the carrying value of property, plant and equipment and intangible assets for accounting purposes and for tax purposes, is a result of business combination accounting and a different basis of depreciation utilized for tax purposes. The Company’s income tax provision is explained further in note 16 in the Notes to Consolidated Financial Statements included in our 2023 Annual Report. Net earnings Net earnings for 2023 finished at $63,399 compared to net earnings of $44,828 in 2022, an increase of $18,571 or 41.4%. 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. EBITDA EBITDA for the year-ended December 31, 2023 was $95,995 versus $69,746 in 2022 – an increase of $26,249 or 37.6%. Adjusted for foreign exchange loss/gain, share based compensation expenses adjusted EBITDA for 2023 was $117,229 versus $73,435 in 2022 – an increase of $43,794 or 59.6%. 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): Long-term incentive plan (“LTIP”) Expense Deferred Share Units (“DSU”) Expense Foreign exchange (gain) loss Adjusted EBITDA 2023 2022 $ 63,399 $ 44,828 1,320 20,595 10,681 $ 95,995 $ 6,367 13,587 1,280 1,596 12,341 10,981 69,746 1,602 2,183 (96) $ 117,229 $ 73,435 25 Annual Report 2023DOLLARS IN THOUSANDS UNLESS OTHERWISE STATED MANAGEMENT’S DISCUSSION AND ANALYSIS Summary of quarterly financial information (unaudited) Fiscal 2023 Quarters Sales Net earnings Net earnings per share – basic Net earnings per share – diluted Average U.S. to Canadian exchange rate Fiscal 2022 Quarters Sales Net earnings Net earnings per share – basic Net earnings per share – diluted Average U.S. to Canadian exchange rate Q1 171,134 15,726 1.32 1.32 1.351 Q1 127,782 8,569 0.72 0.72 1.267 $ $ $ $ $ $ $ $ $ $ Q2 172,451 13,333 1.12 1.12 1.345 Q2 137,476 6,505 0.55 0.55 1.276 $ $ $ $ $ $ $ $ $ $ Q3 179,521 14,437 1.21 1.21 1.340 Q3 148,953 11,531 0.97 097 1.305 $ $ $ $ $ $ $ $ $ $ Q4 186,958 19,903 1.68 1.68 1.365 Total 710,064 63,399 5.33 5.33 1.350 $ $ $ $ $ Q4 Total 144,253 $ 558,464 18,223 1.55 1.53 1.358 $ $ $ $ 44,828 3.79 3.77 1.301 $ $ $ $ $ $ $ $ $ $ HPS sales have increased quarter-over-quarter for the past two years with the exception of Quarter 4, 2022. Quarterly sales continue to grow, with Quarter 4, 2023 sales significantly higher than any quarter in 2022. The drop in Quarter 4, 2022 was related to a large India order that was shipped but unable to be recognized until Quarter 1, 2023 given the sales terms of FOB destination. The increase in sales over the past eight quarters is a function of increased pricing as well as higher volume and additional sales related to Mesta and Mexico. Sales have also been positively impacted by the stronger U.S. dollar exchange rate. Gross margin rates for the quarter have increased from the same quarter last year. This margin rate improvement is attributed to higher operating leverage, pricing, a shift to higher margin products, and margin improvements in India. 26 Hammond Power Solutions Quarter 4, 2023 financial results Sales Gross margin rate Earnings from operations Exchange loss (gain) Net earnings Earnings per share – basic Earnings per share – diluted Cash provided by operations Quarter ended December 31, 2023 Quarter ended December 31, 2022 $ $ $ $ $ $ $ 186,958 35.5% 24,661 1,593 19,903 1.68 1.68 21,053 $ $ $ $ $ $ $ 144,253 34.4% 20,369 (847) 18,223 1.55 1.53 5,352 Sales for the quarter ended December 31, 2023 were $186,958, an increase of $42,705 or 29.6% from the comparative quarter last year. Sales were higher mainly due to 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 1.1% from 34.4% in 2022 to 35.5% in 2023. 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 $19,988 in Quarter 4, 2023 versus $16,071 in Quarter 4, 2022 – an increase of $3,917. Selling and distribution expenses as a percentage of sales have decreased to 10.7% in Quarter 4, 2023 compared to 11.1% in Quarter 4, 2022, a decrease of 0.4% of sales. The increased expenses were a result of higher commission and freight variable expenses. General and administrative expenses as a percentage of sales have increased to 11.6% in 2023 compared to 9.2% in 2022. General and administrative expenses for Quarter 4, 2023 totaled $21,746, an increase of $8,539 when compared to Quarter 4, 2022 costs of $13,207. Additional salary and incentive costs account for the increase in the quarter. Quarter 4, 2023 net finance and other costs were $1,982 compared to $367 for the same quarter in 2022, an increase of $1,615. The Quarter 4, 2023 interest cost decreased from $536 in Quarter 4, 2022 to $360 in Quarter 4, 2023. Foreign exchange loss in Quarter 4, 2023 was $1,593 compared to a foreign exchange gain of $847 in Quarter 4, 2022. Earnings from operations for the quarter were $24,661 in 2023 and $20,369 in 2022, an increase of $4,292. Additional gross margin dollars were offset by higher general, administrative, selling and distribution expenses. Quarter 4, 2023 income tax expense was $2,776 on earnings before income taxes of $22,679 (an effective tax rate of 12.2%) as compared to an income tax expense of $1,779 on income before income taxes of $20,002 (an effective tax rate of 8.9%) in Quarter 4, 2022. The lower Quarter 4, 2022 effective tax rate is result of a significant deferred tax assets at year-end. 27 Annual Report 2023DOLLARS IN THOUSANDS UNLESS OTHERWISE STATED MANAGEMENT’S DISCUSSION AND ANALYSIS Net income for Quarter 4, 2023 was $19,903 Inventories finished the year at $114,590 as at compared to net income of $18,223 in Quarter 4, 2022 – December 31, 2023, versus $106,353 as at December 31, an improvement of $1,680. 2022, an increase of $8,237. The higher inventory levels Cash provided by operations for Quarter 4, 2023 in 2023 were attributed to increased sales volume, and was $21,053 versus $5,352 in Quarter 4, 2022 – an the higher cost of raw materials. increase of $15,701. The main driver for this change was Accounts payable and accrued liabilities, excluding an increase in cash used for working capital. derivative and share-based compensation liabilities, Overall net operating cash balance was $34,1201 increased by $17,246 finishing at $103,516 as at as at December 31, 2023, an improvement of $12,148 as December 31, 2023 compared to $86,270 at the end compared to a net operating cash balance1 of $21,972 of 2022. The change in accounts payable is due to as at December 31, 2022, primarily reflecting improved higher sales volumes, higher raw materials costs, profitability. higher accruals and the timing of purchases from and payments to suppliers. Capital resources and liquidity The Company continued to focus on generating cash Net income taxes payable2 were $324 as at December 31, 2023, versus net income taxes payable of from operations, debt management, investment and $347 as at December 31, 2022 – a change of $23 due to liquidity. changes in the effective tax rate3. Cash provided from operating activities during Cash generated by financing activities was $755 2023 was $44,108 versus $37,013 in 2022, an increase in 2023, compared to cash used of $22,303 in 2022, a in cash generated of $7,095 or 19.2%. This increase change of $23,058. The change in the balance can be in cash generated from operating activities was due attributed to repayment from the operating line in 2022 to higher profitability, offset by an increase in non- compared to advances on the bank operating lines cash working capital versus 2022. Non-cash working in 2023. capital used cash of $51,708 in 2023 versus $19,539 Cash used in investing activities in 2023 increased in 2022, resulting in an increase of $32,169 from 2022. $6,686 from $12,674 in 2022 to $19,360 in 2023. There The change in non-cash working capital in 2023 was was an increase in capital spending for property, plant primarily a result of increases in accounts receivable and equipment of $11,523 over the prior year, totaling and inventory, decreases in deferred revenue offset by $20,169 in 2023 – compared to $8,646 for 2022. The increases in accounts payable. higher spending is primarily the result of spending on Accounts receivable finished the year at $128,030 capacity increases. as compared to $86,701 as at December 31, 2022, Bank operating lines of credit finished the year at an increase of $41,329 – a result of higher sales in $18,471 as at December 31, 2023, compared to $6,154 Quarter 4, 2023 compared to Quarter 4, 2022. HPS’ as at December 31, 2022 resulting in an increase of days sales outstanding ratio remains stable, which $12,317 in the year. The Company had cash and cash can be attributed to effective credit policies and tightly equivalent balances of $52,591 as at December 31, 2023 managed accounts receivable administration. as compared to $28,126 as at December 31, 2022. 1 Overall net operating cash balance is the bank operating lines of credit of $18,471 net of cash and cash equivalents of $52,591 2 Net income taxes payable consists of income taxes payable of $4,602 less income taxes receivable of $4,278 3 Effective tax rate is calculated as the income tax expense divided by the earnings before income taxes 28 Hammond Power Solutions Overall net operating cash balance1 was $34,120 as at December 31, 2023, an improvement of $12,148 as compared to a net operating debt balance of $21,974 as at December 31, 2022, primarily reflecting improved profitability and cash generated from operations. All bank covenants were met as at December 31, 2023, 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 $12,252. 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 in the process of setting up an approximately 110,000 square foot small products facility, while also adding equipment to existing facilities there. HPS is also actively expanding its manufacturing capacity at the Mesta location in Pennsylvania, USA, as well as its facility in Guelph, Ontario, Canada. Additional details of our change in non-cash working capital can be found in note 24 in the Notes to Consolidated Financial Statements contained in our 2023 Annual Report. Contractual obligations The following table outlines payments due for each of the next 5 years and thereafter related to debt, lease, purchase and other long-term obligations. Accounts payable and accrued liabilities $ 125,222 Capital expenditure purchase commitments Operating lines of credit Derivative liability Lease liabilities Contingent consideration Total 2024 2025 2026 2027 12,252 18,471 1,138 5,500 2,138 – – – – – – – – – – – – 4,742 – 3,413 – 2,228 – 2028 & Thereafter Total – $ 125,222 – – – 4,332 – 12,252 18,471 1,138 20,215 2,138 $ 164,721 $ 4,742 $ 3,413 $ 2,228 $ 4,332 $ 179,436 1 Overall net operating cash balance is the bank operating lines of credit of $18,471 net of cash and cash equivalents of $52,591 29 Annual Report 2023DOLLARS IN THOUSANDS UNLESS OTHERWISE STATED MANAGEMENT’S DISCUSSION AND ANALYSIS Hammond Power Solutions S.p.A – Italy The lease agreement included a put and call option Directors of HPS declared a quarterly cash dividend of fifteen cents ($0.15) per Class A Subordinate Voting related to the leased premises, exercisable within 60 Share of HPS and fifteen cents ($0.15) per Class B days after September 30, 2023. The call option granted Common Share of HPS, for the third and fourth quarters the purchaser an option to purchase the premises for of 2023. consideration equal to 2,225,000 Euros (approximately The Quarter 1 dividend was paid on March 30, 2023 $3,249,000). The put option granted HPS an option to to shareholders of record at the close of business on sell the plant to the purchaser for consideration equal March 23, 2023 – the ex-dividend date was March 22, to the initial plant purchase price of 2,225,000 Euros. 2023. The Quarter 2 dividend was paid on June 27, Under both the call and put option the plant purchase 2023 to shareholders of record at the close of business price was to be reduced by 50% of the monthly rent on the 20th day of June 2023 – the ex-dividend date installments received, to a maximum of 375,000 Euros was June 19, 2023. The dividend for Quarter 3 was paid (approximately $548,000). If the purchaser failed to on September 22, 2023 to shareholders of record at complete the acquisition of the leased premises upon the close of business on September 15, 2023 – the ex- the exercise of the put option by the Company and dividend date was September 14, 2023. The Quarter 4 pay the required consideration, the purchaser would dividend was paid on December 15, 2023 to shareholders pay 500,000 Euros (approximately $730,000) in of record at the close of business on December 8, 2023 liquidated damages. – the ex-dividend date was December 7, 2023. On November 22, 2023, given that the expiry date In 2023, the Company has paid a total cash dividend to exercise its put option was approaching and that of fifty-five cents ($0.55) per Class A Subordinate Voting the parties had not yet entered into any settlement Share and fifty-five cents ($0.55) per Class B Common agreement or a preliminary agreement for the sale and Share. In 2022, the Company had paid a total cash purchase of the plant, the Group exercised its put option, dividend of thirty-eight and a half cents ($0.385) per specifying that the final plan purchase price, inclusive Class A Subordinate Voting Share and thirty-eight and of any reduction agreed in the lease agreement, was a half cents ($0.385) per Class B Common Share. equal to Euro 1,885,000. The date under which it will be settled has been extended into 2024. Contingent liabilities Management is not aware of any contingent liabilities. Regular quarterly dividend The Board of Directors of HPS declared a quarterly cash Controls and procedures The Chief Executive Officer and the Chief Financial Officer are responsible for establishing and maintaining disclosure controls and procedures and for establishing and maintaining adequate internal controls over financial reporting. The control framework used in the design of disclosure controls and procedures and internal control dividend of twelve and a half cents ($0.125) per Class A over financial reporting is the 2013 Internal Control Subordinate Voting Share of HPS and of twelve and a Integrated Framework issued by the Committee of half cents ($0.125) per Class B Common Share of HPS, Sponsoring Organizations of the Treadway Commission for the first and second quarters of 2023. The Board of (“2013 COSO Framework”). Our internal control system was designed to provide reasonable assurance to our 30 Hammond Power Solutions Management and