Management’s Discussion and Analysis and Financial Statements December 31, 2007 THE ONEX OPERATING COMPANIES Onex’ businesses generate annual revenues of $33 billion, have assets of $38 billion and employ 237,000 people worldwide. General Partner ONEX PARTNERS I ONEX PARTNERS II ONCAP II Direct Investments ONEX CREDIT PARTNERS ONEX REAL ESTATE PARTNERS Camden Partnerships Cronus Investments Town and Country Properties Flushing Town Center NY Credit The investment in The Warranty Group is split almost equally between Onex Partners I and II. The investment in Husky is split approximately 20%/80% between Onex Partners I and II, respectively. Table of Contents 2 Management’s Discussion and Analysis 111 Summary Historical Financial Information 64 Consolidated Financial Statements 112 Shareholder Information ONEX CORPORATION A Leading Private Equity Investor and Alternative Asset Manager Founded in 1984, Onex is one of North America’s oldest and most successful private equity investors and alternative asset managers. Onex has completed more than 220 acquisitions valued at approximately $34 billion. Employing a disciplined, active ownership investment approach in these acquisitions, the Company has generated 2.9 times its invested capital, earning a 27 percent compound annual IRR on realized and publicly traded investments. Onex manages approximately $4.8 billion of third-party capital through its Onex Partners and ONCAP families of funds, as well as Onex Credit Partners. Through these Funds, Onex generates annual management fee income from third parties and is entitled to a carried interest on that third-party capital. Onex also has a real estate investment platform, Onex Real Estate Partners, through which it expects to raise third-party capital in the future. The Onex Funds Large-cap Private Equity • Onex Partners LP, initiated November 2003 – US$1.655 billion • Onex Partners II LP, initiated November 2006 – US$3.45 billion Mid-cap Private Equity • ONCAP L.P., initiated December 1999 – $400 million • ONCAP II L.P., initiated May 2006 – $574 million Distressed Credit • Onex Credit Partners, established in November 2007 – US$350 million Real Estate • Onex Real Estate Partners, initiated January 2005 – US$400 million Onex is a public company whose shares are traded on the Toronto Stock Exchange under the symbol OCX. Throughout this report, all amounts are in Canadian dollars unless otherwise indicated. Onex Corporation December 31, 2007 1 MANAGEMENT ’S DISCUSSION AND ANALYSIS The Management’s Discussion and Analysis (“MD&A”) of the financial condition and results of operations analyzes significant changes in the consolidated statements of earnings, consolidated balance sheets and consolidated statements of cash flows of Onex Corporation (“Onex”). As such, this MD&A should be read in conjunction with the audited annual con- solidated financial statements and notes thereto of this report. The MD&A and the Onex consolidated financial statements have been prepared to provide information on Onex on a consolidated basis and should not be considered as providing sufficient information to make an investment decision in regard to any particular Onex operating company. The following MD&A is the responsibility of management and is as of February 27, 2008. The Board of Directors carries out its responsibility for the review of this disclosure through its Audit and Corporate Governance Committee, comprised exclusively of independent directors. The Audit and Corporate Governance Committee has reviewed the disclosure and recommended its approval by the Board of Directors. The Board of Directors has approved this disclosure. The MD&A is presented in the following sections: Industry Segments Significant Events in 2007 Consolidated Operating Results 3 Onex Business Objective and Strategies 6 9 Financial Review 9 12 36 39 47 55 55 57 Outlook 59 Risk Management Fourth-Quarter Results Consolidated Financial Position Liquidity and Capital Resources Recent Accounting Pronouncements Disclosure Controls and Procedures and Internal Controls over Financial Reporting Onex Corporation’s financial filings, including the 2007 MD&A and Financial Statements and interim quarterly reports, Annual Information Form and Management Circular, are available on the Company’s website at www.onex.com or on the Canadian System for Electronic Document Analysis and Retrieval (“SEDAR”) at www.sedar.com. Forward-Looking/Safe Harbour Statements This MD&A may contain, without limitation, statements concerning possible or assumed future results preceded by, followed by or that include words such as “believes”, “expects”, “anticipates”, “estimates”, “intends”, “plans” and words of similar connotation, which would constitute forward-looking statements. Forward-looking statements are not guarantees of future performance. They involve risks and uncertainties that may cause actual performance or results to be materially different from those anticipated in these forward-looking statements. Onex is under no obligation to update any forward-looking statements contained herein should material facts change due to new information, future events or other factors. These cautionary statements expressly qualify all forward-looking statements in this MD&A. 2 Onex Corporation December 31, 2007 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 ONEX BUSINESS OBJECTIVE AND STRATEGIES OUR OBJECTIVE: Onex’ business objective is to create long-term value for shareholders and partners and to have that value reflected in our share price. The discussion that follows outlines Onex’ strategies to achieve that objective and that drove our performance in 2007. OUR STRATEGY: Private Equity Investing + Alternative Asset Management Our strategy to deliver value to shareholders and partners is concentrated on two activities: private equity investing and alternative asset management. Our private equity investing focuses on our disciplined, active ownership approach of acquiring and building industry-leading busi- nesses in partnership with outstanding management teams. The objective of our alternative asset management business is to manage and grow third-party capital that brings management fees to Onex and enhances Onex’ return through carried interests. This also enables Onex to be efficient and responsive to acquisition opportunities in our private equity investing. PRIVATE EQUITY INVESTING: Acquire, Build and Grow Value Onex seeks to acquire attractive businesses, build them into industry leaders and grow their value. We look to maintain substantial financial strength and have capital available for our private equity investing. 2007 Performance Acquire attractive businesses • Onex Partners completed five major acquisitions and investments: • Tube City IMS in a transaction valued at $730 million; Carestream Health in a transaction val- ued at $2.6 billion; and Husky Injection Molding Systems in a transaction valued at $960 mil- lion. Onex, Onex Partners and Onex management invested $1.4 billion in these transactions, of which Onex’ share was $524 million. • In partnership with other private equity firms we acquired Hawker Beechcraft in a transaction valued at $3.8 billion and Allison Transmission in a transaction valued at $5.9 billion; Onex, Onex Partners, certain limited partners and Onex management invested $1.4 billion in these transactions; Onex’ portion was $488 million. • ONCAP acquired Mister Car Wash and CiCi’s Pizza; Onex, ONCAP and Onex management invested $105 million of equity and debt in these two transactions, of which Onex’ portion was $47 million. I N V E S T E D C A P I TA L F R O M 2 0 0 4 T O 2 0 0 7 ($ millions) 3,032 1,062 1,193 749 540 132 312 330 04 05 06 07 Onex’ portion of total invested capital Total invested capital Onex Corporation December 31, 2007 3 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 • Onex Real Estate Partners invested $146 million collectively in NY Credit, a real estate specialty finance company, Flushing Town Center, a large-scale commercial and residential development, and Cronus investments, a real estate partnership, in 2007. Onex’ portion of these investments was $134 million. Build our businesses into industry leaders • Onex’ operating company, ClientLogic, acquired and merged with SITEL Corporation during 2007 in a transaction valued at $550 million; the acquisition tripled the size of the business. Now operating as Sitel Worldwide, the company is a leading global provider of outsourced cus- tomer care services. • Emergency Medical Services, Skilled Healthcare and Center for Diagnostic Imaging also com- pleted follow-on acquisitions valued at approximately $180 million to build their businesses. Grow the value of our businesses • Spirit AeroSystems completed a secondary share offering at approximately 10 times Onex’ original cost. Onex sold a portion of its ownership in Spirit AeroSystems, receiving $361 mil- lion in proceeds including a carried interest in the share sales of our limited partners. • Skilled Healthcare completed an initial public offering of shares at US$15.50 per share, almost double Onex’ original cost. Onex sold a portion of its ownership in Skilled Healthcare, receiving $43 million in proceeds including a carried interest in the share sales of our limited partners. • Emergency Medical Services closed the year at an NYSE value that was approximately four times Onex’ original cost. • ONCAP sold WIS and CMC Electronics for more than five times its original invested capital. Onex’ proceeds on these sales was $225 million, including a carried interest. Financial strength • Onex – At December 31, 2007, Onex, the parent company, had approximately $700 million of cash and no debt. • Onex Partners Funds – Onex has third-party committed uncalled capital of $680 million avail- able through the Onex Partners Funds for future Onex-sponsored investments. • ONCAP Funds – ONCAP has third-party committed uncalled capital available in the ONCAP II Fund of approximately $216 million at December 31, 2007 for future ONCAP-sponsored investments. 4 Onex Corporation December 31, 2007 4 Onex Corporation December 31, 2007 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 ALTERNATIVE ASSET MANAGEMENT: Manage and Grow Third-Party Capital Our alternative asset management business provides substantial value for Onex shareholders through the management fees it earns on third-party capital and the carried interest opportunity on that capital. We seek to grow alternative assets under management and create new alternative asset classes. 2007 Performance Manage third-party capital • Onex earned $55 million in management fees in 2007 from the Onex Partners and ONCAP Funds. • In 2007, Onex received total carried interest of $46 million on the realizations by third-party limited partners’ sale of shares of Onex Partners I investments: Spirit AeroSystems and Skilled Healthcare. At the end of 2007, Onex had unrealized carried interest of $85 million, based on the market value of the public entities in Onex Partners I. It also has $2.1 billion of invested capital subject to a carried interest through the private companies held by Onex Partners I, Onex Partners II and ONCAP II. Grow third-party capital • Onex began fundraising for a third large-cap private equity Fund, Onex Partners III, with expected total capital commitments of approximately US$4.5 billion. Approximately US$3.5 bil- lion of total commitments would be provided by third parties, which, when invested, would pro- vide Onex with the opportunity to earn a further and larger carried interest. • Onex established Onex Credit Partners, a US$350 million distressed credit platform, focused on generating attractive, risk-adjusted returns through the purchase of undervalued credit securities. OUR OBJECTIVE: Have the Value Created from Investing and Alternative Asset Management Reflected in Our Share Price 2007 Performance • Onex’ Subordinate Voting Share price was up 23 percent during 2007 to $34.99 per share at December 31, 2007. Onex Corporation December 31, 2007 5 Onex Corporation December 31, 2007 5 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 INDUSTRY SEGMENTS At December 31, 2007, Onex had seven reportable industry segments. A description of our oper- ating companies by industry segment, and Onex’ net economic and voting ownership in those businesses, is presented below. Industry Segments Electronics Manufacturing Services Companies Celestica Inc. (TSX/NYSE: CLS), one of the world’s largest electronics manufacturing services companies for original equipment manufacturers (“OEMs”) (website: www.celestica.com). Revenues: $8.6 billion Assets: $4.4 billion Onex shares held: 27.3 million Ownership (Onex Owns/ Onex Votes) 12%(2)/79% Aerostructures Spirit AeroSystems, Inc. (NYSE: SPR), the largest independent non-OEM designer and manu- facturer of aerostructures in the world (website: www.spiritaero.com). 6%(2)/76% Revenues: $4.1 billion Assets: $3.3 billion Onex shares held: 8.6 million Onex Partners I shares subject to a carried interest: 17.2 million Healthcare Emergency Medical Services Corporation (NYSE: EMS), a leading provider of emergency med- ical services in the United States (website: www.emsc.net). 29%/97% Revenues: $2.3 billion Assets: $1.4 billion Onex shares held: 12.1 million Onex Partners I shares subject to a carried interest: 16.3 million Center for Diagnostic Imaging, Inc., a leading provider of diagnostic and therapeutic radiol- ogy services in the United States (website: www.cdiradiology.com). 19%/100% Revenues: $123 million Assets: $182 million Total Onex, Onex Partners I and Onex management investment at cost: $88 million Onex portion: $21 million Onex Partners I portion subject to a carried interest: $64 million Skilled Healthcare Group, Inc. (NYSE: SKH), an organization of leading skilled nursing and assisted living facilities operators in the United States, specifically in California, Texas, Kansas, Missouri, New Mexico and Nevada, that is focused on treating patients who require a high level of skilled nursing care and extensive rehabilitation therapy (website: www.skilledhealthcare- group.com). 9%/90% Revenues: $678 million Assets: $1.0 billion Onex shares held: 3.5 million Onex Partners I shares subject to a carried interest: 10.7 million Carestream Health, Inc., a leading provider of medical and dental imaging and healthcare information technology solutions (website: www.carestreamhealth.com). 39%/100% Revenues: $1.8 billion(i) Assets: $3.1 billion Total Onex, Onex Partners II and Onex management investment at cost: $521 million Onex portion: $206 million Onex Partners II portion subject to a carried interest: $292 million (i) Represents eight months of revenues following its April 2007 acquisition. Res-Care, Inc.(1) (NASDAQ: RSCR), a leading U.S. provider of residential, training, educational and support services for people with disabilities and special needs (website: www.rescare.com). 6%/25% Revenues: $1.5 billion Assets: $824 million Onex shares held: 2.0 million Onex Partners I shares subject to a carried interest: 6.2 million (1) This investment is accounted for on an equity basis in Onex’ audited annual consolidated financial statements. (2) Onex’ economic ownership percentage excludes shares held in connection with the Management Investment Plan. 6 Onex Corporation December 31, 2007 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 Industry Segments Financial Services Customer Support Services Companies The Warranty Group, Inc., one of the world’s largest providers of extended warranty contracts (website: www.thewarrantygroup.com). Revenues: $1.4 billion Assets: $5.5 billion Total Onex, Onex Partners I, Onex Partners II and Onex management investment at cost: $556 million Onex portion: $175 million Onex Partners I portion subject to a carried interest: $204 million Onex Partners II portion subject to a carried interest: $155 million Ownership (Onex Owns/ Onex Votes) 30%/100% Sitel Worldwide Corporation, a leading global provider of outsourced customer care services (website: www.sitel.com). 66%/88% Revenues: $1.9 billion Assets: $1.0 billion Onex investment at cost: $308 million Metal Services Tube City IMS Corporation, a leading provider of outsourced services to steel mills (website: www.tubecityims.com). 35%/100% Revenues: $1.7 billion(i) Assets: $881 million Total Onex, Onex Partners II and Onex management investment at cost: $234 million Onex portion: $92 million Onex Partners II portion subject to a carried interest: $132 million (i) Represents 11 months of revenues following its January 2007 acquisition. Other Businesses • Theatre Exhibition Cineplex Entertainment Limited Partnership(1) (TSX: CGX.UN), Canada’s largest film exhibi- tion company operating 131 theatres with a total of 1,327 screens under the Cineplex Odeon, Cinema City, Coliseum, Colossus, Famous Players, Galaxy, Scotiabank Theatre and SilverCity brands (website: www.cineplex.com). 22% (2)/(a) Revenues: $805 million Assets: $778 million Onex units held: 12.8 million (a) On April 2, 2007, Onex ceased to have voting rights on certain units of Cineplex Entertainment Limited Partnership held by unitholders other than Onex and accordingly ceased to have the right to appoint a majority of the directors. Onex now has the right to appoint three of the seven directors of the General Partner of Cineplex Entertainment Limited Partnership. • Aircraft & Aftermarket Hawker Beechcraft Corporation(1) , a leading designer and manufacturer of business jet, turbo- prop and piston aircraft (website: www.hawkerbeechcraft.com). 20%/49% Revenues: $3.0 billion(i) Assets: $4.6 billion Total Onex, Onex Partners II and Onex management investment at cost: $564 million Onex portion: $223 million Onex Partners II portion subject to a carried interest: $319 million (i) Represents nine months of revenues following its March 2007 investment. • Commercial Vehicles Allison Transmission, Inc.(1) , the world leader in the design and manufacture of automatic trans- missions for on-highway trucks and buses, off-highway equipment and military vehicles (website: www.allisontransmission.com). 15%/49% Revenues: $903 million(i) Assets: $6.4 billion Total Onex, Onex Partners II, certain limited partners and Onex management investment at cost: $805 million Onex portion: $250 million Onex Partners II portion subject to a carried interest: $357 million (i) Represents four months of revenues following its August 2007 investment. (1) This investment is accounted for on an equity basis in Onex’ audited annual consolidated financial statements. (2) Onex’ economic ownership percentage excludes shares held in connection with the Management Investment Plan. Onex Corporation December 31, 2007 7 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 Industry Segments Other Businesses (cont’d) • Injection Molding Companies Ownership (Onex Owns/ Onex Votes) Husky Injection Molding Systems Ltd., the leading global supplier of injection molding equip- ment and services to the PET plastics industry (website: www.husky.ca). 36%/100% Revenues: $–(i) Assets: $1.6 billion Total Onex, Onex Partners I, Onex Partners II and Onex management investment at cost: $626 million Onex portion: $226 million Onex Partners I portion subject to a carried interest: $97 million Onex Partners II portion subject to a carried interest: $278 million (i) There are no reported revenues since Husky was acquired in mid-December 2007. • Personal Care Products Cosmetic Essence, Inc., a leading provider of outsourced supply chain management services, including manufacturing, filling, packaging and distribution, to the personal care products industry (website: www.cosmeticessence.com). 21%/100% Revenues: $266 million Assets: $275 million Total Onex, Onex Partners I and Onex management investment at cost: $138 million Onex portion: $32 million Onex Partners I portion subject to a carried interest: $100 million • Communications Infrastructure Radian Communication Services Corporation, a wireless communications infrastructure and network services company (website: www.radiancorp.com). 89%/100% Revenues: $90 million Assets: $35 million Onex investment at cost: $107 million • Mid-cap Opportunities ONCAP, a private equity fund focused on acquiring and building the value of mid-capitalization companies based in North America (website: www.oncap.com), which actively manages invest- ments in CSI Global Education Inc., EnGlobe Corp. (TSX: EG), Mister Car Wash and CiCi’s Pizza. 44%/100% Revenues: $396 million Assets: $734 million Total Onex, ONCAP and Onex management investment at cost: $159 million Onex portion: $71 million ONCAP portion: $83 million • Real Estate Onex Real Estate Partners, a platform dedicated to acquiring and improving real estate assets in North America. 86%/100% Onex investment in Onex Real Estate transactions at cost: $158 million(1) • Distressed Credit Onex Credit Partners, a credit investing platform focused on generating attractive risk-adjusted returns through the purchase of undervalued credit securities. 50%/50% Onex investment in Onex Credit Partners’ funds at cost: $50 million (1) Investment at cost in Onex Real Estate excludes Onex’ investment in Town and Country properties as Town and Country has been substantially realized and has returned all of Onex’ invested capital. 8 Onex Corporation December 31, 2007 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 FINANCIAL REVIEW This section discusses the significant changes in Onex’ consolidated statements of earnings, consolidated balance sheets and consolidated statements of cash flow for the fiscal year ended December 31, 2007 compared to those for the year ended December 31, 2006 and, in selected areas, to those for the year ended December 31, 2005. S I G N I F I C A N T E V E N T S I N 2 0 0 7 Onex Credit Partners As part of Onex’ initiative to grow its alternative asset man- A number of significant events occurred during the year agement business, in November 2007, Onex established that affected Onex’ consolidated results for 2007 and their Onex Credit Partners. This credit investing platform focuses comparability to the results for 2006. These events are dis- on generating attractive risk-adjusted returns through the cussed below. These significant events are presented with purchase of undervalued credit securities. Onex acquired the most recent events first. Acquisition of Husky Injection Molding Systems In mid-December 2007, Onex completed the acquisition of a 50 percent interest in GK Capital, which at the time of acquisition had approximately US$300 million of assets under management, and subsequently renamed the busi- ness Onex Credit Partners. Onex retained the entire GK Husky Injection Molding Systems Ltd. (“Husky”) in a trans- Capital team, led by Michael Gelblat and Stuart Kovensky, action valued at $960 million. Onex, Onex Partners LP seasoned credit investing professionals and co-founders (“Onex Partners I”), Onex Partners II LP (“Onex Partners II”) of GK Capital. At December 31, 2007, Onex Credit Partners and management of Onex and Husky collectively invested had US$350 million of assets under management, which $633 million of equity in the transaction for a 100 percent included Onex’ initial US$50 million investment. ownership interest. Onex’ share of that equity investment was $226 million for an initial 36 percent ownership interest. Husky is one of the world’s largest suppliers of Acquisition of Allison Transmission In early August 2007, Onex, in partnership with The Carlyle injection molding equipment and services to the plastics Group, acquired Allison Transmission, Inc. (“Allison industry. The company’s broad product lines offer its Transmission”) from General Motors Corporation in a customers the ability to manufacture a wide range of plas- transaction valued at $5.9 billion. Onex Partners II and The tics products such as bottles and caps for beverages, con- Carlyle Group equally split the total equity investment of tainers for food, automotive components and consumer $1.6 billion (US$1.5 billion). Onex, Onex Partners II, cer- electronics parts. Husky has a sales and service network tain limited partners and Onex management invested consisting of more than 40 offices worldwide, as well approximately $805 million (US$763 million). Onex’ por- as manufacturing facilities in Canada, the United States, tion of that investment was $250 million (US$237 million) Luxembourg and China. for an initial 16 percent ownership interest. Allison Trans- Husky’s financial results from the date of acquisi- mission has been accounted for on an equity basis. tion in mid-December 2007 were not significant to Onex’ Allison Transmission is the world leader in the consolidated results, and therefore, were not consolidated design and manufacture of automatic transmissions for in the audited annual statement of earnings for the year on-highway trucks and buses, off-highway equipment and ended December 31, 2007. As at December 31, 2007, Husky’s military vehicles. The company employs approximately balance sheet has been included in Onex’ audited annual 3,300 people and sells its transmissions through a world- consolidated balance sheet. wide distribution network with sales offices in North America, South America, Europe, Africa and Asia. Allison Transmission generates annual revenues of approximately $2 billion. Onex Corporation December 31, 2007 9 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 Spirit AeroSystems completes $1.2 billion secondary offering In late May 2007, Spirit AeroSystems Holdings, Inc. (“Spirit 40 percent ownership interest. Of the total shares held, Onex holds 3.5 million shares for a 9 percent ownership interest. After giving effect to the stock split at the time of the initial AeroSystems”) completed a secondary offering of approxi- public offering, Onex’ cost of Skilled Healthcare’s stock was mately 34.3 million shares of Class A common stock at a US$8.19 per share. price of US$33.50 per share. Onex, Onex Partners I and cer- tain limited partners sold approximately 31.8 million shares in the offering for gross proceeds of $1.2 billion and re- Acquisition of Carestream Health In late April 2007, Onex completed the $2.6 billion acquisition corded a pre-tax gain of $965 million. Spirit AeroSystems did of the Health Group division of Eastman Kodak Company not issue any new shares as part of this offering. (“Kodak”). Following the purchase, the business continued Onex received net proceeds of $361 million on its operations under the new name of Carestream Health, Inc. portion of the shares sold, including $42 million of carried (“Carestream Health”). Onex, Onex Partners II and manage- interest. Onex recorded a pre-tax gain of $258 million on the ment of Onex and Carestream Health invested $527 million sale of its shares. Onex, Onex Partners I and certain limited in the equity of Carestream Health for a 100 percent owner- partners continue to hold 32.4 million shares of Spirit ship interest. Onex’ share of the total equity was $206 million AeroSystems’ common stock, which represents a 24 percent for an initial 39 percent ownership interest. ownership interest, and continue to retain voting control Carestream Health is a leading global provider of of the company. Onex’ portion of the Spirit AeroSystems medical and dental imaging and healthcare information shares held at December 31, 2007 is 8.6 million shares for a technology solutions. The company’s offerings include digi- 6 percent ownership interest. Skilled Healthcare completes initial public offering In mid-May 2007, Skilled Healthcare Group, Inc. (“Skilled tal x-ray systems, molecular imaging systems and x-ray film, as well as dental imaging products, software and ser- vices. Onex also acquired Kodak’s non-destructive testing business, which sells x-ray film and digital x-ray products to the non-destructive testing market. Healthcare”) completed an initial public offering of ap- Carestream Health’s results from the date of acqui- proximately 19 million shares of Class A common stock sition have been reported in the healthcare segment in (NYSE: SKH) following a stock split. The offering was priced Onex’ audited annual consolidated financial statements. at US$15.50 per share for gross proceeds of approximately $325 million. As part of the offering, Skilled Healthcare issued approximately 8.3 million new common shares while Onex and Onex Partners I sold 10.6 million shares. ONCAP II completes two acquisitions – Mister Car Wash and CiCi’s Pizza In early April 2007, ONCAP II acquired the Mister Car Wash Onex and Onex Partners I received total net proceeds of chain, now the second-largest conveyor car wash business $166 million for their shares sold and recorded a pre-tax in the United States. Mister Car Wash currently operates gain of $68 million. 60 car washes, 24 lube shops and three convenience stores Onex’ portion of the net proceeds was $43 million, in eight regional markets in the western United States. including $4 million of carried interest. Onex recorded a net Mister Car Wash employs more than 2,500 people and pre-tax gain of $13 million on the sale. The issuance of the services more than seven million vehicles a year. Also, in new common shares by Skilled Healthcare resulted in an early June 2007, ONCAP acquired CiCi’s Pizza, a leading additional non-cash accounting dilution gain of $20 million, franchisor of family-oriented “all you want” buffet-style of which Onex’ share was $5 million. Onex, Onex Partners I restaurants serving fresh pizza, pasta, salad and desserts. and Onex management continue to hold 14.8 million shares CiCi’s Pizza has 611 franchised restaurants and 12 CiCi’s To of Skilled Healthcare’s common stock for an approximate Go stores throughout 29 states in the United States. 10 Onex Corporation December 31, 2007 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 Onex, ONCAP II and Onex management invested Hawker 900XP, part of the best-selling business jet family in $105 million of equity and debt in these two acquisitions. the history of the general aviation industry, as well as the Onex’ portion of these investments was $47 million. Onex King Air family of aircraft, the industry’s best-selling turbo- and ONCAP II have an initial 89 percent ownership interest prop line. Hawker Beechcraft is also a significant manufac- in Mister Car Wash and an initial 54 percent ownership turer of military training aircraft for the U.S. Air Force and interest in CiCi’s Pizza. The operations of Mister Car Wash Navy and for a variety of foreign governments. and CiCi’s Pizza have been consolidated in Onex’ other segment with other current ONCAP investments from the dates of their acquisitions. Cineplex Entertainment In early April 2007, Onex ceased to have voting rights on Acquisition of Tube City IMS Onex completed the $730 million acquisition of Tube City IMS Corporation (“Tube City IMS”) in late January 2007; Onex, Onex Partners II and management of Onex and Tube City IMS invested $257 million of equity in the transaction certain units of Cineplex Entertainment Limited Part- for a 100 percent ownership interest. Onex’ share of that nership (“Cineplex Entertainment”) held by other Cineplex equity investment was $92 million for an initial 36 percent Entertainment unitholders. As a result, Onex no longer had ownership interest. sufficient voting rights over the units to continue to elect a Tube City IMS is a leading provider of outsourced majority of the board of the General Partner of Cineplex services to steel mills. Tube City IMS provides raw materials Entertainment, retaining the right to elect three of the procurement, scrap and materials management and slag seven directors. Therefore, beginning in the second quarter processing and other services. The company currently of 2007, Onex no longer consolidates Cineplex Entertain- operates at 69 steel mills in the United States, Canada and ment and now accounts for its 23 percent ownership inter- Europe, and procures materials for mills and foundries est on an equity basis. On a comparative basis, Cineplex worldwide. Entertainment’s results are consolidated in Onex’ audited Tube City IMS’ results have been reported in a new annual consolidated statement of earnings for the year reportable segment – Metal Services – in Onex’ audited ended December 31, 2006. annual consolidated financial statements from the date of the acquisition. Purchase of Hawker Beechcraft In late March 2007, Onex, in partnership with the private equity subsidiary of Goldman Sachs, acquired Raytheon ClientLogic acquires SITEL Corporation In January 2007, ClientLogic Corporation (“ClientLogic”) Aircraft Company in a transaction valued at $3.8 billion. completed the $550 million acquisition of SITEL Corpora- The total initial equity invested by Onex, Onex Partners II tion. ClientLogic and SITEL Corporation were merged and Onex management was $605 million for an initial immediately following this purchase, with the new com- 49 percent ownership interest, of which Onex’ share was pany operating as Sitel Worldwide Corporation (“Sitel $238 million for an initial 20 percent ownership interest. Worldwide”). The acquired business now operates as Hawker Beechcraft Sitel Worldwide is a leading global provider of out- Corporation (“Hawker Beechcraft”) and has been accounted sourced customer care services, offering fully integrated, for on an equity basis. In July 2007, Onex, Onex Partners II world-class customer care and back-office processing and Onex management received a $41 million distribution services. The merger created a company with annualized from Hawker Beechcraft resulting from a purchase price revenues of approximately $1.9 billion and significant adjustment under the purchase agreement. As a result of diversification in its customer base, geographies and service this adjustment, Onex’ investment in Hawker Beechcraft offerings. The company operates more than 155 facilities was reduced by $15 million to $223 million. throughout North America, South America, Europe, Africa Hawker Beechcraft is a leading manufacturer of and Asia Pacific and employs 64,000 associates in 27 coun- business jet, turboprop and piston aircraft through its tries. The merger has enabled annualized cost savings of Hawker and Beechcraft brands. Its products include the more than US$83 million for Sitel Worldwide in 2007. Onex Corporation December 31, 2007 11 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 ONCAP’s sale of WIS and CMC Electronics In January 2007, ONCAP completed the sale of its oper- C O N S O L I D A T E D O P E R A T I N G R E S U L T S ating company, WIS International (“WIS”), for $445 mil- This section should be read in conjunction with Onex’ lion. ONCAP received cash proceeds of $222 million on audited annual consolidated statements of earnings and this sale compared to its $30 million investment made in corresponding notes thereto. 2003. Onex’ share of the proceeds was $80 million, on which Onex recorded a pre-tax gain of $52 million. In March 2007, ONCAP sold its operating com- Critical accounting policies and estimates Onex prepares its financial statements in accordance pany, CMC Electronics Inc. (“CMC Electronics”), which it with Canadian generally accepted accounting principles acquired in 2001. ONCAP received proceeds of $148 million (“GAAP”). The preparation of these financial statements in on this sale, bringing total proceeds realized by ONCAP on conformity with Canadian GAAP requires management CMC Electronics to $284 million compared to its $70 mil- of Onex and management of the operating companies to lion investment. Onex’ proceeds from the sale, including make estimates and assumptions that affect the reported those from its direct investment in CMC Electronics, were amounts of assets and liabilities, disclosures of contingent $145 million. Onex recorded a pre-tax gain of $90 million assets and liabilities, and the reported amounts of rev- on these proceeds. Including these proceeds, the total enues and expenses for the period of the consolidated amount Onex has received on CMC Electronics is $261 mil- financial statements. Significant accounting policies and lion compared to an investment of $63 million in 2001. methods used in the preparation of the financial state- The gains on the sales of WIS and CMC Elec- ments are described in note 1 to the December 31, 2007 tronics were reported as earnings from discontinued oper- audited annual consolidated financial statements. Onex ations in the audited annual consolidated statement of and its operating companies evaluate their estimates earnings for the year ended December 31, 2007. Share repurchases under Onex’ Normal Course Issuer Bid During 2007, Onex repurchased 3,357,000 Subordinate and assumptions on a regular basis based on historical experience and other relevant factors. Included in Onex’ consolidated financial statements are estimates used in determining the allowance for doubtful accounts, inventory valuation, the valuation of intangible assets and Voting Shares under its Normal Course Issuer Bid at an goodwill, the useful lives of property, plant and equip- average cost per share of $33.81 for a total cost of $113 mil- ment and intangible assets, revenue recognition under lion. Onex’ shareholders’ equity at December 31, 2007 has contract accounting, pension and post-employment bene- been reduced for the effect of these repurchases of fits, losses and loss adjustment expenses reserves, restruc- Subordinate Voting Shares. turing costs and other matters. Actual results could differ Onex believes that it is in the best interest of its materially from those estimates and assumptions. remaining shareholders to repurchase its Subordinate The assessment of goodwill, intangible assets and Voting Shares when they are trading at prices that reflect long-lived assets for impairment, the determination of in- a significant discount from their value as perceived come tax valuation allowances, contract accounting, devel- by Onex. opment costs and losses and loss adjustment expenses reserves require the use of judgements, assumptions and estimates. Due to the material nature of these factors, they are discussed here in greater detail. 12 Onex Corporation December 31, 2007 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 Impairment tests of goodwill, intangible assets Contract accounting and long-lived assets In the aerostructures segment, the contract method of Goodwill represents the cost of investments in operating accounting requires that revenues from each contract be companies in excess of the fair value of the net identifiable recognized in accordance with the percentage-of-comple- assets acquired. Essentially all of the goodwill amount that tion method of accounting, using the units-of-delivery appears on Onex’ audited annual consolidated balance method. As a result, contract accounting uses various esti- sheets at December 31, 2007 and 2006 was recorded by mating techniques to project costs to completion and esti- the operating companies. Goodwill is not amortized, but mates of recoveries asserted against the customer for assessed for impairment at the reporting unit level annu- changes in specifications. These estimates involve assump- ally, or sooner if events or changes in circumstances or tions of future events, including the quantity and timing of market conditions indicate that the carrying amount could deliveries and labour performance and rates, as well as pro- exceed fair value. The test for goodwill impairment used by jections relative to material and overhead costs. Contract our operating companies is to assess the fair value of each estimates are re-evaluated periodically and changes in esti- reporting unit within an operating company and determine mates are reflected in the current period. if the goodwill associated with that unit is less than its car- During 2007, Onex’ operating company, Spirit Aero- rying value. This assessment takes into consideration sev- Systems, recognized revenues under the contract method of eral factors, including, but not limited to, future cash flows accounting, using the units-of-delivery method. The com- and market conditions. If the fair value is determined to be pany follows this method of accounting as a significant lower than the carrying value at an individual reporting portion of its revenues are under long-term, volume-based unit, then goodwill is considered to be impaired and an pricing contracts that require delivery of products over sev- impairment charge must be recognized. Each operating eral years. company has developed its own internal valuation model to determine the fair value. These models are subjective and Development costs require management of the particular operating company Included in deferred charges in Onex’ audited annual con- to exercise judgement in making assumptions about future solidated balance sheets are capitalized development costs results, including revenues, operating expenses, capital of Spirit AeroSystems primarily associated with that com- expenditures and discount rates. pany’s product development on The Boeing Company’s The impairment test for intangible assets and (“Boeing”) 787 aircraft. These development costs are amor- long-lived assets with limited lives is similar to that of tized over the first 500 production units. goodwill. Losses and loss adjustment expenses reserves Income tax valuation allowance The Warranty Group, Inc. (“The Warranty Group”) records An income tax valuation allowance is recorded against losses and loss adjustment expenses reserves, which repre- future income tax assets when it is more likely than not that sent the estimated ultimate net cost of all reported and some portion or all of the future income tax assets recog- unreported losses on warranty contracts. The reserves for nized will not be realized prior to their expiration. The unpaid losses and loss adjustment expenses are estimated reversal of future income tax liabilities, projected future tax- using individual case-basis valuations and statistical analy- able income, the character of income tax assets, tax plan- ses. These estimates are subject to the effects of trends in ning strategies and changes in tax laws are some of the loss severity and frequency claims reporting patterns of factors taken into consideration when determining the val- The Warranty Group’s third-party administrators. While uation allowance. A change in these factors could affect the there is considerable variability inherent in these esti- estimated valuation allowance and income tax expense. mates, management of The Warranty Group believes the Note 14 to the audited annual consolidated financial state- reserves for losses and loss adjustment expenses are ade- ments provides additional disclosure on income taxes. quate and appropriate, and they continually review and adjust those reserves as necessary as experience develops or new information becomes known. Onex Corporation December 31, 2007 13 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 New accounting policies in 2007 Financial instruments, hedges and comprehensive income Variability of results Onex’ audited annual consolidated operating results may vary substantially from year to year for a number of rea- On January 1, 2007, Onex adopted the Canadian Institute sons, including some of the following: acquisitions or dis- of Chartered Accountants Handbook (“CICA Handbook”) positions of businesses by Onex, the parent company; the Section 3855, “Financial Instruments – Recognition and volatility of the exchange rate between the Canadian dollar Measurement”; Section 3865, “Hedges”; Section 1530, “Com- and certain foreign currencies, primarily the U.S. dollar; prehensive Income”; and Section 3861, “Financial Instru- the change in market value of stock-based compensation ments – Disclosure and Presentation”. Under these new for both the parent company and its operating companies; standards, Onex is required to measure certain securities changes in the market value of Onex’ publicly traded oper- and hedging derivatives at fair value and include a new line ating companies; and activities at Onex’ operating compa- called accumulated other comprehensive earnings in the nies. These activities may include the purchase or sale of consolidated statements of shareholders’ equity and com- businesses; fluctuations in customer demand and in mate- prehensive earnings to report unrealized gains or losses, all rials and employee-related costs; changes in the mix of net of income taxes, related to certain available-for-sale products and services produced or delivered; and charges securities, cash flow hedges and foreign exchange gains or to restructure operations. The discussion that follows losses on the net investment in self-sustaining operations. identifies material factors that affected Onex’ operating The adoption of these standards did not have segments and audited annual consolidated results for the a significant effect on the audited annual consolidated year ended December 31, 2007. financial statements. The comparative audited annual con- solidated financial statements have not been restated for the adoption of these new standards other than to reclassify Consolidated revenues Consolidated revenues were $23.4 bil- the change in currency translation adjustment to a compo- lion, up 26 percent from $18.6 billion in nent of accumulated other comprehensive earnings. For 2006 and up 52 percent from $15.5 bil- details of the specific accounting changes and related lion in 2005. A percentage breakdown T O TA L R E V E N U E S ($ millions) 23,433 impacts, see note 1 to the audited annual consolidated of total revenues by industry segment 18,620 financial statements. is provided in the following charts for the years ended December 31, 2007, 15,451 2006 and 2005. Segmented Total Consolidated Revenue Breakdown 20 07 20 06 2 0 0 5 a. 37% b. 18% c. 20% d. 6% e. 8% f. 7% x. 4% a. 54% b. 19% c. 16% d. 1% e. 4% x. 6% 07 06 05 a. 66% b. 9% c. 14% e. 5% x. 6% a. Electronics Manufacturing Services b. Aerostructures c. Healthcare d. Financial Services e. Customer Support Services f. Metal Services x. Other (1) (1) 2007 and 2006 other include Cineplex Entertainment, CEI, Radian, ONCAP, Onex Real Estate and the parent company. 2005 other includes Cineplex Entertainment, CEI, Radian and the parent company. 14 Onex Corporation December 31, 2007 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 Table 1 presents revenues by industry segment in Canadian evaluating the performance of those businesses year-over- dollars and in the functional currency of the companies in year since it eliminates the impact of foreign currency 2007, 2006 and 2005 and the percentage change in revenues translation on revenues. The discussion that follows will for those periods. Onex believes that reporting revenues in review the factors that affected the change in revenues by the operating companies’ functional currencies is useful in industry segment. Changes in Revenues by Industry Segment TABLE 1 ($ millions) Canadian Dollars Functional Currency Year ended December 31 2007 2006 Change (%) 2007 2006 Change (%) Electronics Manufacturing Services $ 8,617 $ 9,982 Aerostructures Healthcare Financial Services Customer Support Services Metal Services Other (b) Total 4,147 4,826 1,399 1,868 1,676 900 3,631 2,920 118(a) 749 – 1,220 $ 23,433 $ 18,620 (14)% 14 % 65 % 1,086 % 149 % – (26)% 26 % US$ 8,070 US$ 3,861 US$ 4,573 US$ 1,304 US$ 1,748 US$ 1,575 C$ 900 US$ 8,812 US$ 3,208 US$ 2,575 US$ 103(a) US$ 660 – C$ 1,220 (8)% 20 % 78 % 1,166 % 165 % – (26)% Results are reported in accordance with Canadian generally accepted accounting principles. These results may differ from those reported by the individual operating companies. (a) Represents one month of revenues from The Warranty Group’s November 2006 acquisition date. (b) 2007 and 2006 other include Cineplex Entertainment, CEI, Radian, ONCAP, Onex Real Estate and the parent company. ($ millions) Canadian Dollars Functional Currency Year ended December 31 2006 2005 Change (%) 2006 2005 Change (%) Electronics Manufacturing Services $ 9,982 $ 10,257 Aerostructures Healthcare Financial Services Customer Support Services Other (c) Total 3,631 2,920 118(b) 749 1,220 1,436(a) 2,126 – 686 946 $ 18,620 $ 15,451 (3)% 153 % 37 % – 9 % 29 % 21 % US$ 8,812 US$ 3,208 US$ 2,575 US$ 103(b) US$ 660 C$ 1,220 US$ 8,471 US$ 1,208(a) US$ 1,758 – US$ 584 C$ 946 4% 166% 46% – 13% 29% Results are reported in accordance with Canadian generally accepted accounting principles. These results may differ from those reported by the individual operating companies. (a) Represents six-and-a-half months of revenues from Spirit AeroSystems’ mid-June 2005 acquisition date. (b) Represents one month of revenues from The Warranty Group’s November 2006 acquisition date. (c) 2006 other includes Cineplex Entertainment, CEI, Radian, ONCAP, Onex Real Estate and the parent company. 