Mar 18, 2019

Fourth quarter 2018 results for Hammond Power Solutions Inc. show it achieved record breaking sales, substantial market growth in both Canada and the U.S., and unprecedented bookings and backlog levels. The company is a leading manufacturer of dry-type, cast resin transformers, liquid filled and related magnetics.

Despite solid results in North America, several years of economic and market downturns in Europe as well as sizeable and disproportionate losses have led the company to close its Italian operation. The Italian operation is classified and disclosed as discontinued operations in the 2018 financial statements.

“The resulting costs of closing our Italian operation are considerable, however with these behind us HPS will be a stronger and more profitable company going forward,” says Bill Hammond, Chairman and CEO.

Sales from continuing operations for the quarter ended December 31, 2018 were $85,875,000, an increase of $13,536,000 or 18.7% from Q4 2017 sales of $72,339,000, reflecting increased market activity and market share growth. Year-to-date sales from continuing operations in 2018 were $314,082,000 as compared to sales of $284,635,000 in 2017, a significant increase of $29,447,000 or 10.3%. U.S. sales for Q4 2018 increased significantly by $8,350,000 or 18.5%, and were $53,387,000 compared to $45,037,000 in Q4 2017.

Year-to-date U.S. market sales were $197,860,000 an increase of $23,272,000 or 13.4%, compared to 2017 sales of $174,588,000. Canadian sales were $26,523,000 for the quarter, an increase of $4,171,000 or 18.7% from Q4 2017 sales of $22,352,000. Year-to-date Canadian sales were $93,641,000 an increase of $9,316 or 11.0% as compared to sales of $84,325,000 in 2017. India sales increased in Q4 2018 finishing at $5,965,000 versus $5,525,000 in Q4 2017, an increase of $440,000 or 8.0%. On a year-to-date basis, India sales were $22,581,000 versus $25,722,000 in 2017, a decrease of $3,141,000 or 12.2%.

Bookings for continuing operations for the year were very strong. 2018 bookings increased by 7.6% over the prior year: direct bookings increased by 5.9% and bookings in the distributor channel had an increase of 9.3%. The company’s Q4 2018 bookings increased by 15.7% over Q4 2017. During the quarter, direct bookings increased 21.8%, while distributor channel bookings grew by 10.2%.

The consolidated gross margin rate from continuing operations in 2018 is 23.2% versus 25.6 % in 2017, a decline of 2.4% of sales. The weakening in margin rates can be attributed to selling price pressures and realization, product mix, volatile and increasing commodity costs and customer mix. Quarterly gross margin rates from continuing operations decreased to 23.4% in Q4 2018 versus 27.9% in Q4 2017 as a result of sales mix.

Selling and distribution expenses from continuing operations amounted to $9,446,000 in Q4 2018 versus $8,692,000 in Q4 2017, an increase of $754,000 or 8.7%, Year to date selling and distribution expenses from continuing operations were $36,003,000 for 2018 versus $32,816,000 in 2017, an increase of $3,180,000 or 9.7%. On a percentage-of-continuing-sales basis, year-to-date selling and distribution increased slightly to 11.5% of sales in 2018 from 11.3% in 2017.

The general and administrative expenses from continuing operations for Q4 2018 totalled $4,269,000, a decrease of $1,290,000,000 or 23.2% when compared to Q4 2017 costs of $5,559,000 and were $23,153,000 in 2018 compared to $22,476,000 for 2017, an increase of $677,000 or 3.0%. On a percentage-of-continuing-sales basis these costs have decreased from 7.9% in 2017 to 7.4% in 2018.

Earnings from continuing operations were $13,779,000 in 2018, as compared to earnings of $16,884,000 in 2017, a decrease of $3,105,000 or 18.4%. The reduction in year-to-date earnings from continuing operations is a result of the increase in sales negatively impacted by decreased gross margin rates and increased selling and distribution and general and administrative expenses. Q4 2018 earnings from continuing operations were $6,364,000 as compared to Q4 2017 earnings of $5,923,000, an increase of $441 or 7.4%.

Net finance and other costs have increased $1,396,000 from $881,000 in 2017 to $2,277,000 in 2018. The majority of the change, $1,811,000, relates to uncertainty over collectability of the note receivable. Interest expense from continuing operations for the year ended December 31, 2018, finished at $614,000 as compared to $541,000 in 2017, an increase of $73,000 or 13.5%.

In Q4 2018, the Company decided to close the Italian facility and cease operations as the entity struggled to generate adequate sales and profits. The restructuring charges comprised severance and benefit costs related to workforce terminations, closure and cancellation costs and write-downs of goodwill, intangible assets, and inventory, totaling $15,925,000. The closure of the Italian operations has been presented as discontinued operations in the financial statements. The total net loss of the Italian operation for 2018 was $21,022,000. Removing the 2018 restructuring charges of $16,485,000, the normalized Italian operating loss for 2018 was $4,537,000. Removing the 2017 restructuring charges of $570,000 and the loss on disposition of the VPI business line of $1,022,000 the normalized Italian operating loss for 2017 was $2,567,000, a current year increased net loss increase of $1,970,000.

Net earnings from continuing operations for Q4 2018 finished at $4,166,000 compared to net earnings from continuing operations of $3,971,000 in Q4 2017, an increase of $195 or 4.9%. The change in the quarter is a result of increased sales, offset by lower gross margin rates and higher selling and administrative expenses. Year-to-date net earnings from continuing operations were $8,105,000 in 2018 compared to $10,273,000 in 2017, a decrease of $2,168,000 or 21.1%. The decline in year-over year earnings is primarily a result of lower gross margins and higher selling and distribution expenses.

The Q4 2018 basic earnings per share (“EPS”) from continuing operations was $0.35 in 2018 and $0.34 in 2017 and the Q4 2018 basic loss per share was ($1.26) compared an earnings per share $0.05 for Q4 2017. The basic EPS from continuing operations was $0.69 in 2018 and $0.88 in 2017 and 2018 basic loss per share was ($1.10) compared to a 2017 earnings per share $0.53.

The company continued with its regular quarterly dividend program, paying six cents ($0.06) per Class A Subordinate Voting Share of HPS and six cents ($0.06) per Class B Common Share of HPS on December 4, 2018, totaling twenty-four cents ($0.24) per Class A Subordinate Voting Share of HPS and twenty-four cents ($0.24) per Class B Common Share of HPS for the 2018 year.

“We are optimistic about the near future,” says Hammond. “We are coming out of 2018 with record levels of bookings and sales. As we move into 20I9, we are well positioned in the market-place. I am confident in our ability to continue gaining market share and delivering value for all our stakeholders.”

On March 4, 2019, the company announced an increase in its regular quarterly dividend program to seven cents per Class A Subordinate Voting Share of HPS and seven cents per Class B Common Share of HPS.