Board of Directors regarding the weakness” rather than “reportable deficiency.” HPS preparation and fair presentation of published financial has designed its internal controls in accordance with statements in accordance with IFRS Accounting the COSO Framework and has carried out retesting in Standards. All internal control systems, no matter how 2023, which was completed in the fourth quarter. well designed, have inherent limitations, therefore, even As of December 31, 2023 Management, with the those systems determined to be effective can provide supervision and participation of the Chief Executive only reasonable assurance with respect to financial Officer and Chief Financial Officer, assessed the statement preparation and presentation. effectiveness of the Company’s internal control over As at December 31, 2023, the Company conducted financial reporting. Based on that assessment, the an evaluation, under the direction and supervision Chief Executive Officer and Chief Financial Officer of the Chief Executive Officer and the Chief Financial have concluded that the internal controls are effective Officer, of the effectiveness of the design and operation and that there were no material weaknesses in the of our disclosure controls and procedures. Based on Company’s internal control over financial reporting as this evaluation, our Chief Executive Officer and Chief of December 31, 2023. Financial Officer have concluded that as of December 31, 2023 such disclosure controls and procedures were operating effectively. Internal controls over financial reporting is responsible Management for establishing and Changes in internal control over financial reporting and disclosure controls and procedures During 2023 there were no material changes identified in HPS’ internal controls over financial reporting that maintaining adequate internal controls over financial had materially affected or were reasonably likely to reporting. Our internal control system was designed materially affect HPS’ internal control over financial to provide reasonable assurance to our Management reporting. HPS does carry out ongoing improvements and Board of Directors regarding the preparation and to its internal controls over financial reporting, but fair presentation of published financial statements nothing was considered at a material level. in accordance with IFRS Accounting Standards. All internal control systems, no matter how well designed, Subsequent events have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Canadian Securities Administrators require that companies certify the effectiveness of internal controls over financial reporting. It also requires a company to Dividends On March 6, 2024, the Company declared a dividend of fifteen cents ($0.15) per Class A subordinate voting shares of HPS and a quarterly cash dividend of fifteen cents ($0.15) per Class B common shares of HPS payable on March 28, 2024 to shareholders of record at the close of business on March 21, 2024. The ex-dividend use a control framework such as the COSO Framework date is March 20 2024. to design internal controls over financial reporting. As well, the threshold for reporting a weakness of internal controls over financial reporting should be of a “material On March 27, 2024, the Company declared a dividend of twenty-seven and a half cents ($0.275) per Class A subordinate voting shares of HPS and a quarterly 31 Annual Report 2023DOLLARS IN THOUSANDS UNLESS OTHERWISE STATED MANAGEMENT’S DISCUSSION AND ANALYSIS cash dividend of twenty-seven and a half cents ($0.275) results to vary materially from anticipated future results. per Class B common shares of HPS payable on June 25, The Company is aware of these risks and continually 2024 to shareholders of record at the close of business assesses the current and potential impacts that they on June 18, 2024. The ex-dividend date is June 18, 2024. have on the business. HPS continuously strives to curtail Italy On March 14, 2024 the Group and the purchaser signed the negative impact of these risks through diversification of its core business, market channel expansion, breadth of product offering, geographic diversity of its a settlement agreement for the sale and purchase of operations and business hedging strategies. the plant. As outlined in Note 8, the Group exercised its put option, specifying the final plant purchase price was Market supply and demand impact on equal to 1,850,000 EUR. The final negotiations resulted in a net settlement amount of 1,050,000 EUR ($1,535,000 commodity prices HPS relies on a global supply chain to meet its CAD). This agreement will settle all outstanding manufacturing needs. The Company sources both disputed receivables and liabilities as well as the need raw materials and components from our own factories for significant repairs to the roof of the building. The and third-party suppliers. Industry supply shortages transfer of ownership and title will be executed no later including those caused by logistics disruptions than March 28, 2024. A deposit of 150,000 EUR was and global conflicts, may interrupt manufacturing received on March 14, 2024. production, therefore affecting our ability to ship SmartD On March 22, 2024, HPS entered into a financing product to customers. One particular commodity that is specific to the transformer industry is grain-oriented electrical steel (“GOES”). GOES is produced in relatively agreement with SmartD Technologies Inc. (“SmartD”). few mills in the world and as a result HPS is heavily In the agreement, the Corporation will invest up to $3.9 reliant on foreign sourced product. The Company million over three years in convertible debentures of attempts to mitigate these commodity risks through SmartD. SmartD Technologies produces advanced supplier agreements and supplier diversification. motor control products, most notably it’s Clean Power The cyclical effects and unprecedented rise of Variable Frequency DriveTM. SmartD’s products global commodity prices, including prices for copper, combine motor drives with harmonic mitigating aluminum and electrical steel may put margins at risk. technology that help businesses save energy, lower There is a risk in our ability to recoup the rapid escalating costs, and minimize their carbon footprint. commodity costs through timely and effective Risks and uncertainties The Company’s goal is to proactively manage risks in selling price increases. Conversely, there is a risk that decreasing commodity costs will create competitive price pressure in our market, forcing prices down and a structured approach in conjunction with strategic reducing our gross margins. planning, with the intent to preserve and enhance If any of the following risks were to occur, they could shareholder value. However, as with most businesses, materially adversely affect HPS’ financial condition, HPS is subject to several marketplace, industry and liquidity or results of operations. economic-related business risks, which could cause our 32 Hammond Power Solutions Attraction and retention of skilled talent Hammond Power Solutions is known for its engineering depth and expertise. As we enter into broader power Fighting Against Forced Labour and Child Labour in Supply Chains Act The Fighting Against Forced Labour and Child Labour in electronics solutions, a key to our continual continued Supply Chains Act (previously known as Bill S-211) came growth along with maintaining our current core into force in Canada on January 1, 2024. This legislation business, will be our ability to acquire and retain key imposes mandatory reporting obligations on Canadian engineering talent. As the world moves to electrification and international businesses regarding forced and child to support decarbonization, as well as on-shoring of labor in their supply chains. Entities falling under the Act’s critical components within North America, competition definitions must submit annual reports by May 31, 2024. for top-tier engineers to rival companies has been Failure to comply with the Act can result in significant elevated. As our world undergoes electrification, another business risks, including legal penalties, reputational significant transformation is occurring as a substantial damage, supply chain disruptions, and market access number of baby boomers retire. HPS, too, experiences challenges. Management of the Corporation has no the effects of these demographic changes, particularly knowledge of non-compliance in its supply chain in the retirement of key and essential skill sets. and in an effort to ensure compliance, has engaged a The demand for skilled engineering professionals is consulting firm to assist with supply chain due diligence exceeding the available global supply, making it harder and to meet its reporting obligations to the Ministry of to find and attract the right talent locally or globally. Labour. This is leading to extended recruitment lead times, increased salary expectations and elevating labour costs. The need to choose a candidate quickly due to Risk of cyber attack Globally there have been increased incidences of outside multiple competing offers can lead to a misalignment in cyberattacks and viruses on companies’ information terms of cultural fit. This misalignment has the potential infrastructure and technologies. A successful cyber- to compromise both the quality of our projects and the attack could result in misappropriation of assets, cause cohesion of our teams, all while posing a challenge to interruptions to manufacturing and our ability to take maintaining our organizational culture during periods orders, as well as impact our general productivity. of rapid expansion. Our culture serves as a pivotal This risk is reduced through several initiatives to component of our brand reputation within our market. mitigate exposure, including a transition to cloud- Given organizations are competing for limited based applications, periodic risk assessments, and engineering resources, the risk of poaching or high more robust practices around employee training and turnover remains a concern. Proactive and creative awareness and system updates. recruitment strategies, competitive compensation packages and intentional retention strategies to We may not realize all of the anticipated benefits preserve cultural fit are ways of ensuring these risks to of our acquisitions, divestitures, joint ventures or delivering our growth initiatives are mitigated. strategic initiatives, or these benefits may take longer to realize than expected. In order to be profitable, the Company must successfully execute upon its strategic initiatives and effectively 33 Annual Report 2023DOLLARS IN THOUSANDS UNLESS OTHERWISE STATED MANAGEMENT’S DISCUSSION AND ANALYSIS manage the resulting changes in its operations. The on growth in our sales in non-Canadian markets. Our Company’s assumptions underlying its strategic global operations are subject to numerous financial, initiatives may be subjective, the market may react legal and operating risks, such as political and economic negatively to these plans and HPS may not be able to instability; prevalence of corruption in certain countries; successfully execute these plans. Even if successfully enforcement of contract and intellectual property executed, the initiatives may not be effective or may rights; and compliance with existing and future laws, not lead to the anticipated benefits within the expected regulations and policies, including those related to time frame. tariffs, investments, taxation, trade controls, product HPS’ strategic initiatives can include acquisitions content and performance, employment and repatriation and joint ventures. To be successful, management will of earnings. conduct due diligence to identify valuation issues and potential loss contingencies, negotiate transaction Our global business translates into conducting terms, complete complex transactions and manage business in various currencies, all of which are post-closing matters such as the integration of acquired startup businesses. Management’s due diligence subject to fluctuations. HPS’ global footprint exposes the Company to reviews are subject to the completeness and accuracy currency fluctuations and volatility and, at times, has of disclosures made by third parties. The Company had a significant impact on the financial results of the may incur unanticipated costs or expenses following Company. The Company’s functional currency is the a completed acquisition, including post-closing asset Canadian dollar with its operating results reported in impairment charges, expenses associated with Canadian dollars. A significant portion of the Company’s eliminating duplicate facilities, litigation or other liabilities. sales and material purchases are denominated in U.S. Many of the factors that could have an adverse dollars. There is a natural hedge, as sales denominated impact will be outside of management’s control and in U.S. dollars are largely offset by the cost of raw could result in increased costs and decreases in materials purchased from the U.S. and commodities the amount of expected revenues and diversion of tied to U.S. dollar pricing. A change in the value of management’s time and attention. Failure to implement the Canadian dollar against the U.S. dollar will impact an acquisition strategy, including successfully integrating earnings, significantly at times. Generally, a lower value acquired businesses, could have an adverse effect on for the Canadian dollar compared to the U.S. dollar will our business, financial condition and result of operations. have a beneficial impact on the Company’s results, while a higher value for the Canadian dollar compared to the We sell to customers around the world and have U.S. dollar will have a corresponding negative impact on global operations and, therefore, are subject to the Company’s profitability. the risks of doing business in many countries. HPS does business in a host of countries around HPS has partially reduced the impact of foreign exchange fluctuations by increasing our U.S. dollar the world. Approximately 75% of our sales are to driven manufacturing output, periodically instituting customers outside of Canada. In addition, several of our price increases to help offset negative changes and manufacturing operations, suppliers and employees entering into forward foreign exchange contracts. are located in many places around the world. The future success of our business depends in large part 34 