2005 other includes Cineplex Entertainment, CEI, Radian and the parent company. Onex Corporation December 31, 2007 15 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 Electronics Manufacturing Services Celestica Inc. (“Celestica”) reported revenues of $8.6 billion Revenues grew at Spirit AeroSystems in 2007 due primarily to a 14 percent A E R O S T R U C T U R E S (US$ millions) in 2007 (37 percent of Onex’ total consolidated revenues in increase in shipments to Boeing on its 3,861 2007), down 14 percent from $10.0 billion in 2006 (54 percent B737, B747, B767 and B777 programs over of Onex’ total consolidated revenues in 2006). In the com- 2006 and delivery of the first B787 pro- 3,208 pany’s functional currency, Celestica reported US$8.1 billion duction forward fuselage. In total, Spirit in 2007, an 8 percent decline from US$8.8 billion in 2006. AeroSystems’ shipments to Boeing and Approximately 75 percent of Celestica’s revenue decrease Airbus increased 27 percent year-over- resulted from program losses and customer disengagements year. In addition, Spirit AeroSystems’ ac- 1,208 primarily in the industrial and communications markets. quisition of Spirit AeroSystems (Europe) Lower volumes primarily from customers in the commu- Ltd. (“Spirit Europe”) in April 2006 con- nications market also contributed to the year-over-year tributed $149 million of Spirit AeroSys- decline in revenues. Partially offsetting these revenue tems’ total revenue growth in 2007. declines was a 3 percent increase in revenues over 2006 The aerostructures segment was from new customers, new program wins and stronger end a new reportable segment in 2005 fol- market demand in the consumer and server markets. lowing Onex’ acquisition of Spirit Aero- 07 06 05 (a) (a) Represents six-and- a-half months of revenues following its acquisition date. Celestica reported revenues of Systems in mid-June 2005. The 2006 results represent a full $10.0 billion in 2006, a 3 percent decline from $10.3 billion in 2005 (66 percent of Onex’ total consolidated revenues in 2005). In the company’s functional cur- rency, Celestica reported revenues of US$8.8 billion in 2006, up 4 percent from US$8.5 billion in 2005. Celestica’s revenue growth in its functional cur- rency was primarily from new cus- tomers in the consumer electronics sector that more than offset the decline in its telecommunications and com- puting sectors resulting from demand weakness and program disengagements. E L E C T R O N I C S M A N U FA C T U R I N G S E R V I C E S (US$ millions) 8,812 8,471 8,070 year of operations compared to six-and-a-half months of revenues reported in 2005. This is the major reason for the significant increase in revenues in 2006. In addition, the acquisition of Spirit Europe in April 2006 added revenues of $355 million for the balance of 2006. Healthcare The healthcare segment revenues include the operations of Emergency H E A LT H C A R E (US$ millions) Medical Services, Center for Diagnos- 4,573 07 06 05 tic Imaging, Skilled Healthcare and Carestream Health. The healthcare seg- ment reported consolidated revenues of $4.8 billion in 2007 (20 percent of Onex’ total consolidated revenues 2,575 1,758 Aerostructures Spirit AeroSystems’ revenues were $4.1 billion (18 percent of in 2007), up 65 percent from $2.9 bil- lion in 2006 (16 percent of Onex’ total Onex’ total consolidated revenues in 2007), up 14 percent consolidated revenues in 2006). The from $3.6 billion (19 percent of Onex’ total consolidated rev- revenue increase in the healthcare enues in 2006). In the company’s functional currency, Spirit segment was primarily due to the April 07 06 05 AeroSystems reported revenues of US$3.9 billion in 2007, up 2007 acquisition of Carestream Health. $653 million, or 20 percent, from US$3.2 billion for 2006. 16 Onex Corporation December 31, 2007 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Table 2 provides revenues by operating company in the healthcare segment for 2007, 2006 and 2005 in both Canadian dollars and the companies’ functional currencies. Res-Care, Inc. (“ResCare”) is accounted for by the equity method and thus the company’s revenues are not consolidated. Healthcare Revenues TABLE 2 ($ millions) Canadian Dollars Functional Currency Year ended December 31 2007 2006 Change (%) 2007 2006 Change (%) Emergency Medical Services $ 2,262 $ 2,194 Center for Diagnostic Imaging Skilled Healthcare Carestream Health 123 678 1,763(a) 123 603 – Total $ 4,826 $ 2,920 3 % – 12 % – 65 % US$ 2,107 US$ 115 US$ 635 US$ 1,716(a) US$ 1,934 US$ 109 US$ 532 – US$ 4,573 US$ 2,575 9% 6% 19% – 78% Results are reported in accordance with Canadian generally accepted accounting principles. These results may differ from those reported by the individual operating companies. (a) Carestream Health’s financial results are from the date of acquisition on April 30, 2007 to December 31, 2007. ($ millions) Canadian Dollars Functional Currency Year ended December 31 2006 2005 Change (%) 2006 2005 Change (%) Emergency Medical Services $ 2,194 $ 2,002 Center for Diagnostic Imaging Skilled Healthcare 123 603 124 –(a) Total $ 2,920 $ 2,126 10 % (1)% – 37% US$ 1,934 US$ 109 US$ 532 US$ 1,656 US$ 102 –(a) US$ 2,575 US$ 1,758 17% 7% – 46% Results are reported in accordance with Canadian generally accepted accounting principles. These results may differ from those reported by the individual operating companies. (a) Skilled Healthcare’s financial results for the four days from the date of acquisition on December 27, 2005 to December 31, 2005 were not significant to Onex’ consolidated results. Accordingly, the company’s revenues for those four days were not included in Onex’ audited annual consolidated statement of earnings for the year ended December 31, 2005. Emergency Medical Services from 2006. The growth in AMR’s revenues was due primarily During 2007, Emergency Medical Services Corporation to higher transport revenues from AMR’s acquisitions of (“EMSC”) reported revenues of $2.3 billion, up 3 percent, or Abbott Ambulance, based in St. Louis, Missouri and Medic- $68 million, from $2.2 billion in 2006. In the company’s West Ambulance, based in Las Vegas, Nevada. EmCare is a functional currency, EMSC’s revenues grew 9 percent to leading provider of outsourced emergency department US$2.1 billion in 2007 from US$1.9 billion in 2006. EMSC staffing and management services in the United States. The operates its business under two subsidiaries: American company generates income from hospital contracts for Medical Response, Inc. (“AMR”) and EmCare Holdings Inc. emergency department staffing, hospitalist and radiology (“EmCare”). AMR is a leading provider of ambulance trans- services and other management services. EmCare con- port services in the United States. AMR provides emergency tributed US$888 million of EMSC’s total revenues in 2007, 911 ambulance transport services and non-emergency up 19 percent from US$745 million in 2006. Several factors ambulance transport services, including critical care trans- contributed to EmCare’s revenue growth: approximately fer, wheelchair transports and other inter-facility trans- US$72 million was from net new hospital contracts in 2007 ports. It also offers training, dispatch centres and other and the inclusion of a full year of revenues from net new services to communities and public safety agencies. AMR hospital contracts in 2006; and approximately US$71 million generated approximately US$1.2 billion of EMSC’s total rev- was from existing contracts due primarily to an 8 percent enues in 2007, an increase of US$30 million, or 3 percent increase in revenue per patient visit from third-party payors. Onex Corporation December 31, 2007 17 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 During 2006, EMSC’s revenues were $2.2 billion, Skilled Healthcare up 10 percent, or $192 million, from $2.0 billion in 2005. In Skilled Healthcare has two revenue segments: long-term the company’s functional currency, EMSC’s revenues grew care services and ancillary services. The majority of its rev- 17 percent to US$1.9 billion in 2006 from US$1.7 billion enues are from long-term care services, which include in 2005. AMR generated approximately US$1.2 billion of skilled nursing care and integrated rehabilitation therapy EMSC’s total revenues in 2006 compared to US$1.1 billion services to residents in the company’s network of skilled in 2005. The 12 percent, or US$130 million, growth in AMR’s nursing facilities. In addition, the company earns ancillary revenues was due primarily to the inclusion of a full service revenue by providing related healthcare services, 12 months of revenues compared to the 11 months of rev- such as rehabilitation therapy services, to third-party facili- enues in 2005 following Onex’ acquisition of EMSC in ties and hospice care. Skilled Healthcare reported revenues February 2005 and to the additional revenues generated of $678 million, an increase of $75 million, or 12 percent, from AMR’s acquisition of Air Ambulance Specialists in from $603 million in 2006. In the company’s functional cur- July 2006 (US$12 million). EmCare contributed US$745 mil- rency, Skilled Healthcare reported revenues of US$635 mil- lion of EMSC’s total revenues in 2006, up 25 percent from lion, up US$103 million, or 19 percent, from US$532 million US$596 million in 2005. Several factors contributed to last year. EmCare’s revenue growth: approximately US$42 million Long-term care services revenues increased was from new hospital contracts in 2006; an approximate US$87 million, or 19 percent, to US$557 million in 2007 due 5 percent increase in new patient visits from existing con- primarily to a 19 percent increase in skilled nursing facili- tracts; higher revenue per patient visit of approximately ties revenues (US$85 million) and to a 12 percent increase 7 percent; as well as the inclusion of a full 12 months of in assisted living facilities revenues (US$2 million); these revenues in 2006 compared to 11 months in 2005 following increases in long-term care services resulted primarily the acquisition. Center for Diagnostic Imaging from higher reimbursement rates from Medicare, Medi- caid, managed care and private pay sources, as well as higher patient acuity mix and US$57 million from higher Center for Diagnostic Imaging (“CDI”) operates 41 diag- occupancy as a result of add-on acquisitions completed in nostic imaging centres in 10 markets in the United States, 2006 and 2007 in Missouri and New Mexico. Ancillary ser- providing imaging services such as magnetic resonance vices increased US$16 million, or 24 percent, in 2007 com- imaging (MRI), computed tomography (CT), diagnostic pared to 2006. and therapeutic injection procedures and other proce- For the year ended December 31, 2006, Skilled dures such as PET/CT, conventional x-ray, mammography Healthcare reported revenues of $603 million, or US$532 mil- and ultrasound. CDI reported revenues of $123 million in lion in the company’s functional currency. Long-term care both 2007 and 2006. Excluding the impact of foreign cur- service revenue accounted for US$470 million of total 2006 rency translation, CDI reported revenues of US$115 million revenues while US$62 million of revenues were from ancil- in 2007, up 6 percent from US$109 million in 2006. The lary services. Included in Skilled Healthcare’s revenues for growth in revenues in 2007 was due primarily to new centres 2006 is acquisition revenue growth of US$9 million from (US$2 million) and a 6 percent increase in MRI volumes the three acquisitions that the company completed in the at existing centres. For the year ended December 31, 2007, year. The company’s financial results for the four days from approximately 65 percent of CDI’s revenues were derived its December 27, 2005 acquisition date to December 31, from MRI services, 12 percent from CT services, 10 percent 2005 were not significant to Onex’ consolidated results and from diagnostic and therapeutic injections and the balance accordingly, Skilled Healthcare’s revenues are not included from other services. in the healthcare segment of Onex’ consolidated revenues Reported revenues for CDI totalled $123 million in for the year ended December 31, 2005. 2006, down slightly from $124 million in 2005. Excluding the impact of foreign currency translation, CDI’s revenues grew 7 percent to US$109 million in 2006 from US$102 million in 2005 due primarily to new centres opened in 2006. 18 Onex Corporation December 31, 2007 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 Carestream Health Carestream Health, acquired in late April 2007, reported 2007 Financial Services During 2007, The Warranty Group reported revenues of revenues from the time of its acquisition totalling $1.8 bil- $1.4 billion (6 percent of Onex’ total consolidated revenues in lion, or US$1.7 billion in the company’s functional currency. 2007) compared to $118 million (less than 1 percent of Onex’ The company provides products and services for the cap- total consolidated revenues in 2006) of ture, processing, viewing, sharing, printing and storing of revenues reported in 2006. Excluding the images and information for medical and dental applica- impact of foreign currency translation, F I N A N C I A L S E R V I C E S (US$ millions) tions. The company also has a non-destructive testing busi- The Warranty Group reported revenues 1,304 ness, which sells x-ray film and digital radiology products of US$1.3 billion in 2007 compared to to the non-destructive testing market. Carestream Health’s US$103 million for the year ended De- revenues are in five reportable segments: Medical Film cember 31, 2006. The Warranty Group’s and Printing Solutions, Dental, Digital Capture Solutions, revenues consist of warranty revenues, Healthcare Information Solutions and Other. During 2007, insurance premiums and administrative the Medical Film and Printing Solutions segment, which and marketing fees earned on warranties provides digital and film products to the medical industry, and service contracts for manufacturers, accounted for US$866 million of total 2007 revenues; retailers and distributors of consumer 103 US$348 million of revenues were reported in the Dental seg- electronics, appliances, homes and autos 07 06 (1) ment, which provides film products, digital products and as well as credit card enhancements (1) Represents one dental practice management software products to the dental and travel and leisure programs through industry; the Digital Capture Solutions segment, which pro- a global organization. Of The Warranty vides computed radiology and digital radiology systems Group’s total revenues in 2007, approxi- month of revenues following its November 2006 acquisition. and service to the medical and non-destructive testing mately US$1.0 billion was from premiums earned on war- industry, accounted for US$326 million of revenues in 2007; ranty contracts and US$0.3 billion from contract fees and US$134 million of revenues were reported in the Healthcare other income. Information Solutions segment, which provides solutions The financial services segment was a new report- that address radiology and cross-enterprise information able segment in 2006 following Onex’ acquisition of The technology needs of hospitals; and the balance was in the Warranty Group in late November 2006. The 2007 results other segment. represent a full year of operations compared to one month of revenues reported in 2006. This is the major reason for the significant increase in revenues from 2006. Onex Corporation December 31, 2007 19 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 Customer Support Services Sitel Worldwide (formerly ClientLogic Corporation) reported revenues of $1.9 billion (8 percent of Onex’ total C U S T O M E R S U P P O R T S E R V I C E S (US$ millions) consolidated revenues in 2007), up 1,748 $1.1 billion from $749 million in 2006 (4 percent of Onex’ total consolidated revenues in 2006). In the company’s functional currency, Sitel Worldwide’s Metal Services The metal services segment is a new reportable segment in 2007 following Onex’ acquisition of Tube City IMS in January 2007. Reported 2007 revenues for Tube City IMS represent 11 months of revenues from the time of its acqui- sition, which totalled $1.7 billion (7 percent of Onex’ total consolidated revenues in 2007), or US$1.6 billion in the company’s functional currency. Tube City IMS has two rev- enue categories: service revenue and revenue from the sale revenues grew 165 percent to US$1.7 bil- 660 584 of materials. Service revenue is generated from scrap man- lion in 2007 from US$660 million in 2006. The acquisition of SITEL Corpora- tion in January 2007 accounted for the majority of the increase in revenues agement, scrap preparation, raw materials optimization, metal recovery and sales, material handling or product handling, slag or co-product processing and metal recovery 07 06 05 services and surface conditioning. Revenue from the sale (US$1.0 billion) in 2007. In addition, higher volumes from of materials is mainly generated by the company’s raw new and existing customers, as well as favourable foreign materials procurement business, but also includes revenue currency translation from the weakening of the U.S. dollar, from two locations in Tube City IMS’ pre-production mate- boosted Sitel Worldwide’s revenues in the year. rials handling business that purchase, process and sell For the year ended December 31, 2006, Sitel scrap inventory for its operations in addition to receiving Worldwide reported revenues of $749 million, up $63 mil- service revenue through scrap handling services to steel lion, or 9 percent, from $686 million in 2005 (5 percent of mill customers. During 2007, service revenues totalled Onex’ total consolidated revenues in 2005). Excluding the US$0.4 billion and revenues from raw materials procure- impact of foreign currency translation, Sitel Worldwide’s ment were US$1.2 billion. revenues grew 13 percent to US$660 million in 2006 from US$584 million in 2005. Customer contact management revenue grew by US$76 million due primarily to new cus- Injection Molding Husky is one of the world’s largest suppliers of injection tomers of US$86 million, partially offset by lower revenues molding equipment and services to the plastics industry. of US$10 million from existing customers who did not The company’s operating financial results for the few days from its mid-December 2007 acquisition date to December 31, 2007 were not significant to Onex’ consoli- dated results. Accordingly, Husky’s revenues were not in- cluded in Onex’ consolidated revenues for the year ended December 31, 2007. Other Businesses The other businesses segment primarily includes the rev- enues of Cosmetic Essence, Inc. (“CEI”), the ONCAP compa- nies – CSI Global Education Inc. (“CSI”), EnGlobe Corp. (“EnGlobe”), Mister Car Wash and CiCi’s Pizza – Radian Communication Services Corporation (“Radian”) and Cine- plex Entertainment. continue or renew their contracts. 20 Onex Corporation December 31, 2007 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Table 3 provides revenues by operating company in the other businesses segment for 2007, 2006 and 2005 in both Canadian dollars and the companies’ functional currencies. Other Businesses Revenues TABLE 3 ($ millions) Canadian Dollars Functional Currency Year ended December 31 2007 2006 Change (%) 2007 2006 Change (%) CEI ONCAP companies(a) Radian Cineplex Entertainment(b) Other Total $ 266 $ 292 396 90 179 (31) 27 132 741 28 (9)% 1,367 % (32)% (76)% (211)% US$ 249 US$ 257 C$ 396 C$ 90 C$ 179 C$ (31) C$ 27 C$ 132 C$ 741 C$ 28 (3)% 1,367 % (32)% (76)% (211)% $ 900 $ 1,220 (26)% Results are reported in accordance with Canadian generally accepted accounting principles. These results may differ from those reported by the individual operating companies. (a) 2007 ONCAP companies include CSI, EnGlobe, Mister Car Wash and CiCi’s Pizza. 2006 ONCAP companies include CSI. There were no comparative 2005 revenues for ONCAP companies since revenues of WIS and CMC Electronics were reclassified to discontinued operations in 2006 and 2005 following ONCAP’s sale of those businesses in 2007. (b) 2007 revenues represents three months of operations consolidated by Onex due to the change in accounting from consolidation to equity basis of accounting beginning in April 2007. This compares to a full 12 months of revenues in 2006. ($ millions) Canadian Dollars Functional Currency Year ended December 31 2006 2005 Change (%) 2006 2005 Change (%) CEI ONCAP companies(a) Radian Cineplex Entertainment Other Total $ 292 $ 304 27 132 741 28 – 134 491 17 $ 1,220 $ 946 (4)% – (2)% 51 % 65 % 29 % US$ 257 US$ 253 C$ 27 C$ 132 C$ 741 C$ 28 – C$ 134 C$ 491 C$ 17 2 % – (2)% 51 % 65 % Results are reported in accordance with Canadian generally accepted accounting principles. These results may differ from those reported by the individual operating companies. (a) 2006 ONCAP companies include CSI. There were no comparative 2005 revenues for ONCAP companies since revenues of WIS and CMC Electronics were reclassified to discontinued operations in 2006 and 2005 following ONCAP’s sale of those businesses in 2007. CEI’s reported revenues were $266 million in 2007 (1 per- 2006, up US$4 million, or 2 percent, from US$253 million cent of Onex’ total consolidated revenues in 2007), down in 2005. The growth in revenues in 2006 was primarily 9 percent from $292 million (2 percent of Onex’ total con- from new customers and the inclusion of a full year of rev- solidated revenues in 2006) last year. Excluding the impact enues from Hauer Custom Manufacturing, Inc., acquired of foreign currency translation, CEI’s revenues were down in April 2005. 3 percent to US$249 million in 2007 from US$257 million in ONCAP’s companies – CSI, EnGlobe, Mister Car Wash 2006 due primarily to the company’s decision to exit its and CiCi’s Pizza – reported combined revenues of $396 mil- license product business, slightly offset by net higher rev- lion in 2007 (2 percent of Onex’ total consolidated revenues enues from new and existing customers. For the year ended in 2007), up $369 million from $27 million reported in 2006 December 31, 2006, CEI generated revenues of $292 mil- (less than 1 percent of Onex’ total consolidated revenues in lion, down 4 percent from $304 million in 2005 (2 percent of 2006). Approximately $197 million of the revenue growth for Onex’ total consolidated revenues in 2005). In the company’s 2007 was due to ONCAP’s acquisitions of Mister Car Wash, functional currency, CEI’s revenues were US$257 million in now the second-largest conveyor car wash business in the Onex Corporation December 31, 2007 21 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 United States, in April 2007 and CiCi’s Pizza, a leading fran- chisor of family-oriented “all you want” buffet-style restau- Consolidated cost of sales Consolidated cost of sales was $19.2 billion in 2007 com- rants, in June 2007. The balance of the 2007 revenue growth pared to $16.2 billion in 2006. A breakdown of the percent- was from the inclusion of a full year of revenues of EnGlobe, age of total cost of sales by industry segment is provided in acquired in November 2006, as well as higher revenues at CSI the charts below for the years ended December 31, 2007 due to that company’s purchase of the assets of the Institute of and 2006. Canadian Bankers in early 2007. There are no comparative rev- enues for 2005 since ONCAP completed its investments in CSI Segmented Total Consolidated Cost of Sales Breakdown 2 0 07 2 0 0 6 a. 42% b. 18% c. 19% d. 4% e. 6% f. 8% x. 3% a. 58% b. 18% c. 15% d. 1% e. 3% x. 5% a. Electronics Manufacturing Services b. Aerostructures c. Healthcare d. Financial Services e. Customer Support Services f. Metal Services x. Other (1) (1) 2007 and 2006 other include Cineplex Entertainment, CEI, Radian, ONCAP and the parent company. and EnGlobe in 2006. ONCAP’s businesses – WIS and CMC Electronics – previously reported revenues in 2006 and 2005 were reclassified in 2006 and reported as discontinued. Radian reported revenues of $90 million (less than 1 percent of Onex’ total consolidated revenues in 2007) compared to $132 million in 2006 (less than 1 percent of Onex’ total consolidated revenues in 2006) and $134 mil- lion in 2005 (1 percent of Onex’ total consolidated revenues in 2005). The 32 percent decline in revenues in 2007 was due primarily to the sale of a business division. Revenues for 2006 were down 2 percent from 2005 due largely to a delay in the start of some large customer contracts in the United States and a weak broadcast tower manufacturing market in 2006. During 2007, Onex consolidated $179 million of revenues of Cineplex Entertainment, which represented three months of operations. In early April 2007, Onex ceased to have voting rights on certain units of Cineplex Entertainment held by other Cineplex Entertainment unitholders. As a result, Onex no longer has sufficient vot- ing rights over the units to continue to elect a majority of the board of the General Partner of Cineplex Entertain- ment. Therefore, beginning in the second quarter of 2007, Onex changed the accounting for Cineplex Entertainment to be on an equity basis, and no longer consolidated Cineplex Entertainment’s revenues. This compares to fully consolidating Cineplex Entertainment’s revenues in 2006 of $741 million and of $491 million in 2005. The growth in rev- enues in 2006 over 2005 was due primarily to the acquisi- tion of Famous Players in July 2005. In addition, the negative reported revenues in the other segment for 2007 was due primarily to a lower valua- tion of Onex Capital Management’s (“OCM”) U.S. securities. 22 Onex Corporation December 31, 2007 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Table 4 provides a detailed breakdown of reported cost of companies. Cost of sales is provided in the companies’ sales by industry segment for 2007 and 2006 and the per- functional currencies to eliminate the impact of foreign centage change in cost of sales from those periods in both currency translations on cost of sales. Canadian dollars and the functional currencies of the Changes in Cost of Sales by Industry Segment TABLE 4 ($ millions) Canadian Dollars Functional Currency Year ended December 31 2007 2006 Change (%) 2007 2006 Change (%) Electronics Manufacturing Services $ 8,079 $ 9,378 Aerostructures Healthcare Financial Services Customer Support Services Metal Services Other (b) Total 3,344 3,659 727 1,205 1,529 643 2,919 2,423 60(a) 453 – 928 $ 19,186 $ 16,161 (14)% 15 % 51 % 1,112 % 166 % – (31)% 19 % US$ 7,563 US$ 3,112 US$ 3,455 US$ 677 US$ 1,128 US$ 1,437 C$ 643 US$ 8,277 US$ 2,579 US$ 2,135 US$ 52(a) US$ 399 – C$ 928 (9)% 21 % 62 % 1,202 % 183 % – (31)% Results are reported in accordance with Canadian generally accepted accounting principles. These results may differ from those reported by the individual operating companies. (a) Represents one month of cost of sales from The Warranty Group’s November 2006 acquisition date. (b) 2007 and 2006 other include Cineplex Entertainment, CEI, Radian, ONCAP and the parent company. Table 5 provides additional details on cost of sales as a per- centage of revenues by industry segment for 2007 and 2006. Electronics Manufacturing Services Celestica’s cost of sales was $8.1 billion in 2007 compared Cost of Sales as a Percentage of Revenues rency, cost of sales decreased 9 percent to US$7.6 billion in to $9.4 billion in 2006. In the company’s functional cur- by Industry Segment 2007 from US$8.3 billion in 2006. This decline was in line with the 8 percent decline in Celestica’s revenues in the TABLE 5 2007 2006 company’s functional currency. Cost of sales as a percent- Electronics Manufacturing Services Aerostructures Healthcare Financial Services Customer Support Services Metal Services Other(a) Total 94% 81% 76% 52% 65% 91% 71% 82% 94% 80% 83% 51% 60% – 76% 87% Results are reported in Canadian dollars and in accordance with Canadian generally age of revenues was 94 percent in 2007, unchanged from 2006. Celestica reported gross profit of US$507 million in 2007, down 5 percent from US$535 million in 2006. The decline in gross profit was due primarily to lower volumes, underutilization of facilities in Europe and higher costs associated with customer disengagements at its Mexican facility, which more than offset the benefits from the com- pany’s restructuring plans and operational efficiencies. Included in the gross profit of 2006 was a net charge of US$36 million taken at two of its facilities in the accepted accounting principles. These results may differ from those reported by the Americas. The majority of the charge consisted of addi- individual operating companies. (a) 2007 and 2006 other include Cineplex Entertainment, CEI, Radian, ONCAP and the parent company. tional inventory provisions recorded in Mexico to cover excess inventory created by demand reductions. Onex Corporation December 31, 2007 23 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 Aerostructures Cost of sales at Spirit AeroSystems was $3.3 billion in 2007 Healthcare The healthcare segment reported cost of sales of $3.7 billion compared to $2.9 billion in 2006. Excluding the impact of in 2007 compared to $2.4 billion in 2006. Table 6 provides foreign currency translation, Spirit AeroSystems booked cost cost of sales by operating company in the healthcare seg- of sales of US$3.1 billion in 2007 compared to US$2.6 billion ment for 2007 and 2006 in both Canadian dollars and the in 2006. Cost of sales in the company’s functional currency companies’ functional currencies. was up 21 percent compared to a 20 percent increase in revenues. Cost of sales as a percentage of revenues was 81 percent in 2007 compared to 80 percent in 2006. Healthcare Cost of Sales TABLE 6 ($ millions) Canadian Dollars Functional Currency Year ended December 31 2007 2006 Change (%) 2007 2006 Change (%) Emergency Medical Services $ 1,972 $ 1,923 Center for Diagnostic Imaging Skilled Healthcare Carestream Health 39 520 1,128(a) 40 460 – Total $ 3,659 $ 2,423 3 % (3)% 13 % – 51 % US$ 1,838 US$ 36 US$ 486 US$ 1,095(a) US$ 1,695 US$ 36 US$ 404 – US$ 3,455 US$ 2,135 8% – 20% – 62% Results are reported in accordance with Canadian generally accepted accounting principles. These results may differ from those reported by the individual operating companies. (a) Carestream Health’s financial results are from the date of acquisition on April 30, 2007 to December 31, 2007. Emergency Medical Services Center for Diagnostic Imaging EMSC reported cost of sales of $2.0 billion in 2007 compared Cost of sales for CDI was $39 million in 2007 and $40 mil- to $1.9 billion in 2006. In the company’s functional currency, lion in 2006. Excluding the impact of foreign currency cost of sales for EMSC was US$1.8 billion in 2007 compared translation, reported cost of sales for CDI was US$36 mil- to US$1.7 billion in 2006. Cost of sales recorded by the AMR lion for both 2007 and 2006. Cost of sales was 32 percent subsidiary was US$1.1 billion in 2007, essentially unchanged of revenues in 2007 compared to 33 percent in 2006. The from 2006. The EmCare subsidiary reported cost of sales of decline in cost of sales as a percentage of revenues in 2007 US$754 million in 2007 compared to US$644 million in 2006. was due primarily to a 6 percent increase in revenues in The overall increase in EMSC’s cost of sales in 2007 was due the company’s functional currency while cost of sales primarily to higher revenues as discussed previously in this remained essentially unchanged. report. Cost of sales as a percentage of revenues was 87 per- cent in 2007, essentially unchanged from 2006. 24 Onex Corporation December 31, 2007 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 Skilled Healthcare Skilled Healthcare’s cost of sales totalled $520 million in Financial Services The Warranty Group reported cost of sales of $727 million in 2007, up 13 percent, or $60 million, from $460 million in 2007 compared to $60 million in 2006. Excluding the impact 2006. In the company’s functional currency, cost of sales of foreign currency translation, cost of sales of The Warranty for Skilled Healthcare was US$486 million in 2007, up Group was US$677 million in 2007 compared to US$52 mil- US$82 million from US$404 million in 2006. Long-term lion in 2006. It is important to note that 2006 cost of sales services cost of sales increased 18 percent, or US$66 mil- represents one month of operations following Onex’ acqui- lion, in 2007 over 2006 due primarily to higher operating sition of The Warranty Group in late November 2006. The costs per patient day and to higher occupancy. Much of Warranty Group’s cost of sales consists primarily of the the increase in operating costs per patient day at skilled change in reserves for future warranty and insurance claims, nursing facilities was due to higher labour costs (US$13 mil- current claims payments, administrative and marketing lion) resulting from a 6 percent increase in hourly rate, and expenses, deferred acquisition costs and related amortiza- additional staffing, particularly in the nursing area, for tion for warranties and service contracts for manufacturers, higher acuity patient mix. Cost of sales from ancillary ser- retailers and distributors of consumer electronics, appli- vices increased US$24 million, or 28 percent, in 2007 com- ances, homes and autos as well as credit card enhance- pared to 2006 due primarily to higher ancillary revenues ments and travel and leisure programs. from new and existing rehabilitation therapy contracts. Cost of sales as a percentage of revenue at Skilled Healthcare was 77 percent in 2007, up slightly from 76 percent in 2006. Carestream Health Customer Support Services For the year ended December 31, 2007, Sitel Worldwide reported cost of sales of $1.2 billion, up $752 million from $453 million of cost of sales in 2006. In Sitel Worldwide’s Cost of sales of Carestream Health from the time of its functional currency, the company reported cost of sales of acquisition in April 2007 was $1.1 billion, or US$1.1 billion US$1.1 billion in 2007 compared to US$399 million in 2006. in the company’s functional currency. Cost of sales by the The significant increase in cost of sales was due to the company’s reportable segments was US$570 million for the acquisition of and merger with SITEL Corporation in Medical Film and Printing Solutions segment, US$170 mil- January 2007. Sitel Worldwide’s cost of sales as a percentage lion for the Dental segment, US$228 million for the Digital of revenues was 65 percent in 2007 compared to 60 percent Capture Solutions segment, US$99 million for the Health- in 2006. The increase in cost of sales as a percentage of care Information Solutions segment and the balance in the revenues was driven primarily by the acquired SITEL Cor- other segment. Cost of sales as a percentage of revenues poration customer contracts carrying a lower margin con- was 64 percent in 2007. Cost of sales was higher than what tribution percentage than legacy ClientLogic customers, as would normally be the case due primarily to a $102 million well as the adverse impact of a weakened U.S. dollar on one-time charge included in cost of sales in 2007 originating customer contracts billed in U.S. dollars but serviced from from the step up in value of inventory on the company’s bal- off-shore operations. ance sheet at the date of acquisition. Accounting principles for acquisitions require that inventory be stepped up in value to the selling price of the inventory less the direct Metal Services The cost of sales for Tube City IMS totalled $1.5 billion, or cost to complete and sell the product. Therefore, when the US$1.4 billion in the company’s functional currency, for stepped up inventory is subsequently sold in the normal the 11-month period following Onex’ acquisition of the course of business, cost of sales is increased for the effect of company. Cost of sales as a percentage of revenues was the inventory step-up with the result that the accounting 91 percent in 2007. Much of the cost of sales of Tube City for these sales will not report the typical profit margins for IMS is associated with the procurement cost of scrap the company. materials for its customers. Onex Corporation December 31, 2007 25 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 Other Businesses The other businesses segment reported cost of sales of $643 million in 2007 compared to $928 million in 2006. Table 7 pro- vides cost of sales by operating company in the other businesses segment for 2007 and 2006 in both Canadian dollars and the companies’ functional currencies. Other Businesses Cost of Sales TABLE 7 ($ millions) Canadian Dollars Functional Currency Year ended December 31 CEI ONCAP companies(a) Radian Cineplex Entertainment(b) Other Total 2007 $ 200 222 73 148 – 2006 Change (%) 2007 2006 Change (%) $ 214 (7)% US$ 187 US$ 189 2 114 594 4 11,000 % (36)% (75)% – (31)% C$ 222 C$ 73 C$ 148 – C$ 2 C$ 114 C$ 594 C$ 4 (1)% 11,000 % (36)% (75)% – $ 643 $ 928 Results are reported in accordance with Canadian generally accepted accounting principles. These results may differ from those reported by the individual operating companies. (a) 2007 ONCAP companies include CSI, EnGlobe, Mister Car Wash and CiCi’s Pizza. 2006 ONCAP companies include CSI. (b) 2007 cost of sales represents three months of operations consolidated by Onex due to the change in accounting from consolidation to equity basis of accounting beginning in April 2007. This compares to a full 12 months of cost of sales in 2006. CEI reported cost of sales of $200 million, or US$187 million The ONCAP companies reported cost of sales of in the company’s functional currency, in 2007. This com- $222 million in 2007 compared to $2 million in 2006. As pares to cost of sales of $214 million, or US$189 million in was the case with revenues, substantially all of the cost of the company’s functional currency, in 2006. Cost of sales was sales increase was associated with the acquisitions of 75 percent of revenues in 2007, up 2 percent from 73 percent Mister Car Wash and CiCi’s Pizza completed in 2007, as well in 2006. The increase in CEI’s cost of sales in its functional as the inclusion of a full year of cost of sales of EnGlobe. currency was due primarily to a shift in product mix. Radian’s cost of sales was $73 million in 2007 com- pared to $114 million in 2006. As a percentage of revenues, the company’s cost of sales was 81 percent in 2007 com- pared to 86 percent in 2006. 26 Onex Corporation December 31, 2007 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 Operating earnings Operating earnings is defined as earnings before interest Onex uses operating earnings as a measure to evaluate each operating company’s performance because it elimi- expense, amortization of intangible assets and deferred nates interest charges, which are a function of the oper- charges, and income taxes. As Onex’ objective is to achieve ating company’s particular financing structure, as well as an operating earnings measurement of our businesses, any unusual or non-recurring charges. Onex’ method of the Company also excludes earnings (loss) from equity- determining operating earnings may differ from other accounted investments, foreign exchange gains (loss), companies’ methods and, accordingly, operating earnings stock-based compensation charges, non-recurring items may not be comparable to measures used by other compa- such as acquisition and restructuring charges, other in- nies. Operating earnings are not a performance measure come, gains on sales of operating investments, as well as under Canadian GAAP and should not be considered non-controlling interests and discontinued operations. either in isolation of, or as a substitute for, net earnings Table 8 provides a reconciliation of the audited annual con- prepared in accordance with Canadian GAAP. solidated statements of earnings to operating earnings for Consolidated operating earnings of $1.7 billion in the years ended December 31, 2007 and 2006. 2007 were up 49 percent, or $550 million, from $1.1 billion Operating Earnings Reconciliation TABLE 8 ($ millions) 2007 2006 in 2006. Table 9 provides a breakdown of and the change in operating earnings (loss) by industry segment for the years ended December 31, 2007 and 2006. Earnings before the undernoted items $ 2,084 $ 1,372 Operating Earnings (Loss) by Industry Segment Amortization of property, plant and equipment Interest income (535) 125 (370) 122 Operating earnings $ 1,674 $ 1,124 Amortization of intangible assets and deferred charges Interest expense of operating companies Earnings (loss) from equity-accounted investments Foreign exchange gains (loss) Stock-based compensation Other income (409) (537) (44) (118) (150) 6 Gains on sales of operating investments, net 1,144 Acquisition, restructuring and other expenses (123) Writedown of goodwill and intangible assets Writedown of long-lived assets (7) (15) (91) (339) 25 22 (634) 9 1,307 (292) (10) (3) Earnings before income taxes, non-controlling interests and discontinued operations $ 1,421 $ 1,118 TABLE 9 ($ millions) 2007 2006 Change ($) Electronics Manufacturing Services Aerostructures Healthcare Financial Services Customer Support Services Metal Services Other (a) Total $ 162 $ 201 $ (39) 552 453 402 97 35 (27) 501 250 43 54 – 75 51 203 359 43 35 (102) $ 1,674 $ 1,124 $ 550 Results are reported in Canadian dollars and in accordance with Canadian generally accepted accounting principles. These results may differ from those reported by the individual operating companies. (a) Other includes Cineplex Entertainment, CEI, Radian, ONCAP and the parent company. Onex Corporation December 31, 2007 27 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 During 2007, Onex’ overall operating earnings growth was Husky’s operating earnings for the few days from its driven by several factors: mid-December 2007 acquisition date to December 31, 2007 • a $51 million increase in Spirit AeroSystems’ operating were not significant and therefore not included in Onex’ earnings resulting primarily from the inclusion of a full consolidated operating earnings in 2007. Looking forward to year of operating earnings for Spirit Europe following 2008, we expect that Husky will report an operating loss in its acquisition in April 2006 and increased product the first and second quarters of 2008 due to the effect of pur- deliveries at Spirit AeroSystems’ existing North Ameri- chase price accounting on the company’s opening balance can operations; sheet, in particular regarding inventory. Accordingly, when • the inclusion of a full 12 months of operating earnings that inventory is subsequently sold in the normal course of of The Warranty Group, acquired in November 2006 business, for accounting purposes these sales will not report ($359 million) reported in the financial services segment; the typical profit margins and so will not cover the operating • Onex’ acquisitions of Tube City IMS in January 2007 costs of the business in that period. ($35 million), reported in the metal services segment; and of Carestream Health in April 2007 ($177 million) in the healthcare segment representing the initial period of Onex’ ownership from April 2007 to December 31, 2007. Amortization of intangible assets and deferred charges Amortization of intangible assets and deferred charges Included in Carestream Health’s operating earnings was totalled $409 million in 2007, up $318 million from $91 mil- a $102 million charge originating from the opening valu- lion in 2006. The increase in amortization of intangible ation of inventory on the company’s balance sheet at the assets and deferred charges resulted primarily from the date of acquisition. Accounting principles for acquisi- inclusion of a full year of amortization of intangible assets tions require that inventory be stepped up in value to its of The Warranty Group ($175 million) and from the inclu- selling price less the direct cost to complete and sell sion of eight months of amortization of Carestream Health the product. Accordingly, when that inventory is subse- ($116 million), acquired in April 2007. quently sold in the normal course of business, cost of sales is increased for the effect of the inventory step-up with the result that the accounting for these sales will Interest expense of operating companies Onex has a policy to structure each of its operating compa- not report the typical profit margins for the company; nies with sufficient equity in the company to enable it to • the SITEL Corporation acquisition in January 2007 by self-finance a significant portion of its acquisition cost with ClientLogic primarily boosted operating earnings in the a prudent level of debt. The level of debt assumed is com- customer support services segment by $43 million; mensurate with the operating company’s available cash • higher revenues and improved operating costs increased flow, including consideration of funds required to pursue operating earnings at EMSC by $18 million; and growth opportunities. It is the responsibility of the acquired • $24 million of operating earnings from ONCAP’s acquisi- operating company to service its own debt obligations. tions of Mister Car Wash and CiCi’s Pizza. Consolidated interest expense was up $198 million Partially offsetting the growth in operating earnings was details the change in consolidated interest expense from a $39 million reduction in operating earnings at Celestica 2006 to 2007. to $537 million in 2007 from $339 million in 2006. Table 10 in 2007 stemming primarily from lower revenues and a $52 million operating loss in the other segment recorded by OCM, which resulted primarily from a lower valuation of OCM’s U.S. securities. In addition, the change in accounting of Cineplex Entertainment from consolidation to equity accounting as previously discussed resulted in a $47 million reduction in operating earnings in 2007, which was also reported in the other segment. 