Management’s Discussion and Analysis and Financial Statements December 31, 2008 THE ONEX OPERATING COMPANIES Onex’ businesses generate annual revenues of $36 billion, have assets of $45 billion and employ 233,000 people worldwide. Table of Contents 2 Management’s Discussion and Analysis 111 Summary of Historical Financial Information 62 Consolidated Financial Statements 112 Shareholder Information ONEX CORPORATION A Leading Private Equity Investor and Asset Manager Founded in 1984, Onex is one of North America’s oldest and most successful private equity investors and asset managers. Onex has completed more than 250 acquisitions valued at approxi- mately $43 billion. Employing a disciplined, active ownership investment approach in these acquisitions, Onex has generated 3.4 times the capital it has invested and managed, earning a 29 percent compound IRR on realized and publicly traded investments. Onex’ near $4 billion of proprietary capital continues to be invested largely through Onex Partners, its large-cap pri- vate equity investing operations. Onex has also allocated meaningful amounts of capital to ONCAP (mid-cap private equity), Onex Real Estate Partners and Onex Credit Partners, while always main- taining a financially strong parent com- pany with significant cash on hand. Onex has approximately US$7 billion of third-party, fee-earning assets under management in its Onex Partners and ONCAP families of funds, as well as through Onex Credit Partners. These Funds generate a stable and growing stream of annual management fees that more than offsets Onex’ overhead. In addition, Onex is entitled to a carried interest on this capital that has the potential to significantly enhance Onex’ investment returns. Onex Invested Capital Onex Credit Partners 2% Mid-cap Private Equity 3% Onex Real Estate 5% Cash and Near-cash Items 15% Large-cap Private Equity 75% Public 30% Private 45% Private investments are valued at cost and publicly traded investments are valued at market as at December 31, 2008. Third-Party Assets Under Management Onex Credit Partners 3% ONCAP 4% Onex Partners I 19% Onex Partners II 29% Onex Partners III 45% 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, 2008 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, consoli- dated 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 consolidated 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 25, 2009. The Board of Directors carries out its responsibility for the review of this disclosure through the 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: 3 Onex Business Objective and Strategies 7 Industry Segments Consolidated Operating Results Fourth-Quarter Results 10 Financial Review 10 34 37 44 52 53 54 Outlook 55 Risk Management Consolidated Financial Position Liquidity and Capital Resources Transition to International Financial Reporting Standards Disclosure Controls and Procedures and Internal Controls over Financial Reporting Onex Corporation’s financial filings, including the 2008 MD&A and Financial Statements and interim quar- terly reports, Annual Information Form and Management Circular, are available on Onex’ 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 than those anticipated in these forward-looking statements. Onex is under no obligation to update 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, 2008 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 part- ners and to have that value reflected in our share price. The discussion that follows outlines Onex’ strategies to achieve this objective and how we performed against those strategies during 2008. OUR STRATEGY: Private Equity Investing + Asset Management Our strategy to deliver value to shareholders and partners is concentrated on two activities: private equity investing and asset management. Our private equity investing focuses on our disciplined, active ownership approach of acquiring and building industry-leading businesses in partnership with outstanding management teams. The objective of our asset management business is to man- age and grow third-party capital, which earns management fees for Onex and enhances our overall returns through carried interests. The availability of third-party capital enables Onex to be efficient and responsive to acquisition opportunities in our private equity investing. For 25 years, Onex has had a distinctive ownership culture that requires its management team to invest meaningfully in each private equity transaction and to reinvest a portion of its carry distributions in Onex shares. As well, the Onex management team owns approximately 23 percent of Onex’ outstanding Subordinate Voting Shares. We believe that our superior track record is a direct result of this strong alignment of interests between Onex, our shareholders, our partners and our management team. PRIVATE EQUITY INVESTING: Acquire, Build and Grow Value Onex seeks to acquire attractive businesses, build them into industry leaders and grow their value. We are committed to maintaining substantial financial strength and have capital available for our private equity investing. 2008 Performance Acquire attractive businesses The credit crisis that began in mid-2007 intensified globally during the second half of 2008. Traditional sources of credit, such as bank lending, commercial paper and corporate fixed- income markets, either locked up or became prohibitively expensive. The injection of hundreds of billions of dollars into domestic financial systems by national governments around the world provided a needed capital cushion for the global banking system. Yet, by the end of 2008, only limited progress had been made in stimulating the banking system to commit to renewed lending. The combination of stringent credit terms and fewer participants in the market made financing for new acquisitions very difficult to obtain, which in turn limited private equity investment and realizations. Onex Corporation December 31, 2008 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 Despite these challenges, Onex completed two attractive acquisitions during the