It’s Our World. - Hammond Power Solutions Nuevo Leon ... Dale Sidey, Director of U.S. Sales Dhiru Patel, Director of Engineering Bob Yusyp, Director of Manufacturing Al Davenport,

It’s Our World.

Annual Report 2011

Products nMarkets nPeople

At home all over the world.

Over 50 countries, 6 continents, 4 emerging markets and still counting.

n Letter to shareholders 16

n Our product lineup 18

n Review of operations 20

n Management’s discussion and analysis 22

n Consolidated financial statements 36

n Corporate information 74

Inside

1H a m m o n d P o w e r S o l u t i o n S | a n n u a l r e P o r t

Hammond Power Solutions expands into Italy and India and new technologies In 2011 HPS acquired Euroelettro

S.p.A. (“EH”) in Italy and

Pan-Electro Enterprises Private

Limited (“PETE”) in India in early

2012. These companies give HPS

a platform for expansion into the

Asian, African and Australian markets,

access to design and manufacturing

capabilities in cast coil technology,

as well as custom liquid filled

distribution transformers.

Euroelettro and PETE have excellent

reputations in the transformer

industry for their engineered to

order capabilities, product reliability

and quality.

These strategic steps for HPS will

assist in company-wide growth

and worldwide opportunity.

Our VisionTo be the leader in our industry by delivering:n Lead times as defined by our customersn A broad range of competitive productsn Quality and Service excellence in all that we don Technical expertisen Strong financial performancen Global diversification

2 o u r V i S i o n

Highlights

16%SALES GROWTH

99%5-YEAR GROWTH

BOOK VALUE PER SHARE

28%INCREASE IN BOOKINGS

46%RISE IN BACKLOG

$ 6. 2MNET CASH POSITION

$ 6. 6MCASH PROVIDED BY OPERATIONS

What makes HPS transformers so special?For over 90 years, HPS has

continued to be the industry-

leader in dry-type transformer

technology. Our global reach

into new markets allows us to

build on that traditional product

type into complimentary

products such as cast coil

and liquid filled distribution,

and power transformers. New

markets mean new business

and new business means

business growth. HPS’ stability

as a supplier is paramount in

a world of instability where

demands must be resolved

quickly and effectively.

DID YOU KNOW?HPS Canada delivered a record number of mining sub transformers

for the Potash, Gold, Iron Ore, and Copper mining industries.

These robust designed products are used in underground mining

operations because of their durability, safety, and environmental

green footprint.

H a m m o n d P o w e r S o l u t i o n S | a n n u a l r e P o r t 3

7,611

6,254

26,418

Cash Provided By Operations(in thousands of dollars)

14,109

6,592

07

08

09

10

11

48,1

77

Gross Margin(in thousands of dollars)

53,9

91

47,0

43

65,1

84

52,7

27

Gross Margin(In thousands of dollars)

13,6

42

Gross Margin(in thousands of dollars)

13,0

3919,5

75

26,5

58

18,9

43

Earnings from Operations(In thousands of dollars)

7.89

3.82

5.91

6.57

Book Value Per Share ($)

7.45

Book Value Per Share ($)

190,604

160,606

226,348

195,437

Consolidated Sales(in thousands of dollars)

221,323

07

08

09

10

11

Consolidated Sales(In thousands of dollars)

18,089

4,395

(4,100)

10,024

Total (Bank Indebtedness)/Cash Position(in thousands of dollars)

6,218

07

08

09

10

11

Cash Balance Net of Operating Lines of Credit

(In thousands of dollars)

Cash Provided by Operations

(In thousands of dollars)

HPS will continue to develop and expand its market share growth through our U.S.,

Canadian and worldwide distributor channels, by developing supplier relationships with new

Original Equipment Manufacturer (“OEM”) customers and by seeking new markets and

expanding our sales of custom engineered transformers to alternative energy systems,

mining equipment and drives equipment manufacturers.

4

A global presence produces global results.

(in thousands of dollars, except earnings per share) 2011 2010

Sales $ 221,323 $ 190,604

Earnings from operations 13,039 13,642

Net earnings 5,993 10,652

Net cash provided from operating activities 6,592 14,109

Net cash position 6,218 18,089

Basic earnings per share $ 0.52 $ 0.92

1200employees worldwide

Cast Coil

Mining Oil

Dry-type

Oil and Gas

Oil

8 regional warehouses

10manufacturingfacilities


PETE is a leading manufacturer of Power and Distribution transformers located in

Andhra Pradesh, India. With over 22 years experience, PETE manufactures

dry-type and furnace/arc furnace and oil transformers in 3 area plants.

Their continuing focus on product innovation, consistent quality and competitive

pricing is what has made them a successful global company.

▶ 3 plants total of 50,000 square feet

▶ 80 employees

HPS in India

Mr. K. Ravi Krishna Reddy, Managing Director

6 P r o d u C t S m a r K e t S P e o P l e


EUROELETTRO S.p.A. (“EH”) was founded in 1990 in Sarego, province of Vicenza, Italy.

EH focuses on the design and manufacture of low and medium voltage magnetic components for

supply to the telecommunication, naval and marine, power electronics, nuclear power stations and

offshore industries.

▶ 40,000 square feet

▶ 55 employees

HPS in Italy

Mr. Georgio Consolaro, General Manager



With humble beginnings in Guelph, Ontario, HPS has grown to include locations in

Walkerton and Aberfoyle, Ontario and Granby, Quebec. Canadian operations focus on

dry-type transformer products.

Guelph, Ontario


▶ 350 employees

HPS in Canada

Aberfoyle, Ontario


▶ Distribution Centre

Granby, Quebec


▶ 195 employees

Walkerton, Ontario


▶ 65 employees



HPS has been manufacturing and selling from U.S. facilities for over 15 years. Through

a sales office in Baraboo, Wisconsin and manufacturing facilities in Compton, California

HPS supplies and services markets in North America as well as Central and South America

with dry-type transformers.

HPS in the United States

Compton, California


▶ 45 employees

Baraboo, Wisconsin Sales & Distribution


▶ 35 employees



An HPS manufacturing facility in Monterrey, Mexico HPS supplies and

services markets in North America as well as Central and South America with

dry-type transformers.

HPS in Mexico


Monterrey, Nuevo Leon


▶ 179 employees

▶ Established 2001

Monterrey, Nuevo Leon


▶ 150 employees

▶ Established 2008

14


Fellow Shareholders,2011 was certainly an interesting year for Hammond Power Solutions Inc. (“HPS”). Alongside the rest of the world, we encountered a wide

variety of unpredicted adversities; the global economic effects of the Japanese earthquake and tsunami, a very wet spring in central Canada and the U.S. which delayed construction projects, the European debt crisis breaking to the surface, political gridlock in Washington slowing the U.S. economy, pricing pressure from competitive U.S. markets, the European debt crisis worsening with several countries nearing default and

our industry being hit with a level of material price volatility the magnitude of which has never been experienced in such a short span of time.

Despite all of these challenges, our businesses performed remarkably well. Our sales grew by 16% over the previous year, and our core

profitability was quite respectable when taking into consideration the impact of copper hedging and losses at our newly acquired European

company Euroelettro Hammond S.p.A. (“EH”). Our fourth quarter performance was especially strong showing sales growth of 27% higher

than the same quarter in 2010. This volume of sales represents the strongest sales of any quarter going back to the beginning of 2009. Much

of this growth has come from our major Original Equipment Manufacturer (“OEM”) customers who continue to benefit from buoyant export

markets as well as strong commodity markets. We have been working diligently at improving our overall gross margin performance and I am

pleased to report that our concerted efforts in this area resulted in a 13% increase in gross margin rates from 22.9% in the second Quarter

to 25.8% in the last Quarter in what is still a highly competitive market place. In 2011 we made important strides to expand globally with the acquisition of EH in Vicenza, Italy as well as the Quarter 1, 2012 acquisition

HPS ExEcutivE tEamLeft to Right: Michael Frayne, Director of Marketing; Bill Hammond, Chief Executive Officer; Chris Huether, Chief Financial Officer; Dale Sidey, Director of U.S. Sales; Dhiru Patel, Director of Engineering; Bob Yusyp, Director of Manufacturing; Al Davenport, Director of Canadian Sales

16 L e t t e r t o s h a r e h o L d e r s

Our growing global presence gives us the strength that we need to remain diversified in product and markets.

William G. HammondChairman of the Board & Chief exeCutive offiCer

15%Increase in U.S. Sales

$16MEBITDA

of Pan-Electro Technic Enterprises (“PETE”) in Hyderabad, India. Although the European economy collapsed shortly after our Italian acquisition, EH gives HPS access to cast coil technology as well as a foothold in Europe, which collectively is still the largest global market. PETE gives us access to not only the significant and growing market of India but also an operating base to serve the growing markets of the Middle East, Africa, Southeast Asia, and Australia.

HPS ended 2011 in a very positive financial position, despite being faced with, in many ways the most challenging period of the past ten years. We enter 2012 with a robust momentum of bookings and backlog. In addition to our strong base of North American business we took some key steps to implement our vision of becoming a global transformer company that will not only open up new and significant global opportunities but also help diversify our business geographically. Given the challenges that we have just come through as well as the continuing uncertainty of the global economy, we remain cautiously optimistic as we grow our sales and profits going forward by continuing to manage the Company in a conservative manner. U

Larry Lichty, Director of Human Resources; Larry Bell, Director Supply Chain; John Bolton, Director of Quality; Bob Thompson, Director of International Operations.


Control

Distribution

Drive Isolation

Power

Where your treasure is, your heart

Did You Know?HPS was awarded the contract to supply hundreds of

potted (Titan) transformers for the new Littoral Fighting

vessels. These revolutionary new vessals are nicknamed

“brown water ships” for their ability to navigate in

shallow water.

HPS – the power transformer of choiceHPS continues to be the power transformer of choice for t

he off-shore oil rig industry. In 2011 we supplied to drilling

ships used in the Gulf of Mexico.

18 O U R P R O D U C T L I N E U P

Shovel Duty

Oil-filled Cast Coil

Powering the mining industryHPS powers some of the largest mining operations in the world.

From copper mines in South America and Africa to operations in

Australia and China, HPS’ reliability and quality is what our

customers relay on to keep their operations running smoothly.

Our increased presence on the world stage brings a tremendous potential for growth.

will be also.


Highlights of Our Success

n Annual overview 23

n 2011 Sales, an increase of 16.1% 24

n Quarter 4, 2011, financial review 27

n Purchase of “EH” 31

n Strategic direction and outlook 34

We continue to expand our capabilities into other parts of the world with great success

affected our commercial and retail project sales. This market remains slow and is not expected to show signs of meaningful growth for several years to come. The Original Equipment Manufacturer (“OEM”) market on the other hand is very strong driven by increased consumption of commodities like oil, coal, and copper, as well as the export of equipment and electrical systems to countries like China, India, and Brazil. This positive momentum is expected to be sustained for the foreseeable future. Finally, we are continuing to expand our penetration and share of the U.S. electrical distributor channel, which has shown year-over-year growth rates, with some distributors’ growth exceeding 30% in a competitive market place. This broader distributor footprint will put HPS in a very positive position to benefit from greater growth opportunities when the U.S. construction market finally does start to recover over the next 2-3 years.

Canada is our second largest market representing 37% of total sales and where we have dominant market share. Our sales grew by 9% during 2011 even though many projects were delayed as a result of the very wet

We anticipated 2011 to be a much stronger year for Hammond Power Solutions. The impact of the long North American recession began to wane in 2010 and business momentum was beginning to build as we broached the New Year. Unfortunately a sizeable number of unexpected external events sideswiped business confidence, our markets and our results. We regained our positive momentum in the fourth quarter of 2011 however, with a significant upswing in bookings, shipments, and future backlog.

Given the challenging first half of the year, we delivered respectable sales growth in our North American markets. In the United States (“U.S.”) our sales were 14% higher (in U.S. dollars) than the previous year. In Canada, where we now have a very dominant share, our sales were up 9% compared to 2010. The acquisition of the Italian transformer company Euroelettro S.p.A. (“EH”) in March, 2011 contributed just over CDN $9 million additional sales in the year.

The U.S. is still by far our largest market representing 58% of our total sales. The weakened U.S. non- residential construction market has

20 R e v i e w o f o p e R at i o n s

spring in central Canada. Infrastructure projects across the country, as well as condominium construction helped to drive our growth. In addition, through our strong distributor network from coast to coast we benefited from regional growth driven by a variety of activities such as oil and gas production, potash mining, condominium construction, and alternative energy. We are mindful going forward of the challenges facing central Canada because of the high Canadian Dollar and government debt levels, while at the same time ready to take advantage of the accelerating growth in the resource rich provinces.

The acquisition of EH was the culmination of over two years of effort and fulfilled two of our key strategic initiatives. Firstly, it gives us access to cast coil technology which we will use to expand our sales in certain markets and geographies around the globe. Secondly, it gives us a beach-head into Europe which as a whole is the largest market in the world. EH sales and margin performance in 2011 were negatively impacted by the unforeseen and serious sovereign debt problems, which affected the European economy almost immediately following our acquiring EH. None-the-less, throughout the year we have been expanding the sales organization and our distributor network in Germany, France, Poland, Slovakia, the United Kingdom and other parts of Europe and expect to see sales growth in 2012 and beyond.

The acquisition of a company in Europe was an important initial part of our corporate strategy to become a global transformer company as it allows us to better meet the global needs of our major OEM customers. It will also help to diversify HPS’ geographical presence in this growingly uncertain world of geopolitical events and economic challenges. Finally, it will open up significant new and growing markets that will support our strategic growth goals. Toward this end, and in parallel with our merger and acquisition efforts in Europe over the last two years, we have been heavily engaged in acquiring an Indian transformer company. We were successful with this endeavor as we acquired a 70% equity ownership of Pan-Electro Technic Enterprises Private Limited (“PETE”) in India mid Quarter 1, 2012. We are very excited about the opportunities in India, the Middle East, Africa, Southeast Asia, as well as Australia and look forward to significant growth coming from our Indian operations.

2011 was also a busy time of expanding and improving our North American operations. We completed the expansion of our Guelph, Ontario plant, which will allow us to increase our sales of large custom power transformers as well as build them more efficiently. We expanded our capacities in several locations to handle the sales growth in reactors, control, and potted transformers coming from our increasing penetration of the North American distributor channel. We reorganized the production layout at our Granby, Quebec plant to improve work flow and implemented new manufacturing techniques. We continued to expand the workforce and capacity of our second Mexican plant to handle an acceleration of growth coming from the oil and gas drilling, commercial power as well as drive system markets.

Like so many Canadian manufacturers who have been bruised by the appreciation of the Canadian dollar, HPS continues to focus time and money on ways to reduce costs and improve productivity. We have a very loyal workforce and are doing everything we can to further engage our

employees, making HPS an even more productive and service-oriented company. As mentioned we have invested in new plants and equipment in Canada and Mexico to improve flow and expand surge capacity. After two years of research, we selected a new ERP system, which will also support improved productivity in all business process areas. This world-class system will eventually connect all of our operations around the globe, enabling us to do business internally and externally like never before possible.

Every eighteen months or so an outside firm conducts an employee survey at all locations to gauge how well we are satisfying a set of 25 drivers that influence employee satisfaction. These drivers include job satisfaction, satisfaction with the supervisor, health and safety, pay and benefit satisfaction, recognition, loyalty and more. This past year’s survey had a 91% participation rate and showed a very positive improvement in the grand average of all combined measures not only internally, but also compared to the external database of the consulting firm. We also saw very positive results in three key areas, employee engagement, company communications, and employee involvement. Our loyalty score continues to come in much higher than any other external organization in the comparative database of over 200 firms. Training and development is a key driver that came up as an area that we need to work on, and to that end, we were already working on this as an important strategic project to address the training and development needs of our employees today and as we plan for the new generation of employees to come.

Engineering is also a critical part of our business and one that we constantly use to differentiate HPS from our competitors. In 2011, we reorganized the engineering group in our North American Operations to give us greater focus on our end markets. This will allow us to better understand the present and future needs of our customers as their products end up in demanding applications and locations all over the world. With our acquisitions in Italy and India, we will learn from the design and manufacturing experiences of EH and PETE and they will in turn learn from HPS. Together we are in a stronger position to better serve our customers around the world.

HPS has a wide range of advantages and strengths that have allowed us to weather the many unexpected adversities that battered the global economy and many of our markets. Despite the variety of economic and geopolitical events that buffeted our North American markets, we ended the year with a strong momentum of sales and margins, as well as the biggest backlog we have ever experienced going into a new year. We also made significant strides in implementing our strategic vision of becoming a global transformer company with acquisitions in Europe and India. These acquisitions will not only open up new and growing markets, they will expand our product range and capabilities as well as diversify our business geographically. We look forward to a world of opportunities in 2012 and beyond as we build on our strong North American base and our global market capabilities.


dollarS in tHouSandS unleSS otHerwiSe StateddollarS in tHouSandS unleSS otHerwiSe Stated

2011 Management’s Discussion and Analysis

Hammond Power Solutions Inc. (“HPS” or the “Company”) is a North American leader in the design and manufacture of custom electrical engineered magnetics, as well as a leading manufacturer of standard electrical dry-type transformers. Advanced engineering capabilities, high quality products and fast responsive service to customers’ needs have established the Company as a technical and innovative leader in the electrical and electronic industries. The Company has manufacturing plants in Canada, United States, Mexico, Italy and India.

The following is Management’s Discussion and Analysis (“MD&A”) of the Company’s consolidated operating results for the years ended December 31, 2011 and 2010, and should be read in conjunction with the accompanying Consolidated Financial Statements of the Company as at December 31, 2011 and 2010, which have been prepared in accordance with International Financial Reporting Standards (“IFRS”). This information is based on Management’s knowledge as at March 29, 2012. All amounts in this report are expressed in thousands of Canadian dollars unless otherwise noted. Additional information relating to the Company may be found on SEDAR’s website at www.sedar.com or on the Company’s website at www.hammondpowersolutions.com.

Caution regarding forward-looking informationOur MD&A contains forward-looking information that reflects the current expectations of Management about the future results, performance, achievements, prospects or opportunities for HPS and the transformer business. These statements generally can be identified by use of forward looking words such as “may”, “will”, “expect”, “estimate”, “anticipate”, “believe”, “project”, “should” or “continue” or the negative thereof or similar variations. Forward-looking statements are based upon a number of assumptions and are subject to a number of known and unknown risks and uncertainties, many of which are beyond Company control that could cause actual results to differ materially from those that are disclosed in or implied by such forward-looking statements.

We do not have an intention to update any forward-looking information, except as required by applicable securities laws. Any forward-looking information contained in our MD&A represents our views as of the date of this document and such information should not be relied upon as representing our views as of any date subsequent to the date of this document. There can be no assurance that any forward-looking information will prove to be accurate, as actual results and future events could differ materially from those expected or estimated in such statements. Accordingly, readers should not place undue reliance on any such forward-looking information. For a list of factors that could affect HPS see “risk factors” highlighted in materials filed with the securities regulatory authorities in Canada from time to time.