28 Onex Corporation December 31, 2007 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 a US$675 million term loan and a US$85 million revolving credit facility. The new facility was used to repay Client- Logic’s previous facility and to fund the purchase of SITEL $ 339 Corporation in January 2007 as well as three additional acquisitions. Partially offsetting these expenses was lower re- ported interest expense at Skilled Healthcare of $5 million in 2007 due primarily to the company using proceeds received on the sale of new common shares in its initial public offering in May 2007 to redeem US$70 million of its 11 percent senior subordinated notes, partially offset by borrowings to fund its 2007 acquisitions. Earnings (loss) from equity-accounted investments Earnings from equity-accounted investments in 2007 rep- resent Onex’ and/or Onex Partners’ portion of the earnings (loss) of Allison Transmission; Cineplex Entertainment; Hawker Beechcraft; ResCare; Cypress Insurance Group (Florida & Texas) (“Cypress”), a homeowners’ insurance company; and Onex Real Estate’s investments in the Camden partnerships, Flushing Town Center and NY Credit. Onex reported a loss on equity-accounted investments of $44 million in 2007 compared to earnings of $25 million last year. Table 11 details the earnings (loss) of equity-accounted investments by company, as well as Onex’ share of those earnings (loss). Change in Interest Expense TABLE 10 ($ millions) Reported interest expense for 2006 Additional interest expense in 2007 due to: A full year of The Warranty Group interest expense Acquisitions: Tube City IMS Carestream Health Sitel Worldwide Interest expense reductions due to: Skilled Healthcare’s repayment of debt using proceeds from its initial public offering Other Reported interest expense for 2007 13 41 122 35 (5) (8) $ 537 The Warranty Group, acquired in November 2006, added $13 million in interest expense in 2007 as a result of the inclusion of a full 12 months of that company’s interest expense compared to approximately one month in 2006. The inclusion of the debt associated with the acquisitions of Tube City IMS in January 2007 and Carestream Health in April 2007 added a further $41 million and $122 million, respectively, of interest expense in 2007. Sitel Worldwide added $35 million in interest expense in 2007 due to additional interest costs associated with the company’s new larger credit facility, consisting of Earnings (Loss) from Equity-accounted Investments TABLE 11 ($ millions) 2007 2006 Allison Transmission(b) Cineplex Entertainment(c) Hawker Beechcraft(b) ResCare Other (d) Total Net earnings (loss)(a) Onex’ share of net earnings (loss) Net earnings(a) Onex’ share of net earnings $ (75) $ (24) $ – $ – 7 (4) 11 17 7 (2) 3 17 – – 10 15 – – 2 15 $ (44) $ 1 $ 25 $ 17 (a) The net earnings (loss) represent Onex’ and/or Onex Partners’ share of the net earnings (loss) in those businesses. (b) Onex completed its investments in Hawker Beechcraft and Allison Transmission in March and August 2007, respectively. (c) Beginning in the second quarter of 2007, Onex changed the accounting for Cineplex Entertainment to be on an equity basis. (d) Other includes Cypress and Onex Real Estate. Onex Corporation December 31, 2007 29 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 Allison Transmission contributed $75 million of the loss on equity-accounted investments. Approximately $50 million Stock-based compensation During 2007, stock-based compensation expense was of the loss was due to the step-up in value of the inventory $150 million compared $634 million in 2006. Table 12 pro- on the company’s balance sheet at the date of acquisition. vides a breakdown of and the change in stock-based Accounting principles for acquisitions require that inven- compensation by industry segment for the years ended tory be stepped up in value to the selling price of the inven- December 31, 2007 and 2006. tory less the direct cost to complete and sell the product. Accordingly, when that inventory is subsequently sold in Stock-based Compensation Expense (Income) the normal course of business, for accounting purposes by Industry Segment these sales will not report the typical profit margins for the company and therefore, will not cover the operating costs TABLE 12 ($ millions) 2007 2006 Change ($) of the business in that period leading to the operating loss. Electronics Manufacturing In addition, included in Allison Transmission’s loss was a Services deferred tax provision of $29 million associated with the Aerostructures company’s indefinite life assets. Onex’ share of Allison Trans- Healthcare mission’s net loss was $24 million. Financial Services Partially offsetting this loss was $7 million of Onex’ Customer Support Services share of the net earnings of Cineplex Entertainment and Other (a) $14 million of Onex’ share of Cypress’ net earnings in 2007. Onex, the parent company $ 14 36 $ 23 438 $ (9) (402) 3 3 2 3 89 3 – (1) 2 – 3 3 1 169 (80) Cypress reported strong profitability in 2007 largely due to lower claims from a mild hurricane season. Foreign exchange gains (loss) Foreign exchange gains (loss) reflect the impact of changes in foreign currency exchange rates, primarily on the U.S.- dollar-denominated cash held at Onex, the parent company. Total $ 150 $ 634 $ (484) Results are reported in Canadian dollars and in accordance with Canadian generally accepted accounting principles. These results may differ from those reported by the individual operating companies. (a) Other includes Cineplex Entertainment, CEI and ONCAP. Stock-based compensation expense declined by $484 mil- For the year ended December 31, 2007, a consol- lion in 2007 due primarily to: • a $402 million decrease in stock-based compensation expense recorded by Spirit AeroSystems. This change was primarily associated with a charge that Spirit AeroSystems recorded in the fourth quarter of 2006 relating to the com- pany’s Union Equity Participation plan following Spirit AeroSystems’ initial public offering of shares in November 2006; the total value of the Union Equity Participation plan was $343 million. Additionally, Spirit AeroSystems recorded stock-based compensation charges in 2006 associated with the revaluation of prior common stock purchases and restricted stock awards to other employ- ees of Spirit AeroSystems as a result of the initial public offering and the rise in value of its stock plans; and idated net foreign exchange loss of $118 million was re- corded due primarily to the decrease in the value of the U.S. dollar relative to the Canadian dollar; the exchange rate was 0.9913 Canadian dollars at December 31, 2007 compared to 1.1654 Canadian dollars at December 31, 2006. Since Onex, the parent company, holds a significant portion of its cash in U.S. dollars, this exchange rate move- ment decreased the value of the U.S. cash held and Onex recorded a foreign exchange loss of $132 million in 2007. Partially offsetting the foreign exchange loss was foreign exchange gains recorded at the operating companies. During 2006, a net consolidated foreign exchange gain of $22 million was recorded due primarily to the slight increase in the value of the U.S. dollar relative to the Cana- dian dollar to 1.1654 Canadian dollars at December 31, 2006 compared to 1.1630 Canadian dollars at December 31, 2005. Onex, the parent company, accounted for $10 million of the total consolidated foreign exchange gains in 2006. 30 Onex Corporation December 31, 2007 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 • an $80 million decrease compared to 2006 in stock-based ance of the change in the stock-based compensation compensation expense recorded by Onex, the parent expense was due primarily to the revaluation of the lia- company. Included in the 2006 stock-based compensa- bility for Onex’ stock options. There was a 50 percent tion expense was a $49 million charge associated with increase in the market value of Onex shares in 2006 com- the unrealized value of the investment rights under the pared to a 23 percent increase in 2007. While there was an Management Investment Plan of Spirit AeroSystems fol- increase in value of the liability in both years, the lowing that company’s initial public offering. The bal- increase was greater in 2006. Gains on sales of operating investments Consolidated gains on sales of operating investments were $1.1 billion in 2007 compared to $1.3 billion in 2006. Table 13 details the nature of the gains recorded in 2007 compared to 2006, as well as Onex’ share of those gains. Gains on Sales of Operating Investments TABLE 13 ($ millions) 2007 2006 Gains on: Issue of shares by Sitel Worldwide Sale of shares of Skilled Healthcare Dilution gain on issue of shares by Skilled Healthcare Sale of shares by Spirit AeroSystems Dilution gain on issue of shares by Spirit AeroSystems Carried interest Sale of units of Cineplex Entertainment Dilution gain on June 2006 issue of units by Cineplex Entertainment Other, net Total Total gains Onex’ share of gains Total gains Onex’ share of gains $ 36 68 20 965 – 48 – – 7 $ 36 $ 13 5 258 – 48 – – 7 – – – 1,146 100 – 25 12 24 $ – – – 314 29 – 25 6 24 $ 1,144 $ 367 $ 1,307 $ 398 Sitel Worldwide Skilled Healthcare During the second quarter of 2007, certain investors, other In mid-May 2007, Skilled Healthcare completed an initial than Onex, invested $36 million in the equity of Sitel public offering of common stock. As part of that offering, Worldwide. In prior years, Onex had to record the losses Skilled Healthcare issued 8.3 million new common shares; of non-controlling interests of ClientLogic prior to the Onex and Onex Partners I sold 10.6 million shares. Onex’ acquisition of SITEL Corporation as the non-controlling portion of the shares sold was 2.5 million shares for net pro- interests amount in the company cannot be recorded as ceeds of $43 million, including a carried interest of $4 mil- a negative amount. While Onex did not receive the cash lion. The gain that was recorded has two components: a gain proceeds, for consolidation reporting purposes Onex is on the shares sold and an accounting dilution gain resulting required to record the amount paid in by the investors in from the new common share issuance at a value above the Sitel Worldwide as a gain. Onex will continue to record net book value per share. The gain on shares sold by Onex gains until the losses from non-controlling investors have and Onex Partners I was $68 million, of which Onex’ portion been recovered. was $13 million. The non-cash accounting dilution gain re- corded from the new common share issuance was $20 mil- lion, of which Onex’ portion was $5 million. Onex Corporation December 31, 2007 31 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 Spirit AeroSystems entitled to 60 percent. Under the terms of the partnership In late May 2007, Spirit AeroSystems completed a $1.2 bil- agreements, Onex may receive carried interest as realiza- lion secondary offering of 34.3 million shares of Class A tions occur. The ultimate amount of carried interest common stock. Onex, Onex Partners I and certain limited earned will be based on the overall performance of each of partners sold approximately 31.8 million shares in the Onex Partners I and II, independently, and includes typical offering for net proceeds of $1.1 billion. Onex’ portion of catch-up and clawback provisions. Accordingly, any car- the shares sold was 9.2 million shares for net proceeds of ried interest amounts received by Onex are deferred from $361 million, including carried interest received of $42 mil- inclusion in income for accounting purposes until such lion. A $965 million pre-tax gain on the sale of Spirit Aero- time that the potential for clawback is remote. Systems shares was recorded in the second quarter, of which Table 14 provides a reconciliation of the deferred Onex’ portion was $258 million. carried interest on Onex’ balance sheet as at December 31, In late November 2006, Spirit AeroSystems com- 2006 to the carried interest deferred as at December 31, 2007. pleted a US$1.7 billion initial public offering of common stock. As part of that offering, Spirit AeroSystems issued Carried Interest Reconciliation 10.4 million new shares; Onex, Onex Partners I and certain limited partners sold 48.3 million shares. The gain that was TABLE 14 ($ millions) recorded has two components: a gain on the shares sold Carried interest deferred at December 31, 2006 and an accounting dilution gain resulting from the new Carried interest received on realizations: share issuance at a value above the net book value per Spirit AeroSystems’ secondary offering share. The gain on shares sold by Onex, Onex Partners I Skilled Healthcare’s initial public offering and certain limited partners was $1.1 billion, of which Onex’ Carried interest recorded as gains on sales share was $314 million. Onex’ share of the net proceeds was of operating investments in 2007 $439 million, including a carried interest of $49 million. The non-cash accounting dilution gain recorded from the new share issuance was $100 million, of which Onex’ portion Carried interest deferred at December 31, 2007 $ 60 42 4 (48) $ 58 was $29 million. Carried interest During 2007, Onex received carried interest of $4 million and $42 million, respectively, on the realized gains of Skilled Healthcare and Spirit AeroSystems, as discussed The General Partners of Onex Partners I and II, which are earlier. Onex determined that, with these realizations, the controlled by Onex, are entitled to a carried interest of potential for clawback was remote on a significant portion 20 percent on the realized gains of third-party limited of the carried interest received. Accordingly, Onex recorded partners in each Fund, subject to an 8 percent compound $48 million of carried interest in gains on sales of oper- annual preferred return to those limited partners on all ating investments during the second quarter of 2007. Onex amounts contributed in each particular Fund. Onex, as continues to defer from inclusion in income a further sponsor of Onex Partners I and II, is entitled to 40 percent $58 million of carried interest that has been received as of the carried interest and the Onex management team is cash as of December 31, 2007. 32 Onex Corporation December 31, 2007 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 Acquisition, restructuring and other expenses Acquisition, restructuring and other expenses are consid- ered to be costs incurred by the operating companies to Non-controlling interests in earnings (losses) of operating companies In the audited annual consolidated statements of earnings, realign organizational structures or restructure manufac- the non-controlling interests amount represents the inter- turing capacity to obtain operating synergies critical to ests of shareholders other than Onex in the net earnings or building the long-term value of those businesses. Acquisi- losses of Onex’ operating companies and in the gains on tion, restructuring and other expenses totalled $123 million sales of operating investments. During 2007, this amount in 2007, down from $292 million reported in 2006. Table 15 was $1.0 billion of Onex’ operating companies’ earnings details acquisition, restructuring and other expenses by and gains compared to $838 million in 2006. Table 16 details operating company. the earnings (losses), including gains, by industry segment attributable to non-controlling shareholders in our oper- Acquisition, Restructuring and Other Expenses ating companies. TABLE 15 ($ millions) Celestica Spirit AeroSystems Carestream Health Other Total 2007 $ 39 12 43 29 2006 $ 240 31 – 21 $ 123 $ 292 Non-controlling Interests in Earnings (Losses) of Operating Companies TABLE 16 ($ millions) 2007 2006 Electronics Manufacturing Services $ (17) $ (153) Aerostructures Healthcare Financial Services Restructuring expenses at Celestica were lower by $201 mil- Customer Support Services lion in 2007 compared to 2006. Many of the costs, which Metal Services were spread over several reporting periods, were recorded in Other(a) connection with Celestica’s restructuring plans to rationalize Minority interest of gains on sales its manufacturing network to lower demand levels and to of operating investments 777 915 reduce its overhead costs. These restructuring plans include reducing workforce and consolidating facilities. Partially offsetting that decline was $43 million of acquisition, restructuring and other expenses recorded by Carestream Health relating to the transition and set-up of that company’s operations as a stand-alone business fol- lowing its separation from Kodak. Income taxes During 2007, the consolidated income tax provision was $295 million compared to a provision of $24 million in 2006. Most of the provision in income taxes in 2007 was recorded by Spirit AeroSystems ($177 million), The War- ranty Group ($67 million) and EMSC ($39 million). Total $ 1,017 $ 838 (a) 2007 other includes Cineplex Entertainment, CEI, Allison Transmission, Hawker Beechcraft, Radian, ONCAP, Onex Real Estate and the parent company. 2006 other includes Cineplex Entertainment, CEI, Radian, ONCAP, Onex Real Estate and the parent company. A significant change in the non-controlling interests amount in 2007 was due to the participation of the other limited part- ners of Onex Partners I in the $762 million of gains recorded as a result of the Spirit AeroSystems secondary offering and the Skilled Healthcare initial public offering. A further $15 million resulted from the portion of other limited part- ners in the non-cash accounting dilution gain recorded as a result of Skilled Healthcare’s new common share issuance at a value per share above the net book value per share. In addition, the public offerings of shares of Spirit AeroSystems in November 2006 and May 2007 increased the ownership by shareholders other than Onex. This increased the non-controlling interest in the net earnings as shown in the aerostructures segment. Onex Corporation December 31, 2007 33 264 29 87 4 (7) (120) 99 53 15 6 – (97) 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 Earnings from continuing operations Onex’ consolidated earnings from continuing operations, Earnings from continuing operations in the healthcare segment for the year ended December 31, 2007 were down including gains on sales of operating investments, were $58 million from 2006 due primarily to a loss from contin- $109 million ($0.85 per share) in 2007 compared to earn- uing operations reported by Carestream Health. This loss ings from continuing operations of $256 million ($1.93 per resulted primarily from costs stemming from the valuation share) in 2006 and earnings of $827 million ($5.95 per of inventory on the company’s balance sheet at the date share) reported in 2005. Table 17 details the earnings (loss) of its acquisition. Accounting principles for acquisitions from continuing operations by industry segment before require that inventory be stepped up in value to its selling income taxes, non-controlling interests and discontinued price less the direct cost to complete and sell the product. operations. Earnings from Continuing Operations TABLE 17 ($ millions) 2007 2006 2005 Earnings (loss) before income taxes and non-controlling interests: Electronics Manufacturing Accordingly, when that inventory is subsequently sold in the normal course of business, the accounting for these sales will not report the typical profit margins for the com- pany and therefore, will not cover the operating costs of the business in that period leading to the reported loss. The amount of $102 million recorded by Carestream Health was a pre-tax step-up in inventory. The increase in loss in the other segment in 2007 $ 1 $ (160) $ (39) was due primarily to the foreign exchange loss of $132 mil- lion recorded by Onex, the parent company, on its U.S. cash. This compares to a foreign exchange gain of $10 mil- lion recorded by Onex, the parent company, in 2006. In addition, the loss from continuing operations in the other segment includes the $75 million loss from equity-accounted investments of Allison Transmission and a $52 million operating loss on OCM as previously discussed. (1) 51 – (7) – (27) 921 898 (70) Services Aerostructures Healthcare Financial Services Customer Support Services Metal Services Other(a) Gains on sales of operating 469 55 192 11 (18) (433) (22) 113 32 23 – (175) investments 1,144 1,307 Provision for income taxes Non-controlling interests of 1,421 (295) 1,118 (24) operating companies (1,017) (838) (1) Earnings from continuing operations $ 109 $ 256 $ 827 (a) 2007 other includes Cineplex Entertainment, CEI, Hawker Beechcraft, Allison Transmission, Radian, ONCAP, Onex Real Estate and the parent company. 2006 other includes Cineplex Entertainment, CEI, Radian, ONCAP, Onex Real Estate and the parent company. 2005 other includes Cineplex Entertainment, CEI, Radian and the parent company. 34 Onex Corporation December 31, 2007 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 Earnings from discontinued operations Earnings from discontinued operations were $119 mil- gains (loss) on sales of operating investments as well as Onex’ share of earnings (loss) of those businesses that lion ($0.93 per share) in 2007 compared to $746 million were discontinued in 2007 and in fiscal 2006. ($5.62 per share) in 2006. Table 18 provides a breakdown of earnings (loss) by company, including the net after-tax Earnings from Discontinued Operations TABLE 18 ($ millions) 2007 Sale of WIS Sale of CMC Electronics Sale of certain Town and Country properties J.L. French Automotive Sky Chefs InsLogic Sale of CSRS Sale of Futuremed Sitel Worldwide’s warehouse management business Gain, net of tax Onex’ share of loss $ 41 76 4 – – – – – – $ – – (2) – – – – – – Total $ 41 76 2 – – – – – – 2006 Onex’ share of earnings (loss) Gain (loss), net of tax Total $ – – 45 615 50 2 21 19 (2) $ 7 $ 7 (15) – – – – – (3) 7 7 30 615 50 2 21 19 (5) Total $ 121 $ (2) $ 119 $ 750 $ (4) $ 746 As discussed in the significant events section on page 9 of French Automotive Castings, Inc. (“J.L. French Automotive”), this report, during 2007 the operations of WIS, CMC Elec- Canadian Securities Registration Systems Ltd. (“CSRS”), tronics and certain Town and Country properties were Futuremed Health Care Products Limited Partnership classified as discontinued. In addition to these operations, (“Futuremed”) and Sitel Worldwide’s warehouse manage- included in the earnings from discontinued operations for ment business. 2006 are the operations and gains on disposition of J.L. Onex Corporation December 31, 2007 35 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 Consolidated net earnings Consolidated net earnings were $228 million in 2007 F O U R T H - Q U A R T E R R E S U L T S compared to $1.0 billion in 2006 and $965 million in 2005. Table 21 presents the statements of earnings (loss) for the Table 19 identifies the net earnings (loss) by industry segment fourth quarters ended December 31, 2007 and 2006. as well as the contribution from net after-tax gains on the sales of operating investments and discontinued operations. Fourth-Quarter Statements of Earnings (Loss) Consolidated Net Earnings TABLE 21 ($ millions) 2007 2006 TABLE 19 ($ millions) 2007 2006 2005 Revenues Cost of sales Selling, general and administrative expenses (612) $ 6,022 $ 4,992 (4,837) (4,282) (324) Onex’ share of net earnings (loss): Electronics Manufacturing Services Aerostructures Healthcare Financial Services Customer Support Services Metal Services Other(a) Net after-tax gains on sales Earnings from continuing operations Earnings from discontinued operations $ (3) $ (23) $ (13) Amortization of property, plant Earnings before the undernoted items $ 573 $ 386 and equipment Interest income (139) 30 (114) 41 Operating earnings $ 464 $ 313 28 (3) 38 (19) (4) (2) 19 6 4 – (262) (99) (6) 10 – (10) – (75) Amortization of intangible assets and deferred charges Interest expense of operating companies Earnings (loss) from equity-accounted investments 109 119 256 746 827 138 Foreign exchange gains Stock-based compensation Other income of operating investments 334 351 921 Consolidated net earnings $ 228 $ 1,002 $ 965 (a) 2007 other includes Cineplex Entertainment, CEI, Hawker Beechcraft, Allison Transmission, Radian, ONCAP, Onex Real Estate and the parent company. 2006 other includes Cineplex Entertainment, CEI, Radian, ONCAP, Onex Real Estate and the parent company. 2005 other includes Cineplex Entertainment, CEI, Radian and the parent company. Gains on sales of operating investments, net Acquisition, restructuring and other expenses Writedown of goodwill and intangible assets Writedown of long-lived assets Earnings before income taxes, non-controlling interests and (130) (137) (26) 3 3 9 – (59) (5) (15) (33) (94) 9 47 (470) 7 1,249 (82) (5) (3) Table 20 presents the earnings per share from continuing Recovery of (provision for) income taxes operations, discontinued operations and net earnings. Non-controlling interests (99) (18) 34 (761) discontinued operations $ 107 $ 938 Earnings per Subordinate Voting Share Earnings (loss) from continuing operations $ (10) $ 211 Earnings from discontinued operations – 33 TABLE 20 ($ per share) 2007 2006 2005 Net Earnings (Loss) for the Period $ (10) $ 244 Basic and Diluted: Continuing operations Discontinued operations Net earnings $ 0.85 $ 0.93 $ 1.78 $ 1.93 $ 5.62 $ 7.55 $ 5.95 $ 1.00 $ 6.95 36 Onex Corporation December 31, 2007 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 Consolidated revenues were $6.0 billion for the fourth quar- the fourth quarter of 2006. Table 22 provides a break- ter of 2007, up 21 percent, or $1.0 billion, from the same down and change in fourth-quarter revenues and operating quarter of 2006. Operating earnings were $464 million in the earnings by industry segment. fourth quarter of 2007, up 48 percent from $313 million in Fourth-Quarter Revenues and Operating Earnings by Industry Segment TABLE 22 ($ millions) Revenues Operating Earnings Quarter ended December 31 2007 2006 Change ($) Electronics Manufacturing Services $ 2,175 $ 2,580 $ (405) Aerostructures Healthcare Financial Services Customer Support Services Metal Services Other (a) Total 963 1,420 349 464 435 216 966 763 118 206 – 359 (3) 657 231 258 435 (143) 2007 $ 63 124 172 99 30 5 (29) 2006 Change ($) $ 30 119 71 43 16 – 34 $ 33 5 101 56 14 5 (63) $ 6,022 $ 4,992 $ 1,030 $ 464 $ 313 $ 151 Results are reported in Canadian dollars and in accordance with Canadian generally accepted accounting principles. These results may differ from those reported by the individual operating companies. (a) Other includes Cineplex Entertainment, CEI, Radian, ONCAP, Onex Real Estate and the parent company. Fourth-quarter consolidated revenues grew primarily Partially offsetting the revenue growth was a reduction in due to: Celestica’s recorded revenues by $405 million to $2.2 billion • the inclusion of revenues from Onex’ acquisitions in for the fourth quarter of 2007 compared to the same period 2007 – Tube City IMS in January 2007 of $435 million in 2006. Revenues declined due to weaker demand, pro- (metal services segment) and Carestream Health in April gram losses and customer disengagements in the commu- 2007 of $688 million; nications and industrial markets. As most of Celestica’s • the inclusion of a full quarter of revenues of The War- sales are generated in U.S. dollars, the decline in the value ranty Group, acquired in November 2006, of $231 mil- of the U.S. dollar compared to the Canadian dollar was a lion (financial services segment); significant factor in the reported decline in Canadian dollar • a $258 million increase in revenues at Sitel Worldwide revenues. Partially offsetting the revenue decline in 2007 primarily from ClientLogic’s acquisition of and merger were higher revenues from new customer and program with SITEL Corporation in January 2007 (customer sup- wins in the consumer market compared to the same period port services segment); and in 2006. • the inclusion of ONCAP’s acquisitions of Mister Car The change to Cineplex Entertainment being Wash in April 2007 and CiCi’s Pizza in June 2007, which accounted for on an equity basis beginning in the second added $76 million in revenues in the other segment for quarter of 2007 reduced consolidated revenues in the other the quarter. segment. This is discussed in detail in the significant events section on page 9 of this report. Prior to the second quarter of 2007, Cineplex Entertainment was fully consolidated in Onex’ consolidated statements of earnings. Cineplex Enter- tainment’s revenues were $196 million for the fourth quar- ter of 2006. Onex Corporation December 31, 2007 37 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 Consolidated operating earnings grew in the fourth quar- Included in the fourth quarter of 2006 earnings ter of 2007 compared to 2006 as a result of several factors: was a $1.2 billion pre-tax gain resulting from the sale of a • Onex’ acquisitions of Tube City IMS in January 2007 and portion of shares in Spirit AeroSystems by Onex, Onex Carestream Health in April 2007 contributed $5 million Partners I and certain limited partners in that company’s and $115 million, respectively, to operating earnings in initial public offering in November 2006. Onex’ portion of the quarter; that pre-tax gain was $343 million. • the inclusion of a full quarter of operating earnings of The Warranty Group ($56 million); Fourth-Quarter Major Cash Flow Components • a $33 million increase in operating earnings at Celestica due largely to a net inventory charge booked in the fourth TABLE 23 ($ millions) 2007 2006 quarter of 2006, as well as improved results in 2007 in the Cash from operating activities company’s Mexican and European operations; Cash from (used in) financing activities • growth in operating earnings at Sitel Worldwide, for- Cash from (used in) investing activities merly ClientLogic, of $14 million primarily associated Consolidated cash with its January 2007 acquisition of SITEL Corporation; $ 620 $ 211 $ (555) $ 2,462 $ 122 $ (495) $ 1,777 $ 2,944 and • ONCAP’s purchases of Mister Car Wash in April 2007 and CiCi’s Pizza in June 2007, which added $10 million in oper- ating earnings in the quarter. Partially offsetting the growth in operating earnings was the change in accounting of Cineplex Entertainment from con- solidation to equity accounting, which resulted in a $20 mil- lion reduction in operating earnings in the fourth quarter. During the fourth quarter of 2007, there was a loss on equity-accounted investments of $26 million compared to earnings on equity-accounted investments of $9 million in the fourth quarter of last year. Approximately $53 million of the loss from equity-accounted investments in the fourth quarter of 2007 was from Allison Transmission due pri- marily to a deferred tax provision associated with the company’s indefinite life assets as previously discussed on page 30. Partially offsetting this was $26 million of Onex’ and Onex Partners’ share of earnings of Hawker Beechcraft. Stock-based compensation contributed $3 million of income in the fourth quarter of 2007 compared to an expense of $470 million for the same quarter last year. The stock-based compensation expense in the fourth quarter of 2006 was due primarily to a $369 million charge recorded by Spirit AeroSystems in that quarter primarily related to the value of its Union Equity Participation plan following the company’s initial public offering in November 2006. Cash from operating activities totalled $620 million in the fourth quarter of 2007 compared to cash from operating activities of $122 million in 2006. Much of the increase in the cash in the quarter was from newly acquired busi- nesses – Tube City IMS in January 2007 and Carestream Health in April 2007 – as well as from the inclusion of a full quarter of cash from operations of The Warranty Group, acquired in November 2006, and improved operating results of Celestica. Cash from financing activities was $211 million in the fourth quarter of 2007 due primarily to the cash received from limited partners of Onex Partners I and II and Onex management for the purchase of Husky in December 2007. Partially offsetting this cash was $35 million spent on Onex’ repurchase of its Subordinate Voting Shares under the Company’s Normal Course Issuer Bid. This compares to cash used in financing activities of $495 million due primarily to cash paid by Onex Partners to limited partners, other than Onex, on the partial sale of Spirit AeroSystems as part of that company’s November 2006 initial public offering. Cash used in investing activities totalled $555 mil- lion due primarily to the cash spent on the acquisition of Husky in mid-December. This compares to cash from investing activities of $1.8 billion driven from proceeds on sales of operating companies investments primarily as a result of Onex and Onex Partners’ sale of shares in Spirit AeroSystems’ initial public offering. 38 Onex Corporation December 31, 2007 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S S U M M A R Y Q U A R T E R L Y I N F O R M A T I O N Table 24 summarizes Onex’ key consolidated financial information for the last eight quarters. TABLE 24 ($ millions except per share amounts) 2007 2006 Dec. Sept. June Mar. Dec. Sept. June Mar. Revenues $ 6,022 $ 6,028 $ 5,862 $ 5,521 $ 4,992 $ 4,810 $ 4,624 $ 4,194 Earnings (loss) from continuing operations $ (10) Net earnings (loss) $ (10) $ $ (76) $ 162 $ 33 $ 211 $ (35) $ 47 $ 33 (77) $ 166 $ 149 $ 244 $ 31 $ 48 $ 679 Earnings (loss) per Subordinate Voting Share Basic and Diluted: Continuing operations Net earnings (loss) $ (0.08) $ (0.59) $ 1.26 $ 0.26 $ 1.64 $ (0.27) $ 0.35 $ 0.24 $ (0.08) $ (0.60) $ 1.29 $ 1.16 $ 1.89 $ 0.24 $ 0.36 $ 4.95 Onex’ quarterly consolidated financial results do not fol- C O N S O L I D A T E D F I N A N C I A L P O S I T I O N low any specific trends due to acquisitions or dispositions of businesses by Onex, the parent company; the volatility This section should be read in conjunction with the of the exchange rate between the U.S. dollar and the audited annual consolidated balance sheets and the corre- Canadian dollar; and varying business cycles at Onex’ sponding notes thereto. operating companies. Consolidated assets Consolidated assets increased to $26.2 billion at Decem- ber 31, 2007 from $22.6 billion at December 31, 2006 and from $14.8 billion at December 31, 2005. The charts below show the percentage breakdown of total consolidated assets by industry segment as at December 31, 2007, 2006 and 2005. Segmented Total Consolidated Assets Breakdown 20 07 20 06 2 0 0 5 a. 17% b. 13% c. 22% d. 21% e. 4% f. 3% x. 20% a. 24% b. 14% c. 13% d. 29% e. 1% x. 19% a. Electronics Manufacturing Services b. Aerostructures c. Healthcare d. Financial Services e. Customer Support Services f. Metal Services x. Other (1) a. 38% b. 13% c. 18% e. 2% x. 29% (1) 2007 other includes Husky, CEI, Radian, ONCAP, Onex Real Estate and the parent company. 2006 other includes Cineplex Entertainment, CEI, Radian, ONCAP, Onex Real Estate and the parent company. 2005 other includes Cineplex Entertainment, CEI, Radian and the parent company. Onex Corporation December 31, 2007 39 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 The overall 16 percent growth in consolidated assets in and 2005. In addition, note 2 to the audited annual con- 2007 was driven primarily by acquisitions completed by solidated financial statements provides further balance Onex and its operating companies. Table 25 outlines the sheet disclosure on those acquisitions completed in 2007 more significant acquisitions completed in 2007, 2006 and 2006. TABLE 25 Operating company and total assets at time of acquisition EMSC – $84 million EMSC completed two acquisitions: 2007 Acquisitions • MedicWest Ambulance, a franchised emergency ambulance transportation service provider based in Las Vegas, Nevada • Abbott Ambulance, the largest private provider of emergency and non-emergency ambulance services in St. Louis, Missouri Skilled Healthcare – $97 million Skilled Healthcare completed the purchase of 10 nursing facilities and a hospice company located primarily in Albuquerque, New Mexico, as well as three healthcare facilities in Missouri Carestream Health – $3.4 billion Onex’ acquisition of Carestream Health, Inc., a leading provider of medical and dental imaging and healthcare information technology solutions Tube City IMS – $1.1 billion Onex’ purchase of Tube City IMS Corporation, a leading provider of outsourced services to steel mills Husky – $1.6 billion Onex’ acquisition of Husky Injection Molding Systems Ltd., a leading global supplier of injection molding equipment and services to the plastics industry Sitel Worldwide – $960 million ClientLogic’s purchase and merger with SITEL Corporation. The company now operates as Sitel Worldwide Corporation. Sitel Worldwide completed three add-on acquisitions. ONCAP – $726 million ONCAP completed two investments in 2007: • Mister Car Wash, now the second-largest conveyor car wash business in the United States • CiCi’s Pizza, a leading franchisor of family-oriented “all you want” buffet-style restaurants serving fresh pizza, pasta, salad and desserts CSI purchased the assets of the Institute of Canadian Bankers, based in Toronto, Ontario Mister Car Wash completed four add-on acquisitions in the United States 40 Onex Corporation December 31, 2007 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 TABLE 25 Operating company and total assets at time of acquisition 2006 Acquisitions Spirit AeroSystems – $288 million Spirit AeroSystems’ acquisition of BAE Systems’ aerostructures business unit, with operations in Prestwick, Scotland and Samlesbury, England. The company now operates as Spirit AeroSystems (Europe) Ltd. The Warranty Group – $6.6 billion Onex’ acquisition of The Warranty Group, one of the world’s largest providers of extended warranty contracts Town and Country – $817 million(1) Onex Real Estate’s acquisition of Town and Country Trust, a real estate investment trust that owns and operates 37 apartment communities in the Mid-Atlantic states and Florida ONCAP – $214 million ONCAP completed two investments in 2006: • CSI Global Education Inc., Canada’s leading provider of financial education and testing services • EnGlobe Corp. (TSX: EG), a leading environmental services company in the management, treatment and re-use and disposal of organic waste and contaminated soil (1) A significant portion of Town and Country was recorded as discontinued operations as at December 31, 2006. Operating company and total assets at time of acquisition 2005 Acquisitions CDI – $251 million EMSC – $1.5 billion Onex’ acquisition of Center for Diagnostic Imaging, Inc., a leading provider of diagnostic and therapeutic radiology services in the United States Onex’ acquisition of Emergency Medical Services Corporation, a leading provider of emergency medical services, operating through American Medical Response, the leading U.S. provider of ambulance transport services, and EmCare, the leading provider of outsourced services for hospital emergency department physician staffing and management Spirit AeroSystems – $1.6 billion Onex’ acquisition of Spirit AeroSystems, Inc., the world’s largest Tier 1 aerostructures manufacturer Skilled Healthcare – $932 million Onex’ acquisition of Skilled Healthcare Group, Inc., a leading operator of skilled nursing and assisted living facilities in California, Texas, Kansas, Nevada, New Mexico and Missouri, focused on treating elderly patients who require a high level of skilled nursing care and extensive rehabilita- tion therapy Cineplex Entertainment – $622 million Cineplex’ purchase of the Famous Players movie business, a film exhibition company operating 80 theatres with 785 screens across Canada ONCAP – $198 million(2) ONCAP completed two acquisitions in 2005: • ONCAP’s operating company, Western Inventory Service Ltd.’s acquisition of Washington Inventory Service Ltd., a leading provider of inventory counting services in the United States • ONCAP’s operating company, Canadian Securities Registration Systems Ltd.’s purchase of Corporate Research and Analysis Centre Ltd., a provider of corporate and legal searches in Canada (2) These investments were recorded as discontinued operations as at December 31, 2006 and 2005. Onex Corporation December 31, 2007 41 Onex Corporation December 31, 2007 41 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Chart 1 shows Onex’ consolidated assets by industry segment. Asset Diversification by Industry Segment CHART 1 ($ millions) E L E C T R O N I C S A E R O - H E A LT H C A R E F I N A N C I A L C U S T O M E R M A N U FA C T U R I N G S T R U C T U R E S S E R V I C E S S E R V I C E S S U P P O R T S E R V I C E S M E TA L S E R V I C E S O T H E R (a) T O TA L 5,637 5,449 3,272 3,212 5,745 6,615 1,039 881 5,307 4,419 5,536 1,966 2,887 2,753 256 260 26,199 22,578 4,159 4,229 14,845 07 06 05 07 06 05 07 06 05 07 06 07 06 05 07 07 06 05 07 06 05 (a) 2007 other includes Husky, CEI, Radian, ONCAP, Onex Real Estate and the parent company. 2006 other includes Cineplex Entertainment, CEI, Radian, ONCAP, Onex Real Estate and the parent company. 2005 other includes Cineplex Entertainment, CEI, Radian and the parent company. In addition, included in Onex’ total consolidated assets at December 31, 2007 was a 76 percent growth in investments Intangible assets Consolidated assets include $2.7 billion of intangible assets to $3.2 billion from $1.8 billion. Much of that growth was at December 31, 2007, up $1.7 billion from $1.0 billion at due primarily to the following investments accounted for December 31, 2006. The acquisitions completed by Onex and on an equity basis: Onex Partners, as well as ONCAP in 2007, as disclosed in • $1.1 billion was attributable to the investments in Hawker table 25, drove all the increase in intangible assets. Care- Beechcraft and Allison Transmission completed by Onex stream Health accounted for approximately $1.2 billion of in March and August of 2007; the growth in intangible assets primarily associated with • $109 million was the total investment made in Onex Real limited life intangibles including developed technology, Estate Partners in 2007 for its investments in NY Credit, a trademarks and tradenames, and customer relationships real estate specialty finance company that focuses on that were recorded as part of the company’s valuation of its originating, acquiring, structuring, selling and trading opening balance following Onex’ purchase in April 2007. commercial real estate related loans, and Flushing Town During 2008, we expect that the amortization of the limited Center; and life intangible assets of our operating companies will in- • $50 million was invested in Onex Credit Partners’ strate- crease significantly from 2007 due to the higher amounts of gies beginning in November 2007. limited life intangibles recorded by the newly acquired busi- At December 31, 2006, total consolidated assets grew to financial statements provides additional information on nesses in 2007. Note 9 to the audited annual consolidated $22.6 billion from $14.8 billion at December 31, 2005 due intangible assets. primarily to the inclusion of assets from the acquisitions completed in 2006 as detailed in table 25. 42 Onex Corporation December 31, 2007 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 Warranty reserves and unearned premiums Warranty reserves and unearned premiums (consisting of Total long-term debt (consisting of the current portion of long-term debt and long-term debt, net of the current and long-term portions) totalled $3.9 billion at deferred charges) was $6.3 billion at December 31, 2007, up December 31, 2007 compared to $4.9 billion at December 31, from $3.8 billion at December 31, 2006 and $3.7 billion at 2006. These warranty reserves and unearned premiums rep- December 31, 2005. The debt associated with acquisitions resent The Warranty Group’s gross warranty and property completed in 2007 was the primary factor of growth in and casualty reserves, as well as gross warranty unearned long-term debt at December 31, 2007 from year-end 2006. premiums. Gross warranty and property casualty reserves Table 26 summarizes consolidated long-term debt by indus- of $1.3 billion (2006 – $1.7 billion) represent the estimated try segment. future losses on warranty contracts and property and casu- alty insurance policies. The property and casualty reserves Consolidated Long-term Debt, Without Recourse to Onex component of $1.0 billion (2006 – $1.4 billion) has been ceded 100 percent to third-party reinsurers, which has cre- TABLE 26 ($ millions) 2007 2006 2005 ated a ceded claims recoverable asset. A subsidiary of Aon Electronics Manufacturing Corporation, the former parent of The Warranty Group, is Services $ 752 $ 874 $ 872 the primary reinsurer on approximately 37 percent of the Aerostructures reserves and provides guarantees on all of them as part of Healthcare the sales agreement with Onex. The Warranty Group’s liabil- Financial Services ity for gross warranty and property and casualty unearned Customer Support Services premiums totalled $2.7 billion (2006 – $3.2 billion). All of the unearned premiums are warranty business related and rep- Metal Services Other(a) 567 2,835 194 680 370 937 687 1,177 233 196 – 674 839 1,196 – 206 – 541 6,335 3,841 3,654 resent the portion of the revenue received that has not yet been earned as revenue by The Warranty Group on extended warranty products sold by multiple distribution channels. Typically, there is a time delay between when the warranty contract starts to earn and the contract effective date. The contracts generally commence earning after the original manufacturer’s warranty on a product expires. Note 12 to the audited annual consolidated financial statements provides details of the gross warranty and property and casualty reserves for loss and loss adjustment expenses and warranty unearned premiums as at December 31, 2007 and 2006. Consolidated long-term debt, without recourse to Onex Onex, the parent company, has no debt. It has been Onex’ policy to preserve a financially strong parent company Current portion of long-term debt of operating companies (176) (43) (36) Total $ 6,159 $ 3,798 $ 3,618 (a) 2007 other includes Husky, CEI, Radian, ONCAP and Onex Real Estate. 2006 other includes Cineplex Entertainment, CEI, Radian, ONCAP and Onex Real Estate. 