fourth quarter of 2008: (cid:129) Onex Partners II acquired a 50 percent interest in RSI Home Products, Inc., a leading U.S. manufac turer of residential cabinetry, for a total investment of $338 million; Onex’ share was $133 million. This investment was the first in our building products partnership with Philip Orsino, former CEO of Masonite Corporation. (cid:129) ONCAP II, our mid-market private equity fund, completed the acquisition of Caliber Collision Centers, the leading provider of auto collision repair services in the United States, with 66 facil- ities in Texas and California. The total investment was $67 million, of which Onex’ portion was $30 million. During 2008, our gaming partnership with Alex Yemenidjian, former President and CEO of MGM Mirage, was actively seeking attractive investment opportunities in this currently out-of- favour sector. Build our businesses into industry leaders Today, most of Onex’ operating companies are industry leaders with substantial global opera- tions. However, these businesses are not immune to the current environment and therefore, in 2008, we directed the management of each of our operating companies to position these businesses defensively in anticipation of a significant economic downturn. Given Onex’ pru- dent use of financial leverage, our businesses are, for the most part, conservatively capitalized. At December 31, 2008, all but one were well within their debt covenants and have no meaningful debt maturities prior to 2011. We believe this positions our companies well through this eco- nomic contraction to enhance their leadership positions and to enable them to be potential acquirers at an opportune time in the business cycle. Grow the value of our businesses As a General Partner, we are required to report the fair value of our businesses to our limited partners. At December 31, 2008, the overall value of our portfolio of private companies in the Onex Partners Funds had declined slightly from the end of 2007, which is a testament to the qual- ity and stability of our businesses. While the fair values of our capital goods producing companies for the most part were reduced, there were positive developments at certain of our businesses during 2008 that reflect value growth: (cid:129) In September 2008, Carestream Health paid a dividend distribution to its preferred shareholders of US$72 million, of which Onex’ share was US$28 million. This was in addition to the US$94 mil- lion Carestream Health used from cash flow to pay down debt; 4 Onex Corporation December 31, 2008 4 Onex Corporation December 31, 2008 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 (cid:129) In late December 2008, The Warranty Group distributed its second dividend to shareholders in the amount of US$42 million, of which Onex received US$13 million; this is in addition to the US$45 million dividend distributed in 2007, of which Onex’ share was US$14 million; and (cid:129) Allison Transmission repurchased approximately US$139 million of its debt in the market at a discount, which provides value to the equity holders in that business. While there would be the expectation by some that the value of Onex’ private investments through the Onex Partners Funds would have declined further given what transpired in the public markets in 2008, the following factors should be kept in mind: (cid:129) The average multiple that Onex paid to acquire businesses during the period 2005 to 2007 was 6.4x EBITDA, which is about three turns below the average purchase multiple in the private equity market over that time; and (cid:129) The average leverage applied in our acquisitions over 2005 to 2007 was 3.6x, well below the 5.6x average leverage that prevailed on private equity acquisitions through that time period. In fact, Onex regularly accepted less leverage than was offered. Our publicly traded companies through the Onex Partners Funds declined in value by 30 percent during 2008. Emergency Medical Services was up nicely in value but this was more than offset by the decline in market value of Spirit AeroSystems. While there was the meaningful decline in value in 2008, our publicly traded companies in the Onex Partners Funds at December 31, 2008 as a group were still over 300 percent of their original cost. Financial strength Onex’ financial strength comes from both its own capital, as well as its third-party limited part- ners in the Onex Partners and ONCAP families of Funds. (cid:129) Onex: At December 31, 2008, Onex, the parent company, had approximately $470 million of cash. It has been Onex’ policy to maintain a debt-free parent company and not guarantee any of the debt of its operating companies. (cid:129) Onex Partners Funds: At the end of December 2008, Onex completed the latest closing for Onex Partners III, its most recent large-cap private equity fund. The Fund had raised US$3.0 billion of third-party capital at year-end, toward a target of US$3.5 billion of third- party capital. At year-end, third-party committed and uncalled capital through the Onex Partners Funds totalled US$3.5 billion for future Onex-sponsored investments. (cid:129) ONCAP Funds: ONCAP has third-party committed, uncalled capital available in the ONCAP II Fund of approximately $156 million at December 31, 2008 for future ONCAP- sponsored investments. Onex Corporation December 31, 2008 5 Onex Corporation December 31, 2008 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 ASSET MANAGEMENT: Manage and Grow Third-Party Capital Our 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 cap- ital. We seek to grow assets under management and create new asset classes. 