Hammond Power Solutions Worldwide HPS is subject to, and required to risks that could be challenging for the Company. The comply with, multiple income and other taxes, impact of these political changes can be difficult to regulations and is exposed to uncertain tax predict and can have a pervasive impact on the global liabilities risk. The Company operates and is subject to income tax and business climate. Changes in political leaders can impact trade relations as well as taxes and/or duties. other forms of taxation in numerous tax jurisdictions. HPS’ current structure includes a significant amount of Taxation laws and rates, which determine taxation business that crosses borders and any changes in the expenses, may vary significantly in different jurisdictions, current trade structure could have a material impact and legislation governing taxation laws and rates is also for us. HPS’ global footprint will be critical to mitigating subject to change. Therefore, the Company’s earnings any impact for political changes that would modify the may be impacted by changes in the proportion of current trade relationships. earnings taxed in different jurisdictions, changes in taxation rates, changes in estimates of liabilities and changes in a number of other forms of taxation. Tax Our industry is highly competitive. HPS faces competition in all of our market segments. structures are subject to review by both domestic and Current and potential competitors may have greater foreign taxation authorities. Tax filings are subject to brand name recognition, more established distribution audits, which could materially change the amount of networks, access to larger customer bases and current and deferred income tax assets and liabilities. substantially greater financial, distribution, technical, sales and market, manufacturing and other resources We face the potential harms of natural disasters, than HPS does. As a result, those competitors may pandemics, acts of war, terrorism, international have advantages relative to HPS; including stronger conflicts or other disruptions to our operations. Our business depends on the movement of goods bargaining power with suppliers that may result in more favourable pricing, the ability to secure supplies at times around the world. Natural disasters, pandemics, of shortages, economies of scale in production, the acts or threats of war or terrorism, international ability to respond more quickly to changing customer conflicts, political instability and the actions taken by demands and the ability to devote greater resources to governments could cause damage to or disrupt our the development, promotion and sales of their products business operations, our suppliers or our customers and services. If HPS is unable to compete effectively, and could create economic instability. Although it is not it may experience a loss of market share or reduced possible to predict such events or their consequences, profitability. We expect the level of competition to these events could decrease demand for our products remain high in the future. make it difficult or impossible to deliver our products or disrupt our global material sourcing. Our business is highly sensitive to global and 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 regional economic conditions in the industries we serve. Current global economic conditions influence the Company’s focus, direction, strategic initiatives and financial performance. To address the current which we do business may result in several geopolitical uncertainty, we are focusing our efforts on projects 35 Annual Report 2023DOLLARS IN THOUSANDS UNLESS OTHERWISE STATED MANAGEMENT’S DISCUSSION AND ANALYSIS that will increase our market reach, advance our cost quarterly. Any sales exceeding those limits require competetiveness, 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 growing our access to a variety of domestic and global Off-balance sheet arrangements The Company has no off-Balance Sheet arrangements, markets. This will be achieved through our current and other than capital commitments disclosed in note 15 new OEM and distributor channels. in the Notes to the Consolidated Financial Statements contained in our 2023 Annual Report. The disruption to businesses that can come from unpredictable weather can have an impact on sales volume as customer projects can be delayed Transactions with related parties The Company had transactions with related parties or cancelled. Extreme weather conditions such as heavy rains, in 2023, as disclosed in note 23 in the Notes to the Consolidated Financial Statements contained in our flooding, snowfall, tornadoes and hurricanes can 2023 Annual Report. potentially have a negative impact on the Company’s sales trends and booking rates. When these conditions are present, the Company may see short-term effects Proposed transactions The Company had no proposed transactions as at of such occurrences due to their unpredictability. This December 31, 2023. The Company continues to evaluate may impact delivery and capacity requirements. potential business expansion initiatives in accordance 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 customer is analysed individually for creditworthiness before the Company’s standard payment and delivery terms and conditions are offered. The Company’s review includes external ratings, if they are available, financial statements, credit agency information, industry information and in some cases bank references. Sale with its long-term growth strategy. Financial instruments The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, long- term lease receivable, bank operating lines of credit, accounts payable and accrued liabilities, contingent consideration and the following derivative instruments. As at December 31, 2023, the Company had outstanding foreign exchange contracts in place for 14,500 Euros (“EUR”) and $12,658 USD – both of which were implemented as a hedge against translation gains and losses on inter-company loans as well as $45,000 USD to hedge the U.S. dollar denominated accounts payable in Canadian HPS operations. The Company also had outstanding foreign exchange contracts to sell limits are established for each customer and reviewed for $16,656 USD. 36 Hammond Power Solutions Further details regarding the Company’s financial to any warranty claim. instruments and the associated risks are disclosed Quantifying provisions inherently involves judgment, in note 26 in the Notes to the Consolidated Financial and future events and conditions may impact these Statements contained in our 2023 Annual Report. assumptions. Differences in actual future experience from the assumptions utilized may result in a greater or Critical accounting estimates The preparation of the Company’s consolidated financial lower warranty cost. statements requires Management to make estimates and assumptions that affect the reported amounts Outstanding share data Details of the Company’s outstanding share data as of of assets, liabilities, revenues and expenses and the December 31, 2023, are as follows: disclosure of contingent assets and liabilities. These 9,126,624 Class A Shares estimates are based upon Management’s historical 2,778,300 Class B Common Shares experience and various other assumptions that are 11,904,924 Total Class A and B Shares believed by Management to be reasonable under the circumstances. There have been no material changes to the outstanding Such assumptions and estimates are evaluated share data as of the date of this report. on an ongoing basis and form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other New accounting pronouncements The Group adopted the following amendments in its sources. Actual results could differ from these estimates. financial statements for the annual period beginning on The Company conducts its annual impairment January 1, 2023. The adoption of the amendments did assessment of goodwill, intangible assets and property, not have a material impact on the consolidated financial plant and equipment in the fourth quarter of each year, statements. which corresponds with its annual planning cycle, and • Definition of accounting estimates (Amendments to whenever events or changes in circumstances indicate IAS 8); that the carrying amount of an asset or Cash Generating • Disclosure initiative – accounting policies Unit (“CGU”) may not be recoverable. The Company did (Amendments to IAS 1 and IFRS Practice Statement 2 not identify any triggering events during the course of Making Materiality Judgements); and 2023 indicating that the carrying amount of its assets • Deferred tax related to assets and liabilities arising and CGUs may not be recoverable, which would require from a single transaction (Amendments to IAS 12 the performance of an impairment test for those CGUs Income Taxes). which did not contain goodwill. The Company records a provision for warranties based on historical warranty claim information and New accounting pronouncements to be adopted The International Accounting Standards Board has anticipated warranty claims, based on a weighted issued the following Standards, Interpretations and probability of possible outcomes. Amendments to Standards that are not yet effective, The key assumptions made by management in have not yet been adopted by the Group and are not recording the provision are i) warranty cost, ii) probability expected to have a material impact on the consolidated of claim, and iii) quantum of units which may be subject financial statements. 37 Annual Report 2023DOLLARS IN THOUSANDS UNLESS OTHERWISE STATED MANAGEMENT’S DISCUSSION AND ANALYSIS The following amendments are effective for the o Making HPS a preferred employer. annual period beginning on January 1, 2024: • Building a Sustainability Program by • Classification of liabilities as current or non-current o Designing energy efficient products; (Amendments to IAS 1) and Non-current liabilities with o Shrinking our ecological footprint; and covenants (Amendments to IAS 1); and o Energizing the world in a responsible way for • Lease liability in a sale and leaseback (Amendments the generations to come. to IFRS 16). Strategic direction and outlook HPS experienced a successful 2023. The Company The demand for our transformers particularly in North America continues to grow and sales volumes accelerated in 2023. Towards the end of 2023, growth rates in certain sectors, like commercial construction has a rich and extensive history of growth, innovation and industrial applications began to level out. and resilience and 2023 saw significant growth and Commodity costs stabilized during the year protecting progress. The Company has navigated through difficult gross margin rates. It has been, and is, HPS’ objective and fluctuating economic times, increased globalization, to maintain gross margins while delivering value to our adapted to changes in customers and markets and customers. We will continue to do so in the future. has experienced significant advances in technology. We continue to add new distributors and have HPS has framed these challenges as opportunities and implemented additional infrastructure in place to developed strategies to address these rapid changes. support our growth initiative into Mexico. We believe The Company is confronting these challenges that Mexico has strong potential for us as a sales market and continuously building our strategic advantage by due to its proximity to our manufacturing locations and focusing on: our ability to leverage existing people, product, and • Developing our Customers and Markets by: supply chain. o Driving organic growth through continuing to Our acquisition of Mesta in 2021 has expanded develop our NAED channel; HPS’ offering into standard and custom active filter and o Offering competitive products, including an induction heating products. Mesta shares an excellent expanding product quality offering; reputation for product quality, design and reliability. o Providing unparalleled service to our customers; Mesta not only expands HPS’ U.S. presence but also and broadens our power solutions product offering and o Growing through strategic acquisitions. manufacturing capabilities in power quality solutions. • Achieving Operational and Financial Excellence by: Mesta continues to contribute to both the increase o Driving continuous improvement; in revenue as well as the increase in profits. During o Improving efficiency by investing in equipment, Quarter 2, 2023 the Mesta manufacturing location people and technology; and building, which was previously leased, was purchased. o Optimizing the efficiency of our global Expansion of this building is planned for the end of 2023 manufacturing footprint. and into 2024. • Developing our People and Culture by: HPS has modern manufacturing facilities throughout o Building our leadership team for the future; the world, and this continues to be enhanced through o Developing our people to excel and thrive; and our committed capital investment. As we grow, we are 38 Hammond Power Solutions investing in equipment and machinery that will allow us productivity gains, cost reduction and capacity flexibility. to keep up with future demand and allow us to optimize HPS’ strategic vision and operational initiatives our manufacturing capabilities at our various locations. have supported our industry leadership, operational We are also investing in business technology that will strength and financial stability. The combination of our help us become more efficient and provide us with the resilience, drive, decades of experience, commitment, data that we need to improve our business. Our focus engineering expertise, solid supplier relationships and a in this area is evident by the high spending on capital broad and unique business perspective gained through expenditures during 2023. our diverse products, customers and markets are all With a focus on growth and advancement, key success factors critical to our success. HPS intends to increase its capital program by approximately $2 million over 2023 through 2025. These planned capital investments are focused on areas targeted to increase capacity and reduce lead times for low voltage distribution power, power quality and induction heating products. These investments are also expected to support HPS’ supply chain resilience initiatives. In Mexico, HPS is in the process of setting up an approximately 110,000 square foot small products facility, while also adding