Additional GAAP and Non-GAAP measuresThis document uses the terms “earnings from operations” which represents earnings before finance and other costs / (income) and income taxes. “EBITDA” is also used and is defined as earnings before interest, taxes, depreciation and amortization. Operating earnings and EBITDA are some of the measures the Company uses to evaluate the operational profitability. The Company presents EBITDA to show its performance before interest, taxes and depreciation and amortization. Management believes that HPS shareholders and potential investors in HPS use additional GAAP and non-GAAP financial measures, such as operating earnings and EBITDA, in making investment decisions about the Company and to measure its operational results. A reconciliation of EBITDA to earnings from operations for the year-to-date periods ending December 31, 2011 and December 31, 2010 is contained in the MD&A. EBITDA should not be construed as a substitute for net income determined in accordance with IFRS. “Order bookings” represent confirmed purchase orders for goods or services received from our customers. “Backlog” represents all unshipped customer orders. “Book value per share” is the total shareholders’ equity divided by the average outstanding shares. The terms “earnings from operations” “EBITDA”, “adjusted EBITDA”, “order bookings”, “backlog” and “book value per share” do not have any standardized meaning prescribed within IFRS and therefore may not be comparable to similar measures presented by other companies. On January 1, 2011, the Company adopted IFRS, which have become the generally accepted accounting principles required for use by most Canadian publicly accountable enterprises. The Company’s financial statements for the year-ended December 31, 2011, which comprise the statement of financial position as at December 31, 2011, December 31, 2010 and January 1, 2010, the statements of income, comprehensive income, changes in equity and cash flows for the years ended December 31, 2011 and December 31, 2010, and Notes thereto, have been prepared using IFRS. Amounts as at December 31, 2010 and January 1, 2010 and

22 m a n a g e m e n t ’ s d i s c u s s i o n a n d a n a ly s i s

related to the year-ended December 31, 2010 within this MD&A have also been revised to reflect the adoption of IFRS. Amounts for periods prior to January 1, 2010 are presented in this MD&A in accordance with Canadian Generally Accepted Accounting Principles in effect prior to January 1, 2011.

Presentation and terminology used in the Company’s financial statements and this MD&A differ from that used in previous years. Details of the most significant accounting differences are disclosed in Note 27 to our financial statements.

Overview2011 presented another year of challenge for our Company and the industry. This past year has once again demonstrated the strengths in the HPS business model and the many reasons to continue to be confident in the Company’s future. We have grown the business, through hard work and discipline. We have expanded our North American market share. We extended our global footprint through a foreign acquisition. We continue to build our financial health as a company.

In time these initiatives will prove to be highly productive contributors to our bottom line and an integral part of HPS’ legacy.

HPS’ vision is becoming a reality; we are a widely recognized, rapidly growing transformer company offering customer-focused solutions through our broad product range, global presence and engineered-to-order capabilities. Our employees are dedicated to achieving industry-leading performance. In 2011 the Company achieved sales revenue growth, reliable profit performance and a strong financial position through the implementation of short-term operational initiatives and longer-term strategic projects. The Company’s focus on market penetration, gross margin attainment and operational value, were the cornerstones to driving our financial performance. HPS is poised for electrical industry market share growth in the U.S., Canada, and offshore markets. The Company continues to deliver industry-leading sales volume increases in 2011, despite a lethargic North American economy, a turbulent European financial climate and spongy electrical market conditions. From a revenue point of view, consolidated sales dollars increased despite a lower U.S. exchange rate relative to the Canadian dollar, which results in lower U.S. dollar sales stated, in Canadian dollars. However, the Company continues to be a leader in markets served. While there are some indications that the economy is stirring back to life, the near-term outlook for our industry indicates that there are challenges ahead. The Company is very mindful of the precarious U.S., Canadian and European economies, the impact of tough banking policy, in the U.S. and Europe, the unpredictability and fluctuating U.S. dollar, resource based commodity cost variability and lingering global economic recovery. The Company’s 2011 financial performance was lower than expected as a result of an unfavorable exchange effect the Canadian dollar had on our U.S. margins for the majority of the year, volatile and unpredictable raw material costs and extreme competitor selling price pressures. We

combated these negative economic challenges by additional market share expansion, market specific selling price increases and manufacturing throughput improvements. The Company also utilized forward contracts to hedge against the negative impact of a stronger Canadian dollar and fluctuating copper commodity costs.

The Company is tenaciously attacking the industry and profitability pressures it is facing and remains committed and confident that the business base that it has built combined with its strategic vision will support and generate growth opportunities in the future. Our focus on continuous improvement enhanced our cost savings, productivity and efficiency gains and overall cost effectiveness. We expect that combined organic and new customer sales expansion, real capacity expansion, improved manufacturing agility and our multi-national operations capabilities will provide new market opportunities going forward and deliver improved revenue and profitability trends. In addition, we continue to see some indicators of moderate yet uncertain market condition improvement. The Company believes that this is a time to be watchful but not content, to be very calculating in the risks and opportunities that are present and be resolute in the execution of its strategies.

Because the Company is not single market dependent, we expect continued sales variability, growth in some of our market segments and decline in others. A part of our sales will come from major customer projects for which the exact timing is hard to predict, thus influencing quarterly sales fluctuations.

Notwithstanding these challenges, HPS’ sales and order booking rates continue to outperform electrical industry averages due to our committed execution of sales growth projects in our strategic target markets. This continues to deliver additional market share penetration, new account development and further building of our core sales increases. HPS continues to gain market share momentum in our U.S. and Canadian electrical markets evidenced by our high booking rates, sales growth, and increased backlog levels. The Company’s market diversity is demonstrated by the growth in many of its markets, specifically, the North American Electrical Distributor (“NAED”), power conditioning, excitation, specialty, oil and gas pumping, catalog, maintenance, repair and overhaul (“MRO”) and utility markets in both Canada and the U.S., which resulted in increased sales in 2011.

As a result of the sturdy financial foundation, the strong business fundamentals and the strategic vision of the Company, HPS is well positioned for growing success going forward and to deliver additional value over the long-term. We continue to build a company that can be relied upon in all we do, for the goals we set, and in the commitments we undertake. During the year the Company has contended with a soft global economic climate, in Canada, U.S. and Europe. The Company has gained from strategic and operational projects in the areas of market share expansion, global manufacturing diversification, cost competitiveness, efficiency improvement and increased manufacturing throughput. The Company has invested in manufacturing capacity expansion to meet the current and future demand of our customers despite the short-term dilutive


dollarS in tHouSandS unleSS otHerwiSe Stated

effects on financial results. The Company remains attentive to its strategies to grow its market share and will continue to take advantage of Original Equipment Manufacturer (“OEM”) and distributor sales opportunities. HPS’ focus on custom product design capabilities; competitive lead-times, product breadth and uncompromised quality should continue to generate market share growth.

The Company has a strong Balance Sheet, is well capitalized, and is positioned with excellent liquidity and a committed credit facility available to implement these strategies.

In addition, organic and new customer sales, flexible manufacturing capacity and our multi-national operations capabilities, will lead to sales opportunities and overall market growth. These strategies will build upon our positive revenue and profitability trends.

Finally, HPS will continue to develop and expand its market share growth through both our U.S. and Canadian distributor channels, and European OEM markets by developing and strengthening supplier relationships with new OEM customers and by seeking new markets and expanding our sales of custom engineered transformers to drive systems, solar, mining equipment and industrial equipment manufacturers.

The employees of HPS are committed to the execution of the Company’s operational and strategic initiatives.

SalesSales in 2011 totaled $221,323 versus sales of $190,604 in 2010, an increase of $30,719 or 16.1%. Consolidated sales are negatively impacted by U.S. foreign exchange but were more than offset by higher product volumes in the American market. The average U.S. to Canadian exchange rate for 2011 was $0.99 versus $1.03 in 2010, a decline of 4%. When comparing our 2011 consolidated sales after restating our U.S. dollar sales using 2010 U.S. to Canadian foreign exchange rates, sales were $226,609, representing a $36,005 or 18.9% increase over the prior year.

The Company sales momentum continues to exceed the electrical industry average.

The Company continues to grow sales in its strategic markets, geographically and as well saw a moderate improvement in overall market activity in the electrical industry in the U.S. and Canada. The European market was extremely depressed in 2011. Our consolidated growth is evidenced by overall increased quotation and order booking activities. The Company’s strategies relating to its expertise in custom engineered products, global presence, product breadth, competitive product design and consistent quality fuelled this sales and market growth.

Additionally, the Company’s market diversification strategies provide a business hedge, as the Company is not single market or industry dependent. The mining market continues to be very strong and increases in the motor control, excitation, specialty transformer and utility markets in both Canada and the U.S. delivered increased sales year over year. As well, the NAED (North American Electrical Distributor) channel delivered increased sales as compared to the prior year. Quotation and order activity in the OEM market segment gained momentum as the year progressed. Despite the

negative effects of a stronger Canadian dollar, HPS delivered significantly higher increased sales in the year.

U.S. sales when stated in U.S. dollars increased year-over-year by $16,869 from $115,505 in 2010 to $132,374 in 2011, an increase of 14.6%. In 2011, sales to the U.S. market of $131,025 (stated in Canadian dollars) increased by $12,099 or 10.2% compared to 2010 sales of $118,926. This increase was caused by record booking rates, especially from customers in the mining and oil industries as a result of pent up demand from the slow economic recovery in the American market and by increased market share in the standard distribution transformer market.

Canadian sales were $81,238, an increase of $9,560 or 13.3% as compared to sales of $71,678 in 2010. The Canadian electrical industry market somewhat recovered in 2011 after a softer 2010, due to the maturing of the economic recovery from the 2009 recession.

The Company also realized $9,060 of sales derived from the Company’s acquisition of Euroelettro Hammond S.p.A, in Vicenza, Italy (“EH”). The mining and oil and gas markets were growth markets for EH in 2011.

Stated by geographic segment, U.S. sales were 59.2% of our total sales in 2011 versus 62.4% in 2010, while 36.7% of the segment sales in 2011 were derived in Canada as compared to 37.6% last year, while sales within Europe accounted for 4.1% of the Company’s overall sales in 2011 compared to 0% in 2010.

HPS continues to focus on its channel growth initiatives in strategic market segments in the U.S., Canada, and Europe. The Company is committed to producing premium quality transformers, and competitive custom engineered designs and to offering a broad and evolving product range. We expect that this, combined with our capabilities in custom product design, manufacturing agility, competitive lead-times, product breadth, uncompromised quality, and geographically diverse manufacturing capabilities will produce sales growth through existing and new customer sales.

The Company is steadfast in its implementation of its market share growth and channel expansion strategies in U.S., Canada and Europe. This, combined with our strong distribution channel, broad product offering and our multi-national manufacturing capabilities, will continue to be a competitive advantage and the cornerstone to our revenue and profit growth.

The Company is unwavering in its implementation sales growth initiatives.

Order Bookings and BacklogOur sales development initiatives, the acquisition of EH, our engineering and manufacturing strategies, combined with slightly better U.S. and Canadian electrical market conditions combined to produce stronger bookings rates in 2011. These factors were essential in our success in delivering a 27.7% increase in bookings year-over-year. The growth above is inclusive of bookings for our newly acquired company, EH, which had a 2.0% impact on year-to-date bookings increase, all through the direct channel. Excluding the positive impact EH had on our year-over-year results bookings increased 25.7% over last year.

24 M a n a g e M e n t ’ s D i s c u s s i o n a n D a n a ly s i s

Bookings by channel, on a direct basis, increased 37.8% over the prior year and were up 18.3% through our distributor channel as compared to 2010.

Our sales development initiatives supported better than industry booking rates during the year. The impact of a modest improvement in general world economies, improving electrical market conditions and a longer booking horizon, have us feeling slightly more positive about market trends. As a result, we anticipate seeing an upward lift of new order bookings going forward.

Although the Company had higher capacity and achieved productivity improvements, order backlog increased by 45.5% from the prior year. Despite these capacity increases, booking rates continue to exceed our shipping levels , which bodes well for the future quarters.

Excluding EH, there was a backlog rise of 39.2% from the prior year. The year-end backlog levels have positioned HPS well to deliver strong

operational results going into 2012.The Company is also very cognizant that it may see some fluctuations

in booking rates through the year. Currently, several of our markets are seeing positive quotation and order trends. Although there currently is an increase in many of our customers booking rates, the Company is cognizant of the volatility and unpredictability of current global economies and the impact that this will have on booking trends. As a result, HPS anticipates that it will see some volatility in booking rates but does anticipate a trend of higher order bookings year-over-year.

Gross marginsDue to increased sales, gross margin dollar contribution increased $5,814 or 12.1% finishing 2011 at $53,991 versus $48,177 in 2010. Gross margin rates were 24.4% in 2011 versus 25.3% in 2010, a decrease of 0.9% of sales. The Company continues to experience negative selling price pressures from many of our competitors due to the available excess capacity in the industry and the negative impact foreign exchange rates has on Canadian manufactured products sold in the U.S. The Company’s gross margin rates were positively impacted by implemented market specific selling price increases, internal cost reductions, lower U.S. dollar denominated materials costs and the accretive effect that increased manufacturing throughput has on the absorption of our fixed factory cost structures. These factors lessened the negative effects of market driven downward pricing pressures and the detrimental impact that a stronger Canadian dollar had on U.S. resale margins. 2011 gross margin rates were hindered by a 4% stronger Canadian dollar as compared to 2010. This negatively impacts gross margin rates on Canadian manufactured products sold in the U.S.

The Company was pleased that it was successful at increasing its gross margin rates through the year, as gross margin rates for the first half of the year were 23.8% compared to 26.1% in 2010, down 2.3%, but increased by 0.4% in the second half of the year, finishing at 24.9% compared to 24.5% in the last half of 2010.

Despite the unpredictable economic climate, the Company implemented

its capacity expansion projects during the year as a result of increased future manufacturing capacity requirements from anticipated higher future booking rates. In the short-term, the additional fixed costs associated with the expansion are dilutive to our net gross margin rates. HPS is focused on productivity improvements, cost reductions and lead-time improvements throughout the organization.

The Company is confident that these actions combined with increased sales and higher manufacturing throughput will improve margin rates.

Selling and Distribution Expenses Total selling and distribution expenses were $22,609 for 2011 versus $19,319 in 2010, an increase of $3,290 or 17.0%. When compared on a percentage of sales, total selling and distribution costs remained virtually unchanged at 10.2% for Fiscal 2011 versus 10.1% for Fiscal 2010. The selling and distribution expenses for 2011 include an additional $832 or 0.4% of total sales expenses, pertaining to EH. Excluding EH, 2011 expenses were $21,777 versus $19,319 in 2010, an increase of $2,458 or 12.7%.

Commission expenses for the year were $475 higher than 2010. The higher commission expense correlates to the increased sales. There was also an increase in salaries of $495 in 2011, associated with strategic hires to support our sales strategies. Freight expenses for the year increased by $1,080 due to higher sales and increased transportation costs due to higher gasoline prices. Warehousing costs were $94 higher for the year as stocking levels have increased in order to provide better service due to increased product demand.

General and Administrative ExpenseGeneral and administrative expenses in 2011 were higher by $3,127 or 20.6%, totaling $18,343 when compared to $15,216 for 2010. On a percentage of sales basis this cost held relatively flat at 8.3 % in 2011 compared to 8.0% in 2010. The increase is a result of the additional costs related to EH of $1,477 and increases in stock option expenses of $190, costs related to the Company’s ongoing acquisition activities of $680 and engineering costs of $571. Comparing on a normalized basis excluding EH and acquisition costs, general and administrative expenses were $16,186 versus $15,216 in 2010, an increase of $970 or 6.4%.The Company continues to invest in its people resources, specifically in the areas of information services and engineering. HPS is in a growth period and is increasing its general and administrative expense investment in support of its strategic growth initiatives, but remains very cognizant of prudent general and administrative expense management.

Earnings from OperationsThe earnings from operations are reflective of a period of extreme volatility and of a company in transitional growth. Earnings from operations for the year continue to be impacted by lower gross margin rates due to a weaker U.S. dollar, competitive price pressures, increased investment in



selling, general and administrative expenses and the loss from operations of EH. This resulted in a decrease in earnings from operations of $603 or 4.4% from last year, finishing at $13,039 in 2011, as compared to $13,642 in 2010. Excluding EH, earnings from operations were $13,940 in 2011, as compared to $13,642 in 2010, an increase of $298 or 2.2%.

Earnings from operations is calculated as outlined in the following table:

2011 2010Net earnings for the year $ 5,993 $ 10,652Add:Income tax expense 4,329 5,057Net finance and other costs (income) 2,717 (2,067)Earnings from operations $ 13,039 $ 13,642

Interest expenseThe interest expense for the year-ended December 31, 2011, finished at $305 as compared to $103 in 2010, an increase of $202 or 196.1%. The increase in interest expense is a result of higher operating debt levels related to the assumption of debt as a result of the purchase of EH. Interest expense includes all bank fees.

Foreign Exchange Gain / LossThe foreign exchange loss in 2011 was $382 relating primarily to the transactional exchange loss pertaining to the Company’s U.S. dollar trade accounts payable in Canada, compared to a foreign exchange gain of $1,122 in 2010. The Company’s hedging strategy for 2010 included forward foreign exchange contracts to hedge Balance Sheet translational losses. Under IFRS, the translational gains and losses from converting functional currency to presentation currency are now recognized within Other Comprehensive Income and the transactional gains derived from Fiscal 2010 forward exchange contracts of $1,078 remain in the consolidated statement of income. Due to the change in accounting treatment , which sees translation gains and losses now recorded in Other Comprehensive Income under IFRS, HPS’ hedging strategy for 2011 does not include the utilization of forward foreign exchange contracts to hedge against U.S. dollar Balance Sheet translational gains and losses. At December 31, 2011, the Company had outstanding foreign exchange contracts in place for 8,000 EUR and $4,086 U.S., both implemented as a hedge against translation gains and losses on inter-company loans and $4,000 U.S. to hedge the U.S. dollar accounts payable in the Canadian operations of HPS. The details of the foreign exchange contracts outstanding as at December 31, 2011 are discussed in Note 22 in the Notes to Consolidated Financial Statements contained in our 2011 Annual Report.

Derivative instruments-Copper Forwards Gain / LossAn area that has had a definite impact on the Company’s costs and earnings is the cyclical effects and unprecedented market cost pressures of copper

commodity pricing in the global market. Due to this unpredictability, HPS utilized a future contracts hedging strategy. The Company entered copper forwards for approximately 40% of its normal annual requirements in order to reduce the Company’s exposure to changes in the price of copper. During 2011 the Company experienced a significant loss on future copper hedging contracts as the commodity future valuations significantly decreased throughout the year due to concerns over the European debt crisis and a possible world recession. The unrealized loss on future copper contracts for Fiscal 2011 was $2,175 which was offset by a gain on settled contracts of $232, resulting in a net loss $1,943. The opposite occurred in 2010, whereby the Company experienced a significant gain on future copper hedging contracts totaling $1,141 made up of unrealized gains on future contracts of $934 and $207 gains on settled contracts. Due to the magnitude of this volatility, the Company ceased entering into new long-term copper forward contracts mid Quarter 2, 2011. At December 31, 2011, the Company had outstanding forward copper contracts for the purchase of notional 1,200,000 pounds of copper at a fixed price ranging from $4.06 U.S. to $4.43 U.S. per pound with maturity dates through to May 2012. The details of the forward commodity contracts outstanding as at December 31, 2011 are discussed in Note 22 in the Notes to Consolidated Financial Statements contained in our 2011 Annual Report.

Income taxesAs a result of the decrease in income before income tax expense, 2011 income tax expense was $4,329 as compared to $5,057 in 2010 a decrease of $728. The consolidated effective tax rate for 2011 increased to 41.9% versus 32.2% last year, a difference of 9.7%. In 2011, non tax-deductible costs including expenses incurred for the Company’s acquisition activities and stock option expense increased the effective tax expense rate by 3.4%, unrecognized tax assets relating to tax losses and applicable minimum income tax relating to EH, increased the effective tax rate by 1.7% and the proportion of income earned in higher tax jurisdictions increased the effective tax rate by 2.7%.