2008 Performance Manage third-party capital (cid:129) Onex earned US$65 million in management fees in 2008 from the Onex Partners and ONCAP Funds. In late 2008, Onex began drawing management fees related to capital commitments to Onex Partners III. The current annualized rate of management fees from the Onex Partners and ONCAP families of funds is approximately US$80 million. (cid:129) Onex did not complete any realizations during 2008 and therefore did not receive any carried interest distributions. At December 31, 2008, there was approximately US$51 million of unreal- ized carried interest to Onex based on the unrealized gains on public companies held. Grow third-party capital In the context of the very challenging fundraising environment during 2008, we were pleased and encouraged by our success in fundraising for our third large-cap private equity fund, Onex Partners III. At December 31, 2008, we had closed approximately US$3.0 billion of third-party capital commitments, which represents a 50 percent increase in third-party capital from Onex Partners II. We continue to work toward the target of US$3.5 billion of third-party capital for Onex Partners III; however, the current environment will make this difficult to achieve. OUR OBJECTIVE: Have the Value Created from Investing and Asset Management Reflected in Our Share Price 2008 Performance Reflecting the significant declines in global markets and equity values, Onex did not meet this objective in 2008. At December 31, 2008, Onex’ Subordinate Voting Shares closed at $18.19, down 48 percent from their close at the end of 2007. 6 Onex Corporation December 31, 2008 6 Onex Corporation December 31, 2008 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, 2008, Onex had seven reportable industry segments. A description of our oper- ating companies by industry segment, and the economic and voting ownership of Onex in those businesses, is presented below. Industry Segments Companies Onex’ Economic/Voting Ownership Electronics Manufacturing Services Celestica Inc. (TSX/NYSE: CLS), a global provider of electronics manufacturing services (website: www.celestica.com). 12%(a)/79% Onex shares held: 27.3 million Aerostructures Spirit AeroSystems, Inc. (NYSE: SPR), the world’s largest independent designer and manufac- 6%(a)/76% turer of aerostructures (website: www.spiritaero.com). 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), the leading provider of emergency medical services in the United States (website: www.emsc.net). 29%/97% Onex shares held: 12.1 million Onex Partners I shares subject to a carried interest: 16.3 million Center for Diagnostic Imaging, Inc., a U.S. provider of diagnostic and therapeutic radiology services (website: www.cdiradiology.com). 19%/100% Total Onex, Onex Partners I and Onex management investment at cost: $88 million (US$73 million) Onex portion: $21 million (US$17 million) Onex Partners I portion subject to a carried interest: $64 million (US$53 million) Skilled Healthcare Group, Inc. (NYSE: SKH), an organization of skilled nursing and assisted living facilities operators in the United States (website: www.skilledhealthcaregroup.com). 9%/89% Onex shares held: 3.5 million Onex Partners I shares subject to a carried interest: 10.7 million Carestream Health, Inc., a global provider of medical and dental imaging and healthcare infor- mation technology solutions (website: www.carestreamhealth.com). 39%/100% Total Onex, Onex Partners II and Onex management investment at cost: $521 million (US$471 million) Onex portion: $206 million (US$186 million) Onex Partners II portion subject to a carried interest: $292 million (US$266 million) Res-Care, Inc.(b) (NASDAQ: RSCR), the largest U.S. provider of residential, training, educational and support services for people with disabilities and special needs (website: www.rescare.com). 6%/(c) Onex shares held: 2.0 million Onex Partners I shares subject to a carried interest: 6.2 million (a) Onex’ economic ownership percentage excludes shares held in connection with the Management Investment Plan. (b) This investment is accounted for on an equity basis in Onex’ audited annual consolidated financial statements. (c) 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. Onex Corporation December 31, 2008 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 Financial Services Customer Support Services Metal Services Other Businesses • Theatre Exhibition Companies Onex’ Economic/Voting Ownership The Warranty Group, Inc., the world’s largest provider of extended warranty contracts (web site: www.thewarrantygroup.com). 29%/100% Total Onex, Onex Partners I, Onex Partners II and Onex management investment at cost: $556 million (US$488 million) Onex portion: $175 million (US$154 million) Onex Partners I portion subject to a carried interest: $204 million (US$178 million) Onex Partners II portion subject to a carried interest: $155 million (US$137 million) Sitel Worldwide Corporation, a global provider of outsourced customer care services (website: www.sitel.com). 66%/88% Onex investment at cost: $340 million (US$251 million) Tube City IMS Corporation, an outsourced services provider to steel mills (website: www.tubecityims.com). 35%/100% Total Onex, Onex Partners II and Onex management investment at cost: $249 million (US$211 million) Onex portion: $98 million (US$83 million) Onex Partners II portion subject to a carried interest: $140 million (US$119 million) Cineplex Entertainment Limited Partnership(b) (TSX: CGX.UN), Canada’s largest film exhibi- tion company (website: www.cineplex.com). 22% (a)/(c) Onex units held: 12.8 million • Aircraft & Aftermarket Hawker Beechcraft Corporation(b), the largest privately owned designer and manufacturer of business jet, turboprop, and piston aircraft (website: www.hawkerbeechcraft.com). 20%/(c) Total Onex, Onex Partners II and Onex management investment at cost: $564 million (US$485 million) Onex portion: $223 million (US$191 million) Onex Partners II portion subject to a carried interest: $319 million (US$274 million) • Commercial Vehicles Allison Transmission, Inc.(b), 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%/(c) Total Onex, Onex Partners II, certain limited partners and Onex management investment at cost: $805 million (US$763 million) Onex portion: $250 million (US$237 million) Onex Partners II portion subject to a carried interest: $357 million (US$339 million) • Injection Molding Husky Injection Molding Systems Ltd., one of the world’s largest suppliers of injection molding equipment and services to the PET plastics industry (website: www.husky.ca). 