equipment to existing facilities there. HPS is also expanding its manufacturing capacity at the Mesta location in Pennsylvania, USA, as well as its facility in Guelph, Ontario, Canada. The Company has provided shareholders with strong earnings per share, solid cash generation and quarterly dividends paid with an attractive yield. To continue this trend HPS is focused on sales development, continued distributor channel expansion, product development, and bringing quality and value to all that we produce. Our strategic initiatives and focused plans will continue to allow HPS to grow and expand. The Company continues to have a strong reputation of being an industry leader and is both operationally and financially strong. HPS is well positioned to meet the evolving needs of our traditional markets while becoming a leading player in a growing number of other market sectors. We continue to be focused on escalation of market share, improved sales growth from new product development, geographic diversification, 39 Annual Report 2023DOLLARS IN THOUSANDS UNLESS OTHERWISE STATED Selected Annual and Quarterly Information (tabular amounts in thousands of dollars) Annual Information Sales Earnings from operations EBITDA Net earnings (loss) Total assets Non-current liabilities Total liabilities Total shareholders’ equity attributable to equity holders of the Company Operating debt, net of cash Cash provided by operations Basic earnings per share Diluted earnings per share Dividends declared and paid Average exchange rate (USD$=CAD$) Book value per share 2019 2020 2021 2022 2023 322,097 380,202 558,464 358,792 20,543 28,175 11,607 214,953 11,271 105,186 109,767 (9,326) 17,810 0.99 0.99 3,287 1.327 9.36 22,041 29,482 14,062 23,151 30,114 15,176 189,394 235,099 8,329 75,478 113,916 (1,278) 19,683 1.20 1.20 3,993 1.343 9.70 7,104 109,097 126,002 1,638 20,447 1.29 1.28 4,009 1.253 10.69 59,441 69,746 44,828 302,673 8,101 125,779 710,064 86,721 95,995 63,399 408,343 12,500 177,965 176,894 230,378 21,972 37,013 3.79 3.77 4,556 1.301 15.00 34,120 44,108 5.33 5.33 6,548 1.350 19.54 Quarterly Information Q1 2022 Q2 Q3 Q4 Q1 2023 Q2 Q3 Q4 Sales 127,782 137,476 148,953 144,253 171,134 172,451 179,521 186,958 Earnings from operations 12,658 10,046 16,118 20,369 22,623 18,957 20,480 24,661 EBITDA Net earnings Total assets 14,458 12,225 18,970 24,093 24,145 21,444 23,657 26,749 8,569 6,505 11,531 18,223 15,726 13,333 14,437 19,903 253,340 283,852 315,864 302,673 327,116 339,358 373,761 408,343 Non-current liabilities 6,170 5,793 6,640 8,101 9,413 9,800 8,373 12,500 Total liabilities 119,565 140,791 152,187 125,779 135,572 138,863 155,952 177,965 Total shareholders’ equity attributable to equity holders of the Company 133,775 143,061 163,677 176,894 191,594 200,495 217,809 230,378 Operating cash (debt, net of cash) Cash (used) provided by operations Basic earnings per share Diluted earnings per share 0.72 0.72 Dividends declared and paid 1,006 Average exchange rate (USD$=CAD$) Book value per share 1.267 11.39 40 (905) 9,542 21,843 5,352 7,127 11,717 22,130 34,120 537 14,623 16,501 1,837 (10,466) 12,295 22,159 21,053 0.55 0.55 1,183 1.276 12.13 0.97 0.97 1,184 1.55 1.53 1,183 1.305 1.358 13.88 15.00 1.32 1.32 1,488 1.351 16.31 1.12 1.12 1,488 1.345 1.21 1.21 1,787 1.340 17.01 18.47 1.68 1.68 1,785 1.365 19.54 Hammond Power SolutionsManagement’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 IFRS Accounting 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. Adrian Thomas Chief Executive Officer Richard C. Vollering Corporate Secretary & Chief Financial Officer March 27, 2024 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, 2023 and end of December 31, 2022 • 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 material accounting policy information (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 at December 31, 2023 and December 31, 2022, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with IFRS Accounting Standards. 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. 41 Annual Report 2023 Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements for the year ended December 31, 2023. 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)(i), 3(g) and 13 of the financial statements. The goodwill balance is $11,736 thousand, of which, $7,975 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. There is a significant risk of misstatement as changes to certain significant estimates and assumptions could have a significant effect on the recoverable amount of the India CGU. As a result, significant auditor judgment was required in evaluating the results of the audit procedures. How the matter was addressed in the audit The following are the primary procedures we performed to address this key audit matter: • We compared the Entity’s historical projected revenue and projected gross margin rates to actual results to assess the Entity’s ability to accurately project revenue and gross margin rates. • We performed sensitivity analyses over the projected revenue and gross margin rate assumptions by using average actual growth rates realized in previous years to assess the impact on the Entity’s determination that the estimated recoverable amount of the CGU exceeded its carrying value. • We 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 2023”. 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 2023 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 IFRS Accounting Standards, 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. 42 Hammond Power Solutions In preparing the financial statements, management is responsible for assessing the Entity’s ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Entity or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Entity’s financial reporting process. Auditor’s Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Entity’s internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. • Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Entity’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our 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 on the audit resulting in this auditor’s report is Alexandra Duret. March 27, 2024 Kitchener, ON, Canada 43 Annual Report 2023 Consolidated Statements of Financial Position (in thousands of dollars) Assets Current assets Cash and cash equivalents (note 4) Accounts receivable (note 5) Inventories (note 6) Income taxes receivable Prepaid expenses and other assets (notes 7 and 8) Total current assets Non-current assets Property, plant and equipment (note 9) Investment in properties (note 10) Deferred tax assets (note 17) Intangible assets (note 12) Goodwill (note 13) Total non-current assets Total assets Liabilities Current liabilities As at December 31, 2023 December 31, 2022 $ 52,591 $ 128,030 114,590 4,278 9,949 309,438 65,841 2,940 11,798 6,590 11,736 98,905 28,126 86,701 106,353 1,995 6,948 230,123 41,742 3,121 8,013 7,650 12,024 72,550 $ 408,343 $ 302,673 Bank operating lines of credit (note 14) $ 18,471 $ Accounts payable and accrued liabilities (notes 18 and 27) Deferred revenue (note 22) Income taxes payable Provisions (note 21) Current portion of lease and other liabilities (notes 15 and 27) Total current liabilities Non-current liabilities Provisions (note 21) Deferred tax liabilities (note 17) Long-term portion of lease and other liabilities (notes 15 and 27) Total non-current liabilities Total liabilities Shareholders’ Equity Share capital (note 18) Contributed surplus Accumulated other comprehensive income Retained earnings Total shareholders’ equity Commitments (note 16) Subsequent events (note 30) Total liabilities and shareholders’ equity See accompanying Notes to Consolidated Financial Statements. On behalf of the Board: 126,360 5,721 4,602 3,923 6,388 $ 165,465 $ 307 22 12,171 12,500 177,965 15,761 2,289 8,630 203,698 230,378 $ $ 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 $ $ 408,343 $ 302,673 William G. Hammond Chair of the Board David Wood Audit Chair 44 Hammond Power Solutions Consolidated Statements of Operations Years ended December 31, 2023 and 2022 (in thousands of dollars except for per share amounts) Sales (note 22) Cost of sales (notes 6) Gross margin Selling and distribution (note 27) General and administrative Earnings from operations Finance and other costs Interest expense Foreign exchange loss (gain) Share of income of investment in joint venture, net of tax (note 11) Other (note 27) Net finance and other costs Earnings before income taxes Income tax expense (recovery) (note 17): Current Deferred Net earnings Earnings per share (note 19) Basic earnings per share Diluted earnings per share See accompanying Notes to Consolidated Financial Statements. 2023 2022 $ 710,064 $ 558,464 479,053 231,011 76,283 68,007 $ 144,290 $ 86,721 1,320 1,280 – 127 2,727 393,279 165,185 62,263 43,481 105,744 59,441 1,596 (96) (4) 776 2,272 83,994 57,169 23,961 (3,366) 20,595 63,399 $ 15,234 (2,893) 12,341 44,828 5.33 5.33 $ $ 3.79 3.77 $ $ $ 45 Annual Report 2023Consolidated Statements of Comprehensive Income Years ended December 31, 2023 and 2022 (in thousands of dollars) Net earnings Other comprehensive income 2023 2022 $ 63,399 $ 44,828 Items that will be recognized within profit and loss: Foreign currency translation differences for foreign operations Other comprehensive (loss) income, net of income tax (3,801) (3,801) Total comprehensive income $ 59,598 $ 10,322 10,322 55,150 See accompanying Notes to Consolidated Financial Statements. 46 Hammond Power SolutionsConsolidated Statements of Changes in Equity Years ended December 31, 2023 and 2022 (in thousands of dollars) SHARE CAPITAL CONTRIBUTED SURPLUS AOCI* RETAINED EARNINGS TOTAL SHAREHOLDERS’ EQUITY Balance at January 1, 2022 $ 14,886 $ 2,432 $ 2,109 $ 106,575 $ 126,002 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 18) Stock options exercised (note 18) Total transactions with owners – – – – – 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 Balance at January 1, 2023 $ 15,240 $ 2,376 $ 12,431 $ 146,847 $ 176,894 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 18) Stock options exercised (note 18) Total transactions with owners Balance at December 31, 2023 – – – – – 521 521 – – – – – (87) (87) – 63,399 63,399 (3,801) (3,801) (3,801) – – 63,399 – – – (6,548) – (6,548) (3,801) (3,801) 59,598 (6,548) 434 (6,114) $ 15,761 $ 2,289 $ 8,630 $ 203,698 $ 230,378 *AOCI – Accumulated other comprehensive income See accompanying Notes to Consolidated Financial Statements. 47 Annual Report 2023 Consolidated Statements of Cash Flows Years ended December 31, 2023 and 2022 (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 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 (note 11) 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 18) Cash dividends paid (note 18) Net advances (repayments) of bank operating lines of credit Interest paid Payment of lease liabilities (note 15) Payment of contingent consideration Cash provided by (used in) financing activities Foreign exchange on cash and cash equivalents held in a foreign currency Cash acquired in business combination (notes 11) 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. 48 2023 2022 $ 63,399 $ 44,828 – (4) 9,381 1,300 2,713 1,320 20,595 1,138 19,954 119,800 (51,708) 68,092 (23,984) 44,108 1,193 – (20,169) (384) (19,360) 434 (6,548) 12,317 (867) (3,906) (675) 755 (1,038) – 24,465 28,126 52,591 $ 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 Hammond Power SolutionsNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2023 and 2022 (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. a) Basis of preparation Statement of compliance These consolidated financial statements have been prepared in accordance with IFRS Accounting Standards (“IFRS”), and were approved by the Board of Directors on March 27, 2024. 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. 49 Annual Report 2023 The functional currency of the Company’s Canadian operations and its subsidiaries are as follows: Canadian and Subsidiary Operations Functional Currency Hammond Power Solutions Inc. Delta Transformers Inc. Hammond Power Solutions, Inc. Mesta Electronics LLC 11020 Parker Drive LLC 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 Hammond Power Solutions S.p.A. Continental Transformers s.r.l. Hammond Power Solutions Private Limited Euro Rupee (Pesos) (EU €) (INR) d) Use of estimates and judgements 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 judgment. The Company has defined its cash generating units primarily as each manufacturing and contract manufacturing location, due to the fact that each location is managed separately and has its own dedicated human resources and property, plant and equipment. Each manufacturing facility produces products largely independent of the other facilities and is ultimately responsible for producing products that generate revenue. Management monitors the performance of each manufacturing unit through the use of profitability analysis, and also considers the profitability of each manufacturing unit relative to the Group’s business plan. 50 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)Hammond Power Solutions Initial lease term The Group leases certain manufacturing facilities, warehouse facilities, vehicles and other assets. In determining the value of a right-of-use asset and lease liability, IFRS 16 requires the Group to determine the lease payments to be made over the initial term of the lease, including renewal options which are reasonably certain to be exercised. Such payments are then discounted based on the interest rate implicit in the lease or the Group’s incremental borrowing rate. In determining the initial lease term, Management makes an assessment of the renewal periods available to the Group within each lease and evaluates the likelihood and corresponding time horizon of available renewal options. Such assessments involve judgment and ultimately may differ from the terms of leases actually experienced. Operating segments An operating segment is a component of an entity that engages in business activities from which it may earn revenues and incur expenses, whose operating results are regularly reviewed by the entity’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. The determination of operating segments involves judgment. Management has determined that the Group operates as a single operating segment, being the design, manufacture and sale of transformers. Identification of acquired assets and liabilities IFRS 3, Business Combinations, requires acquirers to recognize, separately from goodwill, the identifiable assets acquired and liabilities assumed. The identification of acquired assets and liabilities involves judgment. ii) Key sources of estimation uncertainty The following are the key sources of estimation uncertainty at the end of the reporting period that have a significant risk of causing a material adjustment to the consolidated financial statements within the next twelve months. Recoverability of goodwill and intangible assets The Group tests annually or more frequently if necessary, whether goodwill or other long-lived assets have suffered any impairment in accordance with the accounting 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 51 For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)Annual Report 2023 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 13. 