The Company’s deferred tax assets and liabilities are related to temporary differences in various tax jurisdictions related primarily to reserves and allowances (which are not deductible in the current year) and a difference in the carrying value of property, plant and equipment and intangible assets for accounting purposes and for tax purposes as a result of business combination accounting and a different basis of depreciation utilized for tax purposes. Our income tax provision is explained further in Note 13 in the Notes to Consolidated Financial Statements contained in our 2011 Annual Report.

Net earnings2011 net earnings before taxes finished at $10,322 as compared to $15,709 in 2010, a decrease of $5,387 or 34.3%. $5,489 of the change in net earnings before tax was as a result of a large copper forward hedging loss of $1,943 in 2011 as compared to a gain of $1,141 in 2010, a loss on


foreign exchange of $382 in 2011 compared to a gain of $1,122 in 2010 and the loss before tax of $901 from EH which was acquired in 2011. Our 2011 net earnings were $5,993 versus $10,652 in 2010, a decrease of $4,659 or 43.7%. Net earnings were also impacted by increased 2011 tax expenses and a higher effective tax rate when compared to 2010.

EBITDA EBITDA for the year-ended December 31, 2011 was $15,538 versus $19,499 in 2010, a decrease of $3,961 or 20.3%. Adjusted for both foreign exchange and copper hedging gains and losses, adjusted EBITDA for Fiscal 2011 was $17,863 versus $17,236 in Fiscal 2010, an increase of $627 or 3.6%. EBITDA and adjusted EBITDA is calculated as outlined in the following table:

2011 2010Net earnings (loss) $ 5,993 $ 10,652Add: Interest expense 305 103 Income tax expense 4,329 5,057Depreciation and amortization 4,911 3,687EBITDA $ 15,538 $ 19,499Add (Deduct): Foreign Exchange Losses/(Gain) 382 (1,122)Copper hedging Losses/(Gain) 1,943 (1,141)Adjusted EBITDA $ 17,863 $ 17,236

Summary of quarterly financial information (unaudited)

Fiscal 2011 Quarters Q1 Q2 Q3 Q4 Total

Sales $ 52,777 $ 52,330 $ 55,489 $ 60,727 $ 221,323

Net income $ 1,571 $ 682 $ 171 $ 3,569 $ 5,993

Net income per share – basic $ 0.14 $ 0.06 $ 0.01 $ 0.31 $ 0.52

Net income per share – diluted $ 0.13 $ 0.06 $ 0.01 $ 0.31 $ 0.51

Average U.S. to Canadian exchange rate $ 0.986 $ 0.967 $ 0.980 $ 1.023 $ 0.989

Fiscal 2010 Quarters Q1 Q2 Q3 Q4 Total

Sales $ 44,273 $ 50,820 $ 47,903 $ 47,608 $ 190,604

Net income $ 2,976 $ 1,170 $ 2,250 $ 4,256 $ 10,652

Net income per share – basic $ 0.25 $ 0.10 $ 0.20 $ 0.37 $ 0.92

Net income per share – diluted $ 0.25 $ 0.09 $ 0.20 $ 0.37 $ 0.91

Average U.S. to Canadian exchange rate $ 1.041 $ 1.028 $ 1.039 $ 1.013 $ 1.030

Historically the first quarter of the Company’s fiscal year experiences lower revenues due to a general decline in activity in the construction industry as well as overall electrical markets as many projects are just getting underway and in Quarter 3 due to summer slowdowns at the end customer due to vacations, as evidenced by Fiscal 2010. Fiscal 2011 experienced a different trend, as pent up demand from the economic recession saw an increase in bookings in Q4 2010, which led

to stronger sales in Q1 2011 and continued through to Q4 2011. Effective March 1, 2011 the financial results of the Company includes the financial results of EH, which was acquired in Quarter 1, 2011. The year-to-year quarterly fluctuations in both sales and income are also affected by the changes in the U.S. to Canadian foreign exchange rates, changing economic conditions, and competitive pricing pressures.



Quarter 4, 2010 financial results

December 31, 2011December 31, 2010

(Restated under IFRS)

Sales $ 60,727 $ 47,608

Earnings from operations $ 5,729 $ 4,315

Exchange gain/(loss) $ 327 $ 464

Copper forward gain/(loss) $ 365 $ 1,225

Net earnings $ 3,569 $ 4,256

Earnings per share – basic 0.31 0.37

Earnings per share – diluted 0.31 0.37

Cash provided by operations $ 10,741 $ 3,389

Sales for the quarter ended December 31, 2011 were $60,727 up $13,119 or 27.6% from the comparative quarter last year, which is reflective of the impact of the stronger demand for our product as compared to the previous year, sales contribution from the newly acquired company EH and a favourable product mix.

Quarter 4, 2011 gross margin dollars increased by 28.3% compared to Quarter 4, 2010. Gross margin percentage increased slightly to 25.8% from the Quarter 4, 2010 rate of 25.7%. Quarter 4, 2011 gross margin increased as a result of higher sales levels, a favourable change in product mix, and a higher U.S. dollar exchange rate for Quarter 4 2011 versus Quarter 4, 2010.

Total selling and distribution expenses amounted to $6,049 in Quarter 4, 2011 versus $4,925 in Quarter 4, 2010 an increase of $1,124 or 22.8%. The higher expense in the quarter was from higher freight, commission and engineering costs in Quarter 4, 2011 totaling $673 versus Quarter 4, 2010. The selling expenses attributable to EH in Quarter 4, 2011 were $295.

The general and administrative expenses for Quarter 4, 2011 totaled $3,908, an increase of $922 or 30.9% when compared to Quarter 4, 2010 costs of $2,986. The increase in Quarter 4, 2011 compared to Quarter 4, 2010 is attributed to additional general and administrative costs related to EH of $241, additional costs related to ongoing acquisition activities of $145 and higher bad debt provisions of $267.

The foreign exchange gain in Quarter 4, 2011 was $327 compared to a foreign exchange gain of $464 in Quarter 4, 2010. The majority of the Quarter 4, 2011 foreign exchange gains are as a result of transactional gains in Canada due to the strengthening of the U.S. dollar relative to the Canadian dollar in the quarter. Earnings from operations for the quarter were positively impacted by higher sales, increased margin rates and the favourable impact of higher manufacturing throughput, which produced higher gross margin dollars. Quarter 4, 2011 earnings from operations were up $1,414 or 32.8% from the same quarter last year, finishing at $5,729

in the quarter as compared to $4,315 in Quarter 4, 2010. Quarter 4, 2011 income tax expense was $2,741 on earnings before

income taxes of $6,310 (an effective tax rate of 43.4%) as compared to an Income tax expense of $1,736 on earnings before income taxes of $5,992 (an effective tax rate of 29.0%) in Quarter 4, 2010, an increase of $1,005. The higher effective tax rate is primarily the result of acquisition costs in 2011 not being deductible for tax purposes, minimum tax expense at EH and no recognition of tax benefit of loss in EH.

Net earnings for Quarter 4, 2011 were lower by $687 or 16.1%, concluding at $3,569 compared to $4,256 in Quarter 4, 2010. The main cause for the lower earnings is that Quarter 4 2010 earnings had a significant gain on copper forward contracts of $1,225 or higher by $860 than the gain recorded in Quarter 4, 2011. Cash provided by operations for Quarter 4, 2011 was $10,741 versus $3,389 in Quarter 4, 2010, an increase of $7,352. The major difference in cash from operations is due to a decrease in usage of working capital and the add-back of higher non-cash income tax expense.

Cash, net of operating lines of credit, was $6,218 as at December 31 2011, a decrease of $11,871 as compared to a balance of $18,089 as at December 31, 2010 primarily reflecting acquisition activity and debt repayment during the year.

Capital resources and liquidityThe Company continued to focus on generating cash from operations, debt management, investment and liquidity.

Cash provided by operations during 2011 was $6,592 versus $14,109 in 2010, a decrease in cash generated from operations of $7,517. This decrease is mostly due to lower net earnings of $4,659 and higher working capital usage of $6,854, which were offset by higher non-cash expenses for amortization of $1,224 and change in unrealized gains and losses on derivatives of $2,948. The change in non-cash working capital of $7,730


for 2011 is as a result of increases in accounts receivable and inventories offset by an increase in accounts payable and accrued liabilities. Accounts receivable finished the year at $41,561 as compared to $31,009 as at December 31, 2010, an increase of $10,552. A significant portion of the year-over-year increase in accounts receivable can be attributed to the assumption of additional accounts receivable through the acquisition of EH, an increase in outstanding receivables as a result of higher Quarter 4, 2011 sales and extended terms to several distributor buying groups and OEM customers.

The Company was attentive to its customer accounts receivable collections cycle time and current inventory turnover rates in 2011. Even with the acquisition of EH, where credit terms are traditionally longer, the Company’s days’ sales outstanding ratio remains below industry standards, which can be attributed to effective credit policies and tightly managed accounts receivable administration.

Inventories finished the year at $34,515 as at December 31, 2011, versus $26,342 as at December 31, 2010, an increase of $8,173. This increase can be attributed to a planned increase in levels of standard products due to the growth in customer demand as a result of slightly improved economic conditions and to the additional inventory investment at EH. Accounts payable and accrued liabilities increased by $8,610 finishing at $35,518 as at December 31, 2011 compared to $26,908 at the end of 2010 due to higher purchases to support sales growth and additional accounts payable related to EH.

For comparison purposes on a year-to-date basis, excluding the purchase price impact of EH, accounts receivable has increased by $5,695 due to increased sales, inventories increased by $6,244 to support increased demand and improve customer service and trade accounts payable increased by $3,830.

Net income taxes recoverable were $786 (income taxes recoverable of $1,253 less income taxes payable of $467) as at December 31, 2011, versus net income taxes recoverable of $1,970 (income taxes recoverable of $2,188 less income taxes payable of $218) as at December 31, 2010 a decrease of $1,184.

Cash used in financing activities was $5,924 in 2011, compared to $4,319 in 2010, an increase of $1,605. This change was due to a higher interest payments of $202, a growth in dividends paid of $234 and the payment of long-term debt of EH of $1,843 in 2011, offset by a share repurchase of $584 in 2010 that was not done in 2011.

The Company’s long-term debt of $4,537 is a result of funding it received from the Southern Ontario Development Program (SODP) of $905 for the expansion of its operations including a state-of-the-art research and development test laboratory, to increase larger power transformer manufacturing capacity and the assumption of EH’s long-term debt of $5,476. The funding received from the SODP is a non-interest bearing line that will be repaid over 5 years. This is explained further in Note 11 in the Notes to Consolidated Financial Statements contained in our 2011 Annual Report.

Cash used in investment activities increased by $7,838 mostly as a result of the purchase of EH for $7,784. There was a decrease in capital spending of $850 over the prior year, totaling $3,284 in 2011, compared to $4,134 for 2010. The Company’s capital expenditure program in the year were in the areas of manufacturing capacity expansion, the establishment of a new research and development test lab, productivity improvement projects and information technology infrastructure. There were also “normal” maintenance capital invested at all facilities, manufacturing product mandate projects and productivity improvement projects. The Company also saw an increase in intangible asset purchases of $902, mostly related to software, totaling $1,084 in 2011 versus $182 in 2010.

Bank operating lines of credit finished the year at $1,596 as at December 31, 2011, compared to $1,447 as at December 31, 2010 resulting in an increase of $149 in the year.

Overall cash balances net of debt bank lines of credit resulted in a net cash position of $6,218 as at December 31, 2011, versus a net cash position of $18,089 as at December 31, 2010. This is primarily as a result of the purchase of EH for $7,784 and increased investment in working capital.

The Company currently has a financing agreement with JP Morgan Chase Bank, N.A.; for a $25,000 U.S. revolving credit facility and a $15,000 U.S. delayed draw credit facility, which expires September 30, 2012. The Company is in the process of finalizing a committed long-term financing agreement with its principle lender to provide financing certainty, hedging strategy support, financing for operations and capital for strategic initiatives.

All bank covenants were met as at December 31, 2011, and were in compliance throughout the year.

The Company’s growth strategy includes the pursuit of strategic acquisitions, which would be primarily funded by cash from operations and our existing available credit facility of $40,000 U.S., against which the Company has currently drawn $1,596 supplemented by debt financing as required. The Company’s financial objective is to ensure that the Company has sufficient cash and debt capacity to fund its operating activities, investments and growth. The Company has several alternatives to fund future capital requirements, including its existing cash position, credit facility, future operating cash flows and debt or equity financing. The Company continually evaluates these options to ensure the appropriate mix of capital resources is maintained to best meet our needs. The Company has capital expenditure commitments of $2,222 required for the completion of its plant capacity expansion projects for planned growth from future business development.

Additional details of our change in non-cash working capital can be found in Note 20 in the Notes to Consolidated Financial Statements contained in our 2011 Annual Report.


Contractual obligationsThe following table outlines payments due for each of the next 5 years and thereafter related to debt, lease, purchase and other long-term obligations.

2012 2013 2014 2015 2016 Thereafter Total

Operating leases $ 1,678 $ 1,679 $ 1,372 $ 1,236 $ 636 – $ 6,601

Accounts payable and accrued liabilities

35,518 – – – – 35,518

Capital expenditure purchase commitments

2,222 – – – – 2,222

Long-term debt 1,742 1,293 1,169 452 64 – 4,720

Total $41,160 $ 2,972 $ 2,541 $ 1,688 $ 700 – $49,061

Contingent liabilities Management is not aware of any contingent liabilities.

Normal course issuer bid On December 9, 2011 the Board of Directors authorized the repurchase of up to 50,000 of its Class A Subordinate Voting Shares (“Class A Shares”), representing .57% of the 8,806,624 Class A Shares outstanding as of March 9, 2012, by way of a normal course issuer bid (“NCIB”) through the facilities of the Toronto Stock Exchange (“TSX”). Daily purchases were limited to 1,814 Class A shares, other than block purchase exceptions, which is 25% of the average daily trading volume of 7,257 Class A shares of HPS on the TSX in the preceding six calendar months.

Decisions regarding the timing of repurchases are based on market conditions, share price and other factors. Class A Shares repurchased under the bid will be cancelled.

The Board of Directors of HPS authorized the NCIB, believes market conditions provides opportunities for HPS to acquire Class A Shares at attractive prices and are an appropriate use of HPS funds enhancing shareholder value.

There were no shares repurchased in 2011.

Regular annual dividend declaredOn October 26, 2011, the Board of Directors declared a regular annual cash dividend of $0.15 per Class A Subordinate Voting Share and $0.15 per Class B Common Share, which was paid on December 9, 2011 to shareholders of record at the close of business on November 16, 2011. The ex-dividend date was November 16, 2011. The regular dividend was declared in recognition of the Company’s financial performance in 2011 and demonstrates confidence in HPS’ business strategies going forward.

Controls and proceduresThe Chief Executive Officer and the Chief Financial Officer are responsible for establishing and maintaining disclosure controls and procedures and for establishing and maintaining adequate internal controls over financial reporting. The control framework used in the design of disclosure controls

and procedures and internal control over financial reporting is the internal control integrated framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO Framework). Our internal control system was designed to provide reasonable assurance to our Management and Board of Directors regarding the preparation and fair presentation of published financial statements in accordance with International Financial Reporting Standards. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

As at December 31, 2011, we conducted an evaluation, under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of December 31, 2011 such disclosure controls and procedures were operating effectively.

The Company acquired EH on March 15, 2011 and has included the financial results of EH as part of HPS’ consolidated financial results as of March 1, 2011 for administrative convenience. Management has not fully completed its assessment of the design or operating effectiveness of EH’s disclosure controls and procedures and internal controls over financial reporting.

Internal controls over financial reportingManagement is responsible for establishing and maintaining adequate internal controls over financial reporting. Our internal control system was designed to provide reasonable assurance to our Management and Board of Directors regarding the preparation and fair presentation of published financial statements in accordance with International Financial Reporting Standards. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Canadian Securities Administrators require that companies certify the effectiveness of internal controls over financial reporting. It also requires a company to use a control framework such as the Internal Control – Integrated Framework (“COSO Framework”) to design internal controls over financial reporting. As well, the threshold for reporting a weakness of internal controls over financial reporting should be of a “material weakness” rather than “reportable deficiency.” HPS has designed its internal controls in accordance with the COSO Framework and has carried out retesting in 2011, which was completed in the fourth quarter.

Internal controls over financial reportingAs of December 31, 2011 Management, with the supervision and participation of the Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of the Company’s internal control over financial reporting. Based on that assessment, the Chief Executive Officer and Chief Financial


30 m a n a g e m e n t ’ S d i S C u S S i o n a n d a n a ly S i S

Officer have concluded that the internal controls are effective and that there were no material weaknesses in the Company’s internal control over financial reporting as of December 31, 2011.

Changes in internal control over financial reporting and disclosure controls and proceduresDuring 2011 there were no material changes identified in HPS’ internal controls over financial reporting that had materially affected, or were reasonably likely to materially affect, HPS’ internal control over financial reporting. HPS does carry out ongoing improvements to its internal controls over financial reporting but nothing considered at a material level.

Purchase of Euroelettro S.p.A. (“EH”) HPS announced on March 21, 2011 that the acquisition of EH was completed and that the Company will operate as EH, a wholly owned subsidiary of HPS.

With over 20 years’ of experience, EH has its corporate office and manufacturing plant in Meledo di Sarego, Italy. EH’s business includes the design and manufacture of cast coil, standard and custom dry-type distribution and power transformers with annual sale revenues of approximately CDN $15 million. EH has a reputation in the industry for its custom design capabilities, product reliability and quality.

Total purchase consideration is comprised of the following:

Cash $7,784

Purchase of Euroelettro S.p.A. (“EH”)The allocation of the acquisition costs for EH as at March 1, 2011 is as follows:

Accounts Receivable $ 4,856Inventory $ 1,929Property, Plant & Equipment $ 9,432Intangible Assets $ 2,592Goodwill $ 2,428Total Assets $ 21,237Bank Operating Lines of Credit $ (2,709)Accounts Payable and Accrued Liabilities $ (4,780)Deferred Tax Liabilities $ (488)Long-Term Debt $ (5,476)Total Liabilities $ (13,453)Net Consideration for net assets acquired $ 7,784

The purchase of EH expands HPS’ global presence, provides a platform for expansion into the European market and increases its product breadth offering with design and manufacturing capabilities in cast coil transformer technology. The addition of cast coil product, with HPS’ already broad dry-type transformer product offering will support HPS’ growth in North America as well as in other global markets.

The acquisition of EH also further strengthens HPS’ transformer brands, supports North American and European market share expansion, provides increased manufacturing capacity and advances the Company’s business hedging strategies.

Subsequent events Purchase of Pan- Electro Technic Enterprises Private Limited (“PETE”).

On February 23, 2012, Hammond Power Solutions Inc. signed an agreement for the acquisition of Pan-Electro Technic Enterprises Private Limited (“PETE”) in India, acquiring a 70% equity ownership of its transformer business for 775,000 Indian Rupees (CDN $15,828). PETE’s annual revenues approximate CDN $16,000.

The Company will operate as PETE – Hammond Power Solutions Private Limited, a subsidiary of HPS (“PETE”). The purchase of PETE expands HPS’ global presence and provides a platform for expansion into the Indian, Asian and African markets. PETE also increases the breadth of HPS’ product offering with its design and manufacturing capabilities in cast coil, custom liquid filled distribution, and power transformers. PETE has a reputation in the transformer industry for its custom engineering capabilities, product reliability and quality.

The acquisition supports HPS’ global growth strategies and product offering in new global markets. PETE is involved in the design and manufacture of cast coil, custom liquid filled distribution, and power transformers and has an excellent reputation in the electrical industry for its engineered-to-order capabilities and quality. Management feels that by building on the strengths of both companies, this acquisition will enhance HPS’ market share strategies and performance going forward.