2005 other includes Cineplex Entertainment, CEI and Radian. The acquisition of Tube City IMS in January 2007 added $370 million of debt. Tube City IMS’ debt is comprised of a senior secured asset-based revolving credit facility, a sen- ior secured term loan facility and a senior secured syn- thetic letter of credit that bear interest at a base rate plus a margin of up to 2.5 percent and that mature in 2014 and senior subordinated notes due in 2015 that bear interest at that has funds available for new acquisitions and to sup- a rate of 9.75 percent. port the growth of its operating companies. This policy means that all debt financing is within our operating com- panies and each company is required to support its own debt. Future business conditions of an operating company may result in non-compliance with certain covenants by that operating company. Carestream Health, purchased in April 2007, added debt of $1.9 billion, which represents senior secured first and second lien term loans that bear interest at LIBOR plus a margin of 2 percent and 5.25 percent, respectively, or at a base rate plus a margin of 1.00 percent and 4.25 per- cent. These loans mature in 2013. During the period of Onex’ ownership in 2007, the company paid down approxi- mately US$63 million of its long-term debt from operating cash flows. Onex Corporation December 31, 2007 43 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 Onex’ purchase of Husky in mid-December 2007 increased consolidated long-term debt by $389 mil- Non-controlling interests The non-controlling interests liability in Onex’ audited lion. Husky’s long-term debt comprises a term loan and annual consolidated balance sheet as at December 31, revolving credit facility that bear interest at LIBOR plus a 2007 primarily represents the ownership interests of margin that ranges from 3 percent to 3.25 percent. These shareholders other than Onex in Onex’ consolidated oper- facilities mature in 2012. ating companies and equity-accounted investments. At Sitel Worldwide, formerly ClientLogic, added a December 31, 2007, the non-controlling interests balance net amount of $484 million of long-term debt primarily amounted to $6.1 billion compared to $4.6 billion at associated with that company’s purchase of and merger December 31, 2006. Table 27 details the change in the non- with SITEL Corporation. The company’s new facility of controlling interests balance from December 31, 2006 to US$760 million consists of a US$675 million term loan that December 31, 2007. bears interest at LIBOR plus a margin of up to 2.75 percent and that matures in 2014. Proceeds from the new credit Change in Non-controlling Interests facility were used to repay ClientLogic’s prior US$170 mil- lion credit facility and to fund the acquisition of SITEL TABLE 27 ($ millions) Corporation. Non-controlling interests as at December 31, 2006 $ 4,594 Long-term debt growth from acquisitions in 2007 Non-controlling interests in net earnings of 2007: was partially offset by the change in accounting for Cine- Gains on sales of operating investments plex Entertainment from consolidation in 2006 to equity Operating companies’ earnings 777 240 basis in 2007. At December 31, 2006, Onex consolidated $350 million of long-term debt of Cineplex Entertainment, which was included in the other segment. Note 10 to the audited annual consolidated finan- cial statements provides additional information on the long-term debt of Onex’ operating companies. Future income taxes Future income taxes on Onex’ consolidated balance sheet at Investments by shareholders other than Onex in: Onex Partners I and II Skilled Healthcare’s initial public offering – issuance of new shares New shareholders’ purchase of Onex’ and Onex Partners I’s shares of Skilled Healthcare and Spirit AeroSystems sold in public offerings Distributions to limited partners of Onex Partners I Foreign currency translation December 31, 2007 totalled $1.4 billion compared to $1.1 bil- Other 1,017 1,718 128 240 (869) (858) 179 lion at December 31, 2006. Onex and Onex Partners’ acqui- sitions of Tube City IMS, Carestream Health and Husky, as well as ONCAP’s acquisition of CiCi’s Pizza, accounted Non-controlling interests as at December 31, 2007 $ 6,149 for most of the increase in 2007 over 2006. Note 14 to the The non-controlling interests in net earnings of oper- audited annual consolidated financial statements provides ating companies in 2007 were $1.0 billion. Approximately additional information on future income taxes. $777 million of those earnings were from the gains on the At December 31, 2007, Onex and its investment- shares sold by other limited partners in the offerings of holding companies have nil tax-loss carryforwards (2006 – Spirit AeroSystems and Skilled Healthcare as well as the $391 million). During 2007, Onex Corporation accelerated dilution gain on Skilled Healthcare. recognition of certain sources of income and gains for tax A total of $1.7 billion was invested by limited part- purposes. Consequently, losses that may have otherwise ners in acquisitions and investments completed in 2007. expired are now reflected as tax paid reserves and increased The limited partners of Onex Partners II invested in the basis for tax purposes. 44 Onex Corporation December 31, 2007 acquisitions completed in 2007 of Tube City IMS and Carestream Health as well as the investments in Hawker Beechcraft and Allison Transmission. In addition, the lim- ited partners of Onex Partners I and II invested in the pur- chase of Husky completed in mid-December 2007. 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 New shareholders’ purchase of shares sold by Change in Subordinate Voting Shares Outstanding Onex and Onex Partners I in Spirit AeroSystems’ secondary offering and Skilled Healthcare’s initial public offering added TABLE 29 $240 million to non-controlling interests in 2007. In addition, Subordinate Voting Shares outstanding the issue of new common shares by Skilled Healthcare as at December 31, 2006 part of its initial public offering added $128 million to non- Shares repurchased and cancelled under controlling interests in 2007. Onex’ Normal Course Issuer Bid Partially offsetting these increases were distribu- Issue of shares – Dividend Reinvestment Plan 128,927,135 (4,732,900) 6,017 tions to the limited partners of Onex Partners I of $869 mil- lion for the sale of a portion of their interests in Spirit AeroSystems’ secondary offering and Skilled Healthcare’s initial public offering. Subordinate Voting Shares outstanding at January 31, 2008 124,200,252 Shareholders’ equity Shareholders’ equity decreased slightly to $1.7 billion Onex also has 100,000 Multiple Voting Shares outstanding, which have a nominal paid-in value, and 176,078 Series 1 Senior Preferred Shares, which have no paid-in amount at December 31, 2007 from $1.8 billion at December 31, reflected in Onex’ audited annual consolidated financial 2006 due primarily to the repurchase of shares under the statements. Note 15 to the audited annual consolidated Company’s normal course issuer bid at a cost of $113 mil- financial statements provides additional information on lion. Table 28 provides a reconciliation of the change in Onex’ share capital. There was no change in the Multiple shareholders’ equity from December 31, 2006 to Decem- Voting Shares and Series 1 Senior Preferred Shares out- ber 31, 2007. standing during 2007. Change in Shareholders’ Equity Cash dividends TABLE 28 ($ millions) Shareholders’ equity as at December 31, 2006 $ 1,815 Change in accounting policies Regular dividends declared Shares repurchased and cancelled Net earnings Other comprehensive loss for 2007 1 (14) (113) 228 (214) Shareholders’ equity as at December 31, 2007 $ 1,703 During 2007, Onex declared dividends of $0.11 per Sub- ordinate Voting Share, which were paid quarterly at a rate of $0.0275 per Subordinate Voting Share. The dividends are payable on or about January 31, April 30, July 31 and October 31 of each year. The dividend rate remained un- changed from that of 2006 and 2005. Total payments for dividends have decreased with the repurchase of Subor- dinate Voting Shares under the Normal Course Issuer Bids as discussed on page 46. Dividend Reinvestment Plan Onex’ audited annual consolidated statements of share- Onex’ Dividend Reinvestment Plan (the “Plan”) enables holders’ equity and comprehensive earnings also show the Canadian shareholders to reinvest cash dividends to changes to the components of shareholders’ equity for the acquire new Subordinate Voting Shares of Onex at a mar- years ended December 31, 2007 and 2006. Shares outstanding ket-related price at the time of reinvestment. During 2007, Onex issued 3,952 Subordinate Voting Shares under the Plan at an average cost of $34.67 per Subordinate Voting At January 31, 2008, Onex had 124,200,252 Subordinate Voting Share, creating cash savings of less than $1 million. During Shares issued and outstanding. Table 29 shows the change 2006, 4,404 Subordinate Voting Shares were issued under in the number of Subordinate Voting Shares outstanding the Plan at an average cost of $22.12 per Subordinate from December 31, 2006 to January 31, 2008. Voting Share, creating cash savings of less than $1 million. Onex Corporation December 31, 2007 45 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 During 2005, Onex issued 2,865 Subordinate Voting Shares During 2007, 803,000 options were granted with a weighted under the Plan at an average cost of $19.69 per Subordinate average exercise price of $35.16. Of those granted options, Voting Share, creating cash savings of less than $1 million. 783,000 were issued in December 2007 with a vesting period In January 2008, Onex issued an additional 2,065 Subor- of six years, rather than the five years vesting with prior dinate Voting Shares under the Plan at an average cost of options. In addition, 1,090,600 options were surrendered in $31.85 per Subordinate Voting Share. 2007 at an average exercise price of $10.84 for aggregate cash Stock Option Plan consideration of $26 million and there were 30,000 options that expired. This compares to 758,000 options exercised or Onex, the parent company, has a Stock Option Plan in place surrendered in 2006 and 110,600 options in 2005. Of the total that provides for options and/or share appreciation rights options exercised, there were no options exercised in 2007 to be granted to Onex directors, officers and employees for for Subordinate Voting Shares. In 2006, 20,000 options were the acquisition of Subordinate Voting Shares of the Com- exercised for Subordinate Voting Shares at a total value of pany for a term not exceeding 10 years. The options vest less than $1 million and no options were exercised for Sub- equally over five years for options issued prior to December ordinate Voting Shares in 2005. 2007 and six years for options issued in December 2007. The price the options are issued at is the market value of the Normal Course Issuer Bids Subordinate Voting Shares on the business day preceding Onex had Normal Course Issuer Bids (the “Bids”) in place the day of the grant. Vested options are not exercisable during 2007 that enable it to repurchase up to 10 percent unless the average five-day market price of Onex Subor- of its public float of Subordinate Voting Shares during the dinate Voting Shares is at least 25 percent greater than the period of the relevant Bid. Onex believes that it is advanta- exercise price. geous to Onex and its shareholders to continue to repur- At December 31, 2007, Onex had 12,777,500 options chase Onex’ Subordinate Voting Shares from time to time outstanding to acquire Subordinate Voting Shares, of which when the Subordinate Voting Shares are trading at prices 7,610,700 options were vested and 7,551,700 of those vested that reflect a significant discount to their intrinsic value. options were exercisable. Table 30 provides a detailed recon- During 2007, Onex repurchased 3,357,000 Subordinate ciliation of the options outstanding at December 31, 2007. Voting Shares under the Bids at a total cost of $113 million. Change in Stock Options Outstanding TABLE 30 Number of Options Outstanding at December 31, 2005 13,434,600 Granted Exercised or surrendered Expired 435,000 (758,000) (16,500) Outstanding at December 31, 2006 13,095,100 Granted Exercised or surrendered Expired 803,000 (1,090,600) (30,000) Weighted Average Exercise Price $ 15.69 $ 26.01 $ 8.80 $ 20.02 $ 16.43 $ 35.16 $ 10.84 $ 21.27 Outstanding at December 31, 2007 12,777,500 $ 18.07 Under similar Bids, Onex repurchased 9,176,300 Subordi- nate Voting Shares at a total cost of $203 million during 2006 and 939,200 Subordinate Voting Shares at a total cost of $18 million in 2005. In January 2008, Onex repurchased an additional 1,375,900 Subordinate Voting Shares at a total cost of $44 million. Accumulated other comprehensive earnings (loss) Accumulated other comprehensive earnings (loss) repre- sent the accumulated unrealized gains or losses, all net of income taxes, related to certain available-for-sale securi- ties, cash flow hedges and foreign exchange gains or losses on the net investment in self-sustaining operations. At December 31, 2007, accumulated other comprehensive loss was $409 million compared to $195 million at the end of 2006. The change in accumulated other comprehensive 46 Onex Corporation December 31, 2007 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 loss was from the other comprehensive loss of $214 million Components of Cash from Operating Activities in 2007 primarily from the negative currency translation adjustments of $202 million as a result of the weakened TABLE 33 ($ millions) U.S. dollar. Table 31 provides a breakdown of other com- Cash from operations 2007 $ 1,373 2006 $ 858 prehensive loss for 2007 compared to 2006. Increase (decrease) in cash from non-cash Other Comprehensive Loss TABLE 31 ($ millions) 2007 2006 Other comprehensive earnings (loss), net of taxes working capital items 197 (482) Increase (decrease) in warranty reserves and unearned premiums and other liabilities (242) 520 Cash from operating activities $ 1,328 $ 896 Currency translation adjustments $ (202) $ (121) Cash from operations excludes changes in non-cash work- Change in fair value of derivatives designated as hedges Other (22) 10 – – Other comprehensive loss $ (214) $ (121) L I Q U I D I T Y A N D C A P I T A L R E S O U R C E S This section should be read in conjunction with the audited annual consolidated statements of cash flows and the corresponding notes thereto. Table 32 summarizes the major consolidated cash flow components. Major Cash Flow Components ing capital items, warranty reserves and unearned premi- ums and other liabilities. Cash from operations was up 60 percent to $1.4 billion in 2007 from $858 million in 2006 due primarily to the inclusion of cash from operations of acquired businesses in 2007, which included Carestream Health, Tube City IMS and Husky and a full year for The Warranty Group acquired in November 2006. In addition, improved operating results at Spirit AeroSystems and Celestica contributed to the increase in cash from opera- tions in 2007. A detailed discussion of the consolidated operating results can be found under the heading “Con- solidated Operating Results” on page 12 of this MD&A. Non-cash working capital items increased cash by $197 million in 2007 compared to a decrease to cash of $482 million in 2006. The increase was due primarily to lower working capital at Celestica driven primarily by TABLE 32 ($ millions) 2007 2006 lower inventory levels as a result of improved inventory Cash from operating activities Cash from (used in) financing activities $ 1,328 $ 1,347 $ 896 $ (690) Cash used in investing activities $ (2,817) $ (376) management, partially offset by lower accounts payable balances due to timing of payments. Partially offsetting that was cash spent by Spirit AeroSystems to build up inventory associated with the start-up of Boeing’s 787 pro- Consolidated cash from continuing operations $ 2,462 $ 2,944 gram and other programs. Cash from operating activities Cash from operating activities totalled $1.3 billion in 2007 compared to cash from operating activities of $896 million in 2006. Table 33 provides the components of cash from operating activities. More than offsetting the cash increase from non- cash working capital items was a decrease in cash from warranty reserves and unearned premiums and other liabil- ities of $242 million in 2007 primarily from lower warranty liability reserves at The Warranty Group. This compares to an increase of $520 million in 2006. Onex Corporation December 31, 2007 47 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 Cash from (used in) financing activities Cash from financing activities was $1.3 billion in 2007 Partially offsetting the cash used in financing activities in 2006 were: compared to cash used in financing activities of $690 mil- • Spirit AeroSystems’ initial public offering of 10.4 million lion in 2006. Cash from financing activities in 2007 was new shares that brought in $283 million of cash; generated from: • cash received of $424 million from the limited partners • $2.0 billion of cash received primarily from the limited of Onex Partners primarily for the acquisition of The partners of the Onex Partners Funds for the acquisitions Warranty Group, which was completed in late Novem- of Tube City IMS, completed in January 2007, Care- ber 2006; and stream Health, acquired in April 2007, and Husky, ac- • $30 million of cash received by Cineplex Entertainment quired in December 2007 as well as the investments in as a result of the company’s secondary unit offering in Hawker Beechcraft and Allison Transmission made in June 2006. March and August 2007, respectively; • $128 million of cash received from new shareholders of Skilled Healthcare who purchased the new common Cash used in investing activities Cash used in investing activities totalled $2.8 billion in 2007 shares issued in that company’s initial public offering in compared to cash used of $376 million in 2006. The increase May 2007; and in cash used in investing activities was due primarily to • additional long-term debt at Sitel Worldwide of approxi- more cash spent on acquisitions in 2007 compared to 2006. mately $384 million. Acquisitions completed in 2007 accounted for $1.8 billion of the cash spent in 2007. These acquisitions Partially offsetting cash from financing activities in primarily included: 2007 was: • $197 million of cash spent on the January 2007 acquisi- • $886 million of cash distributed primarily by Onex Part- tion of Tube City IMS by Onex and Onex Partners II; ners I to limited partners, other than Onex, from the • $442 million of cash used in the April 2007 purchase of proceeds received on the sales of shares of Spirit Aero- Carestream Health by Onex and Onex Partners II; Systems as part of that company’s secondary offering • $521 million of cash used in December 2007 for the and Skilled Healthcare from that company’s initial pub- acquisition of Husky by Onex, Onex Partners I and Onex lic offering; and Partners II; • $113 million spent by Onex, the parent company, to • $435 million of cash used by Sitel Worldwide for its repurchase its Subordinate Voting Shares under Onex’ acquisition of and merger with SITEL Corporation in Normal Course Issuer Bid. January 2007, as well as three follow-on acquisitions; and This compares to cash used in financing activities of • $176 million of cash spent for add-on acquisitions com- $690 million in 2006. Included in cash used in financing pleted by Skilled Healthcare and EMSC. activities was: • cash spent of $203 million on the repurchase of shares Note 2 to the audited annual consolidated financial state- under Onex’ Normal Course Issuer Bids; and ments discloses the amount of cash invested in each • $961 million of cash paid by Onex Partners I to limited acquisition completed during 2007 and 2006. Table 25 partners, other than Onex, on the partial sale of shares provides further details on the acquisitions completed in of Spirit AeroSystems as part of that company’s initial 2007 and 2006. public offering. In addition, included in other investing activities in 2007 was cash used for Onex’ and Onex Partners II’s investment in Hawker Beechcraft of $552 million and Alli- son Transmission of $790 million. 48 Onex Corporation December 31, 2007 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 Partially offsetting the cash used in acquisitions Skilled Healthcare spent $31 million on capital and investments in 2007 was $1.3 billion of cash proceeds expenditures related primarily to the construction and de- received by Onex and Onex Partners I on the sale of a por- velopment of its facilities. tion of their shares in the Spirit AeroSystems and Skilled Sitel Worldwide recorded $51 million in capital Healthcare offerings. expenditures mainly for new client contracts and the cor- Onex’ operating companies spent $633 million on responding requirements for additional delivery centre property, plant and equipment during 2007 compared to capacity, as well as enhancements to the company’s tech- $823 million in 2006. Table 34 details property, plant and nology infrastructure. equipment expenditures by industry segment. Capital expenditures of Tube City IMS totalled Property, Plant and Equipment Expenditures needs and new customer sites, new contracted services and productivity improvements, including the expansion of its $55 million in 2007 relating primarily to ongoing equipment TABLE 34 ($ millions) 2007 2006 European operations. Electronics Manufacturing Services $ 67 $ 215 Aerostructures Healthcare Financial Services Customer Support Services Metal Services Other(a) Total 268 136 29 51 55 27 394 111 3 19 – 81 Consolidated cash resources At December 31, 2007, consolidated cash with continuing operations was $2.5 billion compared to $2.9 billion at December 31, 2006. Onex, the parent company, repre- sented approximately $0.7 billion of the cash on hand and Celestica had approximately $1.1 billion of cash at Decem- $ 633 $ 823 ber 31, 2007. Onex believes that maintaining a strong financial (a) 2007 includes Husky, Cosmetic Essence, Radian, ONCAP, Onex Real Estate position at the parent company with substantial liquidity and the parent company. 2006 includes Cineplex Entertainment, CEI, Radian, ONCAP, Onex Real Estate and the parent company. Celestica recorded $67 million in capital expenditures related primarily to the expansion of its manufacturing capabilities in China, the Czech Republic and Thailand in support of new customer programs. Spirit AeroSystems reported $268 million in prop- erty, plant and equipment, software and program tooling in 2007 due in large part to the B787 program. enables the Company to pursue new opportunities to create long-term value and support Onex’ existing operating com- panies. In addition to $0.7 billion of cash at the parent com- pany, Onex also had $88 million of near-cash items at December 31, 2007. At December 31, 2007, the other limited partners in Onex Partners had remaining commitments to provide $680 million of funding for future Onex-sponsored acquisitions. These amounts are not included in Onex’ con- solidated cash. Onex, the parent company, has a conserva- tive cash management policy that limits its cash investments to short-term low-risk money-market products. Onex Corporation December 31, 2007 49 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S A D D I T I O N A L U S E S O F C A S H Contractual obligations The following table presents the contractual obligations of Onex’ operating companies as at December 31, 2007: Contractual Obligations TABLE 35 ($ millions) Total Less than 1 year 1–3 years 4–5 years After 5 years Payments Due by Period Long-term debt, without recourse to Onex Capital and operating leases Purchase obligations Total contractual obligations $ 6,478 1,176 179 $ 7,833 $ 176 319 144 $ 639 $ 509 334 31 $ 874 $ 1,790 $ 4,003 193 4 330 – $ 1,987 $ 4,333 A breakdown of long-term debt by industry segment is pro- vided in table 26. In addition, notes 10 and 11 to the audited Commitments At December 31, 2007, Onex and its operating companies annual consolidated financial statements provide further had total commitments of $557 million (2006 – $1.8 billion). disclosure on long-term debt and lease commitments. Our Commitments by Onex and its operating companies pro- operating companies currently believe they have adequate vided in the normal course of business include commit- cash from operations, cash on hand and borrowings avail- ments to corporate investments and letters of credit, letters able to them to meet anticipated debt service require- of guarantee and surety and performance bonds. Approx- ments, capital expenditures and working capital needs for imately $445 million of the total commitments in 2007 were the foreseeable future. There is, however, no assurance that for contingent liabilities in the form of letters of credit, let- our operating companies will generate sufficient cash flow ters of guarantee, and surety and performance bonds pro- from operations or that future borrowings will be available vided by certain operating companies to various third to enable them to grow their business, service all indebted- parties, including bank guarantees. These guarantees are ness or make anticipated capital expenditures. without recourse to Onex. As part of the Carestream Health purchase, the acquisition agreement provided that if Onex and Onex Part- ners II realize an internal rate of return in excess of 25 per- cent on their investment, Kodak will receive payment equal to 25 percent of the excess return up to US$200 million. 50 Onex Corporation December 31, 2007 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 Recent events Spirit AeroSystems During 2003, Onex raised its first large-cap Fund, Onex Partners I, with US$1.655 billion of committed capital, In early January 2008, Boeing announced a further three- including committed capital from Onex of US$400 million. month schedule shift for the first flight and first delivery of Since 2003, Onex Partners I has completed 10 investments or the B787 program, resulting in the initial deliveries being acquisitions with US$1.5 billion of equity being put to work. rescheduled to early 2009. This is the second shift in the While Onex Partners I has concluded its investment period, B787 program from its original May 2008 delivery date. the Fund still has uncalled committed capital of US$100 mil- Under Spirit AeroSystems’ current contractual agreement lion, which is largely reserved for possible future funding for with Boeing, the company will not receive payment for the any of the Onex Partners I’s existing businesses. B787 ship sets delivered to Boeing prior to certification and During 2006, Onex raised its second large-cap Fund, delivery of the aircraft to a customer. Since Boeing cur- Onex Partners II, a US$3.45 billion private equity fund, rently expects to certify and deliver its first B787 in early including committed capital from Onex of US$1.4 billion. 2009, Spirit AeroSystems estimates that the impact on its During 2007, Onex Partners II completed five investments or working capital from the delay in the B787 delivery will be acquisitions, investing US$2.3 billion of equity in those trans- between US$750 million and US$1.0 billion. The company actions. At December 31, 2007, Onex Partners II had invested is currently in discussions with Boeing regarding the approximately 71 percent of its committed capital and had impact of the B787 schedule shifts on its cash flow in 2008. approximately US$580 million of uncalled committed capital Spirit AeroSystems is also evaluating alternatives for secur- reserved for future Onex-sponsored acquisitions. ing additional financing to meet potential liquidity needs. In late 2007, Onex began fundraising for its third fund, Onex Partners III, that is expected to close in mid- A D D I T I O N A L S O U R C E S O F C A S H 2008 and will continue to provide capital for Onex-spon- Private equity funds Onex has additional sources of cash from its private equity sored acquisitions that are not related to previous Onex Partners I or II Funds or ONCAP. Onex Partners III is tar- geting capital commitments of approximately US$4.5 bil- Funds. Private equity Funds provide capital to Onex-spon- lion, with US$1 billion to be committed by Onex. sored acquisitions that are not related to Onex’ operating In addition, Onex has a mid-cap private equity companies that existed prior to the formation of the Funds Fund, ONCAP II, with total committed capital of $574 mil- and that are not allocated to ONCAP. The Funds provide a lion. ONCAP II has completed four acquisitions, putting substantial pool of committed funds, which enables Onex $159 million of equity to work. The Fund has uncalled com- to be more flexible and timely in responding to investment mitted third-party capital of $216 million available for future opportunities. acquisitions. Onex Corporation December 31, 2007 51 Onex Corporation December 31, 2007 51 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Onex controls the General Partner and the Man- in full if Onex disposes of 90 percent or more of an invest- ager of all its private equity Funds. The Onex Partners and ment before the fifth year. During 2007, the MIP was ONCAP Funds have a diverse group of investors, including amended for investments completed after November 7, 2007. public and private pension funds, banks, insurance compa- nies and endowment funds from the United States, Canada, Europe and Asia. Table 36 presents the total capital commit- For those investments, the investment rights to acquire the remaining 5⁄6ths vest equally over six years. Under the MIP and amended MIP, the investment rights related to a partic- ments under the Onex Partners and ONCAP Funds, and the ular acquisition are exercisable only if Onex earns a mini- available uncalled committed capital at December 31, 2007. mum 15 percent per annum compound rate of return for Private Equity Funds Commitments As at December 31, 2007 TABLE 36 ($ millions) Total Committed Capital Onex Committed Capital that acquisition after giving effect to the investment rights. The funds required for investments under the MIP are not loaned to the management members by Onex or the operating companies. During 2007, there were investments of $2 million under the MIP compared to $2 million in 2006 (these amounts exclude amounts invested under the Onex Partners 1 percent investment requirement). Management Available Uncalled Committed Capital (excluding Onex) Onex Partners I Onex Partners II ONCAP II US$ 1,655 US$ 400 US$ 100 members received $38 million under the MIP related to the US$ 3,450 US$ 1,407 US$ 580 realizations Onex achieved primarily on Spirit AeroSystems $ 574 $ 258 $ 216 and Skilled Healthcare in 2007. This compares to $28 million in realizations under the MIP on the sale of a portion of Spirit AeroSystems in that company’s initial public offering Related party transactions Related party transactions are primarily investments by in 2006. Notes 1 and 23 to the audited annual consolidated financial statements provide additional details on the MIP. the management of Onex and of the operating companies in the equity of the operating companies acquired. Directors Deferred Share Unit Plan Management Investment Plan Onex, the parent company, established a Deferred Share Unit Plan (“DSU Plan”) in 2004, which allows Onex directors Onex has a Management Investment Plan (the “MIP”) in to apply directors’ fees to acquire Deferred Share Units place that requires its management members to invest in (“DSUs”) based on the market value of Onex shares at the each of the operating companies acquired by Onex. time. Grants of DSUs may also be made to Onex directors The aggregate investment by management mem- from time to time. Holders of DSUs are entitled to receive, bers under the MIP is limited to 9 percent of Onex’ interest for each DSU upon redemption, a cash payment equivalent in each acquisition. The form of the investment is a cash purchase for 1⁄6th (1.5 percent) of the MIP’s share of the ag- gregate investment and investment rights for the remain- ing 5⁄6ths (7.5 percent) of the MIP’s share at the same price. Amounts invested under the 1 percent investment require- to the market value of a Subordinate Voting Share at the redemption date. The DSUs vest immediately, are only re- deemable once the holder retires from the board of directors and must be redeemed by the end of the year following the year of retirement. Additional units are issued equivalent to ment in Onex Partners transactions are allocated to meet the value of any cash dividends that would have been paid the 1.5 percent investment requirement under the MIP. on the Subordinate Voting Shares. Onex, the parent com- For investments completed prior to November 7, 2007, the investment rights to acquire the remaining 5⁄6ths vest equally over four years with the investment rights vesting pany, has recorded a liability for the future settlement of DSUs at the balance sheet date by reference to the value of underlying shares at that date. The liability is adjusted up or 52 Onex Corporation December 31, 2007 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 down for the change in the market value of the underlying Onex shares associated with the MDSU Plan, the Company Subordinate Voting Shares, with the corresponding amount expects to enter into forward agreements with a counter- reflected in the consolidated statements of earnings. During party financial institution for all grants under the MDSU 2007, Onex granted 43,550 DSUs to its directors with a cost of Plan. The costs of those arrangements will be borne entirely $2 million (2006 – $1 million) being recorded as stock-based by participants in the MDSU Plan. MDSUs are redeemable compensation expense. In addition, 16,170 additional DSUs only for cash and no shares or other securities of Onex will were issued to directors in lieu of directors’ fees and cash be issued on the exercise, redemption or other settlement dividends and 10,940 DSUs were redeemed in 2007 for cash thereof. Management acquired 202,258 MDSUs having an consideration of less than $1 million. Table 37 reconciles the aggregate value, at the date of grant, of $6 million in lieu of changes in the DSUs outstanding at December 31, 2007. cash compensation for the Company’s 2007 fiscal year. A for- ward agreement was entered into in February 2008 to hedge Change in Outstanding Directors Deferred Share Units Onex’ exposure to changes in the value of the MDSUs. TABLE 37 Outstanding at December 31, 2005 Granted Additional units issued in lieu of directors’ fees and cash dividends Redeemed Outstanding at December 31, 2006 Granted Additional units issued in lieu of directors’ fees and cash dividends Redeemed Outstanding at December 31, 2007 Number of DSUs The Onex Partners Funds 116,301 40,000 24,833 (4,000) 177,134 43,550 16,170 (10,940) 225,914 The structure of both Onex Partners Funds requires Onex management to invest a minimum of 1 percent in all acqui- sitions. Onex management and directors have committed to invest an additional 3 percent of the total capital invested by the Onex Partners Funds. This structure applies to those acquisitions completed through Onex Partners II up to April 21, 2008, the anniversary date of the Fund’s first closing. For acquisitions completed during the 12 months ending April 20, 2009, Onex management and directors have com- mitted an additional 2.65 percent. The total amount invested in 2007 by Onex management and directors on acquisitions and investments completed through the Onex Partners Funds was $104 million (2006 – $22 million). Management Deferred Share Unit Plan Effective December 2007, a Management Deferred Share Unit Plan (“MDSU Plan”) was established as a further means of encouraging personal and direct economic interest by the Company’s senior management in the performance of the Subordinate Voting Shares. Under the MDSU Plan, the mem- bers of the Company’s senior management team are given the opportunity to designate all or a portion of their annual compensation to acquire MDSUs based on the market value of Onex shares at the time in lieu of cash. MDSUs vest imme- diately but are redeemable by the participant only after he or she has ceased to be an officer or employee of the Company or an affiliate for a cash payment equal to the then current market price of the Subordinate Voting Shares. To hedge Onex’ exposure to changes in the trading price of Carried interest The Onex Partners Funds’ General Partner will also receive a carried interest of 20 percent on the realized gains of the third-party limited partners in each Fund, subject to an 8 percent compound annual preferred return to such lim- ited partners on all amounts contributed to the relevant Fund. This carried interest will be based on the overall performance of each of Onex Partners I and II, indepen- dently, and includes typical catch-up and clawback provi- sions. Consistent with market practice, Onex, as sponsor of the Onex Partners Funds, will be allocated 40 percent of the carried interest with 60 percent being allocated to the Onex management team. Onex Corporation December 31, 2007 53 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 During 2007, Onex received a carried interest of Management fees $46 million on the realized gains of Spirit AeroSystems and During the investment period of the Onex Partners Funds Skilled Healthcare. During 2006, Onex received a carried (up to five years for Onex Partners II), Onex receives a man- interest of $49 million on the realized gain of Spirit AeroSys- agement fee of 2 percent on the committed capital of the tems. Prior amounts of carried interest received were $11 mil- relevant Fund provided by third-party investors. Thereafter, lion. While the carried interest amount was received in cash, a 1 percent management fee is payable to Onex based on it is deferred from inclusion in income for accounting pur- invested capital. The investment period of Onex Partners I poses until such time as the potential for repayment of the was completed during 2006 and Onex, therefore, earns a carried interest is remote. In 2007, Onex recorded as income 1 percent management fee on Onex Partners I’s remaining $48 million of the carried interest received. The total deferred invested capital, which would be approximately $7 million carried interest that Onex has received but not booked as based on investments at December 31, 2007. The manage- income at December 31, 2007 was $58 million. Management ment fee on Onex Partners I will decline over time as real- of Onex received a carried interest of $69 million on the real- izations occur. ized gains of Spirit AeroSystems and Skilled Healthcare in Management fees earned by Onex on the Onex 2007 and $74 million on the realized gains in 2006. There Partners Funds totalled approximately $50 million in were no realized gains on investments or acquisitions com- 2007 (2006 – $41 million). pleted by Onex Partners II. Investment in Onex shares and acquisitions During 2007, management fees earned on the ONCAP II Fund totalled approximately $5 million. During 2006, Onex adopted a program designed to further Debt of operating companies align the interests of the Company’s senior management and Onex does not guarantee the debt on behalf of its operating other investment professionals with those of Onex share- companies, nor are there any cross-guarantees between holders through increased share ownership. Under this pro- operating companies. Onex may hold the debt of certain gram, members of senior management of Onex are required operating companies, which amounted to $138 million at to invest at least 25 percent of all amounts received under the December 31, 2007 compared to $175 million at Decem- MIP and carried interests toward the purchase of Onex Sub- ber 31, 2006. Approximately $63 million of the decrease in ordinate Voting Shares until they individually hold at least debt of operating companies in 2007 was related to the 1,000,000 Onex Subordinate Voting Shares. Under this pro- conversion of preferred shares held by Onex to common gram during 2007, approximately $18 million (2006 – $15 mil- shares of Sitel Worldwide in connection with that com- lion) of Onex management’s realizations under the MIP and pany’s acquisition of and merger with SITEL Corporation in carried interest were invested in the purchase of Subordinate January 2007. Partially offsetting this decrease was debt Voting Shares. purchased by Onex in connection with an ONCAP acquisi- Members of management and the Board of Direc- tion in 2007. Note 10 to the audited annual consolidated tors of Onex can invest limited amounts in partnership with financial statements provides information on the debt of Onex in all acquisitions outside Onex Partners I and II at the operating companies held by Onex. same cost as Onex and other outside investors. During 2007, approximately $13 million in investments were made by Onex management and Onex Board members; this com- pares to $13 million in investments made by Onex manage- ment and the Onex Board in 2006. 54 Onex Corporation December 31, 2007 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 R E C E N T A C C O U N T I N G P R O N O U N C E M E N T S Onex’ management, including its CEO and CFO, Inventories In June 2007, the Canadian Institute of Chartered Accoun- have evaluated the effectiveness of the Company’s disclo- sure controls and procedures as at December 31, 2007 and have concluded that those disclosure controls and proce- tants issued Section 3031, “Inventories”, which requires dures were effective to ensure that information required to inventory to be measured at the lower of cost and net realiz- be disclosed by the Company in its corporate filings is able value. The standard provides guidance on the types of recorded, processed, summarized and reported within the costs that can be capitalized and requires the reversal of required time period for the year then ended. previous inventory writedowns if economic circumstances A control system, no matter how well conceived have changed to support higher inventory values. The stan- and operated, can provide only reasonable, not absolute, dard is effective for 2008. Commencing in the first quarter assurance that its objectives are met. Due to inherent of 2008, the Company is required to disclose the amount of limitations in all such systems, no evaluations of controls inventory recognized in cost of sales each quarter, as well as can provide absolute assurance that all control issues, if any inventory writedowns or reversals each quarter. The any, within a company have been detected. Accordingly, Company is currently evaluating the impact of adopting our disclosure controls and procedures are designed to this standard on its consolidated financial statements. provide reasonable, not absolute, assurance that the International Financial Reporting Standards In February 2008, the Canadian Accounting Standards objectives of our disclosure control system are met and, as set forth above, Onex has concluded, based on its evalua- tion as of the end of the period covered by this report, that Board confirmed that the use of International Financial our disclosure controls and procedures were effective in Reporting Standards (“IFRS”) would be required for Cana- providing reasonable assurance that the objectives of our dian publicly accountable enterprises for years beginning disclosure control system were met. on or after January 1, 2011. The Company is currently eval- uating the impact of adopting IFRS. D I S C L O S U R E C O N T R O L S A N D P R O C E D U R E S A N D I N T E R N A L C O N T R O L S O V E R F I N A N C I A L R E P O R T I N G Disclosure controls and procedures Multilateral Instrument 52-109, “Certification of Disclosure Internal controls over financial reporting Multilateral Instrument 52-109 also requires CEOs and CFOs to certify that they are responsible for establishing and maintaining internal controls over financial reporting for the issuer, that those internal controls have been designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with Canadian gener- in Issuers’ Annual and Interim Filings”, issued by the ally accepted accounting principles, and that the issuer Canadian Securities Administrators (“CSA”) requires Chief has disclosed any changes in its internal controls during Executive Officers (“CEOs”) and Chief Financial Officers its most recent interim period that has materially affected, (“CFOs”) to certify that they are responsible for establishing or is reasonably likely to materially affect, its internal con- and maintaining disclosure controls and procedures for the trol over financial reporting. issuer, that disclosure controls and procedures have been designed to provide reasonable assurance that material information relating to the issuer is made known to them, that they have evaluated the effectiveness of the issuer’s dis- closure controls and procedures, and that their conclusions about the effectiveness of those disclosure controls and procedures at the end of the period covered by the relevant annual filings have been disclosed by the issuer. Onex Corporation December 31, 2007 55 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 During 2007, Onex management evaluated the Company continues to assess the design of internal con- Company’s internal controls over financial reporting to trols over financial reporting in its most recently acquired ensure that they had been designed to provide reasonable businesses, including in particular those acquired during assurance regarding the reliability of financial reporting the last fiscal quarter. It has not identified in that review and the preparation of financial statements in accordance any weakness that has materially affected, or that is rea- with Canadian generally accepted accounting principles. sonably likely to materially affect, Onex’ internal control While no changes occurred during the last fiscal quarter of over financial reporting. 2007 that, in the view of Onex management, have materi- Several of Onex’ operating companies have also ally affected, or that are reasonably likely to materially completed system conversions or implemented new systems affect, Onex’ internal control over financial reporting, the during 2007. We believe that these system changes have not Company regularly acquires new businesses, many of materially affected, and are not reasonably likely to materi- which were privately owned or were divisions of larger ally affect, Onex’ internal control over financial reporting. organizations prior to their acquisition by Onex. The 56 Onex Corporation December 31, 2007 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 OUTLOOK We expect that the liquidity contraction in credit markets, • Industry Verticals. We continue to focus on those indus- which began in mid-2007, will continue during 2008. These tries that we believe provide an opportunity to acquire conditions are having an impact on the availability of debt a platform business upon which to grow. Recent past ex- financing for new private equity transactions, as lenders amples are in healthcare and aerospace manufacturing, are not willing to fund large acquisitions on terms and at where we studied the industry and discovered appropri- levels similar to those that prevailed during the first half of ate opportunities upon which to build. We are currently 2007. We expect that new private equity acquisitions will researching other industries in which we feel there are generally have less leverage and include more rigorous debt attractive dynamics for entry and opportunity for growth covenants, essentially returning to the lending conditions and value creation. that we experienced through the end of 2005. • Industry Partnerships. Onex has a long and successful This is not an unduly challenging development history of partnering with seasoned executives to find for Onex because we have not been dependent on excessive particular acquisitions and grow those businesses. The leverage to complete our acquisitions. Through Decem- operating experience of the industry executive combined ber 31, 2007, the average net debt/EBITDA multiple for with Onex’ expertise in acquisition analysis and financing all Onex Partners investments at acquisition was 3.6 times, creates a powerful partnership that has enabled us to an average that was well below private equity industry develop and evaluate opportunities more thoroughly and norms and that we do not view as excessive. We believe efficiently than we would have been able to do on our that by applying a prudent amount of leverage, our oper- own. We currently have three such industry partnerships ating companies are better able to withstand cyclical actively evaluating opportunities. downturns or unforeseen events, which ultimately reduces • Carve-Out Opportunities. Onex has demonstrated its risk for shareholders, investors and other stakeholders. expertise in working with major corporations to acquire a Onex focuses on increasing the intrinsic value of each busi- significant division or operation within a business and ness over the long term, rather than applying excessive establish it as a strong stand-alone entity. We are willing leverage for short- or medium-term gain. We are comfort- to invest the time and energy to work through the many able with a return to traditional debt covenants as we have complexities of such “carve-outs” to achieve not only the completed most acquisition financing in our 24-year his- objectives of the seller but also our own goal of creating tory under such terms. successful new platforms for growth and value creation. It is possible that the credit markets may also Past examples include purchasing the inflight catering affect certain avenues for Onex to realize on its assets dur- operations of American Airlines, Sky Chefs, and building ing 2008. In an outright sale, financing for such a transac- that business into the world leader; purchasing the tion will not likely be as readily available to potential Wichita and Tulsa aerostructures manufacturing opera- buyers as it was in the first half of 2007. tions from Boeing and forming Spirit AeroSystems; and During 2007, Onex completed five major acquisi- more recently purchasing the healthcare division of tions and investments while ONCAP completed two addi- Eastman Kodak, from which we created Carestream tional acquisitions. As we enter 2008, we are continuing to Health. We believe the current environment will enable review new opportunities to deploy capital but, given the us to pursue new carve-out opportunities. current debt market conditions, we are seeing a signifi- cantly lower level of attractive acquisition opportunities We believe that these initiatives, augmented by our team’s compared to recent years. We are, however, pursuing a excellent network of relationships, will enable us to pursue number of initiatives that we believe will help us to iden- interesting acquisition opportunities during 2008. Overall, tify attractive acquisition opportunities. These include: however, we expect the pace of acquisitions to be slower in 2008 than what we achieved in 2007. Onex Corporation December 31, 2007 57 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 Our view is that many of the factors affecting the private- Whatever the eventual trajectory of the U.S. econ- equity markets are cyclical in nature. We plan to continue omy, we believe it is in the best interest of Onex, its share- with our strategy to expand our third-party capital under holders and its partners for Onex management to remain management and, in early 2008, started our fundraising clearly focused on our long-standing business objective: to efforts for a third large-cap fund. Onex Partners III LP create long-term value by acquiring and building industry- is targeting capital commitments of US$4.5 billion, with leading businesses and by controlling and managing third- US$1 billion to be committed by Onex. If we are successful party capital. It is our consistent goal that the pursuit of in raising Onex Partners III, this will increase the amount of this objective will create value over the long term and that management fees Onex earns and the asset base upon value will be reflected in the price of Onex Subordinate which Onex has the opportunity to earn carried interest. Voting Shares. We also intend to raise third-party capital for Onex Real Estate Partners and grow Onex Credit Partners’ assets under management during 2008. At the time of this writing, there is no clear consensus about the direction of the U.S. economy in the coming year. Many believe that the economy and the capital markets will con- tinue to be challenged by the after-effects of the subprime mortgage turmoil. Should a recession ultimately take hold during 2008, the operating results for a number of Onex’ businesses are likely to be adversely affected. A substantial portion of Onex’ consolidated revenues in 2007 were derived from operating companies whose primary markets are in the United States. 