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 judgment, and future events and conditions may impact these assumptions. Differences in actual future experience from the assumptions utilized may result in a greater or lower warranty cost. For further information on the Group’s provisions, refer to note 21. 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. On January 1, 2023 the Company adopted amendments within IAS 1 Presentation of Financial Statements related to the Disclosure of Accounting Policies. The changes required an entity to disclose material rather than significant accounting policies and provided guidance identifying material accounting policies relevant to users of the financial statements. Accordingly, management reviewed its accounting policies and updated the accounting policy information within this note to align with these amendments. a) Basis of consolidation The consolidated financial statements include the accounts of Hammond Power Solutions Inc. and its wholly- owned subsidiaries: • • • Hammond Power Solutions, Inc. Hammond Power Solutions, S.A. de C.V. Delta Transformers Inc. 52 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)Hammond Power Solutions • • • • • • Hammond Power Solutions Private Limited Continental Transformers s.r.l. Hammond Power Solutions S.p.A. Mesta Electronics LLC 11020 Parker Drive LLC 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 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 prior 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 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 of the Group. 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 53 For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)Annual Report 2023 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. • 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. 54 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)Hammond Power Solutions 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. 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. 55 For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)Annual Report 2023 f) Research and development expenses Research expenses are recognized as expenses in the financial period incurred. Development expenses are recognized as an intangible asset if the Group can demonstrate the technical feasibility of making the intangible asset ready for commissioning or sale; its intention to complete the intangible asset and use or sell it; its ability to use or sell the intangible asset; how the intangible asset will generate future economic benefits; the availability of the appropriate resources (technical, financial or other) to complete development and use or sell the intangible asset; and its ability to provide a reliable estimate of expenses attributable to the intangible asset during its development. g) Business Combinations and Goodwill The Group accounts for business combinations using the acquisition method when the acquired set of activities and assets meets the definition of a business and control is transferred to the Group. In determining whether a 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 56 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)Hammond Power Solutions 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, 2023. 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) 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. j) 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. 57 For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)Annual Report 2023 k) 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. Long Term Incentive Plan The Company maintains a long-term Incentive plan (“LTIP”) for the Executive Officers of the Company. This plan replaces the Deferred Share Unit plan for executives. The LTIP consists of an annual grant made to the Chief Executive officer and other executive officers of Performance Share Units (“PSU”) and Restricted Share Units (“RSU”). According to the plan, the PSUs constitute 60% of the total grant and will vest at the end of a three-year period at a ratio of 0% - 150%, depending on whether management met pre-determined EPS and return on net asset (“RONA”) targets. The RSUs constitute the remaining 40% of the grant and will vest at the end of a three- year period at 100%. The increase or decrease in value of the vested PSU’s and RSU’s over the three-year period will be determined by the increase or decrease of the share price. The annual grant is determined by the Compensation Committee, and are currently set at 35% of the executive’s salary and 50% of CEO’s salary. The grant vests after a three-year performance period and is dependent on continuous employment with the Company over that period, with exceptions for retirement and involuntary terminations. After vesting, the value of the PSUs and RSUs will be determined based on the PSU 58 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)Hammond Power Solutions vesting factor and the share price. The value will be paid in cash to the participant, after which, the PSUs and RSUs will be extinguished. Under IFRS, RSUs and PSUs are classified as cash-settled share-based payment transactions as the participants shall receive cash following a Redemption Event, as defined in the LTIP Plan. LTIP units contain vesting conditions, 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 RSUs and PSUs 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 RSUs and PSUs is determined in accordance with the LTIP Plan, which uses the average closing price for HPS shares for the five trading days immediately preceding the relevant date. The LTIP liability is included within accrued liabilities. l) Provisions Provisions comprise liabilities of uncertain timing or amounts that arise from restructuring plans, environmental, litigation, commercial or other risks. Provisions are recognized when there exists a legal or constructive obligation stemming from a past event and when the future cash outflows can be reliably estimated. A provision for warranties is recognized when the underlying products or services are sold. The provision is based on historical warranty data and a weighting of all possible outcomes against their associated probabilities. A restructuring provision relating to a sale or termination of a line of business, the closure of business locations in a country or region, changes in management structure or fundamental reorganizations that have a material effect of the nature or focus of the Group’s operations are recognized when the Group has a detailed, formal plan for the restructuring that identifies: • • • • The business or part of a business concerned; The principal locations affected; The location, function and approximate number of employees affected; The expenditures that will be undertaken; and • When the plan will be implanted. Notwithstanding the above, no provision is recorded until such time a valid expectation by those affected by the plan has been raised. m) 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 59 For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)Annual Report 2023 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. n) Income taxes Income tax expense comprises current and deferred tax. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date and any adjustment to tax payable in respect of previous years. Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted at the reporting date. A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. o) Employee benefits The Group maintains a defined contribution plan, which is described in note 20, 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 60 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)Hammond Power Solutions 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. p) 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). Foreign currency gains and losses are reported on a net basis. q) 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. r) Leases The Group recognizes a right-of-use asset and a lease liability at the lease commencement date. The right- of-use asset is initially measured at cost, and subsequently at cost less any accumulated depreciation and impairment losses, and adjusted for certain remeasurements of the lease liability. The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group’s incremental borrowing rate. Generally, the Group uses its incremental borrowing rate as the discount rate. The group applies a single discount rate to the portfolio of leases with reasonably similar characteristics. The lease liability is subsequently increased by the interest cost on the lease liability and decreased by lease payments made. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, a change in the estimate or the amount expected to be payable under a residual value guarantee, or as appropriate, changes in the assessment of whether a purchase or extension option is reasonably certain to be exercised or a termination option is reasonably certain not to be exercised. The Group does not recognize right-of-use assets and lease liabilities for contracts that have a lease term of 12 months or less or are low-value assets (under $5,000). s) 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, 2023. The adoption of the amendments did not have a material impact on the consolidated financial statements. • Definition of accounting estimates (Amendments to IAS 8); 61 For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)Annual Report 2023 • • Disclosure initiative – accounting policies (Amendments to IAS 1 and IFRS Practice Statement 2 Making Materiality Judgements); and Deferred tax related to assets and liabilities arising from a single transaction (Amendments to IAS 12 Income Taxes). t) 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, 2024: • Classification of liabilities as current or non-current (Amendments to IAS 1) and Non-current liabilities with covenants (Amendments to IAS 1); • Lease liability in a sale and leaseback (Amendments to IFRS 16). 4. Cash and cash equivalents Cash Cash equivalents 5. Accounts receivable Trade accounts receivable Value added tax receivable Other receivables December 31, 2023 December 31, 2022 $ $ 17,131 $ 35,460 52,591 $ 13,894 14,232 28,126 December 31, 2023 December 31, 2022 $ 110,938 $ 10,169 6,923 $ 128,030 $ 75,147 6,602 4,952 86,701 Trade accounts receivable is presented net of expected credit losses of $2,616,000 (December 31, 2022 – $2,806,000). A continuity of the Group’s allowance for doubtful accounts is as follows: Opening balance Additional allowances Writeoffs Adjustments 62 December 31, 2023 December 31, 2022 $ 2,806 $ 2,359 611 (31) (770) 837 (37) (353) $ 2,616 $ 2,806 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)Hammond Power Solutions 6. Inventories Raw materials Work in progress Finished goods December 31, 2023 December 31, 2022 $ 59,786 $ 5,332 49,472 51,773 3,154 51,426 $ 114,590 $ 106,353 Raw materials and changes in finished goods, and work in progress recognized as cost of sales during the year amounted to $478,499,000 (2022 – $391,317,000). In addition, during the year, write-downs in the amount of $12,000 were recognized (2022 – reversal of write-downs of $78,000). Inventories carried at net realisable value as at December 31, 2023 were $578,000 (December 31, 2022 – $485,000). 7. Prepaid and other assets Prepaid expenses Current portion of long-term lease and note receivable (note 8) December 31, 2023 December 31, 2022 $ $ 8,414 $ 1,535 9,949 $ 4,109 2,839 6,948 8. Lease receivable 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 included a put and call option related to the leased premises, exercisable within 60 days after September 30, 2023. The call option granted the purchaser an option to purchase the premises for consideration equal to 2,225,000 EUR (approximately $3,249,000). The put option granted HPS an option to sell the plant to the purchaser for consideration equal to the initial plant purchase price of 2,225,000 EUR. Under both the call and put option the plant purchase price was to be reduced by 50% of the monthly rent installments received, to a maximum of 375,000 EUR (approximately $548,000). If the purchaser failed 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 would pay 500,000 EUR (approximately $730,000) in liquidated damages. On November 22, 2023, given that the expiry date to exercise its put option was approaching and that the parties had not yet entered into any settlement agreement or a preliminary agreement for the sale and purchase 63 For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)Annual Report 2023 of the plant, the Group exercised its put option, specifying that the final plant purchase price, inclusive of any reduction agreed in the lease agreement, was equal to EUR 1,885,000. The date under which it will be settled has been extended into 2024. Should the parties enter into a settlement agreement, the above-mentioned term of 30 business days to execute the necessary agreement to purchase the plant shall be deemed as interrupted as at November 22, 2023 and shall start elapsing (i) only if the plant and the solar panels installed on the roof thereof are not purchased by the purchaser, and (ii) from the first day after the date on which the sale and purchase has not been completed pursuant to the settlement agreement. As a result of discussions with the purchaser in 2023, the Group and the purchaser are negotiating a settlement of various outstanding liabilities and necessary repairs to the building. As at December 31 consideration receivable consists of: Lease receivable of 1,050 EUR (2022 – 1,957 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 December 31, 2023 December 31, 2022 $ 1,535 $ – 1,535 2,867 (28) 2,839 Current portion included within prepaid expenses and other assets $ 1,535 $ 2,839 The aggregate amount of principal payments are expected to be received in the next year. Refer to note 30 for subsequent event disclosure regrading this transaction. 