36%/100% Total Onex, Onex Partners I, Onex Partners II and Onex management investment at cost: $626 million (US$622 million) Onex portion: $226 million (US$225 million) Onex Partners I portion subject to a carried interest: $97 million (US$96 million) Onex Partners II portion subject to a carried interest: $278 million (US$276 million) (a) Onex’ economic ownership percentage excludes shares held in connection with the Management Investment Plan. (b) This investment is accounted for on an equity basis in Onex’ audited annual consolidated financial statements. (c) 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. 8 Onex Corporation December 31, 2008 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) • Building Products • Personal Care Products Companies RSI Home Products, Inc.(a), a leading manufacturer of kitchen, bathroom, and home organiza- tion cabinetry sold through home centre retailers, independent kitchen and bath dealers and other distributors (website: www.rsiholdingcorp.com). Total Onex, Onex Partners II and Onex management investment at cost: $338 million (US$318 million) Onex portion: $133 million (US$126 million) Onex Partners II portion subject to a carried interest: $190 million (US$179 million) Onex’ Economic/Voting Ownership 20%/50%(b) Cosmetic Essence, Inc., an outsourced supply chain management services provider to the personal care products industry (website: www.cosmeticessence.com). 21%/100% Total Onex, Onex Partners I and Onex management investment at cost: $138 million (US$115 million) Onex portion: $32 million (US$27 million) Onex Partners I portion subject to a carried interest: $100 million (US$83 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). ONCAP II actively manages investments in CSI Global Education Inc., EnGlobe Corp. (TSX: EG), Mister Car Wash, CiCi’s Pizza and Caliber Collision Centers. 44% /100% Total Onex, ONCAP II and Onex management investment at cost: $264 million Onex portion: $117 million ONCAP II portion: $131 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 Partners transactions at cost: $192 million (US$179 million)(c) • Credit Securities Onex Credit Partners, a credit investing platform focused on generating attractive risk-adjusted returns through the purchase of undervalued credit securities. 50%(d)/50% Onex investment in Onex Credit Partners’ funds at market: $71 million (US$58 million) (a) This investment is accounted for on an equity basis in Onex’ audited annual consolidated financial statements. (b) 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. (c) 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. (d) This represents Onex’ share of the Onex Credit Partners’ platform. Onex Corporation December 31, 2008 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 FINANCIAL REVIEW This section discusses the significant changes in Onex’ consolidated statements of earnings, consolidated balance sheets and consolidated statements of cash flows for the fiscal year ended December 31, 2008 compared to those for the year ended December 31, 2007 and, in selected areas, to those for the year ended December 31, 2006. 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 Impairment tests of goodwill, intangible assets and long-lived assets This section should be read in conjunction with Onex’ Goodwill in an accounting context represents the cost of audited annual consolidated statements of earnings and investments in operating companies in excess of the fair corresponding notes thereto. Critical accounting policies and estimates Onex prepares its financial statements in accordance value of the net identifiable assets acquired. Essentially all of the goodwill amount that appears on Onex’ audited annual consolidated balance sheets at December 31, 2008 and 2007 was recorded by the operating companies. Good - with Canadian generally accepted accounting principles will is not amortized, but is assessed for impairment at the (“Canadian GAAP”). The preparation of these financial reporting unit level annually, or sooner if events or changes statements in conformity with Canadian GAAP requires in circumstances or market conditions indicate that the management of Onex and management of the operating carrying amount could exceed fair value. The test for good- companies to make estimates and assumptions that affect will impairment used by our operating companies is to the reported amounts of assets and liabilities, disclosure of assess the fair value of each reporting unit within an oper- contingent assets and liabilities, and the reported amounts ating company and determine if the goodwill associated of revenues and expenses for the period of the consoli- with that unit is less than its carrying value. This assess- dated financial statements. Significant accounting policies ment takes into consideration several factors, including, and methods used in the preparation of the financial state- but not limited to, future cash flows and market conditions. ments are described in note 1 to the Decem ber 31, 2008 If the fair value is determined to be lower than the carrying audited annual consolidated financial statements. Onex value at an individual reporting unit, then goodwill is con- and its operating companies evaluate their estimates and sidered to be impaired and an impairment charge must be assumptions on a regular basis based on historical expe - recognized. Each operating company has developed its rience and other relevant factors. Included in Onex’ con- own internal valuation model to determine the fair value. solidated financial statements are estimates used in These models are subjective and require management of determining the allowance for doubtful accounts, inven- the particular operating company to exercise judgement tory valuation, the valuation of deferred taxes, intangible in making assumptions about future results, including assets and goodwill, the useful lives of property, plant and revenues, operating expenses, capital expenditures and equipment and intangible assets, revenue recognition discount rates. under contract accounting, pension and post-employment The impairment test for intangible assets and long- benefits, losses and loss adjustment expenses reserves, lived assets with limited lives is similar to that of goodwill. restructuring costs and other matters. Actual results could There were impairments in goodwill, intangible differ materially from those estimates and assumptions. assets and long-lived assets recorded by certain operating The assessment of goodwill, intangible assets and companies in the fourth quarter of 2008. These are re - long-lived assets for impairment, the determination of viewed on page 31 and note 21 to the audited annual con- income tax valuation allowances, contract accounting, solidated financial statements. development 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. 