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 2023 It’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 Solutions 2023 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 2023 2023 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 Solutions Groundbreaking 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 2023 to 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 Solutions 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.
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 2023 Our 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 Solutions Our 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 2023 Looking 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 Solutions Growth 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 2023 2023 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 2023 Gross 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 Solutions EBITDA*
(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 2023 Management’s Discussion
and Analysis
Hammond Power Solutions Inc. (“HPS” or the “Company”) enables electrification through its broad
range of dry-type transformers, power quality products and related magnetics. HPS’ standard and
custom-designed products are essential and ubiquitous in electrical distribution networks through
an extensive range of end-user applications. The Company has manufacturing plants in Canada,
the United States (“U.S.”), Mexico and India and sells its products around the globe. HPS shares are
listed on the Toronto Stock Exchange and trade under the symbol HPS.A.
Hammond Power Solutions – 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 Solutions in 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 Solutions Management’s Responsibility for Financial Statements
The Consolidated Financial Statements are the responsibility of the management of Hammond Power Solutions Inc. These
statements have been prepared in accordance with 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 2023 Consolidated 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 Solutions Consolidated 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 Solutions NOTES 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
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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
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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.
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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 2023 13. 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 2023 17.
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 2023 Recognized 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 Solutions Movement 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 2023 Movement in temporary differences during the year ended December 31, 2022:
Balance
December 31, 2021
Recognized in
retained earnings
Recognized in
profit or loss
Recognized
in other
comprehensive
income
Balance
December 31, 2022
Property, plant and equipment
$
2,741 $
(392) $
24 $
– $
Intangible assets
Scientific research and
experimental development
Inventories
Long-term lease 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 Solutions b)
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 Solutions e) 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 2023 19.
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 Solutions 21. 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 2023 26. Segment disclosures
The Company operates in a single operating segment, being a manufacturer of transformers. The Company and
its subsidiaries operate in Canada, the United States, Mexico and India.
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 Solutions 27.
Financial instruments
Fair value
The fair value of the Group’s financial instruments measured at fair value has been segregated into three levels.
Fair value of assets and liabilities included in Level 1 are determined by reference to quoted prices in active
markets for identical assets and liabilities. Fair value of assets and liabilities included in Level 2 include valuations
using inputs other than quoted prices for which all significant inputs are observable, either directly or indirectly.
Fair value of assets and liabilities included in Level 3 valuations are based on inputs that are unobservable and
significant to the overall fair value measurement.
The Group’s financial instruments measured at fair value consist of foreign exchange forward contracts and
contingent consideration issued in conjunction with a business combination. The forward foreign exchange
contracts have a fair value of a 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 Solutions Credit risk:
Credit risk arises from the possibility that the Group’s customers and counter parties may experience difficulty
and be unable to fulfill their contractual obligations. The Group manages this risk by applying credit procedures
whereby analyses are performed to control the granting of credit to its customer and counter parties based
on their credit rating. As at December 31, 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 Solutions Interest 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 Solutions Reconciliation of movements of liabilities to cash flows arising from financing activities:
The following is a reconciliation between the opening and closing balances for liabilities arising from financing
activities:
LIABILITIES
EQUITY
Bank
Operating
Lines of Credit
Lease
Liabilities
Contingent
Consideration
Share
Capital
Retained
Earnings
Total
Balance January 1, 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 2023 d)
Investment properties
The fair values of the investment properties are based on available market evidence as determined by third
party valuators using comparable property sale transactions and is considered to be valued at Level 3 of the
fair value hierarchy.
30. 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 Solutions BLANK
99
Annual Report 2023 HPS 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.