58 Onex Corporation December 31, 2007 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 RISK MANAGEMENT As managers, it is our responsibility to identify and manage business risk. As shareholders, we require an appropriate return for the risk we accept. Managing risk Onex’ general approach to the management of risk is to long-term growth in value. Finally, Onex invests in finan- cial partnership with management. This strategy not only apply common-sense business principles to the manage- gives Onex the benefit of experienced managers but also is ment of the Company, the ownership of its operating com- designed to ensure that an operating company is run panies and the acquisition of new businesses. Each year entrepreneurially for the benefit of all shareholders. detailed reviews are conducted of many opportunities to Onex maintains an active involvement in its oper- purchase either new businesses or add-on acquisitions for ating companies in the areas of strategic planning, finan- existing businesses. Onex’ primary interest is in acquiring cial structures and negotiations and acquisitions. In the well-managed companies with a strong position in growing early stages of ownership, Onex may provide resources for industries. In addition, diversification among Onex’ oper- business and strategic planning and financial reporting, ating companies enables Onex to participate in the growth while an operating company builds these capabilities in- of a number of high-potential industries with varying busi- house. In almost all cases, Onex ensures there is oversight ness cycles. of its investment through representation on the acquired As a general rule, Onex attempts to arrange as company’s board of directors. Onex does not get involved many factors as practical to minimize risk without ham- in the day-to-day operations of acquired companies. pering its opportunity to maximize returns. When a pur- Operating companies are encouraged to reduce chase opportunity meets Onex’ criteria, for example, risk and/or expand opportunity by diversifying their cus- typically a fair price is paid, though not necessarily the tomer bases, broadening their geographic reach or prod- lowest price, for a high-quality business. Onex does not uct and service offerings and improving productivity. commit all of its capital to a single acquisition and does In certain instances, we may also encourage an operating have equity partners with whom it shares the risk of company to seek additional equity in the public markets in ownership. Onex Partners LP and Onex Partners II LP order to continue its growth without eroding its balance streamline Onex’ process of sourcing and drawing on sheet. One element of this approach may be to use new commitments from such equity partners. equity investment, when financial markets are favourable, An acquired company is not burdened with more to prepay existing debt and absorb related penalties. debt than it can likely sustain, but rather is structured so Specific strategies and policies to manage business risk that it has the financial and operating leeway to maximize at Onex and its operating companies are discussed below. Onex Corporation December 31, 2007 59 Onex Corporation December 31, 2007 59 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 Business cycles Diversification by industry and geography is a deliberate industry leaders with extensive international operations reduces the financial impact of downturns in specific strategy at Onex to reduce the risk inherent in business regions. As shown on the asset diversification chart that cycles. Onex’ practice of owning companies in various follows, Onex is well diversified among various industries industries with differing business cycles reduces the risk with no single industry representing more than 17 percent of holding a major portion of Onex’ assets in just one or of its net asset base and no single business representing two industries. Similarly, the Company’s focus on building more than 10 percent of its net asset base. Asset Diversification of Onex Mid-Cap Opportunities 2% – ONCAP Injection Molding 6% – Husky Commercial Vehicles 6% – Allison Transmission Financial Services 4% – The Warranty Group Theatre Exhibition 6% – Cineplex Entertainment Other Industries 7% – Tube City IMS – CEI Distressed Credit & Public Markets 4% – Onex Credit Partners – OCM Customer Support Services 8% – Sitel Worldwide Healthcare 17% – EMSC – CDI – Skilled Healthcare – Carestream Health – ResCare Aerostructures 9% – Spirit AeroSystems Aircraft & Aftermarket 6% – Hawker Beechcraft Real Estate 4% – Onex Real Estate Partners Electronics Manufacturing Services 4% – Celestica Cash 17% Private investments are valued at cost and publicly traded investments are valued at market as at December 31, 2007. Operating liquidity It is Onex’ view that one of the most important things exclusively on the strength of the acquired companies’ financial condition and prospects, is assumed by the Onex can do to control risk is to maintain a strong parent acquired company and is without recourse to Onex, the company with an appropriate level of liquidity. Onex parent company, at closing, or its other operating compa- needs to be in a position to support its operating compa- nies or partnerships. The foremost consideration, how- nies when, and if, it is appropriate and reasonable for ever, in developing a financing structure for an acquisition Onex, as an equity owner with paramount duties to act in is identifying the appropriate amount of equity to invest. the best interests of the Onex shareholders, to do so. Main- In Onex’ view, this should be the amount of equity which taining liquidity is important because Onex, as a holding maximizes the risk/reward equation for both shareholders company, generally does not have guaranteed sources of and the acquired company. In other words, it allows the meaningful cash flow. acquired company not only to manage its debt through In completing acquisitions, it is generally Onex’ reasonable business cycles but also to have significant policy to finance a large portion of the purchase price with financial latitude for the business to vigorously pursue its debt provided by third-party lenders. This debt, sourced growth objectives. 60 Onex Corporation December 31, 2007 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 While Onex seeks to optimize the risk/reward equation in all acquisitions, there is the risk that the Financial and commodity risks In the normal course of business activities, Onex and its acquired company will not generate sufficient profitability operating companies may face a variety of risks related to or cash flow to service its debt requirements and/or financial management. Individual operating companies related debt covenants or provide adequate financial flexi- may also use financial instruments to offset the impact of bility for growth. In such circumstances, additional invest- anticipated changes in commodity prices related to the ment by the equity partners, including Onex, may be conduct of their businesses. In all cases, it is a matter of required. In severe circumstances, the recovery of Onex’ Company policy that neither Onex nor its operating com- equity and any other investment in that operating com- panies engages in derivatives trading or other speculative pany is at risk. activities. Interest rate risk As noted above, Onex generally Timeliness of investment commitments Onex’ ability to create value for shareholders is dependent finances a significant portion of its acquisitions with debt taken on by the acquired operating company. An impor- in part on its ability to successfully complete large acquisi- tant element in controlling risk is to manage, to the extent tions. Our preferred course is to complete acquisitions on reasonable, the impact of fluctuations in interest rates on an exclusive basis. However, we also participate in large the debt of the operating company. acquisitions through an auction or bidding process with It has generally been Onex’ policy to fix the inter- multiple potential purchasers. Bidding is often very com- est on some of the term debt or otherwise minimize the petitive for the large-scale acquisitions that are Onex’ effect of interest rate increases on a portion of the debt of primary interest, and the ability to make knowledgeable, its operating companies at the time of acquisition. This is timely investment commitments is a key component in achieved by taking on debt at fixed interest rates and successful purchases. In such instances, the vendor often entering into interest rate swap agreements or financial establishes a relatively short time frame for Onex to re- contracts to control the level of interest rate fluctuation. spond definitively. The risk inherent in such a strategy is that, should In order to improve the efficiency of Onex’ inter- interest rates decline, the benefit of such declines may not nal processes on both auction and exclusive acquisition be obtainable or may only be achieved at the cost of penal- processes, and so reduce the risk of missing out on high- ties to terminate existing arrangements. There is also the quality acquisition opportunities, during 2003 we created risk that the counterparty on an interest rate swap agree- Onex Partners LP (“Onex Partners I”), a US$1.655 billion ment may not be able to meet its commitments. Guide- pool of capital raised from Onex and major institutional lines are in place that specify the nature of the financial co-investors. During 2004, 2005, 2006 and 2007, Onex suc- institutions that operating companies can deal with on cessfully deployed this capital in a variety of attractive interest rate contracts. businesses with the result that Onex Partners I’s invest- Currency fluctuations The majority of the activi- ment period was substantially completed in 2006. Onex ties of Onex’ operating companies were conducted outside raised a second fund, Onex Partners II LP, in 2006. Onex Canada during 2007. Approximately 48 percent of consoli- Partners II, a US$3.45 billion pool of capital, completed its dated revenues and 57 percent of consolidated assets were first investment in November 2006 and in 2007 made five in the United States. Approximately 40 percent of consoli- further investments. dated revenues were from outside North America; how- ever, a substantial portion of that business is actually based on U.S. currency. This makes the value of the Canadian dollar relative to the U.S. dollar the primary cur- rency relationship affecting Onex’ operating results. Onex’ operating companies may use currency derivatives in the normal course of business to hedge against adverse fluctu- ations in key operating currencies but, as noted above, speculative activity is not permitted. Onex Corporation December 31, 2007 61 Onex Corporation December 31, 2007 61 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 Onex’ results are reported in Canadian dollars, Diesel fuel is a key commodity used in Tube City and fluctuations in the value of the Canadian dollar rela- IMS’ operations. The company consumes approximately tive to other currencies can have an impact on Onex’ 10 million gallons of diesel fuel annually. To help mitigate reported results and consolidated financial position. the risk of changes in fuel, Tube City IMS incorporates into During 2007, shareholders’ equity reflected a $202 million substantially all of its contracts pricing escalators based decrease in the value of Onex’ net equity in its operating on published prices indices that would generally offset companies and equity-accounted investments that oper- some portion of the fuel price changes. ate in U.S. currency. Onex holds a substantial amount of cash and marketable securities in U.S.-dollar-denominated securi- Integration of acquired companies An important aspect of Onex’ strategy for value creation is ties. The portion of securities held in U.S. dollars is based to acquire what we consider to be “platform” companies. on Onex’ view of funds it will require for future invest- Such companies often have distinct competitive advan- ments in the United States. Onex does not speculate on the tages in products or services in their respective industries direction of exchange rates between the Canadian dollar that provide a solid foundation for growth in scale and and the U.S. dollar when determining the balance of cash value. In these instances, Onex works with company man- and marketable securities to hold in each currency, nor agement to identify attractive add-on acquisitions that may does it use foreign exchange contracts to protect itself enable the platform company to achieve its goals more against translation loss. quickly and successfully than by focusing solely on the Insurance claims The Warranty Group under- development and/or diversification of its customer base, writes and administers extended warranties and credit which is known as organic growth. Growth by acquisition, insurance on a wide variety of consumer goods including however, may carry more risk than organic growth. While automobiles, consumer electronics and major home appli- as many of these risks as possible are considered in the ances. Unlike most property insurance risk, the risk associ- acquisition planning, in Onex’ experience our operating ated with extended warranty claims is non-catastrophic companies also face risks such as unknown expenses and short-lived, resulting in predictable loss trends. The related to the cost-effective amalgamation of operations, predictability of claims, which is enhanced by the large vol- the retention of key personnel and customers, the future ume of claims data in the company’s database, enables The value of goodwill paid as part of the acquisition price and Warranty Group to appropriately measure and price risk. the future value of the acquired assets and intellectual Commodity prices Certain of Onex’ operating property in addition to the risk factors associated with companies are vulnerable to price fluctuations in major the industry and combined business more generally. Onex commodities. works with company management to understand and Aluminum, titanium and composites represent attempt to mitigate such risks as much as possible. the principal raw materials used in Spirit AeroSystems’ manufacturing operations. Spirit AeroSystems has entered into long-term supply contracts with substantially all of its Dependence on government funding Since 2005, Onex has acquired businesses, or interests in suppliers of raw materials, which limits the company’s businesses, in various segments of the U.S. healthcare exposure to rising raw materials prices. Most of the raw industry. The revenues of these companies are partially materials purchased are based on a fixed pricing or at dependent on funding from federal, state and local gov- reduced rates through Boeing’s or Airbus’ high-volume ernment agencies, especially those responsible for U.S. purchase contracts. Spirit AeroSystems continues to seek federal Medicare and state Medicaid funding. Budgetary ways to further reduce raw material costs and recently, pressures, as well as economic, industry, political and began a sourcing initiative to increase the amount of other factors, could influence governments to not increase material sourced from low-cost countries in Asia and and, in some cases, to decrease appropriations for the Central Europe. services offered by Onex’ operating subsidiaries, which 62 Onex Corporation December 31, 2007 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 could reduce their revenues materially. Future revenues Environmental management by the operating may be affected by changes in rate-setting structures, companies is accomplished through the education of methodologies or interpretations that may be proposed or employees about environmental regulations and appropri- are under consideration. While each of Onex’ operating ate operating policies and procedures; site inspections by companies in the U.S. healthcare industry is subject to environmental consultants; the addition of proper equip- reimbursement risk directly related to its particular busi- ment or modification of existing equipment to reduce or ness segment, it is unlikely that all of these companies eliminate environmental hazards; remediation activities as would be affected by the same event, or to the same required; and ongoing waste reduction and recycling pro- extent, simultaneously. Ongoing pressure on government grams. Environmental consultants are engaged to advise appropriations is a normal aspect of business for these on current and upcoming environmental regulations that companies, and all seek to minimize the effect of possible may be applicable. funding reductions through productivity improvements Many of the operating companies are involved in and other initiatives. the remediation of particular environmental situations such as soil contamination. In almost all cases, these situ- Significant customers Onex has acquired major operating companies and divi- ations have occurred prior to Onex’ acquisition of those companies and the estimated costs of remedial work and sions of large companies. As part of these purchases, the related activities are managed either through agreements acquired company has often continued to supply its for- with the vendor of the company or through provisions mer owner through long-term supply arrangements. It has established at the time of acquisition. Manufacturing been Onex’ policy to encourage its operating companies to activities carry the inherent risk that changing environ- quickly diversify their customer bases to the extent practi- mental regulations may identify additional situations cable in order to manage the risk associated with serving a requiring capital expenditures or remedial work, and asso- single major customer. ciated costs to meet those regulations. Certain Onex operating companies have major customers that represent more than 10 percent of annual revenues. Spirit AeroSystems primarily relied on one major Other contingencies Onex and its operating companies are or may become customer, Boeing, at the time of its acquisition by Onex. parties to legal claims arising in the ordinary course of The table in note 22 to the audited annual consolidated business. The operating companies have recorded liability financial statements provides information on the concen- provisions based upon their consideration and analysis of tration of business the operating companies have with their exposure in respect of such claims. Such provisions major customers. are reflected, as appropriate, in Onex’ consolidated finan- cial statements. Onex, the parent company, has not cur- Environmental considerations Onex has an environmental protection policy that has rently recorded any further liability provision and we do not believe that the resolution of known claims would been adopted by its operating companies; many of these reasonably be expected to have a material adverse impact operating companies have also adopted supplemental on Onex’ consolidated financial position. However, the policies appropriate to these industries or businesses. final outcome with respect to outstanding, pending or Senior officers of each of these companies are ultimately future actions cannot be predicted with certainty, and responsible for ensuring compliance with these policies. therefore there can be no assurance that their resolution They are required to report annually to their company’s will not have an adverse effect on our consolidated finan- board of directors and to Onex regarding compliance. cial position. Onex Corporation December 31, 2007 63 Onex Corporation December 31, 2007 63 MANAGEMENT ’S RESPONSIBILITY FOR FINANCIAL STATEMENTS The accompanying consolidated financial statements have been prepared by management, reviewed by the Audit and Corporate Governance Committee and approved by the Board of Directors of the Company. Management is responsible for the information and representations contained in these financial statements. The Company maintains appropriate processes to ensure that relevant and reliable financial information is produced. The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles. The significant accounting policies which management believes are appropriate for the Company are described in note 1 to the consolidated financial statements. The Board of Directors is responsible for reviewing and approving the consolidated financial statements and overseeing management’s performance of its financial reporting responsibilities. An Audit and Corporate Governance Committee of three non-management independent Directors is appointed by the Board. The Audit and Corporate Governance Committee reviews the consolidated financial statements, adequacy of internal controls, audit process and financial reporting with management and with the external auditors. The Audit and Corporate Governance Committee reports to the Directors prior to the approval of the audited consolidated financial statements for publication. PricewaterhouseCoopers llp, the Company’s external auditors, who are appointed by the holders of Subordinate Voting Shares, audited the consolidated financial statements in accordance with Canadian generally accepted auditing standards to enable them to express to the shareholders their opinion on the consolidated financial statements. Their report is set out on the following page. [signed] [signed] Ewout R. Heersink Chief Financial Officer at December 31, 2007 February 27, 2008 Donald W. Lewtas Vice President Finance Chief Financial Officer beginning January 1, 2008 February 27, 2008 64 Onex Corporation December 31, 2007 AUDITORS’ REPORT To the Shareholders of Onex Corporation: We have audited the consolidated balance sheets of Onex Corporation as at December 31, 2007 and 2006 and the consoli- dated statements of earnings, shareholders’ equity and comprehensive earnings and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our 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 plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2007 and 2006 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. [signed] PricewaterhouseCoopers LLP Chartered Accountants, Licensed Public Accountants Toronto, Canada February 27, 2008 Onex Corporation December 31, 2007 65 CONSOLIDATED BALANCE SHEETS As at December 31 (in millions of dollars) 2007 2006 Assets Current assets Cash and short-term investments Marketable securities Accounts receivable Inventories (note 4) Other current assets (note 5) Current assets held by discontinued operations (note 3) Property, plant and equipment (note 6) Investments (note 7) Other long-term assets (note 8) Intangible assets (note 9) Goodwill Long-lived assets held by discontinued operations (note 3) Liabilities and Shareholders’ Equity Current liabilities Accounts payable and accrued liabilities Current portion of long-term debt, without recourse to Onex (note 10) Current portion of obligations under capital leases, without recourse to Onex (note 11) Current portion of warranty reserves and unearned premiums (note 12) Current liabilities held by discontinued operations (note 3) Long-term debt of operating companies, without recourse to Onex (note 10) Long-term portion of obligations under capital leases of operating companies, without recourse to Onex (note 11) Long-term portion of warranty reserves and unearned premiums (note 12) Other liabilities (note 13) Future income taxes (note 14) Long-term liabilities held by discontinued operations (note 3) Non-controlling interests Shareholders’ equity Commitments and contingencies are reported in notes 11 and 23. Signed on behalf of the Board of Directors [signed] Director [signed] Director 66 Onex Corporation December 31, 2007 $ 2,462 $ 2,944 813 3,463 2,539 1,461 – 10,738 3,489 3,203 2,634 2,692 3,443 – 1,129 2,586 2,345 1,694 139 10,837 2,899 1,822 2,894 1,036 2,696 394 $ 26,199 $ 22,578 $ 4,938 176 104 1,544 – 6,762 6,159 26 2,364 1,663 1,373 – 18,347 6,149 1,703 $ 4,066 43 35 2,246 96 6,486 3,798 70 2,623 1,818 1,050 324 16,169 4,594 1,815 $ 26,199 $ 22,578 CONSOLIDATED STATEMENTS OF EARNINGS Year ended December 31 (in millions of dollars except per share data) Revenues Cost of sales Selling, general and administrative expenses Earnings Before the Undernoted Items Amortization of property, plant and equipment Amortization of intangible assets and deferred charges Interest expense of operating companies (note 16) Interest income Earnings (loss) from equity-accounted investments Foreign exchange gains (loss) Stock-based compensation (note 17) Other income Gains on sales of operating investments, net (note 18) Acquisition, restructuring and other expenses (note 19) Writedown of goodwill and intangible assets Writedown of long-lived assets Earnings before income taxes, non-controlling interests and discontinued operations Provision for income taxes (note 14) Non-controlling interests Earnings from continuing operations Earnings from discontinued operations (note 3) 2007 $ 23,433 (19,186) (2,163) 2,084 (535) (409) (537) 125 (44) (118) (150) 6 1,144 (123) (7) (15) 1,421 (295) (1,017) 109 119 2006 $ 18,620 (16,161) (1,087) 1,372 (370) (91) (339) 122 25 22 (634) 9 1,307 (292) (10) (3) 1,118 (24) (838) 256 746 Net Earnings for the Year $ 228 $ 1,002 Net Earnings per Subordinate Voting Share (note 20) Basic and Diluted: Continuing operations Discontinued operations Net earnings $ $ $ 0.85 0.93 1.78 $ $ $ 1.93 5.62 7.55 Onex Corporation December 31, 2007 67 CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE EARNINGS (in millions of dollars except per share data) Balance – December 31, 2005 Dividends declared(a) Purchase and cancellation of shares Currency translation adjustments Net earnings for the year Balance – December 31, 2006 Adoption of financial instrument accounting policies (note 1) Dividends declared(a) Purchase and cancellation of shares Comprehensive Earnings (Loss) Net earnings for the year Other comprehensive earnings (loss) for the year: Currency translation adjustments Change in fair value of derivatives designated as hedges Other Share Capital (note 15) Accumulated Other Comprehensive Earnings (Loss) Retained Earnings Total Shareholders’ Equity $ 578 $ 648 $ (74)(b) $ 1,152 – (37) – – 541 – – (12) – – – – (15) (166) – 1,002 1,469 1 (14) (101) 228 – – – – – (121) – (195)(b) – – – – (202) (22) 10 (15) (203) (121) 1,002 1,815 1 (14) (113) 228 (202) (22) 10 Balance – December 31, 2007 $ 529 $ 1,583 $ (409)(c) $ 1,703 (a) Dividends declared per Subordinate Voting Share during 2007 totalled $0.11 (2006 – $0.11). In 2007, shares issued under the dividend reinvestment plan amounted to less than $1 (2006 – less than $1). (b) Accumulated Other Comprehensive Earnings (Loss) as at December 31, 2006 and 2005 consists of currency translation adjustments. Included in the currency translation adjustments for the year ended December 31, 2006 is negative $129 relating to the discontinued operations of J.L. French Automotive Castings, Inc. (c) Accumulated Other Comprehensive Earnings (Loss) as at December 31, 2007 consists of currency translation adjustments of negative $397, unrealized losses on the effective portion of cash flow hedges of $20 and unrealized gains on available-for-sale financial assets and other of $8. Income taxes did not have a significant effect on these items. 68 Onex Corporation December 31, 2007 CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31 (in millions of dollars) Operating Activities Net earnings for the year Earnings from discontinued operations Items not affecting cash: Amortization of property, plant and equipment Amortization of intangible assets and deferred charges Writedown of goodwill and intangible assets Writedown of long-lived assets Non-cash component of restructuring (note 19) Non-controlling interests Future income taxes (note 14) Stock-based compensation (note 17) Loss (earnings) from equity-accounted investments Foreign exchange loss (gains) Gains on sales of operating investments, net (note 18) Other Changes in non-cash working capital items: Accounts receivable Inventories Other current assets Accounts payable and accrued liabilities Increase (decrease) in cash due to changes in working capital items Increase (decrease) in warranty reserves and unearned premiums and other liabilities Financing Activities Issuance of long-term debt Repayment of long-term debt Cash dividends paid Repurchase of share capital Issuance of share capital by operating companies Distributions by operating companies Decrease due to other financing activities Investing Activities Acquisition of operating companies, net of cash in acquired companies of $326 (2006 – $144) (note 2) Purchase of property, plant and equipment Proceeds from sales of operating investments Decrease due to other investing activities Cash from discontinued operations Decrease in Cash for the Year Increase (decrease) in cash due to changes in foreign exchange rates Cash, beginning of the year – continuing operations Cash, beginning of the year – discontinued operations Cash, end of year Short-term investments Cash and short-term investments Cash held by discontinued operations (note 3) 2007 2006 $ 1228 (119) $ 1,002 (746) 535 409 7 15 5 1,017 68 150 44 132 (1,144) 26 1,373 (358) 176 109 270 197 (242) 1,328 1,927 (1,643) (14) (113) 2,123 (886) (47) 1,347 (1,840) (633) 1,311 (1,871) 216 (2,817) (142) (351) 2,944 11 2,462 – 2,462 – 370 91 10 3 91 838 72 438 (25) (10) (1,307) 31 858 (128) (619) 7 258 (482) 520 896 543 (792) (15) (203) 822 (1,036) (9) (690) (850) (823) 1,391 (266) 172 (376) (170) 10 3,089 26 2,955 – 2,955 (11) Cash and Short-term Investments Held by Continuing Operations $ 2,462 $ 2,944 Onex Corporation December 31, 2007 69 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in millions of dollars except per share data) Onex Corporation and its subsidiaries (the “Company”) is a diversified company whose businesses operate autonomously. Throughout these statements, the term “Onex” refers to the parent company. The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (“Canadian GAAP” or “GAAP”). All amounts are in millions of Canadian dollars unless otherwise noted. 1. B A S I S O F P R E PA R AT I O N A N D S I G N I F I C A N T A C C O U N T I N G P O L I C I E S B A S I S O F P R E PA R AT I O N The consolidated financial statements represent the accounts of Onex and its subsidiaries, including its controlled operating companies. Onex also controls and consolidates the operations of Onex Partners LP (“Onex Partners I”) and Onex Partners II LP (“Onex Partners II”), referred to collectively as “Onex Partners” (as described in note 23(d) and 23(e)). All significant intercompany balances and transactions have been eliminated. The principal operating companies and Onex’ ownership and voting interests in these entities are as follows: Investments made through Onex Celestica Inc. (“Celestica”) Cineplex Entertainment Sitel Worldwide Corporation (“Sitel Worldwide”) Radian Communication Services Corporation (“Radian”) Investments made through Onex and Onex Partners I Cosmetic Essence, Inc. (“CEI”) Center for Diagnostic Imaging, Inc. (“CDI”) Emergency Medical Services Corporation (“EMSC”) Res-Care, Inc. (“ResCare”) Spirit AeroSystems, Inc. (“Spirit AeroSystems”) Skilled Healthcare Group, Inc. (“Skilled Healthcare”) Investments made through Onex and Onex Partners II Tube City IMS Corporation (“Tube City IMS”) Hawker Beechcraft Corporation (“Hawker Beechcraft”) Carestream Health, Inc. (“Carestream Health”) Allison Transmission, Inc. (“Allison Transmission”) Investments made through Onex, Onex Partners I and Onex Partners II The Warranty Group, Inc. (“The Warranty Group”) Husky Injection Molding Systems Ltd. (“Husky”) Other invesments ONCAP II L.P. Onex Real Estate Partners (“Onex Real Estate”) December 31, 2007 December 31, 2006 Onex Ownership Voting Onex Ownership 13% 23% 66% 89% 21% 19% 29% 6% 7% 9% 35% 20% 39% 15% 30% 36% 44% 86% 79% (a) 88% 100% 100% 100% 97% (a) 76% 90% 100% (a) 100% (a) 100% 100% 100% 100% 13% 23% 67% 89% 21% 19% 29% 6% 13% 21% – – – – 31% – 45% 85% Voting 79% (b) 89% 100% 100% 100% 97% (a) 89% 100% – – – – 100% – 100% 100% (a) Onex exerts significant influence over these equity-accounted investments through its right to appoint members to the Board of Directors (or Board of Trustees) of the entities. (b) At December 31, 2006, Onex controlled a sufficient number of units to elect the majority of the board of the general partner of Cineplex Entertainment Limited Partnership (“CELP”). The ownership percentages are before the effect of any potential Joint ventures, which are not variable interest entities dilution relating to the Management Investment Plans (the “MIP”) (“VIEs”), are accounted for using the proportionate consolidation as described in note 23(f ). The voting interests include shares that method. The consolidated financial statements include revenues Onex has the right to vote through contractual arrangements or of $19 (2006 – $21), net assets of $48 (2006 – $54) and net loss through multiple voting rights attached to particular shares. In before income taxes of $10 (2006 – earnings of $63) with respect to certain circumstances, the voting arrangements give Onex the joint ventures. The 2006 net earnings before income taxes from right to elect the majority of the board of directors. joint ventures consists primarily of gains relating to the sale of cer- tain Town and Country Trust (“Town and Country”) properties. 70 Onex Corporation December 31, 2007 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 S N E W A C C O U N T I N G P O L I C I E S Consolidation On April 2, 2007, Onex ceased to have voting rights on certain units Held-for-trading Financial assets and financial liabilities that are purchased and incurred with the intention of generating profits in the near term of Cineplex Entertainment Limited Partnership (“CELP”) held by are classified as held-for-trading. Other instruments may be des- unitholders other than Onex. As a result, Onex no longer controls a ignated as held-for-trading on initial recognition. These instru- sufficient number of units to elect the majority of the board of the ments are accounted for at fair value with the change in the fair General Partner of CELP and, therefore, Onex ceased consolidating value recognized in earnings. CELP on April 2, 2007. As Onex continues to have significant influ- At January 1, 2007, no investments required mandatory ence over CELP, beginning in the second quarter of 2007 Onex now classification as held-for-trading. However, certain investments accounts for its interest in CELP using equity accounting, with the previously recorded at cost were designated as held-for-trading results included in the other segment in note 27. on January 1, 2007. The difference of $1 between the fair value and Accounting Changes In January 2007, the Company adopted the Canadian Institute of the cost was recorded as an increase to retained earnings on January 1, 2007. The tax effect on this transitional amount was not significant. Chartered Accountants Handbook (“CICA Handbook”) Section 1506, During 2007, the decrease in the fair value of assets des- “Accounting Changes”, which requires that voluntary changes in ignated as held-for-trading of $21 was included in other income in accounting policy be made only if the changes result in financial the consolidated statement of earnings. The decrease in fair value statements that provide reliable and more relevant information. of assets classified as held-for-trading was primarily due to for- It also requires prior period errors to be corrected retrospectively. eign exchange on certain U.S.-dollar-denominated investments. The adoption of this standard did not impact the consolidated finan- cial statements. Available-for-sale Financial assets classified as available-for-sale are carried at fair Financial Instruments The Company adopted CICA Handbook Section 3855, “Financial value with the changes in fair value recorded in other comprehen- sive earnings. Securities that are classified as available-for-sale Instruments – Recognition and Measurement”; Section 3865, and do not have a quoted price in an active market are recorded at “Hedges”; Section 1530, “Comprehensive Income”; and Section 3861, cost. Available-for-sale securities are written down to fair value “Financial Instruments – Disclosure and Presentation” on January 1, through earnings whenever it is necessary to reflect an other-than- 2007. The adoption of these new accounting standards resulted temporary impairment. Gains and losses realized on disposal of in changes in the accounting for financial instruments as well as available-for-sale securities, which are calculated on an average the recognition of certain transition adjustments that have been cost basis, are recognized in earnings. recorded in opening retained earnings and accumulated other com- At January 1, 2007, unrealized losses of $7 on securities prehensive income, as described below. The comparative consoli- classified as available-for-sale that have a quoted price in an dated financial statements have not been restated for the adoption active market were recorded as a decrease to investments. Onex’ of these standards, except for the presentation of currency transla- share of $2 was recorded as an opening adjustment to accumulated tion adjustments. The principal changes in the accounting for finan- other comprehensive earnings. The tax effect on this transitional cial instruments due to the adoption of these accounting standards amount was not significant. are described below. a) Financial assets and financial liabilities Under the new standards, financial assets and financial liabilities Held-to-maturity Securities that have fixed or determinable payments and a fixed maturity date, which the Company intends and has the ability to are initially recognized at fair value and are subsequently accounted hold to maturity, are classified as held-to-maturity and accounted for based on their classification as described below. The classifi- for at amortized cost using the effective interest rate method. cation depends on the purpose for which the financial instruments Investments classified as held-to-maturity are written down to fair were acquired and their characteristics. Except in very limited cir- value through earnings whenever it is necessary to reflect an other- cumstances, the classification is not changed subsequent to initial than-temporary impairment. recognition. Financial assets purchased and sold, where the con- tract requires the asset to be delivered within an established time frame, are recognized on a trade-date basis. Onex Corporation December 31, 2007 71 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 S 1. B A S I S O F P R E PA R AT I O N A N D Amounts accumulated in other comprehensive earnings S I G N I F I C A N T A C C O U N T I N G P O L I C I E S ( c o n t ’d ) are reclassified in the consolidated statement of earnings in the period in which the hedged item affects income. However, when b) Derivatives and hedge accounting Hedge accounting At the inception of a hedging relationship, the Company documents the forecasted transaction that is hedged results in the recogni- tion of a non-financial asset or a non-financial liability, the gains and losses previously deferred in other comprehensive earnings the relationship between the hedging instrument and the hedged are transferred from other comprehensive earnings and included item, its risk management objectives and its strategy for under- in the initial measurement of the cost of the asset or liability. taking the hedge. The Company also requires a documented assess- When a hedging instrument expires or is sold, or when a ment, both at hedge inception and on an ongoing basis, of whether hedge no longer meets the criteria for hedge accounting, any or not the derivatives that are used in the hedging transactions are cumulative gain or loss existing in other comprehensive earnings highly effective in offsetting the changes attributable to the hedged at that time remains in other comprehensive earnings until the risks in the fair values or cash flows of the hedged items. forecasted transaction is eventually recognized in the statement Under the previous standards, derivatives that met the of income. When a forecasted transaction is no longer expected to requirements for hedge accounting were generally accounted for occur, the cumulative gain or loss that was reported in other com- on an accrual basis. Under the new standards, all derivatives are prehensive earnings is immediately transferred to the statement recorded at fair value. The method of recognizing fair value gains of earnings. Upon adoption of the new standards, the Company and losses depends on the nature of the risks being hedged. recorded an increase in assets of $13 relating to cash flow hedges. Derivatives that are not designated in effective hedging Onex’ share of $2 was recorded as an opening adjustment to accu- relationships continue to be accounted for at fair value with mulated other comprehensive earnings. The tax effect on this changes in fair value being included in other income in the con- transitional amount was not significant. solidated statement of earnings. When derivatives are designated as hedges, the Company classifies them either as: (i) hedges of the change in fair value of Net investment hedges Hedges of net investments in foreign operations are accounted for recognized assets or liabilities or firm commitments (fair value similar to cash flow hedges. Any gain or loss on the hedging hedges); (ii) hedges of the variability in highly probable future cash instrument relating to the effective portion of the hedge is recog- flows attributable to a recognized asset or liability or a forecasted nized in other comprehensive earnings. The gain or loss relating transaction (cash flow hedges); or (iii) hedges of net investments in to the ineffective portion is recognized immediately in the consol- a foreign self-sustaining operation (net investment hedges). idated statement of earnings. Gains and losses accumulated in Fair value hedge The Company’s fair value hedges principally consist of interest other comprehensive earnings are included in the consolidated statement of earnings upon the reduction or disposal of the investment in the foreign operation. The adoption of the new rate swaps that are used to protect against changes in the fair standards resulted in the reclassification of the foreign currency value of fixed-rate long-term financial instruments due to move- translation adjustment account to accumulated other compre- ments in market interest rates. hensive earnings. Changes in the fair vlaue of derivatives that are desig- nated and qualify as fair value hedging instruments are recorded in the statement of earnings, along with changes in the fair value c) Comprehensive earnings Comprehensive earnings is composed of the Company’s net of the assets, liabilities or group thereof that are attributable to earnings and other comprehensive earnings. Other comprehen- the hedged risk. Cash flow hedge The Company is exposed to variability in future interest cash flows sive earnings includes unrealized gains and losses on available- for-sale securities, foreign currency translation gains and losses on the net investment in self-sustaining operations and changes in the fair market value of derivative instruments designated as on non-trading assets and liabilities that bear interest at variable cash flow hedges or net investment hedges, all net of income rates or are expected to be reinvested in the future. taxes. The components of comprehensive earnings are disclosed The effective portion of changes in the fair value of in the consolidated statement of shareholders’ equity and com- derivatives that are designated and qualify as cash flow hedges is prehensive earnings. recognized in other comprehensive earnings. Any gain or loss in fair value relating to the ineffective portion is recognized immedi- ately in the consolidated statement of earnings in other income. 