10 Onex Corporation December 31, 2008 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 Income tax valuation allowance reserves as necessary as experience develops or new infor- An income tax valuation allowance is recorded against mation becomes known. future income tax assets when it is more likely than not that some portion or all of the future income tax assets recog- nized will not be realized prior to their expiration. The rever- New accounting policies in 2008 Inventories sal of future income tax liabilities, projected future taxable On January 1, 2008, Onex adopted the Canadian Institute income, the character of income tax assets, tax planning of Chartered Accountants Handbook (“CICA Handbook”) strategies and changes in tax laws are some of the factors Section 3031, “Inventories”, which provides further guid- taken into consideration when determining the valuation ance on the measurement and disclosure requirements for allowance. A change in these factors could affect the esti- inventory. The new standard outlines the types of costs mated valuation allowance and income tax expense. Note 14 that can be capitalized and requires the reversal of previ- to the audited annual consolidated financial statements pro- ous inventory writedowns if economic conditions have vides additional disclosure on income taxes. changed to support higher inventory values. Under this Contract accounting standard, Onex is required to disclose quarterly the amount of inventory recognized in cost of sales, as well as any The aerostructures segment recognizes revenue using the inventory writedowns or reversals. During 2008, Onex contract method of accounti ng since a significant portion expensed $17.2 billion of inventory in cost of sales. In addi- of Spirit AeroSystems’ revenues is under long-term, vol- tion, Onex recorded inventory writedowns of $113 million, ume-based contracts, requiring delivery of products over partially offset by inventory provision reversals of $41 mil- several years. Revenues from each contract are recognized lion for a net provision of $72 million. The adoption of this in accordance with the percentage-of-completion method standard did not materially affect the consolidated finan- of accounting, using the units-of-delivery method. As a cial statements. result, contract accounting uses various estimating tech- niques to project costs to completion and estimates of Capital disclosures recoveries asserted against the customer for changes in On January 1, 2008, Onex adopted CICA Handbook Section specifications. These estimates involve assumptions of 1535, “Capital Disclosures”, which provides guidance for future events, including the quantity and timing of deliver- disclosing information about an entity’s capital and how it ies and labour performance and rates, as well as projec- manages its capital. This standard requires the disclosure tions relative to material and overhead costs. Contract of an entity’s objectives, policies and procedures relating to estimates are re-evaluated periodically and changes in esti- ongoing capital management. This new disclosure is pro- mates are reflected in the current period. vided on page 43 of this report in the discussion of man- agement of capital. Losses and loss adjustment expenses reserves The Warranty Group, Inc. (“The Warranty Group”) records Financial instruments presentation and disclosure losses and loss adjustment expenses reserves, which repre- On January 1, 2008, Onex adopted CICA Handbook Sec- sent the estimated ultimate net cost of all reported and tion 3862, “Financial Instruments – Disclosures” and Sec- unreported losses on warranty contracts. The reserves for tion 3863, “Financial Instruments – Presentation”. These new unpaid losses and loss adjustment expenses are estimated standards require the disclosure of information on the sig- using individual case-basis valuations and statistical analy- nificance of financial instruments on the Company’s consol- ses. These estimates are subject to the effects of trends idated financial position and performance, the nature and in loss severity and frequency claims reporting patterns extent of risks arising from financial instruments, and man- of The Warranty Group’s third-party administrators. While agement’s objectives, policies and procedures for managing there is considerable variability inherent in these estimates, such risks. A discussion of these risks is included in the Risk management of The Warranty Group believes the reserves Management section of this report. In addition, note 1 to the for losses and loss adjustment expenses are adequate and audited annual consolidated financial statements provides appropriate, and it continually reviews and adjusts those these additional disclosures on financial instruments. Onex Corporation December 31, 2008 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 Recent accounting pronouncements Goodwill and intangible assets Investments There was one acquisition of an oper ating company and In February 2008, the CICA issued Handbook Section 3064, one investment completed in 2008. In October 2008, Onex, “Goodwill and Intangible Assets”, which replaces the exist- Onex Partners II and Onex management