9. 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, 2023 December 31, 2022 $ $ 50,357 $ 15,484 65,841 $ 34,789 6,953 41,742 64 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)Hammond Power Solutions Land Buildings Leaseholds & Improvements Machinery & Equipment Office Equipment Construction in Progress & Deposits Total Cost Balance at January 1, 2022 $ 4,198 $ 18,518 $ 1,865 $ 55,207 $ 11,899 $ 4,353 $ 96,040 Acquisition (note 11) 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 Balance at January 1, 2023 $ 4,182 $ 19,651 $ 2,422 $ 69,551 $ 13,482 $ 3,036 $ 112,324 Additions Disposal Effect of movements in exchange rates 181 – 2,190 – 238 – (95) 4,561 1,696 13,072 21,938 – 77 – (95) (69) (989) (14) (60) 146 (1,069) Balance at December 31, 2023 $ 4,349 $ 21,781 $ 2,806 $ 72,948 $ 15,255 $ 16,039 $ 133,178 Accumulated Depreciation Balance at January 1, 2022 $ – $ 12,916 $ 1,246 $ 45,963 $ 10,763 $ – $ 70,888 Depreciation for the year Disposal Effect of movements in exchange rates – – – 826 – 128 – 2,908 (52) 703 (15) (17) 190 1,795 181 – – – 4,565 (67) 2,149 Balance at December 31, 2022 $ – $ 13,725 $ 1,564 $ 50,614 $ 11,632 $ – $ 77,535 Balance at January 1, 2023 $ – $ 13,725 $ 1,564 $ 50,614 $ 11,632 $ – $ 77,535 Depreciation for the year Disposal Effect of movements in exchange rates – – – 1,156 – 211 – 3,676 (70) 848 – (24) 152 (703) 40 – – – 5,891 (70) (535) Balance at December 31, 2023 $ – $ 14,857 $ 1,927 $ 53,517 $ 12,520 $ – $ 82,821 Carrying amounts At December 31, 2022 At December 31, 2023 $ 4,182 $ 5,926 $ 858 $ 18,937 $ 1,850 $ 3,036 $ 34,789 $ 4,349 $ 6,924 $ 879 $ 19,431 $ 2,735 $ 16,039 $ 50,357 Depreciation is recorded in the statement of earnings as follows: cost of sales $5,510,000 (2022 – $4,098,000), selling and distribution $nil (2022 – $nil) and general and administrative $381,000 (2022 – $467,000). 65 For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)Annual Report 2023 Right of use assets The Group leases many assets including buildings, vehicles and office equipment. Information about leases for which the Group is a lessee is presented below. Buildings Vehicles Office Equipment Balance at January 1, 2022 $ 5,237 $ 535 $ 36 $ Additions Disposal Depreciation Effect of movements in exchange rates Carrying amount at December 31, 2022 Balance at January 1, 2023 Additions Disposal Depreciation Effect of movements in exchange rates 3,527 (466) (2,159) 390 145 (47) (273) 43 – – (15) – $ $ 6,529 $ 403 $ 21 $ 6,529 $ 403 $ 21 $ 11,852 (438) (2,964) (272) 685 – (329) 10 – – (13) – Total 5,808 3,672 (513) (2,447) 433 6,953 6,953 12,537 (438) (3,306) (262) Carrying amount at December 31, 2023 $ 14,707 $ 769 $ 8 $ 15,484 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 $676,000, and is for a five- year term. The Group retains rights to renew this lease for 3 successive 5-year periods. • There was additional space leased during 2023 as an extension of this plant which commenced on March 15, 2023 with annual lease payments of $445,000 and is for a five-year term. • The Group’s lease on its second Mexican production facility was renewed on March 31, 2023 and carries annual lease payments of $690,500 and is for a four-year term. • There was a third space leased at the end of 2023 with a lease commencement date of February 2024 with annual lease payments of $1,495,000 and is for a seven year term. The Group retains rights to renew this lease for 2 successive five-year terms. The Company had accessed this facility as of December 31, 2023 to begin installing equipment and completing leasehold improvements. • 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. 66 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)Hammond Power Solutions 10. Investment in properties Glen Ewing Property Marnate Property (net of accumulated depreciation of $1,624 (2021 - $1,415)) December 31, 2023 December 31, 2022 $ $ 1,044 $ 1,044 1,896 2,940 $ 2,077 3,121 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 2023 or 2022. The property is carried at cost. The estimated fair value of the property as at December 31, 2023 is $1,150,000 (2022 – $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 $78,000 (2022 – $148,000). Marnate Property The Group owns a property in Marnate, Italy, (referred to as the Marnate Property). As part of the sale transaction of certain of the assets and liabilities of the Italian company in 2019, the purchaser has leased the Marnate Property for a period of five years at an annual rental amount of 100,400 EUR (approximately $147,000). The operating expenses for this property were 160,000 EUR (approximately $234,000) in 2023 and 225,000 EUR (approximately $326,000) in 2022. Depreciation on the facility was recorded in the statement of earnings as general and administrative expenses in the amount of $124,000 (2022 - $184,000). The estimated fair value of the property as at December 31, 2023 is 2,130,000 EUR (approximately $3,111,000). The fair value was determined based on independent available market evidence, based on comparable property sales, by an independent valuator. 11. Corefficient The Company and National Material L.P. (“National”) had 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 had 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 instalments, due monthly commencing March 2022. 67 For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)Annual Report 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 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 constituted 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. 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 The accounts receivable balance of $13,928,000, included in Accounts receivable and other assets above, was 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. The agreement includes a contingent consideration element relating to unrecognized tax loss carryforwards generated by Coreffecient, under which 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 2022 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, was 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 of the consolidated group would have been approximately $558,464,000 and net income of the consolidated group would have been $44,834,000. 68 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)Hammond Power Solutions 12. Intangible assets Intangible assets Cost Technology and Patents Customer lists, relationships and branding Externally acquired software Total Balance at January 1, 2022 $ 7,776 $ 12,006 $ 8,453 $ 28,235 Additions Effect of movements in exchange rates Balance at December 31, 2022 Balance at January 1, 2023 Additions Effect of movements in exchange rates $ $ – 33 – (311) 686 (45) 686 (323) 7,809 $ 11,695 $ 9,094 $ 28,598 7,809 $ 11,695 $ 9,094 $ 28,598 – (120) – (119) 384 – 384 (239) Balance at December 31, 2023 $ 7,689 $ 11,576 $ 9,478 $ 28,743 Accumulated Amortization Balance at January 1, 2022 Amortization for the year Effect of movements in exchange rates Balance at December 31, 2022 Balance at January 1, 2023 Amortization for the year Effect of movements in exchange rates $ 4,819 $ 7,988 $ 4,925 $ 304 (33) 872 (493) 2,610 (44) 17,732 3,786 (570) $ $ 5,090 $ 8,367 $ 7,491 $ 20,948 5,090 $ 8,367 $ 7,491 $ 20,948 309 (55) 328 (42) 663 2 1,300 (95) Balance at December 31, 2023 $ 5,344 $ 8,653 $ 8,156 $ 22,153 Balance at At December 31, 2022 At December 31, 2023 $ $ 2,719 $ 3,328 $ 1,603 $ 2,345 $ 2,923 $ 1,322 $ 7,650 6,590 Amortization of $560,000 (2022 – $2,704,000) has been recognized in cost of sales, $119,000 (2022 – $120,000) has been recognized in selling and distribution and $621,000 (2022 – $961,000) has been recognized in general and administrative. None of the intangible assets has been internally developed. Research and development expenses of $566,000 (2022 –$425,000) have been recognized in cost of sales in the consolidated statements of earnings. No research and development costs have been capitalized (2022 – $nil). 69 For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)Annual Report 202313. Goodwill and impairment testing for cash-generating units Goodwill Opening balance Effect of movements of exchange rates Ending balance December 31, 2023 December 31, 2022 $ $ 12,024 $ (288) 11,736 $ 12,216 (192) 12,024 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 2023 indicating that the carrying amount of its assets and CGUs may not be recoverable, which would require the performance of an impairment test for those CGUs which did not contain goodwill. Impairment testing for cash-generating units containing goodwill The Company has three subsidiaries identified as CGUs that contain goodwill. The CGUs and their respective goodwill balances are as follows: Delta Transformers Inc. (“Delta”) $2,180,000 (2022 – $2,180,000), Hammond Power Solutions Private Limited (“India”) $7,975,000 (2022 – $8,226,000) and Mesta Electronics LLC (“Mesta”) $1,581,000 (2022 – $1,618,000). For its 2023 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 18.10% (2022 – 18.8%). Through the five year cash flow projections, the Company’s model also incorporated year 1 sales growth rates of 40.6% (2022 – 44.3%). The annual sales growth rates for year 2 to year 5 are in the range of 15.0% – 25.3% (2022 – year 2 to year 5 – 9.1% – 19.0%) 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 8.0% (2022 – 8.0%). 70 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)Hammond Power Solutions Delta Based on the Company’s projections, a five year cash flow forecast was completed and discounted to present-value using discount rate of 17.1% (2022 –16.6%). Through the five year cash flow projections, the Company’s model also incorporated year 1 sales growth rates of 2.2% (2022 – 16.9%). The annual sales growth rates for year 2 to year 5 are 3.0% (2022 – year 2 to year 5 – 2.4% - 3.9%) 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 3.0% (2022 – 3.0%). Mesta Based on the Company’s projections, a five year cash flow forecast was completed and discounted to present-value using discount rate of 26.7% (2022 – 27.4%). Through the five year cash flow projections, the Company’s model also incorporated annualized year 1 sales growth rate of 24.9% (2022 – 83.0%). The annual sales growth rates for year 2 to year 5 are 3% (2022 –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 3.0% (2022 – 3.0%). Management’s approach to determining projected revenue includes consideration of current bookings, 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, 2023, a discount rate increase of 18.1% than the assumptions utilized would cause the estimated recoverable amount to be equal to the carrying amount for this CGU (December 31, 2022 – a discount rate increase of 7.6% or a 8.7% 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, 2023. 71 For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)Annual Report 2023 14. 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 4,000,000 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. The revolver facility bears interest at 2.25% plus the relevant Market Index, Euribor of 3.845% (2022 – plus margin of 2.25%, Euribor on December 31, 2022 – 1.895%, Euribor). 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”) (2022 – 515,000,000 INR) consisting of the sub- facilities of a 40,000,000 INR (2022 – 40,000,000 INR) short-term working capital demand loan, a 475,000,000 INR (2022 – 475,000,000 INR) facility for bank guarantees. The demand loan bears interest at the relevant Market Index + 2.5% and the bank guarantees are at a rate of 1.0%. As at December 31, 2023, there was $nil Canadian dollar equivalent of Rupees drawn against the working capital demand loan (2022 – $nil). As at December 31, 2023 there was 351,156,000 INR, Canadian equivalent $5,583,000 (2022 – 265,106,000 INR, Canadian equivalent $4,347,000) drawings against the bank guarantees. Based on exchange rates in effect at December 31, 2023, the combined Canadian dollar equivalent available across all facilities, prior to any utilization of the facilities was $80,353,000 (2022 – $82,122,000). As at December 31, 2023, the Canadian dollar equivalent outstanding under the U.S. dollar revolving credit facility was $13,902,000, consisting of $5,902,000 Canadian dollars drawn and the Canadian equivalent of $8,000,000 U.S. dollars drawn (2022 – $1,531,000 – consisting of $1,531,000 Canadian dollars drawn and the Canadian equivalent of $nil U.S. dollars drawn). As well, $4,569,000 (2022 – $4,623,000) Canadian dollar equivalent of Euros was outstanding under the Euro facility, and $nil (2022 – $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. 72 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)Hammond Power Solutions 15. 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, 2023 December 31, 2022 $ $ $ $ 16,421 $ 2,138 18,559 6,388 12,171 $ $ $ 8,593 2,846 11,439 4,434 7,005 December 31, 2023 December 31, 2022 $ 5,500 $ 11,838 2,877 20,215 (3,794) 16,421 4,250 12,171 $ $ $ $ $ $ $ $ $ $ 3,198 5,905 – 9,103 (510) 8,593 2,925 5,668 Year Ended December 31, 2023 Year Ended December 31, 2022 Interest on lease liabilities $ 395 $ 232 Amounts recognized in statement of cash flows Year Ended December 31, 2023 Year Ended December 31, 2022 Payment of lease liabilities $ 3,906 $ 3,004 16. Commitments December 31, 2023 December 31, 2022 Capital expenditure commitments $ 12,252 $ 3,484 73 For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)Annual Report 202317. Income taxes Income tax expense Current tax expense Current period Deferred tax recovery 2023 2022 $ 23,961 $ 15,234 Origination and reversal of temporary differences Decrease in tax rate (3,329) (37) (3,366) Total income tax expense $ 20,595 $ (2,894) 1 (2,893) 12,341 Reconciliation of effective tax rate 2023 2023 2022 2022 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 (increase) in tax rate Non-deductible expenses/non-taxable $ 63,399 $ 44,828 20,595 83,994 39.50% (11.04%) (0.04%) 33,178 (9,268) (37) 39.50% (12.82%) 0.00% 12,341 57,169 22,582 (7,328) 1 income (1.25%) (1,052) (0.50%) (284) Reduced rate for active business and manufacturing and processing Losses for which no deferred tax asset was recognized Dividend withholding tax Other (2.94%) (2,468) (1.89%) (1,081) 0.30% 0.00% (0.01%) 252 – (10) (4.05%) 0.84% 0.50% (2,314) 478 287 24.52% $ 20,595 21.58% $ 12,341 74 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)Hammond Power Solutions Unrecognized temporary differences At December 31, 2023, pre-tax temporary differences of $179,057,000 (2022 – $127,871,000) 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 $22,382,000 (2022– $15,984,000) based on current tax rates. Deferred tax assets have not been recognized in respect of the following items: Tax losses Basis difference in subsidiary Financial interests deductible in a future period Provisions Inventory Property, plant and equipment December 31, 2023 December 31, 2022 $ 9,848 $ 31,643 4,586 883 441 623 9,561 30,688 4,552 1,201 – – $ 48,024 $ 46,002 The tax losses, financial interests deductible, provisions, inventory and property, plant and equipment deductions carry forward indefinitely and relate to HPS S.p.A and Continental Transformers s.r.l. The basis difference in subsidiary, when realized, will provide the Company a capital loss that carries forward indefinitely. The benefit of these items has not been reflected in the consolidated financial statements as it is uncertain as to whether the Company will be able to utilize the deductions. 