Bank AgreementOn March 22, 2012, the Company completed a new financing arrangement with JP Morgan Chase Bank, N.A. for a $25,000 U.S. revolving credit facility, a $5,000 U.S. overdraft facility, a 4,000 Euro overdraft facility and a $10,000 U.S. delayed draw credit facility. This is an unsecured, 5-year committed facility that provides financing certainty for the future. This financing better aligns our Canadian, U.S. and European banking requirements, supports our hedging strategies, provides financing for our operational requirements, and capital for our strategic initiatives.

Risks and uncertaintiesAs with most businesses, HPS is subject to a number of marketplace, industry and economic related business risks, which could have some material impact on our operating results. These risks include:

▶ The cyclical effects, unpredictability and volatility of market costs and supply pressures for commodities such as copper, insulation and electrical grain oriented steel;▶ A significant, unexpected change in the global demand for resources;


▶ The extreme variability of the Canadian dollar versus the U.S. dollar;▶ Global economic recession;▶ Interest rates;▶ Government protectionism;▶ Competition;▶ Credit risk; and▶ Global political unrest.

The Company is very cognizant of these risks and continually assesses the current and potential impacts that they have on the business. HPS continuously works to lessen the negative impact of these risks through diversification of its core business, market channel expansion, breadth of product offering, geographic diversity of its operations and business hedging strategies

There are, however, several risks that deserve particular attention:

Commodity pricesAn area that has had a definite impact on the Company’s costs and earnings is the cyclical effects and unprecedented market cost pressures of copper commodity and steel pricing in the global market. Due to this unpredictability, particularly with copper pricing, HPS implemented a future contracts hedging strategy. Strategic supply line agreements and alliances are in place with our major steel suppliers to ensure adequate supply and competitive market pricing.

The Company had forward commodity contracts in place for 2011 and has entered into contracts to the end of May 2012.The details of the forward commodity contracts outstanding as at December 31, 2011, are discussed in Note 22 in the Notes to Consolidated Financial Statements contained in our 2011 Annual Report.

Foreign exchangeHPS operating results are reported in Canadian dollars (“CDN”). The majority of the Company sales and material purchases are denominated in U.S. dollars. While there is a natural hedge, as sales denominated in U.S. dollars are partially offset by the cost of raw materials purchased from the U.S. and commodities tied to U.S. dollar pricing, a change in the value of the Canadian dollar against the U.S. dollar will impact earnings. In general, a lower value for the Canadian dollar compared to the U.S. dollar will have a beneficial impact on the Company’s results. Inversely, a higher value for the Canadian dollar compared to the U.S. dollar will have a corresponding negative impact on the Company’s profitability.

The Company also has a U.S. operating subsidiary and U.S. dollar assets. The exchange rate between the Canadian and U.S. dollar can vary significantly from year-to-year. There is a corresponding positive or negative impact to the Company’s Accumulated Other Comprehensive Income in the Consolidated Statement of Financial Position solely related to the foreign exchange translation of its U.S. Balance Sheet.

We have partially reduced the impact of foreign exchange fluctuations through increasing our U.S. dollar driven manufacturing output and have further enhanced our geographic manufacturing hedge through the acquisition of Delta Transformers Inc. in 2009. This operation is a buyer of raw materials priced in U.S. dollars and essentially has all of its sales in Canada.

The Company had also lessened its intercompany loan transactional exchange rate risk by entering into a forward foreign exchange contracts.

Finally, HPS periodically institutes price increases to help offset the negative impact of changes in foreign exchange and product cost increases.

Unpredictable weather/natural disastersThe Company’s order booking and sales trends, may be negatively impacted by extreme weather conditions such a heavy rains, flooding, snowfall, tornadoes and hurricanes.

The Company may see short-term effects of such occurrences due their unpredictability. This may impact delivery and capacity requirements.

Interest ratesThe Company has structured its debt financing to take advantage of the current lower interest rates, but is cognizant that a rise in interest rates will negatively impact the financial results. The Company continuously reviews its interest rate strategy and with current lower short-term interest rates has not entered into any long-term contracts.

As part of hedging this risk, the Company may enter into fixed long-term rates on part of its total debt. The Company believes that a more significant impact of a rise in interest rates would apply to our customers’ investment decisions and financing capabilities.

CreditA substantial portion of the Company’s accounts receivable are with customers in manufacturing sectors and are subject to credit risks normal to those industries. Although the Company has historically incurred very low bad debt expense, the current economic conditions increase this exposure.

Global/North American economyGiven the negative economic environment, particularly in North America, we are focusing our efforts over the next twelve months on projects that will increase our cost competitiveness, capacity and improve our manufacturing flexibility. The Company believes that being agile as an organization will become even more important in order to respond quickly to both unexpected opportunities and challenges. We also believe that through our OEM and distributor channels, our growing access to a variety of global and domestic markets will help HPS expand market share during this economic slowdown.

Off-Balance Sheet arrangementsThe Company has no off-Balance Sheet arrangements, other than operating



leases disclosed in Note 12 in the Notes to the Consolidated Financial Statements contained in our 2011 Annual Report.

Transactions with related partiesThe Company had no transactions with related parties in 2011.

Proposed transactionsWith the exception of the acquisition of Pan-Electro Technic Enterprises Private Limited (“PETE”) in India subsequent to the year-end as disclosed, the Company had no proposed transactions as at December 31, 2011. The Company continues to evaluate potential business expansion initiatives in accordance with its long-term growth strategy.

Financial instruments The Company’s financial instruments consist of cash, accounts receivable, bank operating lines of credit, accounts payable and accrued liabilities, long-term debt and the following derivative instruments:

At December 31, 2011, the Company had outstanding foreign exchange contracts in place for 8,000 EUR and $4,086 U.S., both implemented as an economic hedge against translation gains and losses on inter company loans and $4,000 U.S. to economically hedge the U.S. dollar accounts payable in the Canadian operations of HPS. The Company had no outstanding foreign exchange contracts as at December 31, 2010. The Company also has forward copper purchase contracts outstanding at December 31, 2011 for the purchase of notional 1,200,000 pounds of copper at fixed prices ranging from $4.06 U.S. to $4.43 U.S. per pound with maturity dates through to May 2012. At December 31, 2010 the Company had forward copper purchase contracts for the purchase of notional 2,300,000 pounds of copper at fixed prices ranging from $3.66 U.S. to $4.06 U.S.

Further details regarding the Company’s financial instruments and the associated risks are disclosed In Note 22 in the Notes to the Consolidated Financial Statements contained in our 2011 Annual Report.

Critical accounting estimates

The preparation of the Company’s consolidated financial statements requires Management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. These estimates are based upon Management’s historical experience and various other assumptions that are believed by Management to be reasonable under the circumstances. Such assumptions and estimates are evaluated on an ongoing basis and form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates. The Company assesses the carrying value of its property, plant and equipment, intangible assets and goodwill every year, or more often if necessary. If it is determined that we cannot recover the carrying value of an asset or goodwill, the unrecoverable amount is written off against current earnings. The Company bases its assessment of

recoverability on assumptions and judgments about future prices, demand and manufacturing costs. A material change in any of these assumptions could have a significant impact on the potential impairment and/or useful lives of these assets.

Outstanding share dataDetails of the Company’s outstanding share data as of March 23, 2012, are as follows: 8,806,624 Class A Shares 2,778,300 Class B Common Shares 11,584,924 Total Class A and B Shares

New accounting pronouncementsThe International Accounting Standards Board has issued the following Standards, Interpretations and amendments to Standards that are not yet effective and while considered relevant to the Company have not yet been adopted by the Company.

Financial instrumentsIn October 2010, the International Accounting Standards Board (“IASB”) issued IFRS 9, Financial Instruments (“IFRS 9”). This standard is effective for annual periods beginning on or after January 1, 2015 and is part of a wider project to replace IAS 39, Financial Instruments: Recognition and Measurement. IFRS 9 replaces the current multiple classification and measurement models for financial assets and liabilities with a single model that has only two classification categories: amortized cost and fair value. The basis of classification depends on the entity’s business model and the contractual cash flow characteristics of the financial asset or liability. The guidance in IAS 39 on impairment of financial assets and hedge accounting continues to apply. The Company intends to adopt IFRS 9 in its financial statements for the annual period beginning on January 1, 2015. The classification and measurement of the Company’s financial assets and financial liabilities is not expected to change under IFRS 9 because of the nature of the Company’s operations and the types of financial assets and liabilities that it holds.

Consolidated financial statementsIn May 2011, the IASB issued IFRS 10, Consolidated Financial Statements (“IFRS 10”). This standard is effective for annual periods beginning on or after January 1, 2013 and establishes principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. IFRS 10 defines the principle of control and establishes control as the basis for determining which entities are consolidated in the consolidated financial statements. The Company intends to adopt IFRS 10 in its financial statements for the annual period beginning on January 1, 2013. The Company does not expect IFRS 10 to have a material impact on the financial statements.


Joint arrangementsIn May 2011, the IASB issued IFRS 11, Joint Arrangements (“IFRS

11”). This standard is effective for annual periods beginning on or after January 1, 2013 and establishes principles for financial reporting by parties to a joint arrangement. IFRS 11 requires a party to assess the rights and obligations arising from an arrangement in determining whether an arrangement is either a joint venture or a joint operation. Joint ventures are to be accounted for using the equity method while joint operations will continue to be accounted for using proportionate consolidation. The Company intends to adopt IFRS 11 in its financial statements for the annual period beginning on January 1, 2013. The Company does not expect IFRS 11 to have a material impact on the financial statements.

Disclosure of interests in other entitiesIn May 2011, the IASB issued IFRS 12, Disclosure of Interests in Other

Entities (“IFRS 12”). This standard is effective for annual periods beginning on or after January 1, 2013 and applies to entities that have an interest in a subsidiary, a joint arrangement, an associate or an unconsolidated structured entity. IFRS 12 integrates and makes consistent the disclosure requirements for a reporting entity’s interest in other entities and presents those requirements in a single standard. The Company intends to adopt IFRS 12 in its financial statements for the annual period beginning on January 1, 2013. When applied, it is expected that IFRS 12 will increase the current level of disclosure of interests in other entities.

Fair value measurementIn May 2011, the IASB issued IFRS 13, Fair Value Measurement (“IFRS 13”). This standard is effective for annual periods beginning on or after January 1, 2013 and provides additional guidance where IFRS requires fair value to be used. IFRS 13 defines fair value, sets out in a single standard a framework for measuring fair value and establishes the required disclosures about fair value measurements. The Company intends to adopt IFRS 13 prospectively in its financial statements for the annual period beginning on January 1, 2013. The Company does not expect IFRS 13 to have a material impact on the financial statements.

Employee benefitsIn June 2011, the IASB issued an amended version of IAS 19, Employee Benefits (“IAS 19”). This amendment is effective for annual periods beginning on or after January 1, 2013 and requires the recognition of actuarial gains and losses immediately in other comprehensive income and full recognition of past service costs immediately in profit or loss. Revised IAS 19 also streamlines the presentation of changes in assets and liabilities arising from defined benefit plans and enhances the disclosure requirements for defined benefit plans. The Company intends to adopt the amendments in its financial statements for the annual period beginning on January 1, 2013. The extent of the impact of adoption of the amendments has not yet been determined.

Presentation of other comprehensive income (OCI)In June 2011, the IASB issued an amended version of IAS 1, Presentation of Financial Statements (“IAS 1”). This amendment is effective for annual periods beginning on or after July 1, 2012 and requires companies preparing financial statements in accordance with IFRS to group together items within OCI that may be reclassified to the profit or loss section of the statement of earnings. Revised IAS 1 also reaffirms existing requirements that items in OCI and profit or loss should be presented as either a single statement or two consecutive statements. The Company intends to adopt the amendments in its financial statements for the annual period beginning on January 1, 2013. As the amendments only require changes in the presentation of items in other comprehensive income, the Company does not expect the amendments to IAS 1 to have a material impact on the financial statements.

Strategic direction and outlookAs evidenced in the 2011 Annual Report, HPS continues to expand in Canada, the United States and Europe, this despite their irregular economies as well as the soft electrical market over the last year. The Company is very aware of the volatility of the general global economic climate particularly in North America and Europe, the potential negative impact of a stronger and unpredictable Canadian dollar as well as the variability of raw material commodity costs. The Company continues to manage these deterrents in a deliberate and forthright manner through its operational projects and strategic initiatives.

The Company is not immune to the challenges it faces from these negative influences however is confident that the business fundamentals that it has built will sustain and grow the Company in the near future and over the long term. The Company believes that this is a time to be prudent but not complacent, conservative but progressive. It will be resolute in its pursuit of improved productivity gains, sales growth from new product development, geographic diversification, capacity expansion and escalation of market share.

The Company showed strong performance across all financial and operational metrics and is proud of these accomplishments, is stronger and more capable of enduring economic uncertainty and looks forward to the many opportunities that lie ahead.

We will continue to focus our efforts on sustaining profit rates through selling price increases, sales growth, geographic manufacturing dispersion, global expansion, productivity gains, new product development and market share penetration.

We expect sales growth will be realized in several of our market segments however will remain at a lower level in others. A portion of our sales will come from major customer projects for which the exact timing is hard to predict, thus influencing quarterly sales fluctuations.

HPS is positioned to meet the evolving needs of our traditional markets while becoming a central player in a growing number of emerging sectors. Our success lies in our resilience, dedication and commitment, by taking


3434 m a n a g e m e n t ’ S d i S C u S S i o n a n d a n a ly S i S

advantage of our decades of experience, our engineering expertise, solid supplier relationships, and a unique business perspective gained through our diverse products, customers and markets.

We are committed to investing in capital and integral recruits ensuring our strategic advantage going forward. We will continue to concentrate on our disciplined cost management initiatives and in bringing quality and value to all stakeholders of the Company. We will make every effort

to deliver solid financial performance, provide a sustainable return to our shareholders and maintain the financial strength of the Company.

The year ahead will not be without its challenges. As we look to 2012 and beyond, we believe in the strength of the

HPS model and the many reasons to continue to be confident in the Company’s future.

Selected Annual and Quarterly Information(tabular amounts in thousands of dollars)

Annual Information*

2007 2008 2009 2010 IFRS Restated 2011

Sales 160,606 226,358 195,437 190,604 221,323

Earnings from operations 19,575 26,558 * 18,943 13,642 13,039

EBITDA 22,704 34,742 19,816 19,500 15,538

Net earnings for the year 12,403 22,829 9,631 10,652 5,993

Total assets 70,264 110,891 106,597 118,643 137,520

Total liabilities 25,784 41,107 29,094 32,360 46,072

Total cash (debt) 4,395 (4,100) 10,024 17,694 1,681

Cash provided from operations 7,611 6,254 26,418 14,109 6,592

Basic earnings per share 1.08 1.95 0.82 0.92 0.52

Diluted earnings per share 1.06 1.93 0.82 0.91 0.51

Dividends declared and paid – – 1,173 1,504 1,738

Average Exchange Rate (USD$=CAN$) 1.075 1.064 1.145 1.030 0.989

Book value per share 3.82 5.91 6.57 7.45 7.89

Quarterly Information2010 IFRS Restated 2011 IFRS

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Sales 44,273 50,820 47,903 47,608 52,777 52,330 55,489 60,727

Earnings from operations 3,527 3,711 2,089 4,315 2,827 1,819 2,664 5,729

EBITDA 5,614 3,047 4,399 6,440 3,580 2,876 1,800 7,282

Net earnings 2,976 1,170 2,250 4,256 1,571 682 171 3,569

Total assets 106,346 109,501 111,188 118,643 127,854 133,574 135,271 137,520

Total liabilities 25,874 25,725 26,738 32,360 40,603 45,481 44,523 46,072

Total cash (debt) 10,675 10,626 16,241 17,694 320 (7,520) (3,344) 1,681

Cash provided (used) by operations 1,607 2,014 7,099 3,563 (2,578) (6,494) 4,923 10,741

Basic earnings per share 0.25 0.10 0.20 0.37 0.14 0.06 0.01 0.31

Diluted earnings per share 0.25 0.09 0.20 0.37 0.14 0.06 0.01 0.31

Dividends declared and paid – – –- 1,504 – – – 1,738

Average Exchange Rate (USD$=CAN$) 1.041 1.028 1.039 1.013 0.986 0.967 0.980 1.023

Book value per share 6.93 7.23 7.30 7.45 7.53 7.60 7.83 7.89

* exchange gain/loss of the 2008 comparative figures has been reclassified to conform with the current period financial statement presentation

H a m m o n d P o w e r S o l u t i o n S | a n n u a l r e P o r t 35H a m m o n d P o w e r S o l u t i o n S | a n n u a l r e P o r t 35

2011 Management Report and Independent Auditors’ Report

To the Shareholders of Hammond Power Solutions Inc.We have audited the accompanying consolidated financial statements of Hammond Power Solutions Inc., which comprise the consolidated statements of financial position as at December 31, 2011, December 31, 2010 and January 1, 2010, the consolidated statements of earnings, comprehensive income, changes in equity and cash flows for the years ended December 31, 2011 and December 31, 2010, and notes, comprising a summary of significant accounting policies and other explanatory information.

Management’s Responsibility for the Financial StatementsManagement is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ ResponsibilityOur responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements 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. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.

OpinionIn our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Hammond Power Solutions Inc. as at December 31, 2011, December 31, 2010 and January 1, 2010, and its consolidated financial performance and its consolidated cash flows for the years ended December 31, 2011 and December 31, 2010 in accordance with International Financial Reporting Standards.

Chartered Accountants, Licensed Public Accountants March 29, 2012 Waterloo, Canada

Management’s Responsibility for Financial StatementsThe Consolidated Financial Statements are the responsibility of the management of Hammond Power Solutions Inc. These statements have been prepared in accordance with International Financial Reporting Standards, using management’s best estimates and judgments where appropriate.

Management is responsible for the reliability and integrity of the Consolidated Financial Statements, the Notes to Consolidated Financial Statements and other financial information contained in the report. In the preparation of these statements, estimates were sometimes necessary because a precise determination of certain assets and liabilities is dependent on future events. Management believes such estimates have been based on careful judgment and have been properly reflected in the accompanying Consolidated Financial Statements. Management is responsible for the maintenance of a system of internal controls designed to provide reasonable assurances that the assets are safeguarded and that accounting systems provide timely, accurate and reliable financial information.

The Board of Directors is responsible for ensuring that management fulfills its responsibilities through the Audit Committee of the Board, which is composed of all of the directors, of whom six are non-management directors. The Audit Committee meets periodically with management and the auditors to satisfy itself that management’s responsibilities are properly discharged, to review the Consolidated Financial Statements and to recommend approval of the Consolidated Financial Statements to the Board of Directors.

KPMG LLP, the independent auditors appointed by the shareholders, has audited the Company’s Consolidated Financial Statements in accordance with Canadian generally accepted auditing standards, and their report follows. The independent auditors have full and unrestricted access to the Audit Committee to discuss their audit and related findings as to the integrity of the financial reporting process.