completed an ing standard. This revised standard establishes guidance investment in RSI Home Products, Inc. (“RSI”), a leading for the recognition, measurement and disclosure of good- U.S. manufacturer of cabinetry for the residential market- will and intangible assets, including internally generated place, for a total investment of $338 million. Onex’ portion intangible assets. This standard is effective for 2009. Onex of that investment was $133 million. The investment was is currently evaluating the impact of adopting this stan- in the form of a convertible preferred security, repre senting dard on its consolidated financial statements. a 50 percent economic and voting interest in RSI, subject to Variability of results Onex’ audited annual consolidated operating results may a minimum preferred return of 10 percent to Onex upon realiza tion. The investment in RSI is accounted for on an equity basis. vary substantially from year to year for a number of rea- In late October 2008, ONCAP II completed the sons, including some of the following: acquisitions or dis- acquisition of Caliber Collision Centers (“Caliber Colli - positions of businesses by Onex, the parent company; the sion”), a leading provider of auto collision repair services volatility of the exchange rate between the Canadian dollar with 66 collision centres in Texas and Southern California, and certain foreign currencies, primarily the U.S. dollar; in a transaction valued at $207 million. Onex and ONCAP II the change in market value of stock-based compensation invested approximately $67 million of equity in this busi- for both the parent company and its operating companies; ness. Onex’ portion of that investment was $30 million. changes in the market value of Onex’ publicly traded oper- Onex and ONCAP II have a controlling ownership interest ating companies; and activities at Onex’ operating compa- in Caliber Collision and therefore, the operations of Caliber nies. These activities may include the purchase or sale of Collision are consolidated from its acquisition date and businesses; fluctuations in customer demand and in mate- reported in Onex’ other segment along with other current rials and employee-related costs; changes in the mix of ONCAP II investments. products and services produced or delivered; impairments There were no dispositions in 2008 by Onex, the in goodwill, intangible assets or long-lived assets; and parent company. charges to restructure operations. 2008 market environment U.S. dollar to Canadian dollar exchange rate movement The credit crisis that began in mid-2007 with the collapse of Since most of Onex’ operating companies report in U.S. the U.S. subprime market and U.S. mortgage market intensi - dollars, the upward or downward movement of the U.S. fied and spread globally in 2008. The financial markets, in dollar to Canadian dollar exchange rate for the year com- particular the equity markets, experienced a dramatic pared to last year will affect Onex’ reported consolidated decline in share prices as investors began to react on fears of results of operations. During 2008, the average U.S. dollar more expensive credit, a negative economic outlook and the to Canadian dollar exchange rate was 1.0671 Canadian impact of these factors on businesses. Financing for major dollars, approximately 1 percent lower compared to 1.0740 acquisitions has become very difficult to obtain. Significant Canadian dollars for 2007. economic uncertainty and the volatile capital markets have had a negative impact on demand for certain of the products and services that our operating companies provide. The dis- cussion that follows identifies material factors that affected Onex’ operating segments and audited annual consolidated results for the year ended December 31, 2008. 12 Onex Corporation December 31, 2008 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 and cost of sales Revenues were $26.9 billion in 2008, up 15 percent from 2008, 2007 and 2006. The per- centage change in revenues and $23.4 billion in 2007 and up 44 percent from $18.6 billion in cost of sales in Cana dian dollars 2006. Con solidated cost of sales was $21.7 billion in 2008, and in the functional currency of up 14 percent from $19.1 billion in 2007 and up 34 percent the companies for these periods from $16.2 billion in 2006. is also shown. The discussions The reported revenues and cost of sales of Onex’ of revenues and cost of sales U.S.-based operating companies in Cana dian dollars may by industry segment that follow not re flect the true nature of the operating results of those are in the companies’ functional operating com panies due to the translation of those currencies in order to eliminate amounts and the associated fluctuation of the U.S. dollar to the impact of foreign currency the Cana dian dollar exchange rate. Therefore, in table 1 translation on those revenues below, revenues and cost of sales by industry segment are and cost of sales. presented in Canadian dollars as well as in the functional currency of the companies for the years ended December 31, T O TA L R E V E N U E S A N D C O S T O F S A L E S ($ millions) 26,881 23,433 21,719 19,133 18,620 16,160 08 07 06 Revenues Cost of Sales Changes in Revenues and Cost of Sales by Industry Segment for the Years Ended December 31, 2008 and 2007 Revenues TABLE 1 ($ millions) Canadian Dollars Functional Currency Year ended December 31 2008 2007 Change (%) 2008 2007 Change (%) Electronics Manufacturing Services $ 8,220 $ 8,617 Aerostructures Healthcare Financial Services Customer Support Services Metal Services Other (a) Total 3,965 6,152 1,388 1,856 3,112 2,188 4,147 4,826 1,399 1,868 1,676 900 $ 26,881 $ 23,433 (5)% (4)% 27 % (1)% (1)% 86 % 143 % 15 % US$ 7,678 US$ 3,772 US$ 5,758 US$ 1,302 US$ 1,748 US$ 2,983 C$ 2,188 US$ 8,070 US$ 3,861 US$ 4,573 US$ 1,304 US$ 1,748 US$ 1,575 C$ 900 (5)% (2)% 26 % – – 89 % 143 % Cost of Sales ($ millions) Canadian Dollars Functional Currency Year ended December 31 2008 2007 Change (%) 2008 2007 Change (%) Electronics Manufacturing Services $ 7,556 $ 8,079 Aerostructures Healthcare Financial Services Customer Support Services Metal Services Other (a) Total 3,215 4,504 665 1,197 2,932 1,650 3,344 3,659 674 1,205 1,529 643 $ 21,719 $ 19,133 (6)% (4)% 23 % (1)% (1)% 92 % 157 % 14 % US$ 7,061 US$ 3,055 US$ 4,219 US$ 624 US$ 1,129 US$ 2,813 C$ 1,650 US$ 7,563 US$ 3,112 US$ 3,455 US$ 628 US$ 1,128 US$ 1,437 C$ 643 (7)% (2)% 22 % (1)% – 96 % 157 % Results are reported in accordance with Canadian generally accepted accounting principles. These results may differ from those reported by the individual operating companies. (a) 2008 other includes CEI, Husky, Radian, ONCAP II and the parent company. 