72 Onex Corporation December 31, 2007 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 S d) Financing charges and other transaction costs Under the new standards, financing charges and other transaction e) Interest rate risk The Company is exposed to interest rate price risk primarily costs may continue to be capitalized. However, deferred financing through investments held by The Warranty Group, as described in charges now must be recorded against the carrying value of the note 7, and certain of its long-term debt subject to fixed rates, as associated debt. As a result of the adoption of this policy, at described in note 10. The Company is exposed to interest rate January 1, 2007, $81 of deferred financing charges were reclassified cash flow risk, primarily through short-term investments held by from other assets to long-term debt. Onex and certain operating companies, as well as certain of its long-term debt subject to floating interest rates. In addition, cer- tain operating companies have hedged a portion or all of their exposure to floating rate interest by entering into interest rate swaps, as described in note 10. The following table summarizes the adjustments required to adopt the new standards. As at January 1, 2007 Increase/(Decrease) Decrease/(Increase) Investments Other Assets Long-term Debt Non-controlling Interest Liability Held-for-trading securities Available-for-sale securities Hedges Classification of transaction costs Total $ 5 (7) – – $ (2) $ – – 13 (81) $ (68) $ – – – 81 $ 81 $ (4) 5 (11) – $ (10) (1) Income taxes did not have a significant effect on the adoption of the new standards. Retained Earnings(1) $ (1) – – – $ (1) Accumulated Other Comprehensive Earnings $ – 2 (2) – $ – Financial instruments were classified as follows: December 31, 2007 December 31, 2006 Carrying Value Fair Value(1) $ 170 $ 170 $ 2,179 $ 132 $ 2,179 $ 132 Carrying Value(2) $ 136 $ 2,297 $ 136 Held-for-trading(3) Available-for-sale(4) Held-to-maturity(5) (1) The fair value of substantially all financial instruments is determined by using prices quoted in an active market. (2) December 31, 2006 carrying value represents the carrying amount in the 2006 financial statements of instruments that are now classified as held-for-trading, available-for-sale and held-to-maturity. (3) Amounts are included in investments in the consolidated balance sheet. At December 31, 2007, these securities classified as held-for-trading were optionally designated as such. (4) Amounts are included in marketable securities, investments and other long-term assets in the consolidated balance sheet. (5) Amounts are primarily included in investments in the consolidated balance sheet. In addition to the above, at December 31, 2007, cash and short-term investments of $2,462 have been classified as held-for-trading. Long-term debt has not been designated as held-for- trading and therefore is recorded at amortized cost subsequent to initial recognition. Recently issued accounting pronouncements Inventories In June 2007, the Canadian Institute of Chartered Accountants (“CICA”) issued Section 3031, “Inventories”, which requires inven- tory to be measured at the lower of cost and net realizable value. The standard provides guidance on the types of costs that can be capitalized and requires the reversal of previous inventory write- downs if economic circumstances have changed to support higher inventory values. The standard is effective for 2008. Commencing in the first quarter of 2008, the Company is required to disclose the amount of inventory recognized in cost of sales each quarter, as well as any inventory writedowns or reversals each quarter. The Company is currently evaluating the impact of adopting this stan- dard on its consolidated financial statements. International Financial Reporting Standards In February 2008, the Canadian Accounting Standards Board con- firmed that the use of International Financial Reporting Standards (“IFRS”) will be required for Canadian publicly accountable enter- prises for years beginning on or after January 1, 2011. The Company is currently evaluating the impact of adopting IFRS. Onex Corporation December 31, 2007 73 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 S 1. B A S I S O F P R E PA R AT I O N A N D S I G N I F I C A N T A C C O U N T I N G P O L I C I E S ( c o n t ’d ) Property, plant and equipment Property, plant and equipment are recorded at cost less accu- mulated amortization and provision for impairments, if any. For S I G N I F I C A N T A C C O U N T I N G P O L I C I E S Foreign currency translation The Company’s operations conducted in foreign currencies, other substantially all property, plant and equipment, amortization is provided for on a straight-line basis over the estimated useful lives of the assets: five to 40 years for buildings and up to 20 years for than those operations that are associated with investment-holding machinery and equipment. The cost of plant and equipment is subsidiaries, are considered to be self-sustaining. Assets and liabili- reduced by applicable investment tax credits more likely than not ties of self-sustaining operations conducted in foreign currencies to be realized. are translated into Canadian dollars at the exchange rate in effect at Leasehold improvements are amortized over the terms the balance sheet date. Revenues and expenses are translated at of the leases. average exchange rates for the year. Unrealized gains or losses on Leases that transfer substantially all the risks and translation of self-sustaining operations conducted in foreign cur- benefits of ownership are recorded as capital leases. Buildings rencies are shown as currency translation adjustments, a compo- and equipment under capital leases are amortized over the nent of other comprehensive earnings. shorter of the term of the lease or the estimated useful life of the The Company’s integrated operations, including invest- asset. Amortization of assets under capital leases is on a straight- ment-holding subsidiaries, translate monetary assets and liabili- line basis. ties denominated in foreign currencies at exchange rates in effect at the balance sheet date and non-monetary items at historical rates. Revenues and expenses are translated at average exchange Costs incurred to develop computer software for internal use The Company capitalizes the costs incurred during the application rates for the year. Gains and losses on translation are included in development stage, which include costs to design the software the income statement. configuration and interfaces, coding, installation and testing. Costs incurred during the preliminary project stage, along with Cash Cash includes liquid investments such as term deposits, money post-implementation stages of internal use computer software, are expensed as incurred. For the year ended December 31, 2007, the market instruments and commercial paper that mature in less Company capitalized computer software costs of $35 (2006 – $18). than three months from the balance sheet date. The investments are carried at cost plus accrued interest, which approximates market value. Impairment of long-lived assets Property, plant and equipment and intangible assets with limited life are reviewed for impairment whenever events or changes in Short-term investments Short-term investments consist of liquid investments such as circumstances suggest that the carrying amount of an asset may not be recoverable. An impairment is recognized when the car- money market instruments and commercial paper that mature in rying amount of an asset to be held and used exceeds the project- three months to a year. The investments are carried at cost plus ed undiscounted future net cash flows expected from its use and accrued interest, which approximates market value. disposal, and is measured as the amount by which the carrying amount of the asset exceeds its fair value. Inventories Inventories are recorded at the lower of cost and replacement cost Assets must be classified as either held for use or held- for-sale. Impairment losses for assets held for use are measured for raw materials, and at the lower of cost and net realizable value based on fair value, which is measured by discounted cash flows. for work in progress and finished goods. For inventories in the Held-for-sale assets are carried at the lower of carrying value and aerostructures segment and certain inventories in the healthcare expected proceeds less direct costs to sell. segment, inventories are stated based on the average cost method. For substantially all other inventories, cost is determined on a first-in, first-out basis. 74 Onex Corporation December 31, 2007 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 S Other assets Acquisition costs relating to the financial services segment Certain costs of acquiring warranty business, principally commis- Losses and loss adjustment expenses reserves Losses and loss adjustment expenses reserves relate to The Warranty Group and represent the estimated ultimate net cost of sions, underwriting, and sales expenses that vary, and are primarily all reported and unreported losses incurred and unpaid through related to the production of new business, are deferred and amor- December 31, 2007. The company does not discount losses and tized as the related premiums and contract fees are earned. The loss adjustment expenses reserves. The reserves for unpaid losses possibility of premium deficiencies and the related recoverability and loss adjustment expenses are estimated using individual of deferred acquisition costs is evaluated annually. Management case-basis valuations and statistical analyses. Those estimates are considers the effect of anticipated investment income in its evalu- subject to the effects of trends in loss severity and frequency and ation of premium deficiencies and the related recoverability of claims reporting patterns of the company’s third-party admin- deferred acquisition costs. istrators. Although considerable variability is inherent in such Certain arrangements with producers of warranty con- estimates, management believes the reserves for losses and loss tracts include profit-sharing provisions whereby the underwriting adjustment expenses are adequate. The estimates are continually profits, after a fixed percentage allowance for the company and an reviewed and adjusted as necessary as experience develops or allowance for investment income, are remitted to the producers new information becomes known; such adjustments are included on a retrospective basis. Unearned premiums and contract fees in current operations. subject to retrospective commission agreements totalled $568 at December 31, 2007 (2006 – $711). Goodwill and intangible assets Goodwill represents the cost of investments in operating compa- Warranty liabilities Certain operating companies offer warranties on the sale of prod- ucts or services. A liability is recorded to provide for future warran- ty costs based on management’s best estimate of probable claims nies in excess of the fair value of the net identifiable assets under these warranties. The accrual is based on the terms of the acquired. Essentially all of the goodwill and intangible asset warranty, which vary by customer and product or service and his- amounts that appear on the consolidated balance sheets were torical experience. The appropriateness of the accrual is evaluated recorded by the operating companies. The recoverability of good- at each reporting period. will and intangible assets with indefinite lives is assessed annually or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairment of goodwill Pension and non-pension post-retirement benefits The operating companies accrue their obligations under employee is tested at the reporting unit level by comparing the carrying benefit plans and related costs, net of plan assets. The costs of de- value of the reporting unit to its fair value. When the carrying fined benefit pensions and other post-retirement benefits earned value exceeds the fair value, an impairment exists and is mea- by employees are accrued in the period incurred and are actuar- sured by comparing the carrying amount of goodwill to its fair ially determined using the projected benefit method pro-rated on value determined in a manner similar to a purchase price alloca- service, based on management’s best estimates of items, including tion. Impairment of indefinite-life intangible assets is determined expected plan investment performance, salary escalation, retire- by comparing their carrying values to their fair values. ment ages of employees and expected healthcare costs. Plan assets Intangible assets, including intellectual property, are are valued at fair value for the purposes of calculating expected recorded at their allocated cost at the date of acquisition of the returns on those assets. Past service costs from plan amendments related operating company. Amortization is provided for intangi- are deferred and amortized on a straight-line basis over the aver- ble assets with limited life, including intellectual property, on age remaining service period of employees active at the date of a straight-line basis over their estimated useful lives of up to amendment. 25 years. The weighted average period of amortization at Decem- Actuarial gains (losses) arise from the difference between ber 31, 2007 was approximately 10 years (2006 – eight years). the actual long-term rate of return on plan assets and the expected Deferred financing charges Deferred financing charges consists of costs incurred by the oper- in actuarial assumptions used to determine the benefit obligation. Actuarial gains (losses) exceeding 10% of the greater of the benefit ating companies relating to the issuance of debt and are deferred obligation or the fair market value of plan assets are amortized and amortized over the term of the related debt or as the debt is over the average remaining service period of active employees. long-term rate of return on plan assets for a period or from changes retired, if earlier. These deferred financing charges are recorded against the carrying value of the long-term debt, as described in note 10. Onex Corporation December 31, 2007 75 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 S 1. B A S I S O F P R E PA R AT I O N A N D and includes estimates of recoveries asserted against the customer S I G N I F I C A N T A C C O U N T I N G P O L I C I E S ( c o n t ’d ) for changes in specifications. These estimates involve various assumptions and projections relative to the outcome of future Defined contribution plan accounting is applied to events, including the quantity and timing of product deliveries. multi-employer defined benefit plans, for which the operating Also included are assumptions relative to future labour perfor- companies have insufficient information to apply defined benefit mance and rates, and projections relative to material and over- accounting. head costs. These assumptions involve various levels of expected The average remaining service period of active employees performance improvements. covered by the significant pension plans is 17 years (2006 – 11 years) The company reevaluates its contract estimates periodi- and for those active employees covered by the other significant cally and reflects changes in estimates in the current period, and post-retirement benefit plans, the average remaining service period uses the cumulative catch-up method of accounting for revisions is 18 years (2006 – 18 years). in estimates of total revenue, total costs or extent of progress on a contract. Income taxes Income taxes are recorded using the asset and liability method of For revenues not recognized under the contract method of accounting, Spirit AeroSystems recognizes revenues from the sale income tax allocation. Under this method, assets and liabilities of products at the point of passage of title, which is generally at the are recorded for the future income tax consequences attributable time of shipment. Revenues earned from providing maintenance to differences between the financial statement carrying values of services, including any contracted research and development, are assets and liabilities and their respective income tax bases. These recognized when the service is complete or other contractual mile- future income tax assets and liabilities are recorded using sub- stones are attained. stantively enacted income tax rates. The effect of a change in income tax rates on these future income tax assets or liabilities is included in income in the period in which the rate change occurs. Healthcare Revenue in the healthcare segment consists primarily of EMSC’s Certain of these differences are estimated based on the current service revenue related to its healthcare transportation and emer- tax legislation and the Company’s interpretation thereof. The gency management service businesses, CDI’s patient service rev- Company records a valuation allowance when it is more likely enue, Skilled Healthcare’s patient service revenue and Carestream than not that the future tax assets will not be realized prior to Health’s product sales revenue. Service revenue is recognized at their expiration. Revenue recognition Electronics Manufacturing Services Revenue from the electronics manufacturing services segment the time of service and is recorded net of provisions for contrac- tual discounts and estimated uncompensated care. Revenue from product sales is recognized when the following criteria are met: pervasive evidence of an arrangement exists; delivery has occurred; the sales price is fixed or determinable; and collectibility is reason- consists primarily of product sales, where revenue is recognized ably assured. upon shipment, when title passes to the customer. Celestica has contractual arrangements with certain customers that require the customer to purchase certain inventory that Celestica has acquired Financial Services Financial services segment revenue consists of revenue on The to fulfill forecasted manufacturing demand provided by that cus- Warranty Group’s warranty contracts primarily in North America tomer. Celestica accounts for purchased material returns to such and the United Kingdom. The company records revenue and customers as reductions in inventory and does not record revenue associated unearned revenue on warranty contracts issued by on these transactions. North American obligor companies at the net amount remitted by the selling dealer or retailer “dealer cost”. Cancellations of these Aerostructures A significant portion of Spirit AeroSystems’ revenues is under long- contracts are typically processed through the selling dealer or retailer, and the company refunds only the unamortized balance term, volume-based pricing contracts, requiring delivery of prod- of the dealer cost. However, the company is primarily liable on ucts over several years. Revenue from these contracts is recognized these contracts and must refund the full amount of customer under the contract method of accounting. Revenues and profits retail if the selling dealer or retailer cannot or will not refund their are recognized on each contract in accordance with the percent- portion. The amount the company has historically been required age-of-completion method of accounting, using the units-of-deliv- to pay under such circumstances has been negligible. The poten- ery method. The contract method of accounting involves the use tially refundable excess of customer retail price over dealer cost at of various estimating techniques to project costs at completion December 31, 2007 was $1,221. 76 Onex Corporation December 31, 2007 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 S The company records revenue and associated unearned revenue on warranty contracts issued by statutory insurance Metal Services The metal services segment generates revenue primarily through companies domiciled in the United Kingdom at the customer slag processing, metal recovery and metal sales, material handling, retail price. The difference between the customer retail price and scrap management services and scrap preparation, and raw mate- dealer cost is recognized as commission and deferred as a compo- rials procurement. nent of deferred acquisition costs. Revenue from slag processing, metal recovery, and metal The company has dealer obligor and administrator obli- sales is derived from the removal of slag from a furnace and pro- gor service contracts with the dealers or retailers to facilitate the cessing it to separate metallic material from other slag compo- sale of extended warranty contracts. Dealer obligor service con- nents. Metallic material is generally returned to the customer and tracts result in sales of extended warranty contracts in which the the non-metallic material is generally sold to third parties. The dealer/retailer is designated as the obligor. Administrator obligor company recognizes revenue from slag processing and metal service contracts result in sales of extended warranty contracts in recovery services when it performs the services and revenue from which the company is designated as the obligor. For both dealer co-product sales when title and risk of loss pass to the customer. obligor and administrator obligor, premium and/or contract fee Revenues from material handling, scrap management revenue is recognized over the contractual exposure period of the services and scrap preparation consists of revenues from receiving, contracts. Unearned premiums and contract fees on single-premi- processing, and managing raw material inputs and handling and um insurance related to warranty agreements are calculated to recording inventory of finished products whereby all of the produc- result in premiums and contract fees being earned over the period tion is generally completed at the customer’s location. Revenues at risk. Factors are developed based on historical analyses of claim from these sources are recognized at the time the service is per- payment patterns over the duration of the policies in force. All formed. The company also has two locations that purchase, other unearned premiums and contract fees are determined on process, and sell scrap iron and steel inventory for the company’s a pro rata method. own account. The company recognizes revenue from scrap sales of Reinsurance premiums, commissions, losses, and loss material, when title and risk of loss pass to the customer. adjustment expenses are accounted for on bases consistent with Revenue from raw materials procurement represents those used in accounting for the original policies issued and the sales to third parties whereby the company either purchases scrap terms of the reinsurance contracts. Premiums ceded to other iron and steel from a supplier and then immediately sells the scrap companies have been reported as a reduction of revenue. Expense to a customer, with shipment made directly from the supplier to the reimbursement received in connection with reinsurance ceded third-party customer, or the company earns a contractually deter- has been accounted for as a reduction of the related acquisition mined fee for arranging scrap shipments for a customer directly costs. Reinsurance receivables and prepaid reinsurance premium with a vendor. The company recognizes revenue from raw materials amounts are reported as assets. procurement sales when title and risk of loss pass to the customer. Customer Support Services The customer support services segment generates revenue primar- Other Other segment revenues consist of product sales and services. ily through its customer contact management services by providing Product sales revenue is recognized upon shipment, when title customer service and technical support to its clients’ customers passes to the customer. Service revenue is recorded at the time through phone, e-mail, online chat, and mail. These services are the services are performed. generally charged by the minute or hour, per employee, per sub- Depending on the terms under which the operating scriber or user, or on a per item basis for each transaction processed companies supply product, they may also be responsible for some and revenue is recognized at the time services are performed. A por- or all of the repair or replacement costs of defective products. The tion of the revenue is often subject to performance standards. companies establish reserves for issues that are probable and Revenue subject to monthly or longer performance standards is rec- estimable in amounts management believes are adequate to cover ognized when such performance standards are met. ultimate projected claim costs. The final amounts determined to The company is reimbursed by clients for certain pass- be due related to these matters could differ significantly from through out-of-pocket expenses, consisting primarily of telecom- recorded estimates. munication, postage and shipping costs. The reimbursement and related costs are reflected in the accompanying consolidated state- ments of earnings as revenue and cost of services, respectively. Onex Corporation December 31, 2007 77 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 S 1. B A S I S O F P R E PA R AT I O N A N D value of the underlying shares, with the corresponding amount S I G N I F I C A N T A C C O U N T I N G P O L I C I E S ( c o n t ’d ) reflected in the consolidated statement of earnings. The fourth type of plan is the Management Deferred Research and development Costs incurred on activities that relate to research and develop- Share Unit Plan (“Management DSU Plan”). The Management DSU Plan enables Onex management to apply all or a portion of ment are expensed as incurred unless development costs meet their annual compensation earned to acquire DSUs based on certain criteria for capitalization. During 2007, $172 (2006 – $130) the market value of Onex shares at the time. The DSUs vest imme- in research and development costs were expensed and $143 of diately, are redeemable only when the holder retires and must be development costs (2006 – $266) were capitalized. Capitalized redeemed within one year following the year of retirement. Addi- development costs relating to the aerostructures segment are tional units are issued for any cash dividends paid on the subordi- included in deferred charges. The costs will be amortized over the nate voting shares. The Company has recorded a liability for the anticipated number of production units to which such costs relate. future settlement of the DSUs by reference to the value of under- Stock-based compensation The Company follows the fair value-based method of accounting lying subordinate voting shares at the balance sheet date. On a quarterly basis, the liability is adjusted up or down for the change in the market value of the underlying shares, with the correspon- which is applied to all stock-based compensation payments. ding amount reflected in the consolidated statement of earnings. There are five types of stock-based compensation plans. To hedge the Company’s exposure to changes in the trading price The first is the Company’s Stock Option Plan (the “Plan”) described of Onex shares associated with the Management DSU Plan, the in note 15(e), which provides that in certain situations the Company expects to enter into forward agreements with a coun- Company has the right, but not the obligation, to settle any exer- terparty financial institution for all grants under the Management cisable option under the Plan by the payment of cash to the option DSU Plan. As such, the change in value of the forward agreements holder. The Company has recorded a liability for the potential will be recorded to offset the amounts recorded as stock-based future settlement of the value of vested options at the balance compensation under the Management DSU Plan. The costs of sheet date by reference to the value of Onex shares at that date. those arrangements are borne entirely by participants in the plan. The liability is adjusted up or down for the change in the market Management DSUs are redeemable only for cash and no shares or value of the underlying shares, with the corresponding amount other securities of the Corporation will be issued on the exercise, reflected in the consolidated statements of earnings. redemption or other settlement thereof. The second type of plan is the MIP, which is described in The fifth type of plan is employee stock option and note 23(f ). The MIP provides that exercisable investment rights other stock-based compensation plans in place for employees at may be settled by issuance of the underlying shares or, in certain various operating companies, under which, on payment of the situations, by a cash payment for the value of the investment exercise price, stock of the particular operating company is rights. Under the MIP, once the targets have been achieved for the issued. The Company records a compensation expense for such exercise of investment rights, a liability is recorded for the value options based on the fair value over the vesting period. of the investment rights by reference to the value of underlying investments, with a corresponding expense recorded in the con- solidated statements of earnings. Earnings per share Basic earnings per share is based on the weighted average number The third type of plan is the Director Deferred Share of Subordinate Voting Shares outstanding during the year. Diluted Unit Plan. A Deferred Share Unit (“DSU”) entitles the holder to earnings per share is calculated using the treasury stock method. receive, upon redemption, a cash payment equivalent to the mar- ket value of a subordinate voting share at the redemption date. The Director DSU Plan enables Onex directors to apply directors’ Use of estimates The preparation of consolidated financial statements in conformity fees earned to acquire DSUs based on the market value of Onex with Canadian generally accepted accounting principles requires shares at the time. Grants of DSUs may also be made to Onex management of Onex and its operating companies to make esti- directors from time to time. The DSUs vest immediately, are mates and assumptions that affect the reported amounts of assets redeemable only when the holder retires and must be redeemed and liabilities, the disclosure of contingent assets and liabilities at within one year following the year of retirement. Additional units the date of the consolidated financial statements and the reported are issued for any cash dividends paid on the subordinate voting amounts of revenues and expenses during the reporting period. shares. The Company has recorded a liability for the future settle- This includes the liability for claims incurred but not yet reported ment of the DSUs by reference to the value of underlying subordi- for the Company’s healthcare and financial services segments. nate voting shares at the balance sheet date. On a quarterly basis, Actual results could differ from such estimates. the liability is adjusted up or down for the change in the market 78 Onex Corporation December 31, 2007 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 S Comparative amounts Certain amounts presented in the prior year have been reclassified d) In April 2007, ONCAP II completed the acquisition of Mister Car Wash Holdings, Inc. (“Mister Car Wash”). Mister Car Wash cur- to conform to the presentation adopted in the current year. rently owns and operates 60 full-service and exterior car wash 2 . C O R P O R AT E I N V E S T M E N T S locations in the United States operating under the Mister Car Wash brand. In June 2007, ONCAP II completed the acquisition of CiCi’s Holdings, Inc. (“CiCi’s Pizza”). CiCi’s Pizza is a franchisor of During 2007 and 2006 several acquisitions, which were accounted approximately 600 low-cost quick service restaurants in the United for as purchases, were completed either directly by Onex or through States. CiCi’s Pizza also operates a captive purchasing and distri- subsidiaries of Onex. Any third-party borrowings in respect of ac- bution business with three distribution centres in the United quisitions are without recourse to Onex. 2 0 0 7 A C Q U I S I T I O N S a) In January 2007, the Company completed the acquisition of Tube City IMS, a leading provider of outsourced services to steel States. At acquisition, Onex and ONCAP II had an initial 89% equi- ty ownership in Mister Car Wash and an initial 54% equity owner- ship in CiCi’s Pizza. During the first quarter of 2007, CSI Global Education Inc. (“CSI”) completed the acquisition of The Institute of Canadian mills. Headquartered in Glassport, Pennsylvania, Tube City IMS Bankers, a division of Thomson Canada Ltd. In addition, subse- provides raw materials procurement, scrap and materials man- quent to the ONCAP II transaction, Mister Car Wash purchased agement and slag processing services at 69 mill sites throughout additional car wash locations in the United States. the United States, Canada and Europe. The total equity invest- The total consideration of these acquisitions was $120. ment of $257, for a 100% equity ownership interest, was made by Onex, ONCAP II and Onex management’s total equity investment Onex, Onex Partners II and management. Onex’ net investment in in these acquisitions was $85, of which Onex’ share was $38. the acquisition was $92, for an initial 36% equity ownership inter- In addition, acquisition financing of $20 was provided est. Onex has effective voting control of Tube City IMS through by Onex, ONCAP II and Onex management, of which Onex’ share Onex Partners II. was $9. b) In January 2007, ClientLogic Corporation (“ClientLogic”) com- pleted the acquisition of SITEL Corporation, a global provider of e) In July 2007, EMSC completed two acquisitions: MedicWest Ambulance (“MedicWest”) and Abbott Ambulance, Inc. (“Abbott outsourced customer support services. The total equity invest- Ambulance”). MedicWest is a franchised emergency ambulance ment of $401 was financed by ClientLogic, without any additional transportation service provider based in Las Vegas, Nevada. investment by Onex. The new combined entity now operates as Abbott Ambulance is the largest private provider of emergency Sitel Worldwide. In connection with the transaction, Onex con- and non-emergency ambulance services in St. Louis, Missouri. verted $63 of mandatorily redeemable preferred shares of Client- The total purchase price of these acquisitions was $74, which was Logic into common shares of the combined entity. Subsequent to financed by EMSC. the transaction, Onex had a 70% economic interest and an 89% In addition, EMSC completed three other acquisitions voting interest in Sitel Worldwide. for total consideration of $5. In addition, Sitel Worldwide completed three other acqui- sitions for total consideration of $71. These acquisitions related to the purchase of the non-controlling interests in three businesses in which Sitel Worldwide had ownership interests. c) In April 2007, the Company completed the acquisition of the Health Group division of Eastman Kodak Company (“Kodak”). The acquired business, which was renamed Carestream Health, is headquartered in Rochester, New York and is a leading global provider of medical imaging and healthcare information technol- f) In September 2007, Skilled Healthcare completed the acquisition of 10 nursing facilities and a hospice company located primarily in Albuquerque, New Mexico. The total purchase price of the acquisi- tion was $56, which was financed by Skilled Healthcare. In addition, Skilled Healthcare completed three other acquisitions for total consideration of $41. g) In December 2007, the Company completed the acquisition of Husky, one of the world’s largest suppliers of injection molding ogy solutions. The equity investment of $527, for a 100% equity equipment and services to the plastics industry. Husky has a sales ownership interest, was made by Onex, Onex Partners II and man- and service network consisting of more than 40 offices worldwide, agement. Onex’ net investment in the acquisition was $206 for an as well as manufacturing facilities in Canada, the United States, initial 39% equity ownership interest. The acquisition agreement Luxembourg and China. The total equity investment was $633 for provides that if Onex and Onex Partners II realize an internal rate a 100% ownership interest, provided through Onex, Onex Partners I, of return in excess of 25% on their investment, Kodak will receive payment equal to 25% of the excess return up to US$200. Onex Corporation December 31, 2007 79 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 S 2 . C O R P O R AT E I N V E S T M E N T S ( c o n t ’d ) The purchase prices of the acquisitions described above were allocated to the net assets acquired based on their relative fair val- Onex Partners II and management. Onex’ net investment in the ues at the dates of acquisition. In certain circumstances where acquisition was $226 for an initial 36% equity ownership interest. estimates have been made, the companies are obtaining third- Onex has effective voting control of Husky through Onex Partners. party valuations of certain assets, which could result in further h) Other includes acquisitions made by CDI, for total considera- tion of $3, and by Onex Real Estate, through its partnership with and accounting adjustments could be recorded at that time. The results of operations for all acquired businesses are included in Cronus Capital, for total consideration of $28. the consolidated statement of earnings of the Company from their refinement of the fair-value allocation of certain purchase prices respective dates of acquisition. Details of the 2007 acquisitions are as follows: Tube City Sitel Carestream Skilled IMS(a) Worldwide(b) Health(c) ONCAP II(d) EMSC(e) Healthcare(f) Husky(g) Other(h) Total $ 31 $ 37 $ 102 $ – $ – $ 89 $ Cash Other current assets Intangible assets with limited life Intangible assets with indefinite life Goodwill Property, plant and equipment and other long-term assets Current liabilities Long-term liabilities(1) Non-controlling interests in net assets 230 241 – 341 229 1,072 (266) (549) 257 (29) 286 95 39 381 122 960 (242) (246) 472 $ 67 998 1,485 9 272 569 3,400 (559) (2,314) 527 28 29 164 250 153 726 (230) (326) 170 – (18) (50) 6 28 – 44 6 84 (4) (1) 79 – – 4 1 39 53 97 – – 97 – 529 339 28 158 491 1,634 (456) (545) 633 (23) – – 1 – 1 90 92 – (61) 31 – $ 326 2,077 2,222 241 1,486 1,713 8,065 (1,757) (4,042) 2,266 (120) Increase in net assets acquired $ 228 $ 472 $ 509 $ 120 $ 79 $ 97 $ 610 $ 31 $ 2,146 (1) Included in long-term liabilities of ONCAP II is $20 of acquisition financing provided by ONCAP II, of which Onex’ share is $9. 2 0 0 6 A C Q U I S I T I O N S a) In January 2006, ONCAP II completed the acquisition of CSI. CSI is Canada’s leading provider of financial education and testing b) In March 2006, the acquisition of Town and Country was com- pleted through a joint venture with Onex Real Estate, Morgan Stanley Real Estate and Sawyer Realty Holdings LLC. Town and services. In March and November 2006, ONCAP II invested in Country owned and operated 37 apartment communities in the Environmental Management Solutions Inc., now operating as United States. The total equity investment by the joint venture EnGlobe Corp. (“EnGlobe”). EnGlobe is a leading environmental was $244 for a 100% equity ownership interest. The equity invest- services company in the management, treatment and re-use and ment by Onex Real Estate was $116 for a 48% equity ownership disposal of organic waste and contaminated soil. The total invest- interest. Onex’ net investment in this acquisition was $100 for a ment made by ONCAP II was $55 in debt and equity. Onex’ net 41% equity ownership at the time of acquisition. Onex accounts investment in these acquisitions was $25. Onex has indirect voting for Town and Country as a joint venture, applying the proportion- control of CSI through ONCAP II. ONCAP II had an initial 90% ate consolidation method. equity ownership in CSI and, on a converted basis, ONCAP II had Beginning in the second quarter of 2006, a portion of an initial 62% equity ownership interest in EnGlobe. the results of Town and Country has been recorded as discontin- ued operations, as described in note 3. 80 Onex Corporation December 31, 2007 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 S c) In April 2006, Spirit AeroSystems completed the acquisition of the aerostructures business unit of BAE Systems plc, with opera- variety of consumer goods and also provides consumer credit and other specialty insurance products primarily through automobile tions in Prestwick, Scotland and Samlesbury, England. The total dealers. The total equity investment was $568 for an initial 98% purchase price of the acquisition was $171 for a 100% equity own- ownership interest, provided through Onex, Onex Partners I, Onex ership, which was financed by Spirit AeroSystems using its avail- Partners II and management. Onex’ net investment was $179 for able cash. d) In November 2006, the Company completed the acquisition of the Aon Warranty Group division of Aon Corporation. Upon clos- ing, the division was renamed The Warranty Group. The Warranty Group underwrites and administers extended warranties on a Details of the 2006 acquisitions are as follows: an initial 31% equity ownership. Onex has effective voting control of The Warranty Group through Onex Partners. e) Other includes acquisitions made by Celestica, Skilled Health- care, EMSC and Onex Real Estate. Cash Marketable securities Other current assets Intangible assets with limited life Intangible assets with indefinite life Goodwill Property, plant and equipment and other long-term assets Current liabilities Long-term liabilities(1) Non-controlling interests in net assets ONCAP II(a) Town and Country(b) Spirit The Warranty AeroSystems(c) Group(d) Other(e) Total $ 18 $ – 53 39 26 40 38 214 (59) (101) 54 (37) 9 – 2 7 – – 799 817 (13) (688) 116 (16) $ – – 125 35 – 12 116 288 (79) (38) 171 – $ 116 $ 1,219 1,511 615 21 373 2,714 6,569 (2,827) (3,164) 578 (10) 1 – 13 11 – 41 50 116 (3) (8) 105 – $ 144 1,219 1,704 707 47 466 3,717 8,004 (2,981) (3,999) 1,024 (63) Interest in net assets acquired $ 17 $ 100 $ 171 $ 568 $ 105 $ 961 (1) Included in long-term liabilities of ONCAP II is $17 of acquisition financing provided by ONCAP II related to the acquisition of CSI, of which Onex’ share is $8. The cost of acquisitions made during the year includes restructuring ties include $32 and $3, respectively (2006 – $2 and nil) of restruc- and integration costs of $62 (2006 – nil). As at December 31, 2007, turing and integration costs, for these and earlier acquisitions. accounts payable and accrued liabilities and other long-term liabili- Onex Corporation December 31, 2007 81 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 S 3 . E A R N I N G S F R O M D I S C O N T I N U E D O P E R AT I O N S The following table shows revenue and net after-tax results from discontinued operations. 2007 2006 2007 2006 WIS International(a) CMC Electronics(b) Town and Country Futuremed J.L. French Automotive CSRS Cineplex Entertainment Sitel Worldwide warehouse Sky Chefs InsLogic Revenue $ – 33 1 – – – – – – – $ 288 197 46 – – – 8 22 – – Gain (Loss), Net of Tax Onex’ Share of Earnings (Loss) $ 41 76 4 – – – – – – – $ – – (2) – – – – – – – Gain (Loss), Net of Tax Onex’ Share of Earnings (Loss) $ – – 45 19 615 21 – (2) 50 2 $ 7 7 (15) – – – – (3) – – Total $ 41 76 2 – – – – – – – Total $ 7 7 30 19 615 21 – (5) 50 2 $ 34 $ 561 $ 121 $ (2) $ 119 $ 750 $ (4) $ 746 a) In January 2007, ONCAP I sold its interest in its operating com- pany, WIS International, for net proceeds of $222, of which Onex’ b) In March 2007, ONCAP I sold its interest in its operating com- pany, CMC Electronics, Inc. (“CMC Electronics”). Onex’ net pro- share was $80. Onex’ gain on the transaction was $52, before a tax ceeds, which include proceeds from its direct investment in CMC provision of $11. Amounts held in escrow of US$9 (of which Onex’ Electronics, were $145. Onex’ gain on the transaction was $90, share is US$3) have been excluded from the gain. before a tax provision of $14. Onex’ share of amounts held in Under the terms of the MIP, as described in note 23(f ), escrow is $11 and has been excluded from the gain. management members participated in the realizations the Com- Under the terms of the MIP, management members par- pany achieved on the sale of WIS International. Amounts paid on ticipated in the realizations the Company achieved on the sale of account of these transactions related to the MIP totalled $4 and CMC Electronics. Amounts paid on account of these transactions have been deducted from the gain included in earnings from dis- related to the MIP totalled $10 and have been deducted from the continued operations. gain included in earnings from discontinued operations. In addition, management of ONCAP I received $16 as its In addition, management of ONCAP I received $12 as its carried interest from investors other than Onex. carried interest from investors other than Onex. 82 Onex Corporation December 31, 2007 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 S The results of operations for the businesses described above December 31, 2007 and 2006 as discontinued operations. The have been reclassified in the consolidated statements of earnings amounts for discontinued operations that are included in the and consolidated statements of cash flows for the years ended December 31, 2006 consolidated balance sheet are as follows: As at December 31, 2006 Cash Accounts receivable Inventories Other current assets Current assets held by discontinued operations Property, plant and equipment Other long-term assets Intangibles Goodwill Long-lived assets held by discontinued operations Accounts payable and accrued liabilities Current portion of long-term debt, without recourse to Onex Current portion of obligations under capital leases, without recourse to Onex Current liabilities held by discontinued operations Long-term debt, without recourse to Onex Obligations under capital leases, without recourse to Onex Other liabilities Long-term liabilities held by discontinued operations Currency translation adjustment Net assets of discontinued operations WIS International CMC Electronics Town and Country $ 1 21 – 2 24 14 6 44 147 211 (14) (1) (1) (16) (162) (1) (18) (181) 5 $ 10 40 48 14 112 28 8 26 76 138 (71) (1) (7) (79) (91) – (13) (104) (3) $ – 1 – – 1 45 – – – 45 (1) – – (1) (39) – – (39) – Other $ – $ 2 – – 2 – – – – – – – – – – – – – – Total 11 64 48 16 139 87 14 70 223 394 (86) (2) (8) (96) (292) (1) (31) (324) 2 $ 43 $ 64 $ 6 $ 2 $ 115 4 . I N V E N T O R I E S 5 . O T H E R C U R R E N T A S S E T S Inventories comprised the following: Other current assets comprised the following: As at December 31 Raw materials Work in progress Finished goods 2007 2006 As at December 31 2007 2006 $ 835 $ 1,044 Current portion of ceded claims recoverable 1,124 580 868 433 $ 2,539 $ 2,345 held by The Warranty Group (note 12) $ 355 $ 600 Current portion of prepaid premiums of The Warranty Group Current portion of deferred costs of The Warranty Group (note 8) Current deferred income taxes (note 14) Other 244 140 228 494 395 – 224 475 $ 1,461 $ 1,694 Onex Corporation December 31, 2007 83 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 S 6 . P R O P E R T Y , P L A N T A N D E Q U I P M E N T Property, plant and equipment comprised the following: As at December 31 Land Buildings Machinery and equipment Construction in progress 2007 Cost Accumulated Amortization $ 235 $ 1,433 3,273 268 – 225 1,495 – Net Cost 2006 Accumulated Amortization $ 235 $ 187 $ 1,208 1,778 268 1,345 2,837 293 – 267 1,496 – Net $ 187 1,078 1,341 293 $ 5,209 $ 1,720 $ 3,489 $ 4,662 $ 1,763 $ 2,899 The above amounts include property, plant and equipment under capital leases of $175 (2006 – $180) and related accumulated amortization of $64 (2006 – $90). As at December 31, 2007, property, plant and equipment included $39 (2006 – $7) of assets held for sale. 7. I N V E S T M E N T S Investments comprised the following: As at December 31 2007 2006 Equity-accounted investment in Hawker Beechcraft(a) Equity-accounted investment in Allison Transmission(b) Equity-accounted investment in ResCare(c) Other equity-accounted investments(d) EMSC insurance collateral(e) Long-term investments held by The Warranty Group(f) Other $ 460 $ 658 110 216 161 1,366 232 – – 117 55 211 1,170 269 b) In August 2007, the Company, together with The Carlyle Group, completed the acquisition of Allison Transmission, a division of General Motors Corporation. Allison Transmission, headquar- tered in Speedway, Indiana, designs and manufactures automatic transmissions for on-highway trucks and buses, off-highway equipment and military vehicles worldwide. The equity invest- ment of US$1,525 was split equally between the Company and The Carlyle Group. The Company’s investment of $805 was made by Onex, Onex Partners II, certain limited partners and manage- ment. Onex’ net investment in the acquisition was $250 for an ini- tial 16% equity ownership interest. As a result of Onex’ significant influence over Allison Transmission, the investment is accounted for using the equity-accounting method. In accordance with equity accounting, the carrying value of this U.S. dollar investment has $ 3,203 $ 1,822 been adjusted to account for the change in the foreign exchange rate since its acquistion. a) In March 2007, the Company, together with GS Capital Partners, an affiliate of The Goldman Sachs Group, Inc., acquired Raytheon Aircraft Company, the business aviation division of Raytheon Com- c) In June 2004, the Company and Onex Partners made an initial $114 equity investment in ResCare for an initial 28% effective own- pany. The acquired business now operates as Hawker Beechcraft. ership interest. Onex’ portion of the investment was approximately Hawker Beechcraft, headquartered in Wichita, Kansas, is a leading $27, representing an initial 7% ownership interest in ResCare. The manufacturer of business jet, turboprop and piston aircraft through current carrying value of the ResCare investment is $110 (2006 – its Hawker and Beechcraft brands. It is also a significant manufac- $117). ResCare is included in the healthcare segment in note 27. turer of military training aircraft for the U.S. Air Force and Navy and In accordance with equity accounting, the carrying value of this for a small number of foreign governments. The equity investment U.S. dollar investment has been adjusted to account for the change of US$1,040 was split equally between the Company and GS Capital in the foreign exchange rate since its acquisition. Partners. The Company’s investment of $605 was made by Onex, Onex Partners II and management. Onex’ net investment in the acquisition was $238, for an initial 20% equity ownership interest. d) Other equity-accounted investments include investments in Cineplex Entertainment, Cypress Insurance Group (“Cypress”), As a result of Onex’ significant influence over Hawker Beechcraft, Onex Credit Partners and certain real estate partnerships. the investment is accounted for using the equity-accounting method. In accordance with equity accounting, the carrying value of this U.S. dollar investment has been adjusted to account for the e) EMSC insurance collateral consists primarily of government and investment grade securities and cash deposits with third par- change in the foreign exchange rate since its acquistion. ties and supports its insurance program and reserves. 