Mr. David Feick reports

HAMMOND POWER SOLUTIONS REPORTS FOURTH QUARTER 2023 FINANCIAL RESULTS

Hammond Power Solutions Inc. has released its financial results for the fourth quarter 2023 (dollar amounts are in thousands unless otherwise specified).

Highlights

• Record sales of $187-million in the quarter, a 29.6-per-cent increase versus 2022. Year-to-date sales of $710-million, a 27.1-per-cent increase versus 2022.
• Net income of $19.9-million in the quarter, a 9.2-per cent increase versus 2022. Year-to-date net income of $63.4-million, a 41.4-per-cent increase versus 2022.
• Earnings per share of $1.68 for the quarter and $5.33 year to date.
• Gross margin of 32.5 per cent for the year.

"Hammond Power Solutions continued to deliver exceptional results with 2023 showing robust growth across all geographies and channels. Financially, the fourth quarter ended with record shipments of $187-million globally. This represents a 30-per-cent increase over the fourth quarter last year and a 27-per-cent increase on a year-to-date basis. This is a new record top line also helped us to achieve our margin and profit targets," said Adrian Thomas, chief executive officer of HPS. "In late 2022, we embarked on the largest capital program in our company's history, allocating $52-million to growing manufacturing capacity at our facilities in Mexico, Guelph and our Mesta location in Pennsylvania. Through 2023, our efforts to build capacity to support demand growth have paid off, as inventory levels recovered and lead times for many facilities came back in line with customer expectations. In 2024, the bulk of our announced capital expenditures will be spent and will provide us with more than $900-million in yearly manufacturing capacity by 2025."

U.S. and Mexico sales were positively impacted by the strengthening of the U.S. dollar relative to the Canadian dollar versus 2022. The U.S. market experienced significant increases in the OEM (original equipment manufacturer) channel, with higher sales supporting data centres, warehousing, industrial manufacturing, mining, electric vehicle charging, renewable energy, and oil and gas production. Sales in the U.S. distributor channel also improved due to strong market activity and resulting growth within the company's established distributors. The Canadian market experienced increases in commercial construction, EV charging and data centre projects. A significant part of the growth in India is through both domestic sales and exports to other Southeast Asian countries.

The company's Dec. 31, 2023, backlog increased by 19.9 per cent as compared with Dec. 31, 2022, and has decreased 3.2 per cent from quarter 3 2023. During the second half of the year, commercial construction and industrial markets began to moderate in their growth profile, while the company's capacity additions allowed it to ship more backlog than previous quarters.

"The backlog contracted in the fourth quarter versus the third as a result of both our ability to ship more product but also flattening bookings in certain areas, mainly in commercial and industrial applications. While growth rates are moderating in some areas, demand in certain sectors, such as EV charging and data centres, remains strong," said Richard Vollering, chief financial officer of HPS. "While margins in the quarter are higher than normal due to year-end adjustments, we are very pleased with our gross margin rate of 32.5 per cent for the year, which is at the high end of our recent range. The margins for the year are the result of strong operating leverage, higher Mesta and power quality sales, product and channel mix, and improved margins in India. Our balance sheet remains strong even with higher working capital requirements and increased capex for the year of over $20-million."

The consolidated gross margin in 2023 increased to 32.5 per cent versus 29.6 per cent in 2022, an increase of 2.9 per cent of sales. The improvement in gross margin is the result of better operating leverage due to high factory throughput, stabilizing cost inputs, a higher proportion of Mesta and power quality sales, and margin improvements in India. Higher gross margins were achieved in all channels and regions. Margins in the fourth quarter were higher than the previous three quarters due to inventory adjustments resulting from the annual physical count in conjunction with adjustments to inventory reserves.

Total selling and distribution expenses were $76,283 for 2023 versus $62,263 in 2022, an increase of $14,020 or 22.5 per cent. On a percentage-of-sales basis, total selling and distribution expenses decreased to 10.7 per cent of sales for 2023 from 11.1 per cent in 2022. The year-over-year increase in selling and distribution expenses is a result of higher variable freight and commission expenses attributed to the large increase in sales.

General and administrative expenses in 2023 were $68,007 compared with $43,481 for 2022, an increase of $24,526 or 56.4 per cent. On a percentage-of-sales basis these costs have increased from 7.8 per cent in 2022 to 9.6 per cent in 2023. The increase is mainly due to higher share-based compensation costs, but also due to the company's continuing strategic investments in people and resources to support its growth strategies with respect to Mesta, Mexico, and power quality, as well as supporting higher levels of general business activity.

Two thousand twenty-three earnings before income taxes were $83,994 as compared with earnings of $57,169 in 2022 -- growing by $26,825 or 46.9 per cent. The main contributors to the higher current year earnings before income tax were higher sales and additional gross margin dollars. These gains were offset by increases in selling, distribution, general and administration expenses.

EBITDA (earnings before interest, taxes, depreciation and amortization) for the year ended Dec. 31, 2023, was $95,995 versus $69,746 in 2022 -- an increase of $26,249 or 37.6 per cent. Adjusted for foreign exchange loss/gain, share-based compensation expenses adjusted EBITDA for 2023 was $117,229 versus $73,435 in 2022 -- an increase of $43,794 or 59.6 per cent.

Basic earnings per share were $1.68 for quarter 4 2023 versus $1.55 in quarter 4 2022, an increase of 13 cents. Year to date the basic earnings per share were $5.33 in 2023 compared with $3.79 in 2022, an increase of $1.54.

The board of directors of HPS declared a quarterly cash dividend of 15 cents per Class A subordinate voting share of HPS and a quarterly cash dividend of 15 cents per Class B common share of HPS paid on Dec. 15, 2023, to shareholders of record at the close of business on Dec. 8, 2023. The ex dividend date was Dec. 7, 2023. The company has paid a cash dividend of 55 cents per Class A Subordinate voting share and 55 cents per Class B common shares year to date.

About Hammond Power Solutions Inc.

Hammond Power Solutions enables electrification through its broad range of dry-type transformers, power-quality products and related magnetics. Hammond Power's standard and custom-designed products are essential and ubiquitous in electrical distribution networks through an extensive range of end-user applications. The company has manufacturing plants in Canada, the United States, Mexico and India, and sells its products around the globe.

We seek Safe Harbor.