75 For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)Annual Report 2023Recognized deferred tax assets and liabilities Deferred tax assets and liabilities are attributable to the following: Property, plant and equipment $ 335 $ 1,166 $ (6,488) $ (3,539) Assets Liabilities 2023 2022 2023 2022 346 415 (378) (468) – 712 – 4,636 5,445 164 2,882 5,631 1,795 21,946 (10,148) 44 653 – 1,833 1,445 184 3,299 5,140 1,736 15,915 (7,902) (41) – (17) – (3,062) (3,832) – (159) – (161) (38) (4) – – (10,170) 10,148 (2) – – – (8,019) 7,902 (117) $ 11,798 $ 8,013 $ (22) $ Intangible assets Scientific research and experimental development Inventories Lease and note receivable Loans and borrowings Employee benefits Unrealized losses (gains) on forward contracts and foreign denominated loans payable/receivable Provisions and tax reserves Tax loss carry-forwards Basis difference in subsidiary Tax assets (liabilities) Set off of tax Net tax assets (liabilities) 76 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)Hammond Power SolutionsMovement in temporary differences during the year ended December 31, 2023: Balance December 31, 2022 Recognized in retained earnings Recognized in profit or loss Recognized in other comprehensive income Balance December 31, 2023 Property, plant and equipment $ 2,373 $ – $ 3,780 $ – $ Intangible assets Scientific research and experimental development Inventories Long-term lease and note receivable Loans and borrowings Employee benefits Unrealized gains on forward contracts and foreign-denominated loans payable/receivable Provisions and tax reserves Tax loss carry-forwards Basis difference in subsidiary Foreign exchange Income tax expense 53 (27) (653) 3,832 (1,833) (1,284) (182) (3,299) (5,140) (1,736) – – – – – – – – – – (21) 68 (59) (770) (2,803) (4,002) 56 421 (491) (59) – – – – – – – – – – $ (7,896) $ – $ (3,880) $ – $ $ $ 514 (3,366) 6,153 32 41 (712) 3,062 (4,636) (5,286) (126) (2,878) (5,631) (1,795) (11,776) 77 For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)Annual Report 2023Movement 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 and note receiveable 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 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) Foreign exchange Income tax expense 18. Share capital a) Authorized: 2,373 53 (27) (653) 3,832 (1,833) (1,284) (182) (3,299) (5,140) (1,736) (7,896) 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. 78 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)Hammond Power Solutionsb) Issued: 9,126,624 Class A subordinate voting shares (2022 – 9,056,624) 2,778,300 Class B common shares (2022 – 2,778,300) 11,904,924 Total A and B shares (2022 – 11,834,924) December 31, 2023 December 31, 2022 $ $ 15,754 $ 15,233 7 7 15,761 $ 15,240 During the year ended December 31, 2023, 70,000 Class A shares were issued upon exercise of stock options, resulting in cash proceeds of $434,000 and a transfer of $87,000 from contributed surplus. 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. The following dividends were declared and paid by the Company: 55 cents per Class A subordinate voting shares (2022 – 38.5 cents) 55 cents per Class B common shares (2022 – 38.5 cents) December 31, 2023 December 31, 2022 $ $ 5,020 $ 1,528 6,548 $ 3,486 1,070 4,556 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, 2023, or the year ended December 31, 2022. There were no options outstanding and exercisable as at December 31, 2023. December 31, 2023 December 31, 2022 Number of options Weighted average exercise price Number of options Weighted average exercise price Outstanding, beginning of year Exercised Cancelled Expired 70,000 $ (70,000) – – 6.20 6.20 – – 115,000 $ (45,000) – – 6.36 6.62 – – Outstanding, end of year – $ – $ 70,000 $ 6.20 79 For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)Annual Report 2023 d) Deferred Share Units Under the Company’s DSU Plan, participants may elect to defer compensation and receive DSUs equal to the value of the deferred compensation. The first DSUs were issued in March 2017. The number of DSUs was determined by dividing the amount of deferred compensation by the fair market value (“FMV”) of DSUs, defined in the DSU Plan as the weighted average closing price of HPS shares for the five business days immediately preceding the relevant date. Upon the occurrence of the redemption event, which could include ceasing to hold any position in the Company and/or any subsidiary or upon death of the participant, the affected participant will be entitled to receive a lump sum cash payment, net of applicable withholding taxes, equal to the product of number of DSUs held by that participant and the FMV on the date of the redemption event. The DSUs do not contain any vesting conditions or forfeiture provisions, as they are issued in exchange for deferred compensation, nor are they performance based. Under the DSU Plan, outstanding DSUs as at the record date are increased by the dividend rate whenever dividends are paid to shareholders. The movement in DSUs for the years ended December 31, 2022 and 2023 is as follows: Balance at January 1, 2022 DSUs issued DSUs redeemed Balance at December 31, 2022 Balance at January 1, 2023 DSUs issued DSUs redeemed Balance at December 31, 2023 Number of DSUs Closing Share Price 201,392 $ 44,152 (31,569) 213,975 $ 11.99 12.49 11.91 20.12 Number of DSUs Closing Share Price 213,975 $ 18,677 (64,517) 168,135 $ 20.12 27.84 8.36 81.70 An expense of $13,587,000 (2022 – $2,183,000) was recorded in general and administrative expenses. The liability of $13,737,000 (2022 - $4,153,000) related to these DSUs is included in accounts payable and accrued liabilities. 80 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)Hammond Power Solutionse) Long Term Incentive Plan In February 2022, the Board of Directors approved a new Long Term Incentive plan (“LTIP”) for the Executive Officers of the Company. This plan replaces the Deferred Share Unit plan described above for executives. The LTIP consists of an annual grant made to the Chief Executive Officer and other Executive Officers of Performance Share Units (“PSU”) and Restricted Share Units (“RSU”). According to the plan, the PSUs constitute 60% of the total grant and will vest at the end of a three-year period at a ratio of 0% - 150%, depending on whether management met pre-determined EPS and RONA targets. The RSUs constitute the remaining 40% of the grant and will vest at the end of a three-year period at 100%. The increase or decrease in value of the vested PSUs and RSUs over the three-year period will be determined by the increase or decrease of the share price. The annual grant is determined by the Compensation Committee, and are currently set at 35% of the executive’s salary and 50% of CEO’s salary. The grant vests after a three-year performance period and is dependent on continuous employment with the Company over that period, with exceptions for retirement and involuntary terminations. After vesting, the value of the PSUs and RSUs will be determined based on the PSU vesting factor and the share price. The value will be paid in cash to the participant, after which, the PSUs and RSUs will be extinguished. The movement in PSUs and RSUs for the years ended December 31, 2022 and 2023 is as follows: Balance at January 1, 2022 Units issued Balance at December 31, 2022 Balance at January 1, 2023 Units issued Balance at December 31, 2023 Number of PSUs Number of RSUs Total Number of Units Closing Share Price – 35,716 35,716 – 23,811 23,811 - $ 59,527 59,527 $ – 12.57 20.12 Number of PSUs Number of RSUs Total Number of Units Closing Share Price 35,716 31,523 67,239 23,811 21,014 44,825 59,527 $ 52,537 112,064 $ 20.12 30.98 81.70 An expense of $6,367,000 (2022 – $1,602,000) was recorded in general and administrative expenses. The liability of $7,969,000 (2022 - $1,602,000) related to these PSUs and RSUs is included in accounts payable and accrued liabilities. The market value of the granted PSUs and RSUs is $11,385,000 as of December 31, 2023. The difference between the market value and the accrual value is due to units granted but not yet vested. 81 For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)Annual Report 202319. 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 2023 5.33 $ 2022 3.79 63,399 $ 44,828 11,904,924 11,833,674 5.33 $ 3.77 63,399 $ 44,828 $ $ $ $ Weighted average number of shares outstanding including effects of 11,904,924 11,876,359 dilutive potential ordinary shares Reconciliation of weighted average number of shares outstanding: Weighted average number of shares outstanding used to calculate basic earnings per share Adjustment for dilutive effect of stock option plan 11,904,924 – 11,833,674 42,685 Weighted average number of shares outstanding used to calculate diluted earnings per share 11,904,924 11,876,359 As at December 31, 2023, nil options (2022 – nil) are excluded from the diluted average number of shares calculation as their effect would have been anti-dilutive. 20. 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 2.0% – 7.0% (2022 – 2.0% - 6.75%)of annual earnings. The Group’s contributions of $1,964,000 (2022 – of $1,764,000) matches the employee contributions. The Group’s contributions related to its defined contribution pension plans are recorded as follows: $1,460,000 (2022 – $1,309,000) in cost of sales, $246,000 (2022 – $222,000) in selling and distribution, and $258,000 (2022 - $233,000) in general and administrative. 82 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)Hammond Power Solutions21. Provisions Balance at January 1, 2022 Provisions made during the period Provisions used during the period Balance at December 31, 2022 Balance at January 1, 2023 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 $ 1,718 $ 216 $ 258 $ 2,192 188 130 779 1,097 (230) 1,676 $ 1,676 $ (149) 197 $ 197 $ (91) 946 $ 946 $ (470) 2,819 2,819 1,904 130 679 2,713 (418) (102) (782) 3,162 $ 225 $ 843 $ (1,302) 4,230 3,162 $ – $ 80 $ 145 $ 681 $ 162 $ 3,923 307 $ $ $ $ $ The provision for warranties relates mainly to transformers sold during the years ended December 31, 2023 and December 31, 2022. The provision is based on estimates made from historical warranty data associated with similar products and claims experience. The Group expects to incur most of the liability over the next year. Site restoration The Group has committed to undertaking a joint remediation plan for the Glen Ewing property with the owner of an adjoining industrial property and the co-owner of the property. The Group has recorded a liability for its estimated portion of the joint remediation. Benefits 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. 83 For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)Annual Report 2023 22. Sales and deferred revenue a) Sales Sales have been captured based on the geography of where the product was sold, as follows: Canada United States and Mexico India 2023 2022 (Adjusted*) $ 175,619 $ 489,579 44,866 151,058 383,137 24,269 $ 710,064 $ 558,464 * The 2022 sales values by geography have been adjusted from previously reported amounts due to a misclassification by geography. The previously disclosed comparative values in Canada was $33,437,000 less than the adjusted value, the previously disclosed values in United States and Mexico was $33,427,000 more than the adjusted value and India was $10,000 more than the adjusted value. b) Deferred revenue Movements in the Group’s contract liabilities (deferred revenue) was as follows: Opening balance Revenue recognized Increase in contract liabilities Ending balance 2023 2022 $ 10,607 $ (6,766) 1,880 5,721 $ $ 5,027 (5,027) 10,607 10,607 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. 23. Related party transactions Related parties William G. Hammond, Executive Chair and Chair of the Board, directly and indirectly, through Arathorn Investments Inc., beneficially owns 2,778,300 (2022 – 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 923,802 (2022 – 924,802) Class A subordinate voting shares of the Company, representing approximately 10.1% (2022 – 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 $2,040,000 (2022 – $1,432,000). 84 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)Hammond Power Solutions 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 2023 $ $ 7,554 $ 9,028 16,582 $ 2022 3,499 2,183 5,682 2023 2022 Wages and salaries $ 105,808 $ 69,624 Group portion of government pension and employment pension and employment benefits Contributions to defined contribution plans 23,472 1,962 $ 131,241 $ 17,731 1,763 89,118 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 2023 2022 $ (41,330) $ (8,237) (4,305) 11,475 (4,886) (1,302) (276) (2,847) 1,552 (42,427) (870) 13,038 5,580 (470) 89 3,969 $ (51,708) $ (19,539) 85 For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)Annual Report 202326. 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. 