William G. HammondChairman of the Board & Chief Executive Officer

March 29, 2012

Christopher R. HuetherCorporate Secretary & Chief Financial Officer

C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S36

Consolidated Statements of Financial PositionYears ended December 31, 2011 and 2010 (tabular amounts in thousands of dollars)

December 31, 2011 December 31, 2010 January 1, 2010

AssetsCurrent assets

Cash $ 7,814 $ 19,536 $ 14,049

Accounts receivable (Note 4) 41,561 31,009 27,366

Inventories (Note 5) 34,515 26,342 25,585

Derivative assets (Note 22) – 1,192 454

Income taxes recoverable (Note 13) 1,253 2,188 3,006

Prepaid expenses 1,093 921 514

Total current assets $ 86,236 $ 81,188 $ 70,974

Non-current assets

Property, plant and equipment (Note 6) 37,529 28,955 28,204

Investment in properties (Note 7) 1,044 1,044 1,044

Deferred tax assets (Note 13) 606 586 685

Goodwill (Note 9) 4,564 2,180 2,180

Intangible assets (Note 8) 7,541 4,690 5,099

Total non-current assets 51,284 37,455 37,212

Total assets $ 137,520 $ 118,643 $ 108,186

Liabilities

Current liabilities

Bank operating lines of credit (Note 10) $ 1,596 $ 1,447 $ 4,025

Accounts payable and accrued liabilities 35,518 26,908 22,953

Income tax liabilities (Note 13) 467 218 85

Provisions (Note 18) 439 962 550

Derivative liabilities (Note 22) 1,018 – –

Current portion of long-term debt (Note 11) 1,688 – –

Total current liabilities $ 40,726 $ 29,535 $ 27,613

Non-current liabilities

Employee future benefits (Note 17) 309 257 250

Provisions (Note 18) 165 118 139

Long-term debt (Note 11) 2,849 395 –

Deferred tax liabilities (Note 13) 2,023 2,055 1,601

Total non-current liabilities 5,346 2,825 1,990

Total liabilities $ 46,072 $ 32,360 $ 29,603

Shareholders’ Equity

Share capital (Note 14) 12,987 12,968 12,959

Contributed surplus 1,525 968 626

Accumulated other comprehensive income (935) (1,267) –

Retained earnings 77,871 73,614 64,998

Total shareholders’ equity $ 91,448 $ 86,283 $ 78,583

Commitments (Note 12)Subsequent events (Note 26)

Total liabilities and shareholders’ equity $ 137,520 $ 118,643 $ 108,186

William G. HammondChairman of the Board & Chief Executive Officer

Douglas V. BaldwinChairman Audit Committee

On behalf of the Board:

See accompanying Notes to Consolidated Financial Statements.

As at


Consolidated Statements of EarningsYears ended December 31, 2011 and 2010 (tabular amounts in thousands of dollars except earnings per share)

2011 2010

Sales $ 221,323 $ 190,604

Cost of sales 167,332 142,427

Gross margin 53,991 48,177

Selling and distribution 22,609 19,319

General and administrative 18,343 15,216

Earnings from operations 13,039 13,642

Finance and other costs (income):

Interest expense (Note 11) 305 103

Foreign exchange loss (gain) 382 (1,122)

Realized and unrealized losses (gains) on copper forward contracts 1,943 (1,141)

Other 87 93

Net finance and other costs (income) 2,717 (2,067)

Income before income taxes 10,322 15,709

Income tax expense (recovery) (Note 13)

Current 4,735 4,520

Future (406) 537

4,329 5,057

Net earnings $ 5,993 $ 10,652

Earnings per share (Note 15)

Basic earnings per share (dollars) $ 0.52 $ 0.92

Diluted earnings per share (dollars) $ 0.51 $ 0.91


38 C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S

Consolidated Statements of Comprehensive IncomeYears ended December 31, 2011 and 2010 (tabular amounts in thousands of dollars))

2011 2010

Net earnings $ 5,993 $ 10,652

Other comprehensive income

Foreign currency translation differences for foreign operations 332 (1,267)

Defined benefit plan actuarial losses (118) (25)

Income tax on other comprehensive income 120 –

Other comprehensive income for the year, net of income tax 334 (1,292)

Total comprehensive income for the year $ 6,327 $ 9,360



Consolidated Statements of Changes in EquityYears ended December 31, 2011 and 2010 (tabular amounts in thousands of dollars)

SHARE CAPITAL

CONTRIBUTED SURPLUS

AOCI** RETAINED EARNINGS

TOTAL

Balance, as at January 1, 2010 $ 12,959 $ 626 $ – $ 64,998 $ 78,583

Total comprehensive income for the year

Net Earnings – – – 10,652 10,652


Foreign currency translation differences – – (1,267) – (1,267)

Defined benefit plan actuarial losses, net of tax – – – (25) (25)

Total other comprehensive income – – (1,267) (25) (1,292)

Total comprehensive income for the year – – (1,267) 10,627 9,360

Transactions with shareholders,

recorded directly in equity

Own shares acquired (74) (3) – (507) (584)

Dividends (Note 14) – – – (1,504) (1,504)

Share-based payment transactions – 373 – – 373

Stock options exercised 83 (28) – – 55

Total transactions with shareholders 9 342 – (2,011) (1,660)

Balance at December 31, 2010 $ 12,968 $ 968 $ (1,267) $ 73,614 $ 86,283

Total comprehensive income for the year

Net Earnings – – – 5,993 5,993


Foreign currency translation differences – – 332 – 332

Defined benefit plan actuarial losses, net of tax – – – 2 2

Total other comprehensive income – – 332 5,995 6,327

Transactions with shareholders, recorded directly in equity

Dividends (Note 14) – – – (1,738) (1,738)

Share-based payment transactions – 563 – – 563

Stock options exercised 19 (6) – – 13

Total transactions with shareholders 19 557 – (1,738) (1,162)

Balance at December 31, 2011 $ 12,987 $ 1,525 $ (935) $ 77,871 $ 91,448

**AOCI – Accumulated other comprehensive incomeSee accompanying Notes to Consolidated Financial Statements.


Consolidated Statements of Cash FlowsYears ended December 31, 2011 and 2010 (tabular amounts in thousands of dollars)

2011 2010

Cash flows from operating activities $ 5,993 $ 10,652

Net earnings

Adjustments for:

Amortization of property, plant and equipment 4,129 3,096

Amortization of intangible assets 782 591

Provisions (476) 391

Interest expense 305 103

Income tax expense 4,329 5,057

Change in unrealized loss (gain) on derivatives 2,210 (738)

Accrued pension benefit obligation (67) 7

Loss on disposal of property, plant and equipment – 6

Stock based compensation expense 563 373

17,768 19,538

Change in non-cash operating working capital (Note 20) (7,730) (876)

Cash generated from operating activities 10,038 18,662

Income tax paid (3,446) (4,553)

Net cash provided from operating activities 6,592 14,109

Cash flows from investing activities

Acquisition of subsidiary company (Note 24) (7,784) –

Proceeds on disposal of property, plant and equipment – 2

Acquisition of property, plant and equipment (3,284) (4,134)

Acquisition of intangible assets (1,084) (182)

Cash used in investing activities (12,152) (4,314)

Cash flows from financing activities

Proceeds from issue of share capital 13 55

Share repurchase and cancellation – (584)

Cash dividends paid (1,738) (1,504)

Repayment of bank operating lines of credit (2,560) (2,578)

Advances of long term debt 509 395

Repayment of long term debt (1,843) –

Interest paid (305) (103)

Cash used in financing activities (5,924) (4,319)

Foreign exchange on cash held in a foreign currency (238) 11

(Decrease) increase in cash (11,722) 5,487

Cash at beginning of year 19,536 14,049

Cash at end of year $ 7,814 $ 19,536



1. Reporting entity

Hammond Power Solutions Inc. (“HPS” or “the Company”) is a company 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”) and the Group’s interest in associates and jointly controlled entities. The Group primarily is involved in the design and manufacture of custom electrical engineered magnetics and standard electrical dry-type transformers, serving the electrical and electronic industries. The Company has manufacturing plants in Canada, the United States (“U.S.”), Mexico and Italy, the latter being Euroelettro Hammond S.p.A. (“EH”), a wholly-owned subsidiary acquired through an acquisition during the year. This subsidiary is held through Continental Transformers S.r.L., a wholly-owned subsidiary established during the year for the purposes of acquiring EH.

2. Basis of preparation

(a) Statement of complianceThese consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”). These are the Group’s first consolidated financial statements and IFRS 1 First-time Adoption of International Financial Reporting Standards has been applied. An explanation of how the transition to IFRS has affected the reported financial position, financial performance and cash flows of the Company is provided in Note 27. This Note includes reconciliations of equity and total comprehensive income for comparative periods and of equity at the date of transition reported under previous Canadian GAAP to those reported for those periods and at the date of transition under IFRS. The consolidated financial statements as at and for the year ended December 31, 2010, which were prepared under Canadian generally accepted accounting principles, are available on the System for Electronic Document Analysis and Retrieval (“SEDAR”).These consolidated financial statements were approved by the Board of Directors on March 29, 2012.

(b) Basis of measurementThe consolidated financial statements have been prepared on the historical cost basis except for derivative financial instruments which are measured at fair value, and the employee benefits liability, which is recognized as the net total of the plan assets, any unrecognized past service cost and the present value of the defined benefit obligation. In addition, the Company has elected under the provisions of IFRS 1 to record certain parcels of land at deemed cost, being fair value at January 1, 2010; the date of transition to IFRS.

(c) Functional and presentation currencyThe functional currency of the Group’s entities is the currency of their primary economic environment. In individual companies, transactions in foreign currencies are recorded at the rate of exchange at the date of the transaction. Monetary assets and liabilities in foreign currencies at the reporting date are re-measured to the functional currency at the exchange rate at that date. Any resulting exchange differences are taken to the income statement. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. On consolidation, assets and liabilities of Group entities reported in their functional currencies are translated into the Canadian dollar, being the presentation currency, at the exchange rate on the reporting date. The income and expenses of foreign operations are translated to Canadian dollars using average exchange rates for the month during which the transactions occurred. Foreign currency differences are recognized in other comprehensive income in the cumulative translation account. The functional currency of the Company’s subsidiary operations located in the United States, Mexico, and Italy are the U.S. dollar, the Mexican Peso, and the Euro respectively. The functional currency of the Company’s Canadian operations is the Canadian dollar.

(d) Use of estimates and judgmentsThe preparation of the consolidated financial statements in conformity with IFRS requires Management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.Information about critical judgments in applying accounting policies that have the most significant effect on the amounts recognized in the consolidated financial statements is included in Notes 9, 14 and 24. Significant estimates and assumptions are also used in the determination of the estimated useful lives of intangible assets and property, plant, and equipment.


Notes to Consolidated Financial StatementsYears ended December 31, 2011 and 2010 (tabular amounts in thousands of dollars)

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 in preparing the opening IFRS statement of financial position at January 1, 2010 for the purposes of the transition to IFRS. The accounting policies have been applied consistently by all Group entities.

(a) Basis of consolidation The consolidated financial statements include the accounts of Hammond Power Solutions Inc. and its wholly-owned subsidiaries, Hammond Power Solutions, Inc., Hammond Power Solutions, S.A. de C.V., and Delta Transformers Inc. The consolidated financial statements also include the Company’s wholly-owned subsidiary, Continental Transformers S.r.L., and its wholly-owned subsidiary, Euroelettro Hammond S.p.A. for the period from March 1, 2011 to December 31, 2011. In addition, the consolidated financial statements include the Company’s proportionate share of assets, liabilities, revenues and expenditures in 1159714 Ontario Inc. and Glen Ewing Properties. During the year, 1159714 Ontario Limited was dissolved, with the Company receiving its proportionate share of net assets upon dissolution. These consolidated financial statements reflect the Company’s proportion of the activity of 1159714 Ontario Limited to the dissolution date. All significant inter-company transactions and balances have been eliminated. Jointly controlled assets arise from an arrangement that is a joint venture carried on with assets that are controlled jointly, whether or not owned jointly, but not through a separate entity. The Company has a 50% interest in Glen Ewing Properties, an unincorporated co-tenancy. The consolidated financial statements include the Group’s proportionate share of the entities’ assets, liabilities, revenue and expenses with items of a similar nature on a line-by-line basis.

(b) Financial instrumentsThe Group aggregates its financial instruments into classes based on their nature and characteristics. The Group has classified its financial instruments as follows:• Cash and accounts receivable are classified as loans and receivables• Bank operating lines of credit, accounts payable and accrued liabilities and long-term debt are classified as other liabilities• Derivative financial instruments are classified as fair value through profit or loss

(c) Financial assets and financial liabilitiesFinancial assets and financial liabilities are initially recognized at fair value plus directly attributable transaction costs, unless the transaction costs relate to financial instruments classified as fair value through profit and loss, in which case they are expensed immediately. Subsequent measurement is determined based on initial classification. The Group uses trade date accounting for regular-way purchases and sales of financial assets.

(i) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. This

category includes cash and trade and other receivables. Subsequent to initial measurement, loans and receivables are carried at amortized cost using the effective interest rate method less

appropriate allowances for doubtful receivables. Allowances for doubtful receivables represent the Group’s estimates of losses that could arise from the failure or inability of customers

to make payments when due. Loans and receivables are further classified as current and non-current depending whether these will be realized within twelve months

after the Balance Sheet date or beyond.

(ii) Other liabilities This category includes bank operating lines of credit, accounts payable and accrued liabilities and long-term debt. Subsequent to initial

measurement, other liabilities are carried at amortized cost using the effective interest rate method.

(iii) Fair value through profit or loss A financial instrument is classified as fair value through profit or loss if it is classified as held for trading or is designated as such on initial

recognition. This category includes derivative financial instruments.

(iv) Derivative financial instruments The Group is party to derivative financial instruments in the form of forward foreign exchange contracts used to hedge foreign currency



exposure arising on an intercompany loan and forward copper purchase contracts used to manage commodity price exposures. The Group records all of its forward contracts at fair value, with changes in fair value recognized through finance costs in the consolidated statement of earnings.

(v) Fair value The fair value of a financial instrument is the amount of consideration that would be agreed upon in an arm’s length transaction between

knowledgeable willing parties that are under no compulsion to act. The fair value of a financial instrument on initial recognition is the transaction price, which is the fair value of the consideration given or received. Subsequent to initial recognition, the fair values of financial instruments that are quoted in active markets are based on bid prices for financial assets held and offer prices for financial liabilities. When independent prices are not available, fair values are determined by using valuation techniques that refer to observable market data.

(d) Property, plant and equipmentProperty, 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 for which the commencement date for capitalization is on or after January 1, 2010. 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 lesser of 5 years and lease term • Machinery and equipment 4-10 years • Office equipment 4-10 years • Land is not depreciated. Depreciation methods, useful lives and residual values are reviewed at each financial year-end and adjusted if appropriate.

(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 balance is comprised mainly of customer relationships and software. The estimated useful lives for the current and comparative periods are as follows: • Customer lists and relationships 15 years • Technology 20 years • Software and other 4 years Depreciation methods, useful lives and residual values are reviewed at each financial year-end and adjusted if appropriate.

(f) GoodwillAcquisitions occurring on or after January 1, 2010, are accounted for using the acquisition method required by IFRS 3. Goodwill is the residual amount that results when the purchase price of an acquired business exceeds the sum of the amount allocated to the identifiable assets acquired, less liabilities assumed, based on their fair values. Goodwill is allocated as of the date of the business combination to the Company’s cash generating units that are expected to benefit from the synergies of the business combination. The Company elects on a transaction-by-transaction basis whether to measure non-controlling interest at its fair value, or at its proportionate share of the recognized amount of the identifiable net assets, at the acquisition date. As part of its transition to IFRS, the Company elected to restate only those business combinations that occurred on or after January 1, 2010. In respect of acquisitions prior to January 1, 2010, goodwill represents the amounts recognized under previous Canadian GAAP. Goodwill is tested for impairment at least annually and upon the occurrence of an indication of impairment.

N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S44


The impairment tests are performed at the cash generating unit (CGU) level. The Group defines its CGUs based on the way it monitors and derives economic benefits from the acquired goodwill and intangibles. The impairment tests are performed by comparing the carrying value of the assets of these CGUs with the greater of its value in use and its fair value, less costs to sell. The value in use is based on their future projected cash flows discounted to the present value at an appropriate pre-tax discount rate. Usually, 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 5 years using a steady or declining growth rate given that the Group businesses are of a long-term nature. The Group assesses the uncertainty of these estimates by making sensitivity analyses. The discount rate used approximates the Company’s weighted average cost of capital. The business risk is included in the determination of the cash flows. Both the cash flows and the discount rates exclude inflation. An impairment loss in respect of goodwill is never subsequently reversed. The group completed its annual impairment tests at December 31, 2011 as well as impairment tests at January 1, 2010 and December 31, 2010 upon transition to IFRS, and concluded there was no impairment.

(g) Investment propertyInvestment 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 property, being the property held by Glen Ewing Properties, at historical cost.

(h) InventoriesInventories 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 its net realizable value no longer exist, the previous impairment is reversed.

(i) Impairment of property, plant and equipment and finite life intangible assetsThe Group periodically reviews the useful lives and the carrying values of its long-lived assets for continued appropriateness. Consideration is given at each Balance Sheet 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 to sell and value in use. 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.

(j) Share-based payment transactionsThe Group has a stock-based compensation plan, which is described in Note 14. 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.

(k) ProvisionsProvisions 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.

(l) RevenueThe Group recognizes revenue when products are shipped and the customer takes ownership and assumes risk of loss, collection of the relevant



receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable.

(m) Income taxesIncome 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 by 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.

(n) Employee benefitsThe Company maintains a defined contribution and defined benefit plan, which are described in Note 17, and has 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. A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. The Company’s net obligation in respect of its defined benefit plan is calculated by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value. Any unrecognized past service costs and the fair value of the plan assets are deducted. The discount rate is the yield at the reporting date on AA credit-rated bonds that have maturity dates approximating the terms of the Company’s obligations. The calculation is performed annually by a qualified actuary using the projected unit credit method. When the benefits of the plan are improved, the portion of the increased benefit relating to past service by employees is recognized in profit or loss on a straight-line basis over the average period until the benefits become vested. To the extent that the benefits vest immediately, the expense is recognized immediately in profit or loss. The Company recognizes all actuarial gains and losses arising from the defined benefit plan immediately in other comprehensive income, and reports them in retained earnings. Short term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognized for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Company 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.

(o) Finance income and finance costs Finance income and finance costs comprise interest income, interest expense on borrowings, changes in fair value of financial instruments measured at fair value through profit and loss, foreign currency losses and other finance costs. Foreign currency gains and losses are reported on a net basis.

(p) Earnings per shareThe 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 the unamortized stock-based compensation were used to acquire shares of common stock at the average market price during the year.

(q) New accounting pronouncementsThe International Accounting Standards Board has issued the following Standards, Interpretations and amendments to Standards that are not yet effective and while considered relevant to the Company have not yet been adopted by the Company.

Financial instruments In October 2010, the International Accounting Standards Board (“IASB”) issued IFRS 9, Financial Instruments (“IFRS 9”). This standard is



effective for annual periods beginning on or after January 1, 2015 and is part of a wider project to replace IAS 39, Financial Instruments: Recognition and Measurement. IFRS 9 replaces the current multiple classification and measurement models for financial assets and liabilities with a single model that has only two classification categories: amortized cost and fair value. The basis of classification depends on the entity’s business model and the contractual cash flow characteristics of the financial asset or liability. The guidance in IAS 39 on impairment of financial assets and hedge accounting continues to apply. The Company intends to adopt IFRS 9 in its financial statements for the annual period beginning on January 1, 2015. The classification and measurement of the Company’s financial assets and financial liabilities is not expected to change under IFRS 9 because of the nature of the Company’s operations and the types of financial assets and liabilities that it holds.

Consolidated financial statementsIn May 2011, the IASB issued IFRS 10, Consolidated Financial Statements (“IFRS 10”). This standard is effective for annual periods beginning on or after January 1, 2013 and establishes principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. IFRS 10 defines the principle of control and establishes control as the basis for determining which entities are consolidated in the consolidated financial statements. The Company intends to adopt IFRS 10 in its financial statements for the annual period beginning on January 1, 2013. The Company does not expect IFRS 10 to have a material impact on the financial statements.