84 Onex Corporation December 31, 2007 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 S f) The table below presents the amortized cost and fair value of all investments in fixed maturity securities held by The Warranty Group. As at December 31 2007 2006 Amortized Cost(1) Fair Value(2) Amortized Cost(1) Fair Value U.S. government and agencies States and political subdivisions Foreign governments Corporate bonds Mortgage-backed securities Other Current portion(3) Long-term portion $ 77 132 328 698 195 99 $ 1,529 (190) $ 1,339 $ 80 133 343 708 196 100 $ 1,560 (194) $ 1,366 $ 314 40 514 673 79 34 $ 1,654 (484) $ 1,170 $ 313 40 510 671 79 34 $ 1,647 (484) $ 1,163 (1) Amortized cost represents cost plus accrued interest and accrued discount or premium, if applicable. (2) Upon adoption of the new financial instruments standards on January 1, 2007, as described in note 1, Onex records its available-for-sale investments at fair value. (3) The current portion is included in marketable securities on the consolidated balance sheet. Fair values generally represent quoted market value prices for Expected maturities differ from contractual maturities because securities traded in the public marketplace or analytically deter- borrowers may have the right to call or prepay obligations with or mined values for securities not traded in the public marketplace. without call or prepayment penalties. Management believes that all unrealized losses on indi- At December 31, 2007, fixed-maturity securities with a vidual securities are the result of normal price fluctuations due to carrying value of $57 (2006 – $372) were on deposit with various the market conditions and are not an indication of other-than- state insurance departments and Canadian insurance regulators, temporary impairment. Management further believes it has the respectively, to satisfy U.S. domestic and Canadian regulatory intent and ability to hold these securities until they fully recover requirements. in value. These determinations are based upon an in-depth analy- sis of individual securities. The amortized cost and fair value of fixed-maturity securi- ties owned by The Warranty Group at December 31, 2007, by con- tractual maturity, are shown below: Amortized Cost Fair Value Years to maturity: One or less After one through five After five through ten After ten Mortgage-backed securities Other $ 190 777 247 21 195 99 $ 194 800 250 20 196 100 $ 1,529 $ 1,560 Onex Corporation December 31, 2007 85 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 S 8 . O T H E R L O N G - T E R M A S S E T S 9. I N TA N G I B L E A S S E T S Other long-term assets comprised the following: Intangible assets comprised the following: As at December 31 2007 2006 As at December 31 2007 2006 Intellectual property with limited life, net of accumulated amortization of $138 (2006 – $152) $ 432 $ 6 Intangible assets with limited life, net of accumulated amortization of $385 (2006 – $266) Intangible assets with indefinite life 1,980 280 925 105 $ 2,692 $ 1,036 Intellectual property primarily represents the costs of certain intel- lectual property and process know-how obtained in acquisitions. Intangible assets include trademarks, non-competition agreements, customer relationships and contract rights obtained in the acquisition of certain facilities. Deferred development charges $ Future income taxes (note 14) Boeing receivable(a) Deferred pension Long-term portion of ceded claims recoverable held by The Warranty Group (note 12) Long-term portion of prepaid premiums of The Warranty Group Long-term portion of deferred costs of The Warranty Group(b) Other 377 413 98 264 718 397 151 216 $ 329 459 223 241 874 476 29 263 $ 2,634 $ 2,894 a) In connection with the acquisition of Spirit AeroSystems from Boeing, Boeing makes quarterly payments to Spirit AeroSystems beginning in March 2007 through December 2009. The fair value of the receivable was recorded as a long-term asset on the opening balance sheet of Spirit AeroSystems. The fair value is being accreted to the principal amount of US$277 over the term of the agreement. The carrying value of the receivable as at December 31, 2007 was $207 (2006 – $273), of which the current portion of $109 is included in accounts receivable. b) Deferred costs of The Warranty Group consist of certain costs of acquiring warranty and credit business including commissions, underwriting, and sales expenses that vary with, and are primar- ily related to, the production of new business. These charges are deferred and amortized as the related premiums and contract fees are earned. 86 Onex Corporation December 31, 2007 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 S 10 . L O N G - T E R M D E B T O F O P E R AT I N G C O M PA N I E S , W I T H O U T R E C O U R S E T O O N E X Long-term debt of operating companies, without recourse to Onex, is as follows: As at December 31 Celestica(a) 7.875% subordinated notes due 2011 7.625% subordinated notes due 2013 Spirit AeroSystems(b) Revolving credit facility and term loan due 2010 and 2013 Emergency Medical Services(c) Revolving credit facility and term loan due 2012 Subordinated secured notes due 2015 Other Carestream Health(d) Skilled Healthcare(e) Senior secured first lien term loan due 2013 Senior secured second lien term loan due 2013 Other Revolving credit facility and term loan due 2010 and 2012 11.0% subordinated notes due 2014 Other Center for Diagnostic Imaging(f) Revolving credit facility and term loan due 2010 Other The Warranty Group(g) Sitel Worldwide(h) Tube City IMS(i) Husky(j) Cosmetic Essence(k) Term loan due 2012 Revolving credit facility and term loans due 2013 and 2014 Revolving credit facility and term loan, repaid Other Senior secured term loan due 2014 Senior subordinated notes due 2015 Revolving credit facility and term loan due 2012 Revolving credit facility and term loans due 2013 and 2014 Revolving credit facility and term loans, repaid Subordinated secured notes due 2014 Radian(l) Revolving credit facility and term loan due 2008 Subordinated secured debentures due 2008 Cineplex Entertainment(m) ONCAP II companies (n) Notes, revolving credit facility, term loans and other Revolving credit facility and term loans due 2011 to 2014 Subordinated notes due 2012 Other Onex Real Estate companies(o) Notes payable due 2009 Other Less: long-term debt held by the Company Long-term debt, December 31 Less: deferred charges(p) Current portion of long-term debt of operating companies 2007 2006 $ 510 251 761 579 222 248 3 473 1,472 436 2 1,910 319 128 4 451 62 1 63 196 693 – 2 695 162 223 385 406 102 – 79 181 29 20 49 – 267 51 2 320 85 62 147 $ 583 291 874 687 264 291 2 557 – – – – 308 232 3 543 77 – 77 233 – 154 103 257 – – – – – 140 85 225 36 19 55 350 57 21 – 78 72 8 80 (138) 6,478 (143) 6,335 (176) (175) 3,841 – 3,841 (43) Consolidated long-term debt of operating companies, without recourse to Onex $ 6,159 $ 3,798 Onex Corporation December 31, 2007 87 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 S 10 . L O N G - T E R M D E B T O F O P E R AT I N G C O M PA N I E S , W I T H O U T R E C O U R S E T O O N E X ( c o n t ’d ) b) Spirit AeroSystems In June 2005, Spirit AeroSystems executed a US$875 credit agree- ment that consists of a US$700 senior secured term loan and a Onex does not guarantee the debt of its operating companies, nor US$175 senior secured revolving credit facility. In November 2006, are there any cross-guarantees between operating companies. Spirit AeroSystems used a portion of the proceeds from its initial The financing arrangements for each operating company public offering to permanently repay US$100 of the senior secured typically contain certain restrictive covenants, which may include term loan and amended its credit agreement. The significant com- limitations or prohibitions on additional indebtedness, payment of ponents of the amendment were to extend the maturity of the cash dividends, redemption of capital, capital spending, making of senior secured term loan from 2011 to 2013, increase the amount investments and acquisitions and sale of assets. In addition, certain available under the senior revolving credit facility to US$400 from financial covenants must be met by the operating companies that US$175 and reduce the applicable interest rate margins by 0.5%. At have outstanding debt. December 31, 2007, US$584 and nil (2006 – US$590 and nil) were Future changes in business conditions of an operating outstanding under the term loan and revolving facility, respectively. company may result in non-compliance with certain covenants The senior secured term loan requires quarterly principal instal- by the company. No adjustments to the carrying amount or clas- ments of US$1, with the balance due in four equal quarterly instal- sification of assets or liabilities of any operating company has ments of US$139 beginning on December 31, 2012. The revolving been made in the consolidated financial statements with respect facility requires the principal to be repaid at maturity in June 2010. to any possible non-compliance. a) Celestica Celestica has a secured, revolving credit facility for US$300 that The borrowings under the agreement bear interest based on LIBOR or a base rate plus an interest rate margin of up to 2.75%, payable quarterly. In connection with the term loan, Spirit AeroSys- tems entered into interest rate swap agreements on US$500 of the matures in April 2009. There were no borrowings outstanding term loan. The agreements, which mature in one to three years, under this facility at December 31, 2007. The facility has restrictive swap the floating interest rate with a fixed interest rate that ranges covenants relating to debt incurrence and sale of assets and also between 4.2% and 4.4%. contains financial covenants that require Celestica to maintain Substantially all of Spirit AeroSystems’ assets are pledged certain financial ratios. Based on the required minimum financial as collateral under the credit agreement. ratios, at December 31, 2007, Celestica was limited to approxi- mately US$240 of available debt incurrence. Celestica also has uncommitted bank overdraft facilities available for operating c) Emergency Medical Services In February 2005, EMSC issued US$250 of senior subordinated requirements that total US$50 at December 31, 2007. notes and executed a US$450 credit agreement. The senior subor- Celestica’s senior subordinated notes due 2011 have an dinated notes have a fixed interest rate of 10%, payable semi- aggregate principal amount of US$500 and a fixed interest rate of annually, and mature in February 2015. 7.875%. In connection with the 2011 notes offering, Celestica The credit agreement consists of a US$350 senior secured entered into interest rate swap agreements that swap the fixed term loan and a US$100 senior secured revolving credit facility. The interest rate on the notes with a variable interest rate based on senior secured term loan matures in February 2012 and requires LIBOR plus a margin. The average interest rate on the notes was quarterly principal repayments. The revolving facility requires the 8.3% for 2007 (2006 – 8.2%). The 2011 notes may be redeemed on principal to be repaid at maturity in February 2011. Interest is deter- July 1, 2008 or later at various premiums above face value. Included mined by reference to a leverage ratio and can range from prime in long-term debt is the change in the fair value of the debt obliga- plus 1.0% to 2.0% and LIBOR plus 2.0% to 3.0%. As at December 31, tion attributable to movement in the benchmark interest rates, 2007, US$224 and nil (2006 – US$226 and nil) were outstanding which resulted in a loss of US$18 for 2007. under the senior secured term loan and the senior secured revolving Celestica’s senior subordinated notes due 2013 have an credit facility, respectively. aggregate principal amount of US$250 and a fixed interest rate of In December 2007, EMSC entered into an interest rate 7.625%. The 2013 notes may be redeemed on July 1, 2009 or later at swap agreement. The agreement, which matures in 2009, swaps the various premiums above face value. variable rate with a fixed rate of 4.3% on US$200 of the company’s variable rate debt. Substantially all of EMSC’s assets are pledged as collat- eral under the credit agreement. 88 Onex Corporation December 31, 2007 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 S d) Carestream Health In April 2007 Carestream Health entered into senior secured first f) Center for Diagnostic Imaging In January 2005, a US$95 credit agreement was executed by CDI. and second lien term loans with an aggregate principal amount of This agreement consists of a US$75 term loan with principal pay- US$1,510 and US$440, respectively. Additionally, as part of the first ments due through 2010 and up to US$20 of revolving credit loans. lien term loan, Carestream Health obtained a senior revolving Loans under the agreement currently bear interest at LIBOR plus credit facility with available funds of up to US$150. The first and a margin of 3.5% and are secured by the assets of CDI. At Decem- second lien term loans bear interest at LIBOR plus a margin of ber 31, 2007, US$62 and nil (2006 – US$66 and nil) were outstanding 2.00% and 5.25%, respectively, or at a base rate plus a margin of under the term loan and revolving credit loans, respectively. 1.00% and 4.25%, respectively. In connection with the term loans, CDI has entered into interest rate swap agreements that Carestream Health entered into seven interest rate swap agree- effectively fix the interest rate on borrowings under the credit agree- ments that swap the variable rate for a fixed rate ranging from ment. The interest rate swap agreements have notional amounts of 4.00% to 5.02%. The agreements, with notional amounts totalling US$50 and US$45 and expire in 2008 and 2010, respectively. US$1,450, expire in 2009 and 2010. The first lien term loan matures in April 2013, with quar- terly instalment payments of US$25 that commenced in Decem- g) The Warranty Group In November 2006, The Warranty Group entered into a US$225 credit ber 2007. The second lien term loan matures in October 2013, with agreement consisting of a US$200 term loan and up to US$25 of the entire balance due upon maturity. The revolving credit facility, revolving credit loans and swing line loans. The amounts outstand- with nil outstanding at December 31, 2007, matures in April 2013. ing on the credit agreement bear interest at LIBOR plus a margin Substantially all of Carestream Health’s assets are pledged based on The Warranty Group’s credit rating. The term loan requires as collateral under the term loans. e) Skilled Healthcare In December 2005, Skilled Healthcare issued unsecured senior annual payments of US$2, with the balance due in 2012. Revolving and swing loans, if outstanding, are due 2012. At December 31, 2007, US$198 and nil (2006 – US$200 and nil) were outstanding on the term loan and revolving and swing loans, respectively. subordinated notes in the amount of US$200 due in 2014. In June The debt is subject to various terms and conditions, 2007, using proceeds from its May 2007 initial public offering, including The Warranty Group maintaining a minimum credit Skilled Healthcare redeemed US$70 of the notes. The notes bear rating and certain financial ratios relating to minimum capital- interest at a rate of 11.0% per annum and are redeemable at the ization levels. option of the company at various premiums above face value beginning in 2009. At December 31, 2007, US$129 (2006 – US$199) was outstanding under the notes. h) Sitel Worldwide In January 2007, in connection with ClientLogic’s acquisition of Skilled Healthcare’s first lien credit agreement consists SITEL Corporation as described in note 2, Sitel Worldwide closed of a US$260 term loan and a US$100 revolving loan. The term loan a new credit facility consisting of a US$675 term loan, with quar- is due in 2012, with annual principal instalments of 1% of the bal- terly instalments of US$2 and maturing in January 2014, and a ance. Outstanding amounts on the revolving loan are due 2010. US$85 revolving credit facility maturing in January 2013. The term The term loan bears interest at the prime rate plus a margin of loan and revolving credit facility bear interest at a rate of LIBOR 1.75% or LIBOR plus a margin of 2.25%. The revolving loan bears plus a margin of up to 2.75%. Borrowings under the facility are interest at the prime rate plus a margin of 1.75% or LIBOR plus a secured by substantially all of Sitel Worldwide’s assets. margin of 2.75%. The margin can be reduced to as low as 1.0% and Sitel Worldwide is required under the terms of the facility 2.0%, respectively, depending on the company’s leverage ratio. At to maintain certain financial ratio covenants. The facility also con- December 31, 2007, US$254 and US$68 (2006 – US$256 and US$9) tains certain additional requirements, including limitations or pro- were outstanding under the term loan and revolving loan, respec- hibitions on additional indebtedness, payment of cash dividends, tively. The first lien credit agreement is secured by the real proper- redemption of stock, capital spending, investments, acquisitions ty of Skilled Healthcare. and asset sales. In compliance with its lien agreement, Skilled Healthcare The proceeds from the facility were used to repay the has entered into an interest rate cap agreement. The agreement has previous credit facility and fund the acquisition of SITEL Corpo- a principal amount of US$148, a cap rate of 6.0% and expires in ration. In April 2007, Sitel Worldwide repaid US$16 of its term loan 2008. In October 2007, Skilled Healthcare entered into an interest from a portion of the proceeds from the April 2007 share issue, as rate swap agreement with a notional amount of US$100. Under the described in note 18(a). As a result, the quarterly repayments of interest rate swap agreement, the company will pay a fixed rate of US$2 will now begin in September 2009. 4.38% in exchange for receiving a floating rate based on LIBOR. At December 31, 2007, US$667 and US$32 were out- standing under the term and revolving credit facility, respectively. Onex Corporation December 31, 2007 89 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 S 10 . L O N G - T E R M D E B T O F O P E R AT I N G C O M PA N I E S , In addition, Tube City IMS issued US$225 of unsecured W I T H O U T R E C O U R S E T O O N E X ( c o n t ’d ) senior subordinated notes. The notes bear interest at a rate of 9.75% and mature in February 2015. The notes are redeemable at Included in other long-term debt at December 31, 2006 the option of the company at various premiums above face value, are mandatorily redeemable preferred shares held by Onex of up to beginning in 2011. US$53. In connection with the acquisition of SITEL Corporation in January 2007, these mandatorily redeemable preferred shares were converted to common shares of Sitel Worldwide. Also included in j) Husky In December 2007, Husky entered into a US$520, committed, other long-term debt at December 31, 2006 are US$31 of loan notes secured credit agreement comprised of a US$410 term loan and a denominated in pounds sterling. The notes were repaid in January US$110 revolving credit facility. Borrowings under the credit agree- 2007 in connection with the SITEL Corporation acquisition. ment bear interest at LIBOR plus a margin that ranges from 3.00% to 3.25% as determined by a consolidated leverage ratio. The term i) Tube City IMS In January 2007 Tube City IMS entered into a senior secured asset- loan has mandatory, quarterly, principal repayments of US$4 in 2008, US$12 in 2009 and US$21 in 2010 and 2011 with US$36 and based revolving credit facility with an aggregate principal amount the outstanding principal balance due in 2012. Additionally, 50% of up to US$165, a senior secured term loan credit facility with an of excess cash flows (as defined in the credit agreement), if any, aggregate principal amount of US$165 and a senior secured syn- must be used to prepay the loan, annually. In January 2008. Husky thetic letter of credit facility of US$20. The credit facilities bear entered into interest rate swap agreements that effectively fix the interest at a base rate plus a margin of up to 2.50%. interest rate on a portion of the borrowings under the credit agree- The senior secured asset-based revolving facility is avail- ment. The agreements hedge more than half of the interest rate able through to January 2013. The maximum availability under the risk over the term of the loan. revolving facility is based on specified percentages of eligible The revolving credit facility is available to Husky and accounts receivable and inventory. As at December 31, 2007, US$10 its key subsidiaries in Canada and Luxembourg. At acquisition, was outstanding under the revolving facility. The obligations under there were US$7 in letters of credit issued under the credit facility, the senior secured asset-based lending facility are secured on a leaving US$103 in available borrowing capacity. The revolving first-priority lien basis by Tube City IMS’ accounts receivable, credit facility matures in December 2012. inventory and cash proceeds therefrom and on a second-priority The credit agreement has restrictions on new debt lien basis by substantially all of Tube City IMS’ other property and incurrence, the sale of assets, capital expenditures, and the main- assets, subject to certain exceptions and permitted liens. tenance of certain financial ratios. Substantially all of Husky’s The senior secured term loan facility and senior secured assets are pledged as collateral under the credit agreement. synthetic letter of credit facility are repayable quarterly, with annual payments of US$2, and mature in January 2014. The facilities require Tube City IMS to prepay outstanding amounts under certain condi- k) Cosmetic Essence In March 2007, CEI completed a refinancing of its credit agreement. tions. At December 31, 2007, US$164 was outstanding under the term The new credit agreement consists of a term loan of US$122 and a loan and there were US$18 of letters of credit outstanding relating revolving line of credit with maximum borrowings of US$35. The to the synthetic letter of credit facility. The obligations under the term loan is repayable with quarterly payments of principal and senior secured term loan facility and senior secured synthetic letter interest with the balance of US$114 due on maturity in March 2014. of credit facility are secured on a first-priority lien basis by all of The revolving line of credit matures in March 2013. At December 31, Tube City IMS’ property and assets (other than accounts receivable 2007, US$100 and US$2 were outstanding on the term loan and and inventory and cash proceeds therefrom) and on a second- revolving line of credit, respectively. priority lien basis on all of Tube City IMS’ accounts receivable and Interest on the term loan is based, at the option of CEI, inventory and cash proceeds therefrom, subject to certain excep- upon either LIBOR plus a margin of 2.25% or a base rate plus a tions and permitted liens. margin of up to 1.25%. Interest on the revolving line of credit is In connection with the senior secured term loan credit based, at the option of CEI, upon either LIBOR plus a margin of facility, Tube City IMS entered into rate swap agreements that 2.75% or a base rate plus a margin of up to 1.75%. Substantially all swap the variable rate for a fixed rate of 5.03%. The agreements of CEI’s assets are pledged as collateral for the borrowings. have total notional amounts of US$120, decreasing to US$75 in The proceeds from the new credit agreement were used 2009 and expiring in 2010. by CEI to repay the first lien term loan and second lien term loan of CEI’s previous credit agreement. CEI has entered into two interest rate swap agreements that effectively fixes the interest rate on borrowings under the credit agreement. The notional amount covered under the first 90 Onex Corporation December 31, 2007 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 S swap agreement was US$54 at December 31, 2007, and declines annually until expiry in 2009. The notional amount covered under o) Onex Real Estate companies Long-term debt held by Onex Real Estate companies consists of the second agreement was US$43 at December 31, 2007 and notes payable of US$86, due 2009, relating to Town and Country expires in 2010. and other long-term debt of US$63, due between 2008 and 2019 CEI also has a promissory note outstanding in the relating to Onex Real Estate partnerships with Cronus Capital. amount of US$80 (2006 – US$72), of which US$73 (2006 – US$66) is held by the Company. The note is due in 2014, with interest of 9.55% per year, payable in additional notes due in 2014. p) Deferred charges As a result of the adoption of new accounting policies, as described in note 1, beginning in January 2007 deferred financing l) Radian Radian’s credit agreement has a revolving credit facility of $20 and charges have been reclassified and recorded net against long-term debt. At December 31, 2006, deferred financing charges of $81 are a term loan of $12. Borrowings under the credit agreement are included in other long-term assets. due in April 2008. Both the revolving credit facility and term loan bear interest at short-term borrowing rates plus a margin of up to The annual minimum repayment requirements for the next 2.25%. The outstanding borrowings at December 31, 2007 on the five years on consolidated long-term debt are as follows: revolving credit facility and term loan were $17 and $12 (2006 – $22 and $14), respectively. The weighted average interest rate for borrowings under the credit agreement was 8.5% in 2007 (2006 – 8.5%). Borrowings under the credit agreement are collateralized by substantially all of the assets of Radian. In October 2003, Radian issued $15 in subordinated 2008 2009 2010 2011 2012 secured convertible debentures to Onex. The debentures are con- Thereafter vertible at any time at the option of the holder or at Radian’s option, under certain circumstances, into Class A multiple voting shares of Radian. The debentures accrue interest at a rate of 7.0% per annum and mature in 2008. m) Cineplex Entertainment Beginning April 2, 2007, the Company uses the equity-accounting method for its investment in Cineplex Entertainment, as described in note 1. As a result, Cineplex Entertainment’s assets and liabilities, including long-term debt, are no longer included in the Company’s consolidated balance sheet. n) ONCAP II companies ONCAP II’s investee companies consist of EnGlobe, CSI, CiCi’s Pizza and Mister Car Wash. Each has debt that is included in the arrangements for each of the investee companies with no cross- guarantees between the companies or by Onex. Under the terms of credit agreements, combined term borrowings of $247 are outstanding and combined revolving cred- it facilities of $20 are outstanding. The available facilities bear interest at various rates based on a base floating rate plus a mar- gin. During 2007, interest rates ranged from 6.6% to 10.5% on bor- rowings under the revolving credit and term facilities. The term loans have quarterly repayments and are due between 2011 to 2014. The companies also have subordinated notes of $51, due in 2012, that bear interest at rates ranging from 13% to 15%, of which the Company owns approximately $46. The senior debt is generally secured by substantially all of the assets of the respective company. $ 176 232 277 672 1,118 4,003 $ 6,478 214 174 138 107 82 327 $ 1,042 11. L E A S E C O M M I T M E N T S The future minimum lease payments are as follows: Capital Leases Operating Leases For the year: 2008 2009 2010 2011 2012 Thereafter Total future minimum lease payments Balance of obligations under capital leases, without recourse to Onex Less: current portion Long-term obligations under capital $ 105 15 $ 7 3 1 3 $ 134 (4) 130 (104) leases, without recourse to Onex $ 26 Substantially all of the lease commitments relate to the operating companies. Operating leases primarily relate to premises. In January 2008, Mister Car Wash amended capital leases of certain properties such that these leases will be classi- fied as operating leases. The properties had a net book value of $78 at December 31, 2007. Onex Corporation December 31, 2007 91 Company’s consolidated financial statements. There are separate Less: imputed interest 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 S 12 . W A R R A N T Y R E S E R V E S A N D U N E A R N E D P R E M I U M S The following describes the reserves and unearned premiums liabilities of The Warranty Group, which was acquired in November 2006. Reserves The following table provides a reconciliation of The Warranty Group’s beginning and ending reserves for losses and loss adjustment expenses (“LAE”), net of ceded claims recoverable for the year ended December 31, 2007: Current portion of reserves, December 31, 2006 Long-term portion of reserves, December 31, 2006 Gross reserve for losses and LAE, December 31, 2006(2) Less current portion of ceded claims recoverable(1) (note 5) Less long-term portion of ceded claims recoverable(1) (note 8) Net reserve for losses and LAE, December 31, 2006 Benefits to policy holders incurred, net of reinsured amounts Payments for benefits to policy holders, net of reinsured amounts Other, including decrease due to changes in foreign exchange rates Net reserve for losses and LAE, December 31, 2007 Add current portion of ceded claims recoverable(1) (note 5) Add long-term portion of ceded claims recoverable(1) (note 8) Gross reserve for losses and LAE, December 31, 2007(2) Current portion of reserves, December 31, 2007 Property and Casualty(a) Warranty(b) Total Reserves $ 571 $ 223 $ 794 874 – 874 $ 1,445 $ 223 $ 1,668 $ $ (571) (874) – – – – – 320 718 1,038 (320) (29) – 194 (600) (874) 194 $ 609 $ 609 (597) (25) (597) (25) $ 181 $ 181 35 – 216 (216) 355 718 1,254 (536) Long-term portion of reserves, December 31, 2007 $ 718 $ – $ 718 (1) Ceded claims recoverable represent the portion of reserves ceded to third-party reinsurers. (2) Reserves for losses and LAE represent the estimated ultimate net cost of all reported and unreported losses incurred and unpaid through December 31, as described in note 1. a) Property and casualty reserves represent estimated future losses on property and casualty policies. The property and casu- Unearned Premiums The following table provides details of the unearned premiums as alty reserves and the corresponding ceded claims recoverable at December 31. were acquired on acquisition of The Warranty Group. The prop- erty and casualty business is being run off and new business is not being booked. The reserves are 100% ceded to third-party Unearned premiums reinsurers. A subsidiary of Aon Corporation, the former parent of Current portion of unearned premiums 2007 2006 $ 2,654 (1,008) $ 3,201 (1,452) The Warranty Group, is the primary reinsurer on approximately 37% of the reserves and provides guarantees on all of the reserves as part of the sales agreement with Onex. b) Warranty reserves represent future losses on warranty policies written by The Warranty Group. Due to the nature of the warranty reserves, substantially all of the ceded claims recoverable and war- ranty reserves are of a current nature. Long-term portion of unearned premiums $ 1,646 $ 1,749 92 Onex Corporation December 31, 2007 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 S 13 . O T H E R L I A B I L I T I E S Other liabilities comprised the following: As at December 31 Reserves(a) Boeing advance(b) Deferred revenue and other deferred items Convertible debentures(c) Pension and non-pension post-retirement benefits (note 24) Stock-based compensation Other(d) 2007 2006 $ 167 625 231 – 178 243 219 $ 207 685 349 100 137 211 129 $ 1,663 $ 1,818 a) Reserves consist primarily of US$145 (2006 – US$150) estab- lished by EMSC for automobile, workers compensation, general liability and professional liability. This includes the use of an off- shore captive insurance program. b) Pursuant to the 787 aircraft long-term supply agreement, Boeing made advance payments to Spirit AeroSystems. As at December 31, 2007, US$700 (2006 – US$600) in such advance payments had been made and will be settled against future sales of Spirit AeroSystems’ 787 aircraft units to Boeing, of which US$68 of the payments has been recorded as a current liability. c) Convertible debentures for 2006 relate to the operations of Cineplex Entertainment. Cineplex Entertainment is now equity- accounted, as described in note 1. d) Other includes the long-term portion of acquisition and re- structuring accruals, amounts for liabilities arising from indem- nifications, mark-to-market valuations of hedge contracts and warranty provisions. 14 . I N C O M E TA X E S The reconciliation of statutory income tax rates to the Company’s effective tax rate is as follows: Year ended December 31 Income tax provision at statutory rates Increase (decrease) related to: Increase in valuation allowance Amortization of non-deductible items Income tax rate differential of operating investments Non-taxable gains Other, including permanent differences Provision for income taxes Classified as: Current Future Provision for income taxes 2007 $ (513) (164) (3) 93 217 75 2006 $ (401) (49) (5) 56 409 (34) $ (295) $ (24) $ (227) (68) $ (295) $ $ 48 (72) (24) Onex Corporation December 31, 2007 93 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 S 14 . I N C O M E TA X E S ( c o n t ’d ) The Company’s future income tax assets and liabilities comprised the following: As at December 31 Future income tax assets:(1) Net operating losses carried forward Net capital losses carried forward Accounting provisions not currently deductible Property, plant and equipment, intangible and other assets Share issue costs of operating investments Acquisition and integration costs Pension and non-pension post-retirement benefits Deferred revenue Scientific research and development Other Less valuation allowance(2) Future income tax liabilities:(1) Property, plant and equipment, intangible and other assets Pension and non-pension post-retirement benefits Gains on sales of operating investments Other Future income tax liabilities, net Classified as: Current asset – other current assets Long-term asset – other long-term assets Current liability – accounts payable and accrued liabilities Long-term liability – future income taxes Future income tax liabilities, net 2007 2006 $ 830 47 444 168 – 30 (29) 98 9 50 (1,006) 641 (632) (31) (689) (111) (1,463) $ (822) $ 228 413 (90) (1,373) $ (822) $ 939 1 311 135 2 172 (27) 166 – 85 (1,101) 683 (267) (14) (678) (101) (1,060) $ (377) $ 224 459 (10) (1,050) $ (377) (1) Income tax assets and liabilities relating to the same tax jurisdiction have been recorded on a gross basis in the consolidated balance sheets. (2) Future tax assets are recorded based on their expected future tax value. The valuation allowance claimed against the future tax assets primarily relates to non-capital losses of Celestica and Sitel Worldwide. A valuation allowance on non-capital losses is recorded where it is more likely than not that the non-capital losses will expire prior to utilization. At December 31, 2007, Onex and its investment-holding compa- of $3,198, of which $1,019 had no expiry, $676 were available to nies have nil tax-loss carryforwards. reduce future taxes between 2008 and 2012, inclusive, and $1,503 At December 31, 2007, certain operating companies in were available with expiration dates of 2013 through 2027. Canada and the United States had tax-loss carryforwards available Cash taxes paid during the year amounted to $194 (2006 – to reduce future income taxes of those companies in the amount taxes recovered of $53). 94 Onex Corporation December 31, 2007 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 S The Company repurchased and cancelled under Normal Course Issuer Bids 3,357,000 (2006 – 9,176,300) of its Subordinate Voting Shares at a cash cost of $113 during 2007 (2006 – $203). The excess of the purchase cost of these shares over the average paid-in amount was $101 (2006 – $166), which was charged to retained earnings. After these purchases, at December 31, 2007, the Com- pany had the capacity under the current Normal Course Issuer Bid to purchase approximately 6.6 million shares. c) At December 31, 2007, the issued and outstanding share capital consisted of 100,000 (2006 – 100,000) Multiple Voting Shares, 125,574,087 (2006 – 128,927,135) Subordinate Voting Shares and 176,078 (2006 – 176,078) Series 1 Senior Preferred Shares. The Series 1 Senior Preferred Shares have no paid-in amount reflected in these consolidated financial statements and the Multiple Voting Shares have nominal paid-in value. d) The Company has a Director Deferred Share Unit Plan (“Director DSU Plan”) as described in note 1. At December 31, 2007, there were 225,914 (2006 – 177,134) units outstanding for which $3 (2006 – $2) has been recorded as compensation expense during the year. Details of DSUs outstanding under the Director DSU Plan are as follows: 15 . S H A R E C A P I TA L a) The authorized share capital of the Company consists of: i) 100,000 Multiple Voting Shares, which entitle their holders to elect 60% of the Company’s Directors and carry such number of votes in the aggregate as represents 60% of the aggregate votes attached to all shares of the Company carrying voting rights. The Multiple Voting Shares have no entitlement to a distribution on winding up or dissolution other than the payment of their nominal paid-up value. ii) An unlimited number of Subordinate Voting Shares, which carry one vote per share and as a class are entitled to 40% of the aggregate votes attached to all shares of the Company carrying voting rights; to elect 40% of the Directors; and to appoint the auditors. These shares are entitled, subject to the prior rights of other classes, to distributions of the residual assets on winding up and to any declared but unpaid cash dividends. The shares are entitled to receive cash dividends, dividends in kind and stock dividends as and when declared by the Board of Directors. The Multiple Voting Shares and Subordinate Voting Shares are subject to provisions whereby, if an event of change occurs (such as Mr. Schwartz, Chairman and CEO, ceasing to hold, directly or indirectly, more than 5,000,000 Subordinate Voting Shares or related events), the Multiple Voting Shares will there- upon be entitled to elect only 20% of the Directors and otherwise Outstanding at December 31, 2005 will cease to have any general voting rights. The Subordinate Granted Voting Shares would then carry 100% of the general voting rights Additional units issued in lieu of directors’ fees and be entitled to elect 80% of the Directors. and cash dividends Redeemed iii) An unlimited number of Senior and Junior Preferred Shares Outstanding at December 31, 2006 issuable in series. The Directors are empowered to fix the rights to Granted be attached to each series. There is no consolidated paid-in value Additional units issued in lieu of directors’ fees for these shares. b) During 2007, under the Dividend Reinvestment Plan, the Company issued 3,952 (2006 – 4,404) Subordinate Voting Shares at and cash dividends Redeemed Outstanding at December 31, 2007 Number of DSUs 116,301 40,000 24,833 (4,000) 177,134 43,550 16,170 (10,940) 225,914 a total value of less than $1 (2006 – less than $1). In 2007, no At December 31, 2007, there were no DSUs outstanding under the Subordinate Voting Shares were issued upon the exercise of stock Management Deferred Share Unit Plan, as described in note 1. options. In 2006, 20,000 Subordinate Voting Shares were issued upon the exercise of stock options at a value of less than $1. Onex renewed its Normal Course Issuer Bid in April e) The Company has a Stock Option Plan (the “Plan”) under which options and/or share appreciation rights for a term not exceeding 2007 for one year, permitting the Company to purchase on the 10 years may be granted to Directors, officers and employees for Toronto Stock Exchange up to 10% of the public float of its Subor- the acquisition of Subordinate Voting Shares of the Company at a dinate Voting Shares. The 10% limit represents approximately price not less than the market value of the shares on the business 10 million shares. day preceding the day of the grant. Under the Plan, no options or share appreciation rights may be exercised unless the average market price of the Subordinate Voting Shares for the five prior Onex Corporation December 31, 2007 95 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 S 15 . S H A R E C A P I TA L ( c o n t ’d ) business days exceeds the exercise price of the options or the share Details of options outstanding are as follows: appreciation rights by at least 25% (the “hurdle price”). At Decem- ber 31, 2007, 15,612,000 (2006 – 15,612,000) Subordinate Voting Shares were reserved for issuance under the Plan, against which options representing 12,777,500 (2006 – 13,095,100) shares were outstanding. The Plan provides that the number of options issued to certain individuals in aggregate may not exceed 10% of the shares outstanding at the time the options are issued. Options vest at a rate of 20% per year from the date of grant, with the exception of the 783,000 options issued December 7, 2007, which vest at a rate of 16.7% per year. When an option is exer- cised, the employee has the right to request that the Company repurchase the option for an amount equal to the difference between the fair value of the stock under the option and its exercise price. Upon receipt of such request, the Company has the right to settle its obligation to the employee by the payment of cash, the issuance of shares or a combination of cash and shares. Number of Options Weighted Average Exercise Price Outstanding at December 31, 2005 13,434,600 Granted Exercised or surrendered Expired Outstanding at December 31, 2006 Granted Surrendered Expired 435,000 (758,000) (16,500) 13,095,100 803,000 (1,090,600) (30,000) $ 15.69 $ 26.01 $ 8.80 $ 20.02 $ 16.43 $ 35.16 $ 10.84 $ 21.27 Outstanding at December 31, 2007 12,777,500 $ 18.07 During 2007, the total cash consideration paid on options surren- dered was $26 (2006 – $14). This amount represents the difference between the market value of the Subordinate Voting Shares at the time of surrender and the exercise price, both as determined under the Plan. Options outstanding at December 31, 2007 consisted of the following: Number of Outstanding Options Exercise Price Number of Exercisable Options Hurdle Price Remaining Life (years) 40,200 143,000 432,700 610,500 625,000 7,260,000 2,441,100 135,000 287,000 20,000 783,000 12,777,500 $ $ 7.30 8.62 $ 20.23 $ 20.50 $ 14.90 $ 15.87 $ 18.18 $ 19.25 $ 29.22 $ 33.40 $ 35.20 40,200 143,000 432,700 610,500 500,000 4,356,000 1,442,300 27,000 – – – 7,551,700 $ 9.13 $ 10.78 $ 25.29 $ 25.63 $ 18.63 $ 19.84 $ 22.73 $ 24.07 $ 36.53 $ 41.75 $ 44.00 0.1 0.3 2.0 4.5 5.1 6.2 6.9 8.1 8.9 9.3 9.9 96 Onex Corporation December 31, 2007 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 S 16 . I N T E R E S T E X P E N S E O F O P E R AT I N G C O M PA N I E S 18 . G A I N S O N S A L E S O F O P E R AT I N G Year ended December 31 2007 2006 Interest on long-term debt of operating companies Interest on obligations under capital leases of operating companies Other interest of operating companies I N V E S T M E N T S , N E T During 2007 and 2006, Onex completed a number of transactions by selling all or a portion of its ownership interests in certain $ 503 $ 317 companies. The major transactions and the resulting pre-tax gains are summarized and described as follows: 6 28 8 14 Year ended December 31 2007 2006 Interest expense of operating companies $ 537 $ 339 Gains on: Cash interest paid during the year amounted to $461 (2006 – $319). 