2007 other includes Cineplex Entertainment, CEI, Radian, ONCAP II, Onex Real Estate and the parent company. Onex Corporation December 31, 2008 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 Changes in Revenues and Cost of Sales by Industry Segment for the Years Ended December 31, 2007 and 2006 Revenues 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)% Cost of Sales ($ 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 3,659 674 1,205 1,529 643 2,919 2,423 59(a) 453 – 928 $ 19,133 $ 16,160 (14)% 15 % 51 % 1,042 % 166 % – (31)% 18 % US$ 7,563 US$ 3,112 US$ 3,455 US$ 628 US$ 1,128 US$ 1,437 C$ 643 US$ 8,277 US$ 2,579 US$ 2,135 US$ 51(a) US$ 399 – C$ 928 (9)% 21 % 62 % 1,131 % 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 revenues and cost of sales from The Warranty Group’s November 2006 acquisition date. (b) 2007 other includes Cineplex Entertainment, CEI, Radian, ONCAP II, Onex Real Estate and the parent company. 2006 other includes Cineplex Entertainment, CEI, Radian, ONCAP II, Onex Real Estate and the parent company. Electronics Manufacturing Services Celestica Inc. (“Celestica”) reported a 5 percent decline in US$617 million, up US$110 million from last year due primarily to operational improvements in Mexico and revenues in 2008 to US$7.7 billion compared to US$8.1 bil- Europe. Celes tica continued to benefit from cost reduc- lion in 2007. The revenue decline was due primarily to tions, restruc turing actions, the impact of renegotiating or lower volumes associated with weaker demand in Celes - exiting unprofitable accounts and the streamlining and tica’s servers, enterprise communications and storage end simplifying of processes throughout the company. markets, as well as the impact of customer disengagements Celestica reported revenues of US$8.1 billion in primarily in the enterprise communications end market. 2007, an 8 percent decline from US$8.8 billion in 2006. These factors more than offset the increase in revenue from Approx imately 75 percent of Celestica’s revenue decrease customers in the company’s consumer, telecommunica- resulted from program losses and customer disengage- tions and industrial end markets. ments primarily in the industrial and communications Cost of sales was US$7.1 billion in 2008, down markets. Lower volumes primarily from customers in the 7 percent from US$7.6 billion in 2007. This compares to communications market also contributed to the year-over- a 5 percent decline in revenues. Gross profit for 2008 was year decline in revenues. Partially offsetting these revenue 14 Onex Corporation December 31, 2008 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 declines was a 3 percent increase E L E C T R O N I C S Cost of sales declined 2 percent, or US$57 million, in revenues over 2006 from new customers, new program wins and stronger end-market demand in the consumer and server markets. Celestica’s cost of sales decreased 9 percent to US$7.6 bil- lion in 2007 from US$8.3 billion in 2006. This decline was in line with the 8 percent decline in Celes- tica’s revenues in the company’s functional currency. Celes tica re - ported gross profit of US$507 mil- lion in 2007, down 5 percent from US$535 million in 2006. The decline M A N U FA C T U R I N G S E R V I C E S (US$ millions) 8,812 8,277 8,070 7,563 7,678 7,061 08 07 06 Revenues Cost of Sales to US$3.1 billion in 2008 from 2007. This compares to a 2 percent decline in revenues in 2008. Cost of sales as a percentage of revenues in the company’s functional cur- rency was 81 percent in both 2008 and 2007. Spirit AeroSystems’ revenues were US$3.9 billion in 2007, up $653 million, or 20 percent, from US$3.2 billion for 2006. Revenues grew at Spirit AeroSystems in 2007 due primarily to a 14 percent increase in shipments to Boeing on its B737, B747, B767 and B777 programs over 2006 and delivery of the first B787 production forward fuselage. In total, Spirit AeroSystems’ shipments to Boeing and Airbus increased 27 percent in 2007 over 2006. In addition, Spirit AeroSystems’ acquisition of Spirit AeroSystems (Europe) Ltd. in April 2006 contributed $149 million of in gross profit was due primarily to lower volumes, under- Spirit Aero Systems’ total revenue growth in 2007. utilization of facilities in Europe and higher costs associ- Cost of sales at Spirit AeroSystems was US$3.1 bil- ated with customer disengagements at its Mexican facility, lion in 2007, up 21 percent from US$2.6 billion in 2006. This which more than offset the benefits from the company’s compares to a 20 percent increase in revenues. Cost of sales restructuring plans and operational efficiencies. as a percentage of revenues was 81 percent in 2007 com- Aerostructures Spirit AeroSystems, Inc. (“Spirit AeroSystems”) reported revenues of US$3.8 billion, down 2 percent, or US$89 mil- Healthcare The healthcare segment revenues and cost of sales consist lion, from US$3.9 billion in 2007. The decrease in revenues of the operations of Emergency Medical Services Cor - pared to 80 percent in 2006. A E R O S T R U C T U R E S (US$ millions) 3,772 3,861 3,055 3,112 3,208 was due primarily to the decrease poration (“EMSC”), Cen ter for in ship set deliveries to Boeing Diag nostic Imaging, Inc. (“CDI”), on its B737, B747, B767, and B777 Skilled Health care Group, Inc. programs as a result of a strike (“Skilled Health care”) and Care - at Boeing in 2008, which lasted stream Health, Inc. (“Care stream for eight weeks. Partially offset- Health”). In the companies’ U.S. 2,579 ting this was a change in product dollar functional currency, the H E A LT H C A R E (US$ millions) 5,758 4,573 4,219 3,455 mix, volume-based pricing adjust- healthcare segment reported a ments and an increase in ship set 26 percent increase in consoli- deliveries to Airbus on its A320, dated revenues to US$5.8 billion in A330/A340 and A380 programs. 