Joint arrangementsIn May 2011, the IASB issued IFRS 11, Joint Arrangements (“IFRS 11”). This standard is effective for annual periods beginning on or after January 1, 2013 and establishes principles for financial reporting by parties to a joint arrangement. IFRS 11 requires a party to assess the rights and obligations arising from an arrangement in determining whether an arrangement is either a joint venture or a joint operation. Joint ventures are to be accounted for using the equity method while joint operations will continue to be accounted for using proportionate consolidation.The Company intends to adopt IFRS 11 in its financial statements for the annual period beginning on January 1, 2013. The Company does not expect IFRS 11 to have a material impact on the financial statements.

Disclosure of interests in other entitiesIn May 2011, the IASB issued IFRS 12, Disclosure of Interests in Other Entities (“IFRS 12”). This standard is effective for annual periods beginning on or after January 1, 2013 and applies to entities that have an interest in a subsidiary, a joint arrangement, an associate or an unconsolidated structured entity. IFRS 12 integrates and makes consistent the disclosure requirements for a reporting entity’s interest in other entities and presents those requirements in a single standard. The Company intends to adopt IFRS 12 in its financial statements for the annual period beginning on January 1, 2013. When applied, it is expected that IFRS 12 will increase the current level of disclosure of interests in other entities.

Fair value measurementIn May 2011, the IASB issued IFRS 13, Fair Value Measurement (“IFRS 13”). This standard is effective for annual periods beginning on or after January 1, 2013 and provides additional guidance where IFRS requires fair value to be used. IFRS 13 defines fair value, sets out in a single standard a framework for measuring fair value and establishes the required disclosures about fair value measurements. The Company intends to adopt IFRS 13 prospectively in its financial statements for the annual period beginning on January 1, 2013. The Company does not expect IFRS 13 to have a material impact on the financial statements.

Employee benefitsIn June 2011, the IASB issued an amended version of IAS 19, Employee Benefits (“IAS 19”). This amendment is effective for annual periods beginning on or after January 1, 2013 and requires the recognition of actuarial gains and losses immediately in other comprehensive income and full recognition of past service costs immediately in profit or loss. Revised IAS 19 also streamlines the presentation of changes in assets and liabilities arising from defined benefit plans, and enhances the disclosure requirements for defined benefit plans. The Company intends to adopt the amendments in its financial statements for the annual period beginning on January 1, 2013. The extent of the impact of adoption of the amendments has not yet been determined.

Presentation of other comprehensive income (OCI)In June 2011, the IASB issued an amended version of IAS 1, Presentation of Financial Statements (“IAS 1”). This amendment is effective for annual periods beginning on or after July 1, 2012 and requires companies preparing financial statements in accordance with IFRS to group together items within OCI that may be reclassified to the profit or loss section of the statement of earnings. Revised IAS 1 also reaffirms existing requirements that items in OCI and profit or loss should be presented as either a single statement or two consecutive statements. The Company intends to adopt



the amendments in its financial statements for the annual period beginning on January 1, 2013. As the amendments only require changes in the presentation of items in other comprehensive income, the Company does not expect the amendments to IAS 1 to have a material impact on the financial statements.

4. Accounts receivable:


Trade accounts receivable $ 38,707 $ 28,532 $ 26,208

Other receivables 2,854 2,477 1,158

$ 41,561 $ 31,009 $ 27,366

Trade accounts receivable is presented net of an allowance for doubtful accounts of $1,495,000 (December 31, 2010 - $355,000; January 1, 2010 - $550,000).

5. Inventories:


Raw materials $ 16,370 $ 13,746 $ 12,938

Work in progress 1,018 940 816

Finished goods 17,127 11,656 11,831

$ 34,515 $ 26,342 $ 25,585

Raw materials and changes in finished goods and work in progress recognized as cost of sales during the year amounted to $167,346,000 (2010 - $142,395,000). In addition, during the year a reversal of previous write-downs in the amount of $14,000 was recognized (2010 write down - $32,000). Inventories carried at fair value less cost to sell included above as at December 31, 2011 were $1,581,000 (December 31, 2010 - $1,170,000; January 1, 2010 - $920,000).



6. Property, plant and equipment:

Cost

Balance at January 1, 2011 $ 3,731 $ 13,831 $ 802 $ 27,630 $ 6,684 $ 2,115 $ 54,793

Additions – 1,782 56 3,181 579 (1,464) 4,134

Disposals – – – (12) – – (12)

Effect of movements in exchange rates – – (14) (557) (42) – (613)

Balance at December 31, 2010 $ 3,731 $ 15,613 $ 844 $ 30,242 $ 7,221 $ 651 $ 58,302

Balance at January 1, 2011 3,731 15,613 844 30,242 7,221 651 58,302

Additions – 637 36 2,746 412 (547) 3,284

Additions through business combination 1,700 4, 396 – 3,226 110 – 9,432

Effect of movements in exchange rates (33) (83) (45) 172 (8) – 3

Balance at December 31, 2011 5,398 20,563 835 36,386 7,735 104 71,021

Depreciation

Balance at January 1, 2010 – 3,463 463 17,430 5,233 – 26,589

Depreciation for the year – 788 109 1,735 464 – 3,096

Disposals – – – (4) – – (4)

Effect of movements in exchange rates – – (13) (288) (33) – (334)

Balance at December 31, 2010 – 4,251 559 18,873 5,664 – 29,347

Balance at January 1, 2011 – 4,251 559 18,873 5,664 – 29,347

Depreciation for the year – 1,079 108 2,323 619 – 4,129

Effect of movements in exchange rates – (10) (28) 51 3 – 16

Balance at December 31, 2011 $ – $ 5,320 $ 639 $ 21,247 $ 6,286 $ – $ 33,492

Carrying amounts

At January 1, 2010 $ 3,731 $ 10,368 $ 339 $ 10,200 $ 1,451 $ 2,115 $ 28,204

At December 31, 2010 3,731 11,362 285 11,369 1,557 651 28,955

At December 31, 2011 $ 5,398 $ 15,243 $ 196 $ 15,139 $ 1,449 $ 104 $ 37,529

Depreciation is recorded in the statement of earnings as follows: cost of sales $3,873,000 (2010 - $2,947,000), selling and distribution $41,000 (2010 - $14,000), and general and administrative $215,000 (2010 – $135,000). In connection with the acquisition of EH the Group assumed land and building under capital lease having a fair value of $5,452,000. Depreciation related to this asset under capital lease for the year amounted to $188,000 and is recorded in the statement of earnings in cost of sales.

Land Building Leaseholds &Improvements

Machinery & Equipment

Office Equipment

Construction In Progress

Total



7. Investment in properties

The Company’s proportionate share (50%) of the assets and liabilities of the co-tenancy called Glen Ewing Properties is as follows:


Assets:

Cash $ 8 $ 4 $ 46

Investment in properties 1,044 1,044 1,044

Equipment, net of depreciation 65 90 114

$ 1,117 $ 1,138 $ 1,204

Liabilities:

Environmental reserve $ (276) $ (261) $ (297)

The Company’s proportionate share (50%) of the revenue, expenses, and cash flows of the co-tenancy called Glen Ewing Properties is as follows:

December 31, 2011 December 31, 2010

Revenues: $ – $ –

Expenses: 87 84

$ (87) $ (84)

Cash provided by (used in):

Operations $ (94) $ (102)

Financing 98 60

Total (decrease) increase in cash $ 4 $ (42)

The group has a 50% ownership of 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 2011 or 2010. The property is carried at cost. The fair value of the property as at December 31, 2011 is $1,250,000. The fair value was compiled internally by Management based on available market evidence. HPS’ share of ongoing legal and consulting costs during the year was $87,000 (2010 - $84,000).



8. Intangible assets

TechnologyCustomer lists

andrelationships

Externallyacquiredsoftware

Total

Cost

Balance at January 1, 2010 $ – $ 5,250 $ 1,002 $ 6,252

Acquisitions – – 182 182

Balance at December 31, 2010 – 5,250 1,184 6,434

Balance at January 1, 2011 – 5,250 1,184 6,434

Additions – – 57 57

Additions through business combination 1,425 686 481 2,592

In process – – 1,031 1,031

Effect of movements in exchange rates (27) (13) (16) (56)

Balance at December 31, 2011 1,398 5,923 2,737 10,058

Amortization

Balance at January 1, 2010 – 700 453 1,153

Amortization for the year – 350 241 591

Effect of movements in exchange rates – – – –

Balance at December 31, 2010 – 1,050 694 1,744

Balance at January 1, 2011 – 1,050 694 1,744

Amortization for the year 61 389 332 782

Effect of movements in exchange rates (3) (2) (4) (9)

Balance at December 31, 2011 $ 58 $ 1,437 $ 1,022 $ 2,517

Carrying amounts

At January 1, 2010 $ – $ 4,550 $ 549 $ 5,099

At December 31, 2010 – 4,200 490 4,690

At December 31, 2011 $ 1,340 $ 4,486 $ 1,715 $ 7,541

Amortization of $193,000 (2010 - $141,000) has been recognized in cost of sales, $38,000 (2010 - $nil) has been recognized in selling and distribution and $551,000 (2010 - $ 450,000) has been recognized in general and administrative.

None of the intangible assets have been internally developed.



9. Impairment testing for cash-generating units

The Company has defined its cash generating units 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 fixed assets. Each manufacturing facility produces products largely independent of the other facilities and is ultimately responsible for producing products that generate revenue. The Company monitors the performance of each manufacturing location through the use of profitability analysis based on the most recent business plan in place as of January 1, 2012. Where there were indicators of impairment, the Company performed an impairment test using the value in use method, under which a 5 year present value cash flow projection was completed using the Company’s weighted average cost of capital of 11.23%. The cash flow model also incorporated growth rates in the range of 5% – 10% depending on location and the facility’s operating history. This was then compared to the carrying value of the facility’s assets to determine if there was impairment.

Impairment testing for cash-generating units containing goodwillThe Company has two subsidiaries identified as cash generating units that contain goodwill, Delta Transformers Inc. ($2,180,000) and Euroelettro Hammond S.p.A. ($2,384,000). As at December 31, 2011, the assets, including goodwill, of both these cash generating units were tested and no impairment was found. The recoverable amount for both cash generating units was determined based on a value in use calculation. The calculations use cash flow projections based on budgets approved by Management covering a five year period and discounted using the weighted average cost of capital for each entity. Cash flows beyond the five year period have been extrapolated using a steady growth rate reflecting the long-term average growth rate for the markets that these cash generating units operate in, adjusted to reflect expected growth in market share and the expected synergies to be achieved from operating as part of a global entity. Management believes that any reasonable possible change in the key assumptions on which the recoverable amounts are based would not cause the CGUs carrying amounts to exceed their recoverable amounts.

Impairment testing for cash-generating units not containing goodwill

The assets for those facilities that had indicators of impairment were tested and no impairment was found.

10. Bank operating lines of credit

The Company has a U.S. $40,000,000 revolving credit facility that expires on September 30, 2012, consisting of a U.S. $25,000,000 Canadian dollar equivalent revolving credit line, and a U.S. $15,000,000 Canadian dollar equivalent delayed draw revolving credit line facility, which are both unsecured. Interest on the revolving credit lines is dependent on certain financial ratios and ranges from Canadian bank prime rate minus 0.50% to Canadian bank prime rate for the Canadian dollar denominated revolving credit lines or, if designated, the banks CDOR rate plus 1.25% to 1.75% and from U.S. base rate minus 1.00% to U.S. base rate minus 1.50% for the U.S. dollar denominated revolving credit lines or, if designated, the banks LIBOR rate plus 1.25% to 1.75%. As at December 31, 2011, the Canadian dollar equivalent outstanding under the Canadian revolving credit line and the U.S. revolving credit line was $310,000 and $ 52,000 respectively as well as $1,234,000 Canadian dollar equivalent of Euro’s (2010 - $1,034,000 and $413,000, and $nil). Under the terms of the facility, the Company pays an unused line fee at rates ranging from 0.15% to 0.25% calculated monthly in arrears, on the average daily un-borrowed portion of the Credit Facility. Of the $1,234,000 Canadian dollar equivalent, EH has operating lines of Euro € 935,000 which are currently financed by accounts receivable.



11. Long-term debt

Term loans denominated in Euros are secured by a first priority security interest in all existing and future property of Euroelettro Hammond S.p.A.:


Term loan repayable in monthly payments of $15,100 non-interest bearing

$ 769 $ 395 $ –

Term loan of EU €257,729 repayable in bi-annual payments of EU €128,864 plus interest at Euro base rate plus 6 month Euribor rate

340 – –

Term loan of EU €354,313 repayable in monthly payments of EU €8,140 plus interest at Euro base rate plus 6 month Euribor rate

467 – –

Term loan of EU €1,013,958 repayable in quarterly payments of EU €8,140 plus interest at Euro base rate plus 6 month Euribor rate

1,338 – –

Term loan of EU €153,327 repayable in quarterly payments of EU €8,140 plus interest at Euro base rate plus 3 month Euribor rate

202 – –

Finance lease obligation of EU €1,076,708 repayable in monthly payments of EU €33,115 plus interest at Euro base rate plus 12 month Euribor rate

1,421 – –

4,537 395 –

Less current portion of long-term debt 1,688 – –

$ 2,849 $ 395 $ –

The aggregate amount of principal payments required to meet the existing long-term debt obligations in each of the next five years is as follows:

2012 $ 1,688

2013 1,297

2014 1,077

2015 416

2016 59

$ 4,537

The aggregate amount of annual principal payments required under the provisions of the finance lease obligation is as follows:

2012 $ 524

2013 524

2014 373

$ 1,421

Subsequent to year-end, the Company finalized a committed long-term financing agreement with its principle lender to provide financing certainty, hedging strategy support, financing for operations and capital for strategic initiatives including its Italian subsidiary, EH.

Interest expense is comprised as follows:

2011 2010

Long-term debt $ 158 $ –

Short term interest, bank fees and other 147 103

$ 305 $ 103



12. Commitments

The Company has entered into various non-cancellable operating leases. The future minimum lease payments for years subsequent to the periods below are as follows:


Less than 1 year $ 1,678 $ 1,445 $ 1,407

2 to 5 years $ 4,923 $ 2,279 $ 3,494

Operating lease payments recognized as an expense during the year were $1,445,000 (2010 - $1,407,000).

December 31, 2011 December 31, 2010

Capital expenditure commitments $ 2,222 $ 147

13. Income taxes

Income Tax Expense 2011 2010

Current tax expense

Current period $ 4,567 $ 4,457

Adjustment for prior periods 168 63

4,735 4,520

Deferred tax expense

Origination and reversal of temporary differences (420) 574

Reduction in tax rate 14 (37)

(406) 537

Total income tax expense $ 4,329 $ 5,057

Reconciliation of effective tax rate

2011 2011 2010 2010

Profit for the period – $ 5,993 – $ 10,652

Total income tax expense – 4,329 – 5,057

Profit excluding income tax – 10,322 – 15,709

Income tax using the Company’s domestic tax rate 39.75% 4,103 41.00% 6,441

Effect of tax rates in foreign jurisdictions 0.35% 36 (2.35%) (369)

Reduction in tax rate 0.14% 14 (0.23%) (37)

Non-deductible expenses 4.51% 465 1.08% 170

Reduced rate for active business and manufacturing and processing

(6.64%) (685) (7.51%) (1,180)

Current year losses for which no deferred tax asset was recognized

1.41% 146 – –

Under (over) provided in prior periods 1.63% 168 0.40% 63

Other 0.79% 82 (0.20%) (31)

41.94% $ 4,329 32.19% $ 5,057




Unrecognized deferred tax liabilitiesAt December 31, 2011 temporary differences of $36,197,000 (2010 - $31,993,000) 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.

Unrecognized deferred tax assetsDeferred tax assets have not been recognized in respect of the following items: 2011 2010 Tax losses $ 531 $ –

The tax losses carry forward indefinitely. Deferred tax assets have not been recognized in respect of these items because it is not probable that future taxable profit will be available against which the Group can utilize the benefits.

Recognized deferred tax assets and liabilitiesDeferred tax assets and liabilities at December 31 are attributable to the following: Assets Liabilities

2011 2010 2011 2010

Property, plant and equipment $ – $ (20) $ 3,464 $ 1,733

Intangible assets – – 744 76

Investment property (163) – – –

Scientific research & experimental development – – 57 46

Inventories (213) (344) – –

Loans and borrowings (577) – – –

Employee benefits (111) (16) 146 128

Unrealized losses on forward contracts (256) – – 287

Provisions (1,169) (422) 1 1

Tax loss carry-forwards (506) – – –

Tax (assets) liabilities (2,995) (802) 4,412 2,271

Set off of tax 2,389 216 (2,389) (216)

Net tax (assets) liabilities $ (606) $ (586) $ 2,023 $ 2,055



Movement in temporary differences during the year

Balance January 1, 2010

Recognized in profit or loss

Balance December 31,

2010

Recognized in profit or loss

Recognized in other

comprehensive

Acquired in business

combinations

Balance December 31,

2011

Property, plant and equipment $ 1,382 $ 331 $ 1,713 $ 122 $ – $ 1,629 $ 3,464

Intangible assets 84 (8) 76 14 – 654 744

Investment property – – – – – (163) (163)

Scientific research & experimental development 21 25 46 11 – – 57

Inventories (326) (18) (344) 177 – (46) (213)

Loans and borrowings (577) (577)

Employee benefits 140 (28) 112 43 (120) – 35

Unrealized losses on forward contracts 133 154 287 (542) – (1) (256)

Provisions (518) 97 (421) (231) – (516) (1,168)

Tax loss carry-forwards – – – – – (506) (506)

$ 916 $ 553 $ 1,469 $ (406) $ (120) $ 474 $ 1,417

14. Share capital

(a) Authorized:Unlimited number of special shares, discretionary dividends, non-voting, redeemable and retractable. Unlimited number of Class A subordinate voting shares.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.

(b) Issued:


8,806,624 Class A shares (2010 – 8,804,624) $ 12,980 $ 12,961 $ 12,952

2,778,300 Class B common shares (2010 – 2,778,300) 7 7 7

11,584,924 Total A and B shares (2010 – 11,582,924) $ 12,987 $ 12,968 $ 12,959

During the year, 2,000 (2010 – 16,000) Class A shares were issued upon exercise of stock options, resulting in cash proceeds of $12,000 (2010 - $55,000) and a transfer of $6,000 (2010 - $28,000) from contributed surplus. No shares were repurchased during the year. During 2010, Company purchased and cancelled 51,202 Class A shares under a normal course issuer bid at a cost of $584,000 of which $74,000, $3,000 and $507,000 was applied against share capital, contributed surplus and retained earnings respectively. The normal course issuer bid was approved by the Board of Directors on July 16, 2009 and authorized the repurchase of up to 400,000 Class A shares. Share purchases under the normal course issuer bid terminated on July 20, 2010. The following dividends were declared and paid by the Company:

In thousands of dollars, except per share amounts December 31, 2011 December 31, 2010

15 cents per Class A common share (2010: 13 cents) $ 1,321 $ 1,143

15 cents per Class B common shares (2010: 13 cents) 417 361

$ 1,738 $ 1,504



(c) Stock option planThe Company uses a stock option plan to attract and retain key employees, officers and directors. The shareholders have approved a maximum of 800,000 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. During the year the Company granted 171,667 options, of which 90,556 vested immediately and the remaining 81,111 vest equally in 2012 and 2013. Stock-based compensation recognized and the amount credited to contributed surplus during the year is $563,000 and relates to 2011 options granted and to options granted in prior years that vested during the year. In 2010, 100,000 options were granted of which 60,000 vested immediately and the remaining 40,000 vest throughout 2011 and 2012. The stock-based compensation expense recognized and amount credited to contributed surplus in 2010 amounted to $373,000. The weighted average fair value of options granted in 2011 is $3.93 (2010 - $3.40).