17. S T O C K - B A S E D C O M P E N S AT I O N Year ended December 31 2007 2006 Parent company(a) Spirit AeroSystems(b) Celestica Other $ 89 36 14 11 $ 169 438 23 4 $ 150 $ 634 a) Parent company includes $94 (2006 – $113) relating to Onex’ stock option plan, as described in note 15(e). The 2006 expense includes $49 from MIP units relating to the November 2006 Spirit AeroSystems initial public offering. b) In 2006, Spirit AeroSystems recorded stock-based compen- sation charges, primarily relating to its November 2006 initial public offering. Included in the expense is a $343 charge relating to the Union Equity Plan. Of this amount, $196 was paid in cash at the time of the offering, with the remaining settled in shares in March 2007. Gain on issue of shares by Sitel Worldwide(a) Sale of shares of Skilled Healthcare(b) Dilution gain on issue of shares $ by Skilled Healthcare(c) May 2007 sale of shares of Spirit AeroSystems(d) Carried interest(e) November 2006 sale of shares of Spirit AeroSystems(f) Dilution gain on November 2006 issue of shares by Spirit AeroSystems(g) Sale of units of Cineplex Entertainment(h) Dilution gain on June 2006 issue of units by Cineplex Entertainment(i) Other, net 36 68 20 965 48 – – – – 7 $ – – – – – 1,146 100 25 12 24 $ 1,144 $ 1,307 a) In April 2007, non-Onex investors provided US$33 of additional capital in the new combined entity, Sitel Worldwide, as described in note 2. As a result of Onex having recorded losses in excess of its investment in the predecessor company, ClientLogic, prior to the acquisition, Onex is required to record these proceeds as an accounting gain. As a result of this transaction, Onex’ economic ownership was reduced to 66% from 70% and Onex’ voting inter- est was reduced to 88% from 89%. Onex did not receive any of the proceeds on the issuance of the Sitel Worldwide shares. b) In May 2007, Skilled Healthcare completed an initial public offering of common stock. As part of the offering, Onex and Onex Partners I sold 10.6 million shares, of which Onex’ portion was 2.5 million shares. Net proceeds of $166 were received by Onex and Onex Partners I, resulting in a pre-tax gain of $68. Onex’ share of the net proceeds and pre-tax gain was $39 and $13, respectively. Onex recorded a tax provision of $3 on the gain. Additional amounts received on account of the transac- tions related to the carried interest totalled $10, of which Onex’ portion was $4 and management’s portion was $6. As a result of this transaction, Onex recorded a portion of its carried interest as income, as described in note 18(e). No amounts were paid on account of this transaction related to the MIP as the required performance targets have not been met at this time. Onex Corporation December 31, 2007 97 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 S 18 . G A I N S O N S A L E S O F O P E R AT I N G I N V E S T M E N T S , N E T ( c o n t ’d ) f) In November 2006, Spirit AeroSystems completed an initial public offering of common stock. As part of the offering, Onex, Onex Partners I and certain limited partners sold 48.3 million c) In May 2007, as part of Skilled Healthcare’s initial public offering, Skilled Healthcare issued 8.3 million new common shares. As a shares, of which Onex’ share was 13.9 million shares. Net proceeds of $1,351 were received by Onex, Onex Partners I and certain limit- result of the dilution of the Company’s ownership interest in Skilled ed partners, resulting in a pre-tax gain of $1,146. Onex’ share of Healthcare from the issuance, a non-cash dilution gain of $20 was the net proceeds and pre-tax gain was $390 and $314, respectively. recorded, of which Onex’ share was $5. This reflects Onex’ share of Onex recorded a tax provision of $55 on the gain. the increase in book value of the net assets of Skilled Healthcare due Amounts paid on account of these transactions related to the issue of additional shares at a value above book value. to the MIP totalled $19 and were deducted from the gain. Addi- As a result of the dilutive transaction above and Onex’ tional amounts received on account of the transactions related to sale of shares as described in note 18(b), Onex’ economic owner- the carried interest totalled $123, of which Onex’ portion was $49 ship in Skilled Healthcare was reduced to 9% from 21% and Onex’ and management’s portion was $74. As described in note 23(d), voting interest was reduced to 90% from 100%. Onex continues to Onex’ portion of the carried interest was deferred from inclusion control and consolidate Skilled Healthcare. in income. d) In May 2007, Spirit AeroSystems completed a secondary offering of common stock. As part of the offering, Onex, Onex Partners I and g) In November 2006, as part of Spirit AeroSystems’ initial public offering, Spirit AeroSystems issued 10.4 million new common certain limited partners sold 31.8 million shares, of which Onex’ shares. As a result of the dilution of the Company’s ownership share was 9.2 million shares. Net proceeds of $1,107 were received interest in Spirit AeroSystems from the issuance, a non-cash dilu- by Onex, Onex Partners I and certain limited partners, resulting in a tion gain of $100 was recorded, of which Onex’ share was $29. This pre-tax gain of $965. Onex’ share of the net proceeds and pre-tax reflects Onex’ share of the increase in book value of the net assets gain was $319 and $258, respectively. Onex recorded a tax provision of Spirit AeroSystems due to the issue of additional shares. of $52 on the gain. As a result of the dilutive transaction above and Onex’ As a result of this transaction, Onex’ economic owner- sale of shares as described in note 18(f ), Onex’ economic owner- ship in Spirit AeroSystems was reduced to 7% from 13% and Onex’ ship in Spirit AeroSystems was reduced to 14% from 29% and voting interest was reduced to 76% from 90%. Onex continues to Onex’ voting interest was reduced to 90% from 100%. control and consolidate Spirit AeroSystems. Amounts paid on account of the MIP totalled $24 and have been deducted from the gain. Additional amounts received on h) In June 2006, Onex sold 3.2 million units of Cineplex Enter- tainment as part of a secondary offering. In conjunction with the account of the transactions related to the carried interest totalled sale of units, Onex entered into a forward contract to purchase $105, of which Onex’ portion was $42 and management’s portion 1.4 million units at a price computed with reference to the sec- was $63. As a result of this transaction, Onex recorded a portion of ondary offering. This forward agreement was settled in April 2007. its carried interest into income, as described in note 18(e). Onex received net proceeds of $28 from these transactions and recorded a pre-tax gain of $25. e) As described in note 23(d), Onex defers gains associated with the carried interest until such time as the potential for repayment Amounts accrued on account of these transactions related to the MIP (as described in note 23(f )) totalled $2 and of amounts received is remote. Upon receiving the proceeds from were deducted from the gain. the sale of Spirit AeroSystems and Skilled Healthcare in May 2007, a significant portion of the carried interest received has a remote possibility for repayment. As a result, $48 of carried interest was i) In June 2006, Cineplex Entertainment issued 2.0 million units from treasury and used the proceeds to indirectly repay indebted- recognized as income in the second quarter. At December 31, ness under its development facility of its senior secured revolving 2007, $58 of carried interest continues to be deferred. credit facility. As a result of the dilution of the Company’s owner- ship interest in Cineplex Entertainment from the treasury issue, a non-cash dilution gain of $12 was recorded, of which Onex’ share was $6. This reflects Onex’ share of the increase in book value of the net assets of Cineplex Entertainment due to the issue of addi- tional units. As a result of the dilutive transaction above, and Onex’ sale of units as described in note 18(h), Onex’ economic owner- ship was reduced to 23% from 27%. 98 Onex Corporation December 31, 2007 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 S 19. A C Q U I S I T I O N , R E S T R U C T U R I N G A N D Acquisition, restructuring and other expenses are typically to pro- O T H E R E X P E N S E S Year ended December 31 2007 2006 vide for the costs of facility consolidations, workforce reductions and transition costs incurred at the operating companies. The operating companies record restructuring charges relating to employee terminations, contractual lease obligations Celestica(1) Spirit AeroSystems Carestream Health Other $ 39 12 43 29 $ 240 and other exit costs when the liability is incurred. The recognition 31 – 21 of these charges requires management to make certain judge- ments regarding the nature, timing and amounts associated with the planned restructuring activities, including estimating sublease $ 123 $ 292 income and the net recovery from equipment to be disposed of. (1) Included in 2006 acquisition, restructuring and other expenses for Celestica is a loss of $37 relating to the sale of its plastics business and a loss of $69 relating to the sale of one of its production facilities in Europe. At the end of each reporting period, the operating companies evaluate the appropriateness of the remaining accrued balances. The tables below provide a summary of acquisition, restructuring and other activities undertaken by the operating companies detailing the components of the charges and movement in accrued liabilities. This summary is presented by the year in which the restructuring activities were initiated. Years Prior to 2006 Employee Termination Costs Lease and Other Contractual Obligations Facility Exit Costs and Other Total estimated expected costs $ Cumulative costs expensed to date Expense for the year ended December 31, 2007 Reconciliation of accrued liability Closing balance – December 31, 2006 $ Cash payments Charges Other adjustments 772 721 22 62 (66) 22 (9) $ $ 195 192 9 50 (14) 9 (7) $ $ 72 70 14 11 (13) 14 (2) Closing balance – December 31, 2007 $ 9 $ 38 $ 10 Non-cash Charges $ 434 427 5 (a) (b) Includes Celestica $1,438. Includes Celestica $1,375. Initiated in 2006 Employee Termination Costs Lease and Other Contractual Obligations Facility Exit Costs and Other Non-cash Charges Total estimated expected costs $ Cumulative costs expensed to date Expense for the year ended December 31, 2007 Reconciliation of accrued liability Closing balance – December 31, 2006 $ Cash payments Charges Closing balance – December 31, 2007 $ 11 11 – 8 (8) – – $ $ $ – – – – – – – $ $ $ 3 3 1 1 (1) 1 1 $ – – – Total $ 1,473(a) 1,410(b) 50 $ 123 (93) 45 (18) $ 57 Total 14 14 1 9 (9) 1 1 $ $ $ Onex Corporation December 31, 2007 99 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 S 19. A C Q U I S I T I O N , R E S T R U C T U R I N G A N D O T H E R E X P E N S E S ( c o n t ’d ) Initiated in 2007 Total estimated expected costs Cumulative costs expensed to date Expense for the year ended December 31, 2007 Reconciliation of accrued liability Cash payments Charges Closing balance – December 31, 2007 (a) (b) Includes Carestream Health $52. Includes Carestream Health $43. Employee Termination Costs Lease and Other Contractual Obligations Facility Exit Costs and Other Non-cash Charges $ $ $ 22 17 17 (7) 17 10 $ $ $ 6 3 3 (1) 3 2 $ $ $ 62 52 52 (50) 52 2 Total Employee Termination Costs Lease and Other Contractual Obligations Facility Exit Costs and Other Total estimated expected costs $ Cumulative costs expensed to date Expense for the year ended December 31, 2007 Reconciliation of accrued liability Closing balance – December 31, 2006 $ Cash payments Charges Other adjustments 805 749 39 70 (81) 39 (9) $ $ 201 195 12 50 (15) 12 (7) $ $ 137 125 67 12 (64) 67 (2) Closing balance – December 31, 2007 $ 19 $ 40 $ 13 $ – – – Non-cash Charges $ 434 427 5 Total 90(a) 72(b) 72 (58) 72 14 $ $ $ Total $ 1,577 1,496 123 $ 132 (160) 118 (18) $ 72 2 0 . N E T E A R N I N G S P E R S U B O R D I N AT E V O T I N G S H A R E The weighted average number of Subordinate Voting Shares for the purpose of the earnings per share calculations is as follows: Year ended December 31 Weighted average number of shares (in millions): Basic Diluted 2007 128 128 2006 133 133 100 Onex Corporation December 31, 2007 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 S 21. F I N A N C I A L I N S T R U M E N T S Fair values of financial instruments The estimated fair values of financial instruments as at December 31, 2007 and 2006 are based on relevant market prices and information available at those dates. The carrying values of cash and short-term investments, accounts receivable, accounts payable and accrued lia- bilities approximate the fair values of these financial instruments due to the short maturity of these instruments. Financial instruments with carrying values different from their fair values that have not been disclosed elsewhere in these consolidated financial statements include the following: As at December 31 2007 2006 Carrying Amount Fair Value Carrying Amount Fair Value Financial liabilities: Long-term debt (i) Foreign currency contracts Interest rate swap agreements $ 6,478 $ $ (7) (24) $ 6,346 $ $ (7) (24) $ 3,841 $ $ 4 – $ 3,889 $ $ 3 (14) (i) The fair value of long-term debt is based on quoted market prices for the financial instruments and for others of similar rating and risk. Certain components of long-term debt primarily comprise term loans and other credit facilities with interest and repayment terms that are not significantly different from current market rates. Accordingly, the carrying values approximate estimated fair values. 2 2 . S I G N I F I C A N T C U S T O M E R S O F O P E R AT I N G C O M PA N I E S A N D C O N C E N T R AT I O N O F C R E D I T R I S K A number of operating companies, by the nature of their businesses, individually serve major customers that account for a large portion of their revenues. For each of these operating companies, the table below shows the number of significant customers and the percentage of revenues they represent. Year ended December 31 CDI CEI Celestica Sitel Worldwide EMSC Radian Skilled Healthcare Spirit AeroSystems Tube City IMS 2007 Number of Significant Customers Percentage of Revenues 2006 Number of Significant Customers Percentage of Revenues 1 3 2 – 1 2 2 2 2 16% 45% 21% – 25% 27% 68% 98% 37% 1 3 2 1 1 1 2 1 – 12% 48% 20% 15% 26% 11% 68% 91% – Accounts receivable from the above significant customers at December 31, 2007 totalled $741 (2006 – $758). Onex Corporation December 31, 2007 101 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 S 2 3 . C O M M I T M E N T S , C O N T I N G E N C I E S A N D The Company and its operating companies also have R E L AT E D PA R T Y T R A N S A C T I O N S insurance to cover costs incurred for certain environmental mat- a) Contingent liabilities in the form of letters of credit, letters of guarantee and surety and performance bonds are provided by certain operating companies to various third parties and include certain bank guarantees. At December 31, 2007, the amounts poten- tially payable in respect of these guarantees totalled $445. Certain operating companies have guarantees with respect to employee share purchase loans that amounted to less than $1 at December 31, 2007. These guarantees are without recourse to Onex. The Company, which includes the operating compa- nies, has commitments in the total amount of approximately $112 with respect to corporate investments, including commitments as described in note 26. The Company and its operating companies have also provided certain indemnifications, including those related to businesses that have been sold. The maximum amounts from many of these indemnifications cannot be reasonably estimated at this time. However, in certain circumstances, the Company and its operating companies have recourse against other parties to mitigate the risk of loss from these indemnifications. The Company and its operating companies have commit- ments with respect to real estate operating leases, which are dis- closed in note 11. The aggregate capital commitments as at December 31, 2007 amounted to $179. b) The Company and its operating companies may become parties to legal claims, product liability and warranty claims arising from the ordinary course of business. Certain operating companies, as conditions of acquisition agreements, have agreed to accept cer- tain pre-acquisition liability claims against the acquired compa- nies. The operating companies have recorded liability provisions for the estimated amounts that may become payable for such claims to the extent that they are not covered by insurance or recoverable from other parties. It is management’s opinion that the resolution of known claims should not have a material adverse impact on the consolidated financial position of Onex. However, there can be no assurance that unforeseen circumstances will not result in significant costs. c) The operating companies are subject to laws and regulations concerning the environment and to the risk of environmental lia- bility inherent in activities relating to their past and present oper- ations. As conditions of acquisition agreements, certain operating companies have agreed to accept certain pre-acquisition liability claims on the acquired companies after obtaining indemnifica- tion from prior owners. 102 Onex Corporation December 31, 2007 ters. Although the effect on operating results and liquidity, if any, cannot be reasonably estimated, management of Onex and the operating companies believe, based on current information, that these environmental matters should not have a material adverse effect on the Company’s consolidated financial condition. d) In February 2004, Onex completed the closing of Onex Partners I with funding commitments totalling approximately US$1,655. Onex Partners I is to provide committed capital for future Onex- sponsored acquisitions not related to Onex’ operating companies at December 31, 2003 or to ONCAP. As at December 31, 2007, approximately US$1,477 has been invested of the total approxi- mately US$1,655 of capital committed. Onex has funded US$347 of its US$400 commitment. Onex controls the General Partner and Manager of Onex Partners I. Onex management has committed, as a group, to invest a minimum of 1% of Onex Partners I, which may be adjusted annually up to a maximum of 4%. The total amount invested in Onex Partners I investments by Onex management and directors in 2007 was $5 (2006 – $11). Onex received annual management fees based upon 2% of the capital committed to Onex Partners I by investors other than Onex and Onex management. The annual management fee was reduced to 1% of the net funded commitment at the end of the initial fee period in November 2006, when Onex established a successor fund, Onex Partners II. A carried interest is received on the overall gains achieved by Onex Partners I investors other than Onex to the extent of 20% of the gains, provided that Onex Partners I investors have achieved a minimum 8% return on their investment in Onex Partners I over the life of Onex Partners I. The investment by Onex Partners I investors for this purpose takes into consideration management fees and other amounts paid in by Onex Partners I investors. The returns to Onex Partners I investors other than Onex and Onex management are based upon all investments made through Onex Partners I, with the result that initial carried interests achieved by Onex on gains could be recovered from Onex if subse- quent Onex Partners I investments do not exceed the overall target return level of 8%. Consistent with market practice, Onex, as spon- sor of Onex Partners I, is allocated 40% of the carried interest with 60% allocated to management. Onex defers all gains associated with the carried interest until such time as the potential for repayment of amounts received is remote. For the year ended December 31, 2007, $46 (2006 – $49) has been received by Onex as carried interest while management received $69 (2006 – $74) with respect to the carried interest. At December 31, 2007, the total amount of carried interest that has been deferred from income was $58 (2006 – $60). As described in note 18(e), a portion of the carried interest was recog- nized in income during the year. 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 S e) In August 2006, Onex completed the closing of Onex Partners II with funding commitments totalling approximately US$3,450. f) Under the terms of the MIP, management members of the Company invest in all of the operating entities acquired by the Onex Partners II is to provide committed capital for future Onex- Company. sponsored acquisitions not related to Onex’ operating companies The aggregate investment by management members at December 31, 2003 or to ONCAP or Onex Partners I. As at December 31, 2007, approximately US$2,537 has been invested of the total approximately US$3,450 of capital committed. Onex has funded US$1,003 of its US$1,407 commitment. Onex controls the General Partner and Manager of Onex Partners II. Onex manage- under the MIP is limited to 9% of Onex’ interest in each acquisi- tion. The form of the investment is a cash purchase for 1⁄6th (1.5%) of the MIP’s share of the aggregate investment and investment rights for the remaining 5⁄6th (7.5%) of the MIP’s share at the same price. Amounts invested under the 1% investment requirement in ment has committed, as a group, to invest a minimum of 1% of Onex Partners transactions are allocated to meet the 1.5% Onex Onex Partners II, which may be adjusted annually up to a maxi- investment requirement under the MIP. For investments made mum of 4%. As at December 31, 2007, management and directors had committed 4%. The total amount invested in Onex Partners II investments by Onex management and directors in 2007 was $99 prior to November 7, 2007, the investment rights to acquire the remaining 5⁄6ths vest equally over four years with the investment rights vesting in full if the Company disposes of 90% or more of an (2006 – $11). investment before the fifth year. Onex receives annual management fees based upon 2% The MIP was amended in 2007. For investments made of the capital committed to Onex Partners II by investors other than Onex and Onex management. The annual management fee is reduced to 1% of the net funded commitment at the earlier of subsequent to November 7, 2007, the vesting period for the invest- ment rights to acquire the remaining 5⁄6ths increased from four to six years, with the investment rights vesting in full if the company the end of the commitment period, when the funds are fully disposes of all of an investment before the seventh year. Under invested, or if Onex establishes a successor fund. A carried inter- the MIP and the amended MIP, the investment rights related to a est is received on the overall gains achieved by Onex Partners II particular acquisition are exercisable only if the Company earns investors other than Onex to the extent of 20% of the gains, pro- a minimum 15% per annum compound rate of return for that vided that Onex Partners II investors have achieved a minimum acquisition after giving effect to the investment rights. 8% return on their investment in Onex Partners II over the life of Under the terms of the MIP, the total amount paid by Onex Partners II. The investment by Onex Partners II investors for management members for the interest in the investments in 2007 this purpose takes into consideration management fees and other was $2 (2006 – $2). Investment rights exercisable at the same price amounts paid by Onex Partners II investors. for 7.5% (2006 – 7.5%) of the Company’s interest in acquisitions were The returns to Onex Partners II investors other than issued at the same time. Realizations under the MIP including the Onex and Onex management are based upon all investments value of units distributed were $38 in 2007 (2006 – $28). made through Onex Partners II, with the result that initial carried interests achieved by Onex on gains could be recovered from Onex if subsequent Onex Partners II investments do not exceed g) Members of management and the Board of Directors of the Company invested $13 in 2007 (2006 – $13) in Onex’ investments the overall target return level of 8%. Consistent with market prac- made outside of Onex Partners at the same cost as Onex and other tice and Onex Partners I, Onex, as sponsor of Onex Partners II, will outside investors. Those investments by management and the Board be allocated 40% of the carried interest with 60% allocated to are subject to voting control by Onex. management. Onex defers all gains associated with the carried interest until such time as the potential for repayment of amounts received is remote. As at December 31, 2007, no amount has been h) Each member of Onex management is required to reinvest 25% of the proceeds received related to their share of the MIP and car- received as carried interest related to Onex Partners II. ried interest to acquire Onex shares in the market until the man- agement member owns one million Onex shares. During 2007, Onex management reinvested $18 million (2006 – $15) to acquire Onex shares. i) Certain operating companies have made loans to certain direc- tors or officers of the individual operating companies primarily for the purpose of acquiring shares in those operating companies. The total value of the loans outstanding as at December 31, 2007 was $11 (2006 – $11). Onex Corporation December 31, 2007 103 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 S 2 4 . P E N S I O N A N D N O N - P E N S I O N P O S T - R E T I R E M E N T B E N E F I T S The operating companies have a number of defined benefit and defined contribution plans providing pension, other retirement and post-employment benefits to certain of their employees. The non-pension post-retirement benefits include retirement and termination benefits, health, dental and group life. The total costs during 2007 for defined contribution pension plans were $120 (2006 – $89). Accrued benefit obligations and the fair value of the plan assets for accounting purposes are measured at or around December 31 of each year for the largest plans. The most recent actuarial valuations of these pension plans for funding purposes was December 2005 to October 2007, and the next required valua- tions will be as of January 2008 and December 2008. In 2007, total cash payments for employee future bene- fits, consisting of cash contributed by the operating companies to their funded pension plans, cash payments directly to beneficia- ries for their unfunded other benefit plans and cash contributed to their defined contribution plans, were $164 (2006 – $122). Included in the total was $33 (2006 – $18) contributed to multi- employer plans. For the defined benefit pension plans and non-pension post-retirement plans, the estimated present value of accrued benefit obligations and the estimated market value of the net assets available to provide these benefits were as follows: As at December 31 Accrued benefit obligations: Opening benefit obligations Current service cost Interest cost Contributions by plan participants Benefits paid Actuarial (gain) loss in year Foreign currency exchange rate changes Acquisitions Divestitures and other Plan amendments Settlements/curtailments Reclassification of plans Other Closing benefit obligations Plan assets: Opening plan assets Actual return on plan assets Contributions by employer Contributions by plan participants Benefits paid Foreign currency exchange rate changes Acquisitions Divestitures Settlements/curtailments Reclassification of plans Other Pension Plans in which Assets Exceed Accumulated Benefits Pension Plans in which Accumulated Benefits Exceed Assets Non-Pension Post-Retirement Benefits 2007 2006 2007 2006 2007 2006 $ 910 $ 160 $ 418 $ 976 $ 120 $ 135 4 49 – (13) (108) (103) 36 – – – 14 – 3 46 – (13) 38 4 15 – – 2 651 4 15 20 1 (15) (25) (42) 67 (35) – (2) (14) 2 11 17 1 (15) 15 43 22 – 1 (2) (651) – 6 7 – (4) (1) (9) 10 – – (1) – – 7 6 – (7) (2) 1 2 – – (24) – 2 $ 789 $ 910 $ 390 $ 418 $ 128 $ 120 $ 1,166 $ 169 $ 294 $ 885 $ 71 7 – (13) (149) 36 – – 13 (2) 125 10 – (13) 5 208 – – 659 3 15 30 1 (15) (34) 35 (33) (1) (13) – 21 31 1 (15) 31 – – – (659) (1) – – 4 – (4) – – – – – – – $ $ – – 7 – (7) – – – – – – – Closing plan assets $ 1,129 $1,166 $ 279 $ 294 $ 104 Onex Corporation December 31, 2007 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 S Asset category Equity securities Debt securities Real estate Other Percentage of Plan Assets 2007 51% 41% 4% 4% 100% 2006 59% 34% 3% 4% 100% Equity securities do not include direct investments in the shares of the Company or its subsidiaries but may be invested indirectly as a result of the inclusion of the Company’s and its subsidiaries’ shares in certain market investment funds. The funded status of the plans of the operating subsidiary companies, excluding discontinued operations, was as follows: As at December 31 Deferred benefit amount: Plan assets, at fair value Accrued benefit obligation Plan surplus (deficit): Unrecognized transitional obligation and past service costs Unrecognized actuarial net (gain) loss Reclassification of plans Pension Plans in which Assets Exceed Accumulated Benefits Pension Plans in which Accumulated Benefits Exceed Assets Non-Pension Post-Retirement Benefits 2007 2006 2007 2006 2007 2006 $1,129 (789) $1,166 $ 279 (910) (390) $ 294 (418) $ – (128) $ – (120) $ 340 $ 256 $ (111) $ (124) $ (128) $ (120) (4) (98) 26 (5) (32) 22 – 70 (26) 1 110 (22) (10) 27 – (11) 29 – Deferred benefit amount – asset (liability) $ 264 $ 241 $ (67) $ (35) $ (111) $ (102) The deferred benefit asset is included in the Company’s consolidated balance sheets under “Other assets”. The deferred benefit liabilities are included in the Company’s consolidated balance sheets under “Other liabilities”. The net expense for the plans, excluding discontinued operations, is outlined below: Year ended December 31 Net periodic costs: Current service cost Interest cost Actual return on plan assets Difference between expected return and actual return on plan assets for period Actuarial (gain) loss Difference between actuarial (gain) loss recognized for period and actual actuarial (gain) loss on the accrued benefit obligation for period Plan amendments (curtailment/settlement (gain) loss) Difference between amortization of past service costs for period and actual plan amendments for period Other Pension Plans in which Assets Exceed Accumulated Benefits Pension Plans in which Accumulated Benefits Exceed Assets Non-Pension Post-Retirement Benefits 2007 2006 2007 2006 2007 2006 $ 4 49 (71) (15) – 1 – – – $ $ 3 46 (125) 46 38 (35) 1 – – 15 20 (15) (1) 4 – – – – $ 11 17 (21) 6 15 (9) 1 (1) 1 $ 6 7 – – 1 – (1) (1) (1) $ 7 6 – – (2) 3 1 (1) 1 Net periodic costs (income) $ (32) $ (26) $ 23 $ 20 $ 11 $ 15 Onex Corporation December 31, 2007 105 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 S 2 4 . P E N S I O N A N D N O N - P E N S I O N P O S T - R E T I R E M E N T B E N E F I T S ( c o n t ’d ) The following assumptions were used to account for the plans: Year ended December 31 Accrued benefit obligation Pension Benefits Non-Pension Post-Retirement Benefits 2007 2006 2007 2006 Weighted average discount rate 4.56%–6.60% 4.47%–5.75% 5.00%–6.40% 5.25%–5.60% Weighted average rate of compensation increase Benefit cost Weighted average discount rate Weighted average expected long-term 0.00%–4.80% 0.00%–4.00% 0.00%–3.40% 0.00%–3.58% 4.56%–6.00% 4.47%–6.00% 5.00%–6.00% 5.25%–5.75% rate of return on plan assets 4.97%–8.50% 5.00%–8.25% n/a n/a Weighted average rate of compensation increase 0.00%–4.80% 0.00%–4.00% 0.00%–3.60% 0.00%–3.50% Assumed healthcare cost trend rates Initial healthcare cost rate Cost trend rate declines to Year that the rate reaches the rate it is assumed to remain at 2007 2006 3.50%–13.00% 3.50%–5.00% 3.50%–14.00% 3.50%–5.00% Between 2008 and 2015 Between 2007 and 2015 Assumed healthcare cost trend rates have a significant effect on the amounts reported for post-retirement medical benefit plans. A 1% change in the assumed healthcare cost trend rate would have the following effects: Year ended December 31 Effect on total of service and interest cost components Effect on the post-retirement benefit obligation 2007 $ $ 2 21 1% Increase 2006 $ $ 2 17 2007 $ (1) $ (17) 1% Decrease 2006 $ (1) $ (14) 2 5 . VA R I A B L E I N T E R E S T E N T I T I E S 2 6 . S U B S E Q U E N T E V E N T S In 2006, the Company formed three real estate partnerships with Certain operating companies have entered into agreements to an unrelated third party. These partnerships were formed to devel- acquire or make investments in other businesses. These transac- op residential units on property in the United States. The partner- tions are subject to a number of conditions, many of which are ships are considered variable interest entities under Accounting beyond the control of Onex or the operating companies. The effect Guideline 15 (“AcG-15”). However, the Company is not the primary of these planned transactions, if completed, may be significant to beneficiary of these VIEs and, accordingly, the Company accounts the consolidated financial position of Onex. for its interest in the partnerships using the equity-accounting method. The partnerships have combined assets of $273 as at December 31, 2007. The Company has a maximum exposure to loss of $66, which includes the carrying value of $18. 106 Onex Corporation December 31, 2007 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 S 2 7. I N F O R M AT I O N B Y I N D U S T R Y A N D education and support services for people with disabilities and spe- G E O G R A P H I C S E G M E N T Onex’ reportable segments operate through autonomous compa- nies and strategic partnerships. Each reportable segment offers different products and services and is managed separately. The Company had seven reportable segments in 2007 (2006 – six): electronics manufacturing services; aerostructures; healthcare; financial services; customer support services; metal services; and other. The electronics manufacturing services segment consists of Celestica, which provides manufacturing services for electronics original equipment manufacturers (“OEMs”). The aero- structures segment consists of Spirit AeroSystems, which manufac- tures aerostructures. The healthcare segment consists of EMSC, a leading provider of ambulance transport services and outsourced hospital emergency department physician staffing and manage- ment services in the United States; Carestream Health, a leading global provider of medical imaging and healthcare information technology solutions; CDI, which owns and operates diagnostic imaging centres in the United States; Skilled Healthcare, which operates skilled nursing and assisted living facilities in the United States; and ResCare, a leading U.S. provider of residential training, cial needs. The financial services segment consists of The Warranty Group, which underwrites and administers extended warranties on a variety of consumer goods and also provides consumer credit and other specialty insurance products primarily through automobile dealers. The customer support services segment consists of Sitel Worldwide, which provides services for telecommunications, con- sumer goods, retail, technology, transportation, finance and utility companies. The metal services segment consists of Tube City IMS, a leading provider of outsourced services to steel mills. Other includes Husky, one of the world’s largest suppliers of injection molding equipment and services to the plastics industry; Allison Trans- mission, a leading designer and manufacturer of automatic trans- missions for on-highway trucks and buses, off-highway equipment and military vehicles worldwide; Hawker Beechcraft, a leading man- ufacturer of business jet, turboprop and piston aircraft; Cineplex Entertainment, Canada’s largest film exhibition company; as well as Radian, CEI, Onex Real Estate Partners, ONCAP II and the parent company. The operations of ResCare, Allison Transmission, Hawker Beechcraft and Cineplex Entertainment are accounted for using the equity-accounting method, as described in note 1. Onex Corporation December 31, 2007 107 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 S 2 7. I N F O R M AT I O N B Y I N D U S T R Y A N D G E O G R A P H I C S E G M E N T ( c o n t ’d ) 2007 Industry Segments Electronics Manufacturing Services Aero- structures Healthcare Financial Services Customer Support Services Metal Services Other Consolidated Total Revenues Cost of sales Selling, general and administrative expenses (8,079) (278) (3,344) (193) (3,659) (561) $ 8,617 $ 4,147 $ 4,826 $ 1,399 $ 1,868 $ 1,676 $ 900 $ 23,433 (727) (260) 412 (1,205) (516) 147 Earnings (loss) before the undernoted items 260 610 606 Amortization of property, plant and equipment Amortization of intangible assets and deferred charges Interest expense of operating companies Interest income Earnings (loss) from equity-accounted investments Foreign exchange gains (loss) Stock-based compensation Other income (loss) Gains on sales of operating investments, net Acquisition, restructuring and other expenses Writedown of goodwill and intangible assets Writedown of long-lived assets Earnings (loss) before income taxes, non-controlling interests and (114) (23) (73) 16 – 3 (14) – – (39) – (15) (89) (5) (39) 31 – (2) (36) 11 – (12) – – (160) (10) (152) (239) 7 14 28 (3) 6 – (45) (7) – (186) (14) – – – (3) (2) – (5) – – (52) (15) (65) 2 – (1) (2) 2 – (5) – – (1,529) (49) 98 (63) (12) (41) – – – – – – – – – (643) (306) (49) (47) (16) (66) 69 (58) (146) (92) (11) 1,144 (17) – – (19,186) (2,163) 2,084 (535) (409) (537) 125 (44) (118) (150) 6 1,144 (123) (7) (15) discontinued operations $ 1 $ 469 $ 55 $ 192 $ 11 $ (18) $ 711 $ 1,421 Provision for income taxes Non-controlling interests Earnings from continuing operations Earnings from discontinued operations Net earnings Total assets Long-term debt (a) Property, plant and equipment additions Goodwill additions Goodwill (295) (1,017) $ $ 109 119 228 $ 4,419 $ 3,272 $ 5,745 $ 5,536 $ 1,039 $ $ $ $ 752 67 – 831 $ $ $ $ 567 $ 2,835 268 – 4 $ $ 136 356 $ 1,097 $ $ $ $ 194 29 – 341 $ $ $ $ 680 51 381 307 $ $ $ $ $ 881 $ 5,307 $ 26,199 370 55 341 289 $ $ $ $ 937 $ 6,335 27 $ 633 408 574 $ 1,486 $ 3,443 (a) Long-term debt includes current portion, excludes capital leases and is net of deferred charges. 108 Onex Corporation December 31, 2007 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 S 2006 Industry Segments Revenues Cost of sales Selling, general and administrative expenses Earnings before the undernoted items Amortization of property, plant and equipment Amortization of intangible assets and deferred charges Interest expense of operating companies Interest income Earnings from equity-accounted investments Foreign exchange gains Stock-based compensation Other income (loss) Gains on sales of operating investments, net Acquisition, restructuring and other expenses Writedown of goodwill and intangible assets Writedown of long-lived assets Earnings (loss) before income taxes, non-controlling Electronics Manufacturing Services Aero- structures Healthcare Financial Services Customer Support Services $ 9,982 $ 3,631 $ 2,920 $ (9,378) (291) (2,919) (194) (2,423) (158) 313 (117) (30) (76) 5 – 10 (23) – – (240) – (2) 518 (49) (7) (54) 32 – – (438) 7 – (31) – – 339 (93) (23) (113) 4 13 – (3) 1 – (7) (5) – 118 (60) (25) 33 – (11) (1) 10 – – – 1 – – – – $ 749 (453) (212) 84 (31) (1) (30) 1 – 1 1 1 – (3) – – Other Consolidated Total $ 1,220 $ 18,620 (928) (207) 85 (80) (19) (65) 70 12 11 (171) (1) 1,307 (11) (5) (1) (16,161) (1,087) 1,372 (370) (91) (339) 122 25 22 (634) 9 1,307 (292) (10) (3) interests and discontinued operations $ (160) $ (22) $ 113 $ 32 $ 23 $ 1,132 $ 1,118 Provision for income taxes Non-controlling interests in operating companies Earnings from continuing operations Earnings from discontinued operations Net earnings Total assets(a) Long-term debt (b) Property, plant and equipment additions Goodwill additions Goodwill (24) (838) 256 746 $ $ 1,002 $ $ $ $ $ 5,449 874 215 – 984 $ $ $ $ $ 3,212 687 394 12 7 $ $ $ $ $ 2,887 1,177 111 40 901 $ $ $ $ $ 6,615 233 3 373 380 $ $ $ $ $ 256 196 19 – – $ $ $ $ $ 4,159 $ 22,578 674 81 41 424 $ $ $ $ 3,841 823 466 2,696 (a) Customer Support Services and Other include discontinued operations as described in note 3. (b) Long-term debt includes current portion and excludes capital leases. Onex Corporation December 31, 2007 109 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 S 2 7. I N F O R M AT I O N B Y I N D U S T R Y A N D G E O G R A P H I C S E G M E N T ( c o n t ’d ) Geographic Segments 2007 2006 Canada U.S. Europe Asia and Oceania Other Total Canada U.S. Europe Asia and Oceania Other Total Revenue $ 1,619 $ 11,235 $ 3,607 $ 5,358 $ 1,614 $ 23,433 $ 2,010 $ 7,716 $ 1,958 $ 5,208 $ 1,728 $ 18,620 Property, plant and equipment $ 337 $ 2,301 $ 459 $ 325 $ 67 $ 3,489 $ 633 $ 1,593 $ 262 $ 316 $ 95 $ 2,899 Intangible assets $ 434 $ 1,638 $ 458 $ 118 $ 44 $ 2,692 $ 118 $ 568 $ 284 $ 37 $ 29 $ 1,036 Goodwill $ 191 $ 1,853 $ 441 $ 930 $ 28 $ 3,443 $ 219 $ 1,361 $ 105 $ 1,003 $ 8 $ 2,696 Revenues are attributed to geographic areas based on the destinations of the products and/or services. Other consists primarily of operations in Central and South America, and Mexico. Significant customers of operating companies are discussed in note 22. 110 Onex Corporation December 31, 2007 SUMMARY HISTORICAL FINANCIAL INFORMATION The following is a summary of key consolidated financial information of the Company for the past five fiscal years: Year ended December 31 (in millions of dollars except per share data) 2007 2006 2005 2004 2003 Revenues Cost of sales Selling, general and administrative expenses Earnings before the undernoted items Amortization of property, plant and equipment Amortization of intangible assets and deferred charges Interest expense of operating companies Interest income Earnings (loss) from equity-accounted investments Foreign exchange gains (loss) Stock-based compensation Other income Gains on sales of operating investments, net Acquisition, restructuring and other expenses Writedown of goodwill and intangible assets Writedown of long-lived assets Earnings (loss) before income taxes, non-controlling interests and discontinued operations Provision for income taxes Non-controlling interests Earnings (loss) from continuing operations Earnings (loss) from discontinued operations (a) $ 23,433 $ 18,620 $ 15,451 $ 12,590 $ 10,609 (19,186) (2,163) (16,161) (1,087) $ 2,084 $ 1,372 $ (13,732) (11,671) (913) 806 (333) (81) (229) 72 5 (35) (44) 76 921 (252) (3) (5) 898 (70) (1) 827 138 $ (643) 276 (294) (63) (84) 25 (5) (130) (55) 105 108 (195) (393) (86) (791) (295) 838 (248) 283 $ (9,669) (672) 268 (317) (84) (58) 80 – (116) 14 – 129 (147) (188) (78) (497) (53) 269 (281) (51) (370) (91) (339) 122 25 22 (634) 9 1,307 (292) (10) (3) 1,118 (24) (838) 256 746 (535) (409) (537) 125 (44) (118) (150) 6 1,144 (123) (7) (15) 1,421 (295) (1,017) 109 119 228 Net earnings (loss) for the year $ $ 1,002 $ 965 $ 35 $ (332) Total assets Shareholders’ equity Dividends declared per Subordinate Voting Share Earnings (loss) per Subordinate Voting Share: Continuing operations Net earnings (loss) Fully diluted $ 26,199 $ 22,578 $ 14,845 $ 11,809 $ 14,621 $ $ $ $ $ 1,703 0.11 0.85 1.78 1.78 $ $ $ $ $ 1,815 0.11 1.93 7.55 7.55 $ $ $ $ $ 1,152 0.11 5.95 6.95 6.95 $ $ $ $ $ 227 0.11 (1.75) 0.25 0.25 $ $ $ $ $ 293 0.11 (1.83) (2.16) (2.16) (a) The earnings from discontinued operations for 2003 include the sale of Lantic Sugar/Rogers Sugar and MAGNATRAX. The earnings from discontinued operations from 2003 to 2004 include the sale of Dura Automotive, Loews Cineplex Group and InsLogic. The earnings from discontinued operations from 2003 to 2005 include the sale of Commercial Vehicle Group. The earnings from discontinued operations from 2004 to 2005 include the sale of Magellan. The earnings from discontinued operations from 2003 to 2006 include the disposition of J.L. French Automotive, the discontinued operations of Cineplex Entertainment and the discontinued operations of Sitel Worldwide. The earnings from discontinued operations from 2003 to 2007 include the discontinued operations of certain ONCAP companies. The 2006 earnings from discontinued opera- tions also include the 2006 recovery of taxes relating to the 2001 sale of Sky Chefs and the discontinued operations of Town and Country. Previously reported consolidated revenues and earnings figures for the years 2003 to 2006 have been restated to classify the results of the above entities as discontinued operations. Year-end closing share price As at December 31 The Toronto Stock Exchange 2007 2006 2005 2004 2003 $ 34.99 $ 28.35 $ 18.92 $ 19.75 $ 14.69 Onex Corporation December 31, 2007 111 SHAREHOLDER INFORMATION Shares The Subordinate Voting Shares of the Registrar and Transfer Agent CIBC Mellon Trust Company Company are listed and traded on P.O. Box 7010 The Toronto Stock Exchange. Share symbol OCX Adelaide Street Postal Station Toronto, Ontario M5C 2W9 (416) 643-5500 or call toll-free throughout Duplicate communication Registered holders of Onex Corporation shares may receive more than one copy of shareholder mailings. Every effort is made to avoid duplication, but when shares are registered under different names and/or addresses, multiple Canada and the United States mailings result. Shareholders who Dividends Dividends on the Subordinate Voting Shares are payable quarterly on or about January 31, April 30, July 31 and 1-800-387-0825 www.cibcmellon.ca or inquiries@cibcmellon.ca (e-mail) receive but do not require more than one mailing for the same ownership are requested to write to the Registrar and Transfer Agent and arrangements will October 31 of each year. At December 31, All questions about accounts, stock be made to combine the accounts for 2007 the indicated dividend rate certificates or dividend cheques mailing purposes. for each Subordinate Voting Share should be directed to the Registrar was $0.11 per annum. and Transfer Agent. Shares held in nominee name To ensure that shareholders whose shares are not held in their name receive all Company reports and releases Shareholder Dividend Reinvestment Plan The Dividend Reinvestment Plan provides Investor Relations Contact Requests for copies of this report, quarterly reports and other corporate on a timely basis, a direct mailing list shareholders of record who are resident communications should be directed to: is maintained by the Company. If you in Canada a means to reinvest cash divi- Investor Relations dends in new Subordinate Voting Shares Onex Corporation would like your name added to this list, please forward your request to Investor of Onex Corporation at a market-related 161 Bay Street Relations at Onex. price and without payment of brokerage P.O. Box 700 commissions. To participate, registered Toronto, Ontario M5J 2S1 shareholders should contact Onex’ share registrar, CIBC Mellon Trust Company. Non-registered shareholders who wish to participate should contact their invest- ment dealer or broker. Corporate governance policies A presentation of Onex’ corporate governance policies is included in the Management Information Circular that is mailed to all shareholders and is available on Onex’ website. E-mail: info@onex.com Website: www.onex.com Auditors PricewaterhouseCoopers llp Chartered Accountants Annual meeting of shareholders Onex Corporation’s Annual Meeting of Shareholders will be held on Thursday, May 8, 2008 at 10:00 a.m. (Eastern Daylight Time) at Scotiabank Paramount Toronto Theatre 259 Richmond Street West Toronto, Ontario. Typesetting and copyediting by Moveable Inc. www.moveable.com Printed in Canada 112 Onex Corporation December 31, 2007