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 Intangibles, net Canada United States India Goodwill Canada United States India 2023 2022 (Adjusted*) 175,619 $ 489,579 44,866 710,064 $ 151,058 383,137 24,269 558,464 20,153 $ 16,945 23,813 4,930 65,841 $ 1,044 $ 1,896 2,940 $ 1,271 $ 3,913 1,406 6,590 $ 2,180 $ 1,581 7,975 11,736 $ 15,458 8,992 12,718 4,574 41,742 1,044 2,077 3,121 1,588 4,400 1,662 7,650 2,180 1,618 8,226 12,024 $ $ $ $ $ $ $ $ $ $ *Refer to note 22(a), sales & deferred revenue for explanation of adjustment. 86 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)Hammond Power Solutions27. Financial instruments Fair value The fair value of the Group’s financial instruments measured at fair value has been segregated into three levels. Fair value of assets and liabilities included in Level 1 are determined by reference to quoted prices in active markets for identical assets and liabilities. Fair value of assets and liabilities included in Level 2 include valuations using inputs other than quoted prices for which all significant inputs are observable, either directly or indirectly. Fair value of assets and liabilities included in Level 3 valuations are based on inputs that are unobservable and significant to the overall fair value measurement. The Group’s financial instruments measured at fair value consist of foreign exchange forward contracts and contingent consideration issued in conjunction with a business combination. The forward foreign exchange contracts have a fair value of a liability of $1,138,000 as at December 31, 2023 (2022 – $276,000) 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 $2,138,000 as at December 31, 2023 (2022 - $2,846,000) and is included in Level 3 of the fair value hierarchy. There have been no transfers between levels in 2023 or 2022. The contingent consideration is comprised of three components: Current Non-current Balance at December 31, 2022 Current Balance at December 31, 2023 • Employee performance Employee performance Revenue achievement Deferred tax losses $ $ $ $ 672 $ – $ 837 $ – 672 $ – $ – $ 1,337 1,337 $ 1,320 $ 1,320 $ – 837 $ 818 $ 818 $ Total 1,509 1,337 2,846 2,138 2,138 To determine the fair value of the contingent consideration, Management calculated the present vale 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 in the amount of $651,000 and two payments were made during 2023 for a total of $672,000. • 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 non-payment 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 87 For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)Annual Report 2023 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, 2023 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. In 2022, the employee performance and revenue achievement increases of $940,000 were recorded in general and administrative expenses and the deferred tax asset value of $837,000 was recorded in other expenses. 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, 2023, the Company had outstanding forward foreign exchange contracts to buy and sell the following contracts, all with maturity dates in January 2024. Buy/Sell Buy Currency Selling Currency BUY BUY BUY USD USD USD CAD INR MXN Buy/Sell Sell Currency Buying Currency SELL SELL SELL USD EUR USD MXN CAD INR Amount of Buy Currency 45,000 6,044 6,614 Amount of Buy Currency 13,000 14,500 3,656 Traded Rate 1.4485 83.26 – 83.48 16.97 Traded Rate 17.03 – 17.268 1.493 83.15 At December 31, 2022, the Company has outstanding forward foreign exchange contracts to buy and sell the following contracts, all with maturity dates in January 2023. 88 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)Hammond Power Solutions 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 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 36,000 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 As at December 31, 2023 the Group has recognized a net unrealized expense of $1,138,000 representing the fair value of these forward foreign exchange contracts, comprised of a liability of $1,138,000 included within accounts payable and accrued liabilities. As at December 31, 2022 the Group recognized a net unrealized expense of $276,000, comprised of a liability of $276,000 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. 89 For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)Annual Report 2023 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, 2023: U.S. Dollars Mexican Pesos Euros Indian Rupees Cash $ 29,113 $ 12,023 2023 2022 2023 777 2022 2023 2022 2023 2022 14,881 € 895 € 675 575 310,754 338,036 552,742 262,828 Accounts receivable 53,188 41,666 35,275 16,072 - Long-term lease receivable Bank operating lines of credit Accounts payable Lease obligation Contingent consideration – – (18,139) (12,902) – – – – – – 1,050 1,957 (3,112) (3,063) – – – – (18,003) (26,513) (16,464) (331) (160) (473,545) (346,452) (6,506) (1,614) (2,100) – – – – – – – – – – (773) – Net exposure $ 49,646 $ 27,080 9,539 14,489 € (1,498) € (16) 389,951 253,639 A one cent ($0.01) decline in the Canadian dollar against the U.S dollar as at December 31, 2023 would have decreased net earnings by $868,000 and increased equity by $670,000. 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, 2023 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, 2023 would have decreased net earnings by $24,000 and increased equity by $22,000. Inversely, a one cent ($0.01) increase in the Canadian dollar against the Euro as at December 31, 2023 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, 2023 would have increased net earnings and equity by $64,000. Inversely, a one cent ($0.01) increase in the Canadian dollar against the Indian Rupee as at December 31, 2023 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, 2023 would have decreased net earnings by $12,000 and increased equity by $7,000. Inversely, a one cent ($0.01) increase in the Canadian dollar against the Peso as at December 31, 2023 would have had an equal but opposite effect. 90 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)Hammond Power SolutionsCredit 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, 2023, 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. 91 For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)Annual Report 2023 During the year, the expected credit losses for trade accounts receivables decreased $190,000 (2022 – increased $447,000), for which a recovery (2022 – expense) was recognized in general and administrative expenses. The aging of accounts receivable and the related allowance is as follows: December 31, 2023 December 31, 2022 Gross Allowance Gross Allowance $ 95,888 $ – $ 63,877 $ 25,809 5,819 3,114 – – 2,616 20,035 3,505 2,090 $ 130,630 $ 2,616 $ 89,507 $ – – 716 2,090 2,806 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, 2023 December 31, 2022 $ $ 52,591 $ 128,030 1,535 182,156 $ 28,126 86,701 2,839 117,666 The maximum exposure to credit risk for accounts receivable at the reporting date by geographic region was: Carrying Amount December 31, 2023 December 31, 2022 $ 31,463 $ 70,052 13,659 689 12,167 23,050 55,390 7,705 553 3 $ 128,030 $ 86,701 Canada United States Mexico Italy India 92 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)Hammond Power SolutionsInterest rate risk: 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, 2023 would increase or decrease net earnings by approximately $340,000 (2022 – $62,000) 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, 2023, no forward commodity purchase contracts were outstanding (2022 – none). 93 For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)Annual Report 2023 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. The following are the carrying amounts and related anticipated contractual maturities of the Group’s financial liabilities: December 31, 2023 Carrying amount 1 year or less 1-2 years 2-5 years Bank operating lines of credit $ 18,471 $ 18,471 $ – $ Accounts payable and accrued liabilities Contingent consideration Derivative liabilities 126,360 126,360 2,138 1,138 2,138 1,138 – – – $ 148,107 $ 148,107 $ – $ – – – – – 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 92,025 2,846 276 92,025 1,509 276 – 1,337 – $ 101,301 $ 99,964 $ 1,337 $ – – – – – 94 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)Hammond Power SolutionsReconciliation 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, 2023 $ 6,154 $ 8,593 $ 2,846 $ 15,240 $ 146,847 $ 179,680 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 12,317 – (1,320) – – – – – 434 – – (3,906) – (675) 19 – – – – – – 434 – – – – – – (6,548) – 12,317 (675) (867) 434 (6,548) (3,906) financing cash flows $ 10,997 $ (3,472) $ (656) $ 434 $ (6,548) $ 755 Other changes Liability-related Interest expense Foreign exchange Non-cash disposals to lease liabilities Non-cash additions to lease liabilities Total liability-related other 1,320 – – – – (800) (437) 12,537 – (52) – – – – – – – – – – 1,320 (852) (437) 12,537 changes $ 1,320 $ 11,300 $ (52) $ – $ – $ 12,568 Equity-related Exercise of stock options Net income Total equity-related other changes Balance December 31, 2023 $ $ – – – 18,471 $ $ – – – 16,421 $ $ – – – 2,138 87 – – 87 63,399 63,399 $ $ 87 $ 63,399 15,761 $ 203,698 $ $ 63,486 256,489 95 For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)Annual Report 2023 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 Advances of bank operating lines of credit, net (13,113) Payment of contingent consideration Interest payments Exercise of stock options Cash dividends paid Repayment of lease liability Total changes from – (1,596) – – – – – 233 – – (3,004) – (651) 86 – – – – – – 298 – – – – – – (4,556) – (13,113) (651) (1,277) 298 (4,556) (3,004) financing cash flows $ (14,709) $ (2,771) $ (565) $ 298 $ (4,556) $ (22,303) Other changes Liability-related Interest expense Foreign exchange Non-cash additions to lease liabilities Non-cash disposal to lease liabilities (note 11) Non-cash disposal to lease liabilities (note 11) Non-cash additions to contingent consideration (note 27) Total liability-related other 1,596 – – – – – – 108 3,199 590 (513) – 154 – – – – 1,748 – – – – – – – – – – – – 1,596 262 3,199 590 (513) 1,748 changes $ 1,596 $ 3,384 $ 1,902 $ – $ – $ 6,882 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 – 44,828 56 44,828 $ $ 44,828 146,847 $ $ 44,884 179,680 96 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)Hammond Power Solutions 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, 2023. 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, 2023 December 31, 2022 $ 52,591 $ (18,471) (16,936) (2,138) 15,761 2,289 203,698 $ 236,794 $ 28,126 (6,154) (8,593) (2,846) 15,240 2,376 146,847 174,996 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. 97 For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)Annual Report 2023d) Investment properties The fair values of the investment properties are based on available market evidence as determined by third party valuators using comparable property sale transactions and is considered to be valued at Level 3 of the fair value hierarchy. 30. Subsequent events Dividends On March 6, 2024, the Company declared a dividend of fifteen ($0.15) per Class A subordinate voting shares of HPS and a quarterly cash dividend of fifteen cents ($0.15) per Class B common shares of HPS payable on March 28, 2024 to shareholders of record at the close of business on March 21, 2024. The ex-dividend date is March 20, 2024. On March 27, 2024, the Company declared a dividend of twenty-seven and a half cents ($0.275) per Class A subordinate voting shares of HPS and a quarterly cash dividend of twenty-seven and a half cents ($0.275) per Class B common shares of HPS payable on June 25, 2024 to shareholders of record at the close of business on June 18, 2024. The ex-dividend date is June 18, 2024. Italy On March 14, 2024 the Group and the purchaser signed a settlement agreement for the sale and purchase of the plant. As outlined in Note 8, the Group exercised its put option, specifying the final plant purchase price was equal to 1,850,000 EUR. The final negotiations resulted in a net settlement amount of 1,050,000 EUR ($1,535,000 CAD). This agreement will settle all outstanding disputed receivables and liabilities as well as the need for significant repairs to the roof of the building. The transfer of ownership and title will be executed no later than March 28, 2024. A deposit of 150,000 EUR was received on March 14, 2024. SmartD On March 22, 2024, HPS entered into a financing agreement with SmartD Technologies Inc. (“SmartD”). In the agreement, the Corporation will invest up to $3.9 million over three years in convertible debentures of SmartD. SmartD Technologies produces advanced motor control products, most notably it’s Clean Power Variable Frequency DriveTM. SmartD’s products combine motor drives with harmonic mitigating technology that help businesses save energy, lower costs, and minimize their carbon footprint. 98 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)Hammond Power SolutionsBLANK 99 Annual Report 2023HPS Offices, Manufacturing Facilities and Warehouse Locations Canada Hammond Power Solutions Inc. Corporate Head Office 595 Southgate Drive Guelph, Ontario N1G 3W6 India Hammond Power Solutions Private Limited Plot No.6A, Phase-1, IDA Pashamylaram, Patancheru Mandal, Sangreddy District, Telangana, India 502307 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 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 LLC 11020 Parker Drive, North Huntington, Pennsylvania 15642 Annual General Meeting of Shareholders to be held: Thursday, May 9, 2024 1:30 p.m. (EST) Cutten Fields (Cutten Hall) 190 College Avenue East Guelph, Ontario N1H 6L3 100 Hammond Power Solutions Corporate Information Corporate Officers and Directors Stock Exchange Listing Toronto Stock Exchange (TSX) Trading Symbol: HPS.A Officers John Bailey Chief Operations Officer Paul Gaynor Chief Information Officer David Kinsella Chief Commercial Officer Catherine McKeown Chief People Officer Adrian Thomas Chief Executive Officer & Director Richard C. Vollering Chief Financial Officers & Corporate Secretary Directors Dahra Granovsky Corporate Human Resources and Compensation Member William G. Hammond Chair of the Board Christopher R. Huether Governance Member Frederick M. Jaques Governance Chair Grant C. Robinson Lead Director Audit Member Anne Marie Turnbull Corporate Human Resources and Compensation Chair David Wood Audit Chair 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 590 101 Annual Report 2023 HAMMONDPOWERSOLUTIONS.COMTHE WORLD IS CHANGED BY YOUR EXAMPLE, NOT BY YOUR OPINION.

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