Options outstanding and exercisable as at December 31, 2011:

December 31, 2011 December 31, 2010 Weighted Weighted Number of average Number of average options exercise price options exercise price

Outstanding, beginning of year 353,500 $ 7.32 269,500 $ 5.90

Granted 171,667 11.70 100,000 10.55

Exercised (2,000) 6.00 (16,000) 3.46

Cancelled – – – –

Outstanding, end of year 523,167 $ 8.77 353,500 $ 7.32

Options outstanding Options exercisable Weighted Number average Weighted Number Weighted of remaining average of average Exercise options contractual exercise options exercise price outstanding life (years) price exercisable price

$ 1.93 94,000 0.6 $ 1.93 94,000 $ 1.93

6.00 45,000 1.9 6.00 45,000 6.00

13.64 52,500 3.2 13.64 52,500 13.64

5.91 60,000 4.2 5.91 60,000 5.91

10.55 100,000 5.2 10.55 100,000 10.55

11.70 171,667 6.2 11.70 90,556 11.70

523,167 4.7 $ 8.77 442,056 $ 8.23



Terms and conditions of the stock option plan All options are to be settled by physical delivery of shares:

Grant date/employees entitled Number of instruments Vesting conditions Contractual life of options Option grant to Board of Directors, Officers and Senior Management July 22, 2005 94,000 Vest immediately 7 years Option grant to Board of Directors and Officers Dec 5, 2006 10,000 Vest immediately 7 years Option grant to Officers and Senior Management on Dec 5, 2006 35,000 Vest equally over 5 years with 1/5th immediately 7 years Option grant to Board of Directors and Officers and Senior Management March 6, 2008 52,500 Vest immediately 7 years Option grant to Board of Directors and Officers February 24, 2009 60,000 BOD vest immediately, Officers vest equally over 3 years with 1/3rd immediately 7 years Option grant to Board of Directors and Officers March 15, 2010 100,000 BOD vest immediately, Officers vest equally over 3 years with 1/3rd immediately 7 years Option grant to Board of Directors, Officers and Senior Management March 17, 2011 171,667 BOD vest immediately, Officers and Senior Management vest equally over 3 years with 1/3rd immediately 7 years Total share options outstanding 523,167

Inputs for measurement of grant date fair values The grant date fair value of share-based payment plans was measured based on the Black-Scholes formula. Expected volatility is estimated by considering historic average share price volatility. The inputs used in the measurement of the fair values at grant date of the share-based payment plans are the following:

2011 2010 Fair value of share options and assumptions

Fair value at grant date $ 3.93 $ 3.40

Share price at grant date $ 11.70 $ 10.55

Exercise price $ 11.70 $ 10.55

Expected volatility (weighted average volatility) 47.3% 50.4%

Option life (expected

weighted average life) 3.8 years 3.8 years

Expected dividends 1.1% 1.2%

Risk-free interest rate (based on government bonds) 2.13% 2.08%



15. Earnings per share

The computations for basic and diluted earnings per share are as follows:(earnings in thousands of dollars)

2011 2010

Basic earnings per share $ 0.52 $ 0.92

Calculated as:

Net Earnings $ 5,993 $ 10,652

Weighted average number of shares outstanding 11,583,924 11,597,831

Fully diluted earnings per share $ 0.51 $ 0.91

Calculated as:

Net Earnings $ 5,993 $ 10,652

Weighted average number of shares outstanding including effects of dilutive potential ordinary shares

11,666,184 11,715,586

Reconciliation of weighted average number of shares outstanding:

Weighted average number of shares outstanding used to calculate basic earnings per share 11,583,924 11,597,831

Adjustment for dilutive effect of stock option plan 117,755 82,260

Weighted average number of shares outstanding used to calculate diluted earnings per share 11,666,184 11,715,586

As at December 31, 2011, 288,893 options (2010 - 52,500) were excluded from the diluted average number of shares calculation as their effect would have been anti dilutive.

16. Personnel expenses

2011 2010

Wages and salaries $ 40,027 $ 34,227

Group portion of government pension and employment pension and employment benefits

8,586 7,313

Contributions to defined contribution plans 1,154 991

Expenses related to defined benefit plans 15 15

$ 52,644 $ 42,546

17. Pension plans:

(a) Defined contribution plan:The Company has defined contribution pension plans that are available to virtually all of its employees with eligible employee contributions based on 2-5% of annual earnings. The Company’s contributions of $1,154,000 (2010 - $991,000) matches the employee contributions. The Company’s contributions related to its defined contribution pension plans are recorded as follows: $923,000 (2010 - $793,000) in cost of sales, $127,000 (2010 - $109,000) in selling and distribution, and $104,000 (2010 - $89,000) in general and administrative.

(b) Defined benefit plans:In connection with the acquisition of Euroelettro Hammond S.p.A., the Company assumed an Italian statutory liability to make termination payments to employees upon their cessation of employment with the Group, either voluntary or involuntary. Italian employment law prescribes the formula under which an annual amount in respect of each employee is determined. This obligation is unfunded. The liability for past service relating to these employees does not change based on future wage escalation; however does increase based on an inflationary component. The Company accounts for the related projected benefit obligation at its present value. As at December 31, 2011, the obligation, recorded within accounts payable and accrued liabilities, was $663,000 (December 31, 2010 - $nil; January 1, 2010 - $nil). During the year, the expense related to this program was $126,000 (2010 - $nil), included within cost of sales $73,000, in selling and distribution $14,000, and in general and administrative $39,000.



In addition, the Group maintains a contributory, defined pension plan covering all of its former hourly employees in Baraboo, Wisconsin. The Group measures its accrued pension benefit obligations and the fair value of plan assets for accounting purposes as at December 31 of each year. The most recent actuarial valuation of the pension plan for funding purposes was as of August 1, 2011 and the next required valuation is August 1, 2012. Information about the Company’s defined benefit plan is as follows:


Present value of funded obligations $ 1,016 $ 958 $ 975

Total present value of obligations 1,016 958 975

Fair value of plan assets 707 701 725

Recognized liability for defined benefit obligations $ (309) $ (257) $ (250)

Plan assets comprise:


Equity securities $ 201 $ 168 $ 145

Debt securities 470 519 565

Real estate 36 14 15

$ 707 $ 701 $ 725

Movement in the present value of the defined benefit obligations 2011 2010

Defined benefit obligations at January 1 $ 958 $ 975

Benefits paid by the plan (111) (71)

Interest cost (see below) 49 51

Actuarial (gains) losses in other comprehensive income (see below) 99 47

Foreign exchange 21 (44)

Defined benefit obligations at December 31 $ 1,016 $ 958

Movement in the fair value of plan assets

Fair value of plan assets at January 1 $ 701 $ 725

Contributions paid into the plan 83 32

Benefits paid by the plan (111) (71)

Expected return on plan assets 34 36

Actuarial (losses) gains in other comprehensive income (see below) (19) 22


Fair value of plan assets at December 31 $ 707 $ 701

Expense recognized in profit or loss

Current service costs $ – $ –

Interest on obligation 49 51

Foreign exchange – –

Expected return on plan assets (34) (36)

$ 15 $ 15

The expense is recognized in selling and distribution expense in the statement of earnings.

Actual return on plan assets $ 19 $ 51

Actuarial gains and losses recognized in other comprehensive income

Cumulative amount at January 1 $ (280) $ (255)

Recognized during the year (118) (25)

Cumulative amount at December 31 $ (398) $ (280)



Actuarial assumptionsPrincipal actuarial assumptions at the reporting date (expressed as weighted averages):

2011 2010

Discount rate at December 31 5.25% 5.50%

Expected return on plan assets at January 1 6.75% 6.75%

Average remaining life expectancy 20.67 yrs 21.75 yrs The overall expected long-term rate of return on assets is 6.00 percent. The expected long-term rate of return is based on the target asset allocation of the plan and the long term capital market assumptions. The overall return for each asset class was developed by combining a long term inflation component and the associated expected real rates.

Historical information


Present value of the defined benefit obligation $ 1,016 $ 958 $ 975

Fair value of plan assets 707 701 725

Deficit/(surplus) in the plan $ 309 $ 257 $ 250

Experience adjustments arising on plan liabilities $ (99) $ (47)

Experience adjustments arising on plan assets $ (19) $ 22

The Group expects $37,000 in contributions to be paid to its defined benefit plans in 2012.

18. Provisions:

Warranties Site restoration Total

Balance at January 1, 2010 $ 392 $ 297 $ 689

Provisions made during the period 2,111 115 2,226

Provisions used during the period (1,684) (151) (1,835)

Balance at December 31, 2010 819 261 1,080

Balance at January 1, 2011 819 261 1,080

Provisions made during the period 413 118 531

Provisions used during the period (904) (103) (1,007)

Balance at December 31, 2011 $ 328 $ 276 $ 604

Current portion $ 328 $ 111 $ 439

Non-current portion $ – $ 165 $ 165



Warranties The provision for warranties relates mainly to transformers sold during the years ended December 31, 2011 and December 31, 2010. 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 On August 15, 2009, the Company announced that a settlement of statements of claim was reached between the adjoining industrial property owner, HPS and the joint venture partner. All claims with regard to Glen Ewing properties have been settled by agreement between the parties and include the undertaking of a joint remediation plan. The Company has recorded a liability for its estimated portion of the joint remediation.

19. Related party transactions:

Related parties Arathorn Investments Inc. beneficially owns 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 748,110 Class A Subordinate Voting Shares of the Company, representing approximately 8.5% of the issued and outstanding Class A Subordinate Voting Shares of the Company and as a result controls the Company. All of the issued and outstanding shares of Arathorn Investments Inc. are owned by William G. Hammond, Chief Executive Officer and Chairman of the Company. Total dividends paid during the year, directly and indirectly to William G. Hammond were $566,209 (2010 - $490,318).

Transactions with key management personnelThere were no transactions with key management personnel in 2011.

Key management personnel compensationKey management personnel include the Company’s directors and members of the executive management team. Compensation awarded to key management is as follows:

2011 2010

Salaries and benefits $ 1,723 $ 1,517

Share-based awards 560 421

$ 2,283 $ 1,938

20. Change in non-cash operating working capital:

2011 2010

Accounts receivable $ (5,695) $ (3,643)

Inventories (6,245) (757)

Prepaid expenses (172) (407)

Accounts payable and accrued liabilities 3,831 3,955


$ (7,730) $ (876)



21. 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 Italy. The Company’s activity and assets by geography are as follows:

2011 2010

Sales

Canada $ 82,118 $ 72,429

United States and Mexico 130,146 118,175

Italy 9,059 –

$ 221,323 $ 190,604

Earnings from operations

Canada $ 5,428 $ 6,668


Italy (901) –

$ 13,039 $ 13,642

Property, plant and equipment, net

Canada $ 23,561 $ 23,000


Italy 8,645 –

$ 37,529 $ 28,955

Goodwill

Canada $ 2,180 $ 2,180

Italy 2,384 –

$ 4,564 $ 2,180

22. Financial instruments:

Fair valueThe 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 outputs 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 copper forward contracts with a combined fair value of $1,018,000 (December 31, 2010 - $1,192,000; January 1, 2010 - $454,000) and are included in Level 2 in the fair value hierarchy. To determine the fair value of the contracts, Management used a valuation technique in which all significant inputs were based on observable market data. There have been no transfers from or to Level 2 in 2011 or 2010. The carrying values of cash, accounts receivable, bank operating lines of credit, and accounts payable and accrued liabilities approximate their fair value due to the relatively short period to maturity of the instruments. The Company’s long term debt is comprised of term loans with a floating rate of interest, for which the fair value is considered to approximate the carrying value given the variable interest rate, a capital lease obligation for which the fair value is considered to approximate its carrying value as the fixed rate of interest approximates the current market rate of interest, and a non-interest bearing debt for which the fair value is approximately $660,000 based on the current market rate of interest for similar instruments, with a carrying value of $769,000 (December 31, 2010 – fair value of approximately $325,000 with a carrying value of $395,000)(January1, 2010 – nil).



Derivative instrumentsThe 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 as compared to the Canadian dollar. At December 31, 2011, the Company had outstanding forward foreign exchange contracts to buy U.S. $ 4,000,000 in CDN, sell EU 8,000,000 in U.S. and sell U.S. $4,086,000 for Mexican Pesos (in 2010, the Group had no outstanding exchange contracts) at rates of 1.0205, 1.297 and 13.95 respectively, with maturity dates ranging from January to March 2012. As at December 31, 2011 the Group has recognized an unrealized loss of $35,000 representing the fair value of these forward foreign exchange contracts. The Group has also entered into forward copper purchase contracts in order to reduce the Group’s exposure to changes in the price of copper. At December 31, 2011, the Group had outstanding forward copper contracts for the purchase of notional 1,200,000 pounds (2010 – 2,300,000) of copper at a fixed price ranging from $4.06 U.S. to $4.43 U.S. (2010 - $3.66 U.S. to $4.06 U.S.) per pound with maturity dates ranging from January to June, 2012. As at December 31, 2011 the Company has recognized an unrealized loss of $983,000 (December 31, 2010 –$1,192,000 gain) representing the fair value of these forward copper contracts.

Financial risk management:The Company 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) 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. Risk management is carried out by the finance department under guidance by the Board of Directors. This department identifies and evaluates financial risks in close cooperation with management. The finance department is charged with the responsibility of establishing controls and procedures to ensure that financial risks are mitigated.

Currency risk:The Company operates internationally and is exposed to foreign exchange risk from various currencies, primarily U.S. dollars, Mexican Pesos and the Euro. Foreign exchange risk arises primarily from purchases and Canada / U.S. cross border sales transactions 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 exposure to currency risk as at December 31:

U.S. Dollars Mexican Pesos Euro’s

2011 2010 2011 2010 2011 2010

Cash $ 5,113 $ 19,377 196 401 € 500 –

Accounts receivable 22,795 16,793 19,781 21,557 3,579 –

Bank operating lines of credit 51 – – – – –

Accounts payable 18,219 16,140 16,198 13,602 3,095 –

Long-term debt – – – – 2,856 –

$ 46,178 $ 34,310 36,175 35,560 € 10,030 –

In addition the Group is party to derivative financial instruments, being forward copper purchase contracts that settle in the U.S. dollar. A 1 cent decline in the Canadian dollar against the U.S dollar as at December 31, 2011 would have increased net earnings by $50,000. This analysis assumes that all other variables, in particular interest rates, remained constant. Inversely, a 1 cent increase in the Canadian dollar against the U.S. dollar as at December 31, 2011 would have had an equal but opposite effect. A 1 cent decline in the Canadian dollar against the Euro as at December 31, 2011 would have decreased net earnings by $8,000. Inversely, a 1 cent increase in the Canadian dollar against the Euro as at December 31, 2011 would have had an equal but opposite effect.Fluctuations in the U.S. dollar exchange rate could have a potentially significant impact on the Company’s results from operations. However, they would not impair or enhance the ability of the Company to pay its foreign currency denominated expenses as such items would be similarly affected.



Credit risk:Credit risk arises from the possibility that the Company’s customers may experience difficulty and be unable to fulfill their contractual obligations. The Company manages this risk by applying credit procedures whereby analyses are performed to control the granting of credit to its customer based on their credit rating. As at December 31, 2011, the Company’s accounts receivable are not subject to significant concentrations of credit risk. The Company’s maximum exposure to credit risk associated with the Company’s financial instruments is limited to their carrying amount. During the year, an increase in the allowance for doubtful trade accounts receivables of $ 109,000 (2010- decrease of $ 87,000) was recognized in general and administrative expenses. The aging of accounts receivable and the related allowance is as follows:


Gross Allowance Gross Allowance Gross Allowance

Not past due $ 29,776 $ – $ 19,610 $ – $ 16,962 $ –

Past due 0-30 days 9,489 – 9,589 – 7,924 –

Past due 31-120 days 3,791 1,495 2,165 355 3,030 550

$ 43,056 $ 1,495 $ 31,364 $ 355 $ 27,916 $ 550

The carrying amount of financial assets representing the maximum exposure to credit risk at the reporting date was:

Carrying Amount


Accounts receivable $ 41,561 $ 31,009 $ 27,366

Cash 7,814 19,536 14,049

Forward exchange contracts – – 258

Copper forward contracts – 1,192 196

$ 49,375 $ 51,737 $ 41,869

The maximum exposure to credit risk for accounts receivable at the reporting date by geographic region was:

Carrying Amount


Canada $ 12,966 $ 12,774 $ 11,103

United States 22,986 16,563 15,448

Mexico 1,442 1,672 815

Italy 4,167 - -

$ 41,561 $ 31,009 $ 27,366

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 and components of its long-term debt that bear interest at floating interest rates. The Group manages its interest rate risk by maximizing the interest income earned on 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, 2011 would increase or decrease net earnings by approximately $24,000 respectively.



Commodity price risk:A large component of the Group’s cost of goods sold 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 long-term supply contracts with certain suppliers, and from time to time will enter into forward commodity purchase contracts.

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 contractual maturities of the Group’s financial liabilities:

December 31, 2011 Carrying amount 1 year or less 1-2 years 2-5 years

Bank operating lines of credit $ 1,596 $ 1,596 $ – $ –

Long-term debt 4,537 1,742 1,293 1,685

Accounts payable and accrued liabilities 35,518 35,518 – –

Derivative liabilities 1,018 1,018 – –

$ 42,669 $ 39,874 $ 1,293 $ 1,685

December 31, 2010

Bank operating lines of credit $ 1,447 $ – $ 1,447 $ –

Long-term debt 395 – – 395


$ 28,750 $ 26,908 $ 1,447 $ 395

January 1, 2010

Bank operating lines of credit $ 4,025 $ – $ – $ 4,025


$ 26,978 $ 22,953 $ – $ 4,025

23. 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, compromising 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, 2011.

The following table sets out the Group’s capital quantitatively at the following reporting dates:


Cash $ 7,814 $ 19,536 $ 14,049

Bank operating lines of credit (1,596) (1,447) (4,025)

Long-term debt (4,537) (395) –

Share capital 12,987 12,968 12,959

Contributed surplus 1,525 968 626

Retained earnings 77,871 73,614 64,998

$ 94,064 $ 105,244 $ 88,607



24. Business combination:

Effective March 1, 2011, the Company, through its wholly owned subsidiary Continental S.r.L acquired all of the outstanding shares of Euroelettro S.p.A., a transformer business involved in the design and manufacture of standard and custom dry-type and cast coil distribution and power transformers, for cash consideration of $7,784,000. Since acquisition, Euroelettro S.p.A has operated as Euroelettro Hammond S.p.A.. The purchase of EH expands the Group’s global presence, provides a platform for expansion into the European market and increases its product breadth offering with design and manufacturing capabilities in cast coil transformer technology. The addition of cast coil product with the Group’s already broad dry transformer product offering will support the Group’s growth in North America as well as in other global markets. The following summarizes the allocation of the purchase price and the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition:

Accounts receivable $ 4,856

Inventories 1,929

Property, plant and equipment 9,432

Intangible assets 2,592

Goodwill 2,428

Assets 21,237

Bank operating line of credit (2,709)

Accounts payable (4,780)

Future income tax liability (488)

Long-term debt (5,476)

Liabilities (13,453)

Total purchase consideration $ 7,784

The acquisition was accounted for using the purchase method whereby indentified assets acquired and liabilities assumed were recorded at their estimated fair values as of the date of acquisition. The excess of the purchase price over such fair value was recorded as goodwill, which represents the expected synergies to be realized from EH’s complementary products. None of the goodwill recognized is deductible for income tax purposes. The acquisition costs attributed to Euroelettro S.p.A. were $384,000 (2010 - $294,000), which are included in general and administrative expense. Included in the Group’s consolidated results for 2011 is revenue of $9,057,000 and net loss of $1,628,000 recognized by EH from the date of acquisition, to December 31, 2011. If the Company had acquired EH effective January 1, 2011, the revenue would have been approximately $10,962,000 and there would have been a loss of approximately $1,767,000.

25. 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.

(i) Property, plant and equipmentThe fair value of property, plant and equipment recognized as a result of the acquisition of Euroelettro Hammond S.p.A., is based on market values. The market value of property is the estimated amount for which a property could be exchanged on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably and willingly. The fair value of items of the plant and equipment is based on the market approach and cost approaches using quoted market prices.

(ii) Intangible assetsThe fair value of technology and customer relationships acquired in through the purchase of Euroelettro Hammond S.p.A., is based on the discounted cash flows, expected to be derived from the use of the assets.

(iii) InventoriesThe fair value of inventories acquired in a business combination is determined based on the estimated selling price in the common course of business less the estimated costs of completion and sale, and a reasonable profit margin based on the effort required to complete and sell the inventories.



(iv) DerivativesThe fair value of forward exchange and copper commodity contracts is based on their listed market price. 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.

(v) Non-derivative financial liabilitiesFair value of the non-derivative financial liabilities acquired by the acquisition of Euroelettro Hammond S.p.A., and determined for disclosure purposes, 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. For finance leases the market rate of interest is determined by reference to long-term debt of a similar duration.

(vi) Share-based payment transactionsThe fair value of the employee share options is measured using the Black-Scholes formula. Measurement inputs include share price on measurement date, exercise price of the instrument, expected volatility (based on weighted average historic volatility adjusted for changes expected due to publicly available information), weighted average expected life of the instruments (based on historical experience and general option holder behaviour), expected dividends, and the risk-free interest rate (based on government bonds).

26. Subsequent events:

AcquisitionOn February 23, 2012, Hammond Power Solutions Inc. signed an agreement for the acquisition of Pan-Electro Technic Enterprises Private Limited (“PETE”) in India, acquiring a 70% equity ownership of its transformer business for 775,000,000 Indian Rupees (CDN $15,828,000). PETE’s annual revenues approximate CDN $16,000,000. The company will operate as PETE – Hammond Power Solutions Private Limited, a subsidiary of HPS. The purchase of PETE expands HPS’ global presence and provides a platform for expansion into the Indian, Asian and African markets. PETE also increases the breadth of HPS’ product offering with its design and manufacturing capabilities in cast coil, custom liquid filled distribution, and power transformers. PETE has a reputation in the transformer industry for its custom engineering capabilities, product reliability and quality. The acquisition supports HPS’ global growth strategies and product offering in new global markets. PETE is involved in the design and manufacture of cast coil, custom liquid filled distribution, and power transformers and has an excellent reputation in the electrical industry for its engineered-to-order capabilities and quality. Management feels that by building on the strengths of both companies, this acquisition will enhance HPS’ market share strategies and performance going forward. The Company is in the process of obtaining detailed financial information from PETE and accordingly comprehensive disclosures required under IFRS 3, Business Combinations, including a preliminary purchase price allocation, have not been reflected in these consolidated financial statements.

Normal Course Issuer Bid On March 15, 2012 the Toronto Stock Exchange approved the repurchase of up to 50,000 of its Class A Subordinate Voting Shares, which represents 0.57% of the 8,806,624 Class A Subordinate Voting Shares outstanding as at March 12, 2012, by way of a normal course issuer bid (“NICB”) through the facilities of the Toronto Stock Exchange (“TSX”). Daily purchases are limited to 2,099 Class A Subordinate Voting Shares, other than block purchase exemptions, which is 25% of the average daily trading volume of 8,398 Class A Subordinate Voting Shares on the TSX during the preceding six calendar months.

Bank AgreementOn March 22, 2012, the Company completed a new financing arrangement with JP Morgan Chase Bank, N.A. for a $25,000,000 U.S. revolving credit facility, a $5,000,000 U.S. overdraft facility, a 4,000,000 Euro overdraft facility and a $10,000,000 U.S. delayed draw credit facility. This is an unsecured, 5-year committed facility that provides financing certainty for the future. This financing better aligns our Canadian, U.S. and European banking requirements, supports our hedging strategies and provides financing for our operational requirements.

27. Explanation of transition to IFRS:

As stated in Note 2(a), these consolidated financial statements are prepared in accordance with IFRS. The significant accounting policies set out in Note 3 have been applied in preparing the financial statements for the year ended December 31, 2011, the comparative information presented in these financial statements as at December 31, 2010 and in the preparation of an opening IFRS statement of financial position at January 1, 2010 (the Group’s date of transition). In preparing its opening IFRS statement of financial position, the Group has adjusted amounts reported previously in financial statements prepared in accordance with previous Canadian GAAP. An explanation of how the transition from previous Canadian GAAP to IFRS has affected the Group’s financial position, financial performance and cash flows is set out in the following tables and the Notes that accompany the tables.



Reconciliation of Equity

Previous Canadian GAAP

Effect of transition to IFRS

IFRS Previous Canadian GAAP

Effect of transition to IFRS

IFRS

Note January 1, 2010 Dec 31, 2010

Assets

Current assets

Cash $ 14,049 – $ 14,049 $ 19,536 – $ 19,536

Accounts receivable a 27,820 (454) 27,366 32,201 (1,192) 31,009

Prepaid expenses 514 – 514 921 921

Derivative assets a – 454 454 – 1,192 1,192

Income taxes recoverable 3,006 – 3,006 2,188 2,188

Inventories b 25,722 (137) 25,585 26,535 (193) 26,342

Future tax assets c 643 (643) – 574 (574) –

Total current assets 71,754 (780) 70,974 81,955 (767) 81,188

Property, plant and equipment b,d 26,452 1,752 28,204 27,292 1,663 28,955

Intangible assets e 5,125 (26) 5,099 4,905 (215) 4,690

Goodwill 2,180 – 2,180 2,180 – 2,180

Investment property 1,044 – 1,044 1,044 – 1,044

Accrued pension benefit asset g – – – 4 (4) –

Deferred tax assets c 42 643 685 12 574 586

Total non-current assets 34,843 2,369 37,212 35,437 2,018 37,455

Total assets $ 106,597 $ 1,589 $ 108,186 $ 117,392 $ 1,251 $ 118,643

Liabilities

Current liabilities

Bank operating lines of credit $ 4,025 – $ 4,025 $ 1,447 – $ 1,447

Accounts payable and accrued liabilities

f 23,503 (550) 22,953 27,870 (962) 26,908

Income tax liabilities 85 – 85 218 – 218

Deferred tax liabilities c 180 (180) – 326 (326) –

Provisions f – 550 550 – 962 962

Total current liabilities 27,793 (180) 27,613 29,861 (326) 29,535

Employee benefits g 5 245 250 – 257 257

Provisions 139 – 139 118 – 118

Long-term debt – – – 395 – 395

Deferred tax liabilities c,d 1,157 444 1,601 1,465 590 2,055

Total non-current liabilities 1,301 689 1,990 1,978 847 2,825

Total liabilities 29,094 509 29,603 31,839 521 32,360

Shareholders’ Equity

Share capital 12,959 – 12,959 12,968 – 12,968

Contributed surplus 626 – 626 968 – 968

Accumulated other comprehensive b,g – – – – (1,267) (1,267)

Retained earnings 63,918 1,080 64,998 71,617 1,997 73,614

Total shareholders’ equity 77,503 1,080 78,583 85,553 730 86,283

Total liabilities and shareholders’ $ 106,597 $ 1,589 $ 108,186 $ 117,392 $ 1,251 $ 118,643



Reconciliation of Comprehensive Income for the Year Ended December 31, 2010

Previous Canadian GAAP Effect of transition to IFRS IFRS

Note December 31, 2010

Continuing operations

Sales $ 190,604 – $ 190,604

Cost of sales 142,427 – 142,427

Gross margin 48,177 – 48,177

Selling, general and administrative k 34,341 (34,341) –

Selling and distribution k – 19,319 19,319

General and administrative e, g, k – 15,216 15,216

Earnings from operations e,g 13,836 (194) 13,642

Interest expense 103 – 103

Foreign exchange loss (gain) b 14 (1,136) (1,122)

Realized and unrealized losses (gains) on copper forward contracts

(1,141) – (1,141)

Other 93 – 93

Net finance costs (931) (1,136) (2,067)

Income before income tax 14,767 942 15,709

Income tax expense 5,057 – 5,057

Net earnings 9,710 942 10,652


Foreign currency translation differences for foreign operations

b – (1,267) (1,267)

Defined benefit plan actuarial losses g – (25) (25)

Other comprehensive income for the period (1,292) (1,292)

Total comprehensive income for the period $ 9,710 $ (350) $ 9,360

Earnings per share

Basic earnings per share (dollars) $ 0.84 $ 0.92

Diluted earnings per share (dollars) $ 0.83 $ 0.91

Notes to the reconciliations

(a) Upon adoption of IFRS, the Group reclassified derivative financial instruments measured as fair value through profit or loss, being forward foreign exchange and copper contracts from trade and other receivables to derivative assets on the statement of financial position. The effect was to reduce trade and other receivables and increase derivative assets.

As at January 1, 2010 As at December 31, 2010Trade and other receivables $ (454) $ (1,192)Derivative assets $ 454 $ 1,192



(b) Under previous Canadian GAAP, the Group’s functional currency was determined to be the Canadian dollar, as the Company’s subsidiaries operate as integrated foreign operations due to the fact that they are financially and operationally interdependent with the Canadian parent Company. As a result, the temporal method was used to translate assets, liabilities, revenues and expenses. The result of the application of this method was that monetary items were translated at the exchange rate in effect at the Balance Sheet date, non-monetary items were translated at historical rates, revenue and expense items were translated at the exchange rates in effect on the dates they occurred, and depreciation was translated at historical exchange rates as the asset to which it relates. In accordance with IFRS, the Group examined the functional currencies for each of its component entities upon transition. Under IFRS, when the indicators are mixed and the functional currency is not obvious, priority should be given to indicators that have a greater weighting. Canadian GAAP has similar indicators as IFRS in determining functional currency; however, Canadian GAAP does not have a hierarchy of indicators under which certain indicators are given priority. In particular, under IFRS, the Group evaluated the primary economic environment within which each entity operates. In performing this evaluation, the Group looked to the currency that mainly influences sales prices, the currency of the country whose competitive forces and regulations mainly determine the sales prices, and the currency that mainly influences labour, material and other costs of providing goods. The result of this assessment was the determination that the domestic currency of each component entity is the functional currency. Under IAS 21, Foreign Operations, assets and liabilities are translated from their functional currency into the group presentation currency at the exchange rate at the reporting date, and revenue and expenses are translated at the transaction date. The impact arising from the change is summarized as follows: 12 monthsConsolidated Statements of Earnings and Comprehensive Income Dec 31, 2010Decrease in finance costs: Foreign exchange gain $ (1,136)Decrease in other comprehensive income: Foreign currency translation differences 1,267

Total adjustment $ 131

January 1, 2010 December 31, 2010Consolidated Statements of Financial Position Reduction in inventories $ (137) $ (193)Reduction in property, plant and equipment (488) (577)

Increase in cumulative translation reserve $ (625) $ (770)

(c) Upon adoption of IFRS, the Group classified deferred tax assets previously presented as current assets as non-current assets, in accordance with IAS 12,

Income Taxes. Similarly, the Group classified deferred tax liabilities previously presented as current liabilities as non-current liabilities. January 1, 2010 December 31, 2010Deferred tax assets Current deferred tax assets $ (643) $ (574)Non-current deferred tax assets $ 643 $ 574Current deferred tax liabilities $ (180) $ (326)Non-current deferred tax liabilities $ 180 $ 326

(d) IFRS 1 provides for a transitional election to adjust property, plant and equipment to fair value upon adoption of IFRS. As a result, the Group has elected to record certain of its land at fair value, with an offsetting amount reflected through retained earnings. The related deferred tax effect is 11.6% for tax rate on capital gains. The impact arising from the change is summarized as follows:

January 1, 2010 December 31, 2010Consolidated Statements of Financial Position Increase in property, plant and equipment $ 2,240 $ 2,240Related deferred tax effect (264) (264)

Increase in retained earnings $ 1,976 $ 1,976



(e) Upon adoption of IFRS, the Group expensed certain acquisition-related costs which had been incurred previously to effect a business combination in accordance with IAS 3, Business Combinations. Prior to the transition to IFRS these had been presented as intangible assets.

The impact arising from the change is summarized as follows: 12 monthsConsolidated Statements of Earnings December 31, 2010Increase in general and administrative expenses $ 190

January 1, 2010 December 31,2010Consolidated Statements of Financial Position Reduction in intangible assets $ (26) $ (215)

Decrease in retained earnings $ (26) $ (215)

(f) Upon adoption of IFRS, the Group presented provisions previously classified as accrued liabilities separately on the statement of financial position.

January 1, 2010 December 31,2010Consolidated Statements of Financial Position Decrease in accounts payable and accrued liabilities $ (550) $ (962)

Increase in provisions $ 550 $ 962

(g) Under IFRS the Group’s accounting policy is to recognize all actuarial gains and losses immediately in other comprehensive income. At the date of transition, all previously unrecognized cumulative actuarial gains and losses were recognized in retained earnings. Under Canadian GAAP, the Group recognized actuarial gains and losses in the statement of operation over the employees’ expected average remaining service period using the corridor method. The unrecognized actuarial gains and losses exceeding the corridor that were recognized in profit or loss for the year ending December 31, 2010 under previous Canadian GAAP were reversed, and all actuarial gains and losses arising in 2010 ($25,000) were recognized in other comprehensive income. The impact arising from the change is summarized as follows: 12 monthsConsolidated Statements of Earnings December 31,2010Increase in general and administrative expenses $ 4

January 1, 2010 December 31, 2010Consolidated Statements of Financial Position Increase in employee benefits liability $ 245 $ 245(Decrease) increase in employee benefits liability** – 13Decrease in accrued pension benefit asset – 4Decrease in other comprehensive income – 25Increase (decrease) in accumulated other comprehensive income ** – (13)

Decrease in retained earnings $ 245 $ 274

** The pension liability is U.S. denominated and, therefore, the decrease in employee benefits is related to Balance Sheet translation and is included in accumulated other comprehensive income. The Group has elected under IFRS 1 to reset all accumulated actuarial losses recognized upon transition through opening retained earnings.

(h) In accordance with IFRS 1, the Group has elected to deem all foreign currency translation differences that arose prior to the date of transition in respect of all foreign operations to be nil at the date of transition. The impact arising from the change is summarized as follows:

January 1, 2010 December 31, 2010Consolidated Statements of Financial Position Decrease in cumulative translation reserve $ 625 $ 625

Decrease in retained earnings $ 625 $ 625



(i) As part of its transition to IFRS, the Group elected not to restate prior business combinations. In respect of acquisitions prior to January 1, 2010, goodwill represents the amount recognized under previous Canadian GAAP. The above changes decreased (increased) retained earnings as follows: Note January 1,2010 December 31, 2010 Revaluation of property d $ 2,240 $ 2,240Deferred tax on revaluation of property d (264) (264)Acquisition related costs e (26) (215)Actuarial gains and losses g (245) (270)Foreign exchange gains and losses b – 1,136Pension expense g – (4)Cumulative translation h (625) (625)

Increase in retained earnings $ 1,080 $ 1,997

(k) IFRS require the presentation of expenses in the statement of earnings to be made based on their nature of the function to which the expenditure relates. Previous Canadian GAAP permitted a combination of these approaches. The Group has elected to present items in its consolidated statement of earnings based on the function to which they relate, and accordingly, has reclassified items previously presented as selling, general and administrative expenses into selling and distribution and general and administrative.

(l) Upon transition to IFRS the Group has moved the amount of cash paid for interest and income taxes into the body of the Statement of Cash Flows, whereas they were previously disclosed as supplementary information. There are no other material differences between the statement of cash flows presented under IFRS and the statement of cash flows presented under previous Canadian GAAP.

(m) Upon transition to IFRS, the classification and measurement criteria of IAS 39, Financial Instruments: Recognition and Measurement were applied to all financial assets and liabilities. This resulted in the classification of cash as loans and receivables and bank operating lines of credit as other liabilities. Under Canadian GAAP, both these items were classified as held for trading. As the carrying values of cash and bank operating lines of credit approximate their fair value, no transitional adjustment resulted.

(n) Certain of the previously reported Canadian GAAP balances have been reclassified to conform with the current period financial statement presentation.


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.

Hammond Power Solutions Inc.CanadaCorporate Head Office595 Southgate DriveGuelph, Ontario N1G 3W6Phone: (519) 822-2441

15 Industrial RoadWalkerton, Ontario N0G 2V0Phone: (519) 881-3552

Distribution Centre10 Tawse PlaceGuelph, Ontario N1H 6H9

Delta Transformers Inc.795 Industriel Boul.Granby, Quebec J2G 9A1Phone (450) 378-3617

3850 place de JavaSuite 200Brossard, Québec J4Y 0C4

PETE – HammondIndiaG-9 to 11, Bhavya’s Sree Arcade,D.No. 8-3-166/6&7Erragadda, Hyderabad – 500 018

Phone +91 40 23812291

Euroelettro Hammond S.p.AItalyVia dell’Agricoltura, 8/F (Z.I.)36040 Meledo di Sarego (VI) ITALYPhone: +39 0444 822 000

Hammond Power Solutions S.A. de C.V.MexicoAve. Avante #810Parque Industrial GuadalupeGuadalupe, Nuevo Leon, C.P. 67190Monterrey, Mexico(011) 52-81-8479-7115

Ave. Avante #900Parque Industrial GuadalupeGuadalupe, Nuevo Leon, C.P. 67190Monterrey, Mexico

Hammond Power Solutions, Inc.United States1100 Lake StreetBaraboo, Wisconsin 53913Phone (608) 356-3921

17715 Susana RoadCompton, California 90224Phone (310) 537-4690

74 C o r p o r at e I n f o r m at I o n

Corporate Officers and Directors

William G. Hammond *Chairman and Chief Executive Officer

Chris R. HuetherCorporate Secretary and

Chief Financial Officer

Donald H. MacAdam *+

Director

Zoltan D. Simo *+

Director

Douglas V. Baldwin *+

Director

Grant C. Robinson *+

Director

David J. FitzGibbon *+

Director

Dahra Granovsky **

Director

* Corporate Governance Committee + Audit and Compensation Committee

Corporate Head Office

595 Southgate DriveGuelph, Ontario N1G 3W6

Stock Exchange Listing

Toronto Stock Exchange (TSX)Trading Symbol: HPS.A

Registrar and Transfer Agent

Computershare Investor Share Services Inc.100 University AvenueToronto, Ontario M5J 2Y1

Auditors

KPMG, LLP 115 King Street SouthWaterloo, Ontario N2J 5A3

Investor Relations

Contact: Dawn Henderson, Manager Investor RelationsTelephone: 519.822.2441Email: [email protected]

Annual General Meeting

Shareholders are cordially invited to attend the Annual General meeting held at:

The Toronto Stock Exchange(The Gallery)130 King Street WestToronto, Ontario M5X 1J2

Wednesday, May 23, 2012, at 3:00 p.m.


hammondpowersolutions.com

Documents

It’s Our World. - Hammond Power Solutions Nuevo Leon ... Dale Sidey, Director of U.S. Sales Dhiru Patel, Director of Engineering Bob Yusyp, Director of Manufacturing Al Davenport,