2008 from US$4.6 billion in 2007. During 2008, Boeing ship set de - Cost of sales had a corresponding liveries decreased 7 percent, while 22 percent increase to US$4.2 bil- ship set deliveries to Airbus in - lion in 2008 from US$3.5 billion creased 5 percent. in 2007. 2,575 2,135 08 07 06 Revenues Cost of Sales 08 07 06 Revenues Cost of Sales Onex Corporation December 31, 2008 15 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Table 2 provides revenues and cost of sales by operating company in the healthcare segment for the years ended December 31, 2008, 2007 and 2006 in both Canadian dollars and the companies’ functional currencies. Res-Care, Inc. (“ResCare”) is accounted for on an equity basis and, accordingly, that company’s revenues and cost of sales are not consolidated. Healthcare Revenues and Cost of Sales for the Years Ended December 31, 2008 and 2007 Revenues TABLE 2 ($ millions) Canadian Dollars Functional Currency Year ended December 31 2008 2007 Change (%) 2008 2007 Change (%) Emergency Medical Services $ 2,574 $ 2,262 Center for Diagnostic Imaging Skilled Healthcare Carestream Health 144 784 2,650 123 678 1,763(a) Total $ 6,152 $ 4,826 14 % 17 % 16 % 50 % 27 % US$ 2,410 US$ 135 US$ 733 US$ 2,480 US$ 2,107 US$ 115 US$ 635 US$ 1,716(a) US$ 5,758 US$ 4,573 14 % 17 % 15 % 45 % 26 % Cost of Sales ($ millions) Canadian Dollars Functional Currency Year ended December 31 2008 2007 Change (%) 2008 2007 Change (%) Emergency Medical Services $ 2,235 $ 1,972 Center for Diagnostic Imaging Skilled Healthcare Carestream Health 48 638 1,583 39 520 1,128(a) Total $ 4,504 $ 3,659 13 % 23 % 23 % 40 % 23 % US$ 2,094 US$ 44 US$ 597 US$ 1,484 US$ 1,838 US$ 36 US$ 486 US$ 1,095(a) US$ 4,219 US$ 3,455 14 % 22 % 23 % 36 % 22 % 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. 16 Onex Corporation December 31, 2008 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 Healthcare Revenues and Cost of Sales for the Years Ended December 31, 2007 and 2006 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 % Cost of Sales ($ 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 (“EMSC”) and rates on existing contracts. EmCare is a provider of During 2008, EMSC’s revenues increased US$303 million, or hospital-based physician services to more than 400 hos - 14 percent, to US$2.4 billion from US$2.1 billion in 2007. pitals throughout the United States. EmCare accounted for EMSC operates its business under two subsidiaries: Ameri - US$120 million of EMSC’s revenue growth in 2008 due can Medical Response, Inc. (“AMR”) and EmCare Holdings primarily to 79 net new contracts (US$65 million) and an Inc. (“EmCare”). AMR is the leading provider of ambulance increase in patient encounters and revenue per encounter transport services in the United States. During 2008, AMR under existing contracts (US$31 million). recorded US$183 million of EMSC’s revenue growth with Cost of sales at EMSC was US$2.1 billion in 2008, a significant portion of that resulting from increases in rev- up 14 percent from US$1.8 billion in 2007. Cost of sales as enue earned from contracts with FEMA (US$97 million). a percentage of revenues in the company’s functional cur- During the third and early fourth quarter of 2008, AMR dis- rency was 87 percent in both 2008 and 2007. patched an un precedented number of ground, rotary and During 2007, EMSC reported revenues of US$2.1 bil- fixed-wing air ambulances, and patient transport vehicles lion, up 9 percent from US$1.9 billion in 2006. AMR ac - to assist people affected by hur ricanes Gustav and Ike in counted for US$30 million of EMSC’s total revenue growth three Gulf Coast states. The balance of the growth in rev- in 2007 due primarily to higher transport revenues from enue from AMR in 2008 was associated with higher trans- AMR’s acquisitions of Abbott Ambulance, based in St. Louis, port revenue (US$86 million) driven by increased volumes Missouri and MedicWest Ambulance, based in Las Vegas, Onex Corporation December 31, 2008 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 Nevada. EmCare contributed US$143 million of EMSC’s Skilled Healthcare total revenue growth in 2007. Several factors contributed Skilled Healthcare has two revenue segments: long-term to EmCare’s revenue growth: approximately US$72 mil- care services and ancillary services. The majority of its rev- lion was from net new hospital contracts in 2007 and the enues are from long-term care services, which include inclusion of a full year of revenues from net new hospital skilled nursing care and integrated rehabilitation therapy con tracts in 2006; and approximately US$71 million was services to residents in the company’s network of skilled from existing contracts due primarily to an 8 percent nursing facilities. In addition, the company earns ancillary in crease in revenue per patient encounter from third- service revenue by providing related healthcare services, party payors. such as rehabilitation therapy services, to third-party facil- EMSC reported cost of sales of US$1.8 billion ities and hospice care. in 2007 compared to US$1.7 billion in 2006. The overall Revenues at Skilled Healthcare were US$733 mil- increase in EMSC’s cost of sales in 2007 was due primarily lion, up 15 percent, or US$98 million from US$635 million in to higher revenues. 2007. Long-term care services accounted for US$88 million of the revenue growth due primarily to revenues associated Center for Diagnostic Imaging (“CDI”) with acquisitions completed in New Mexico in Septem ber CDI operates 51 diagnostic imaging centres in nine states 2007 and Kansas in April 2008 (US$64 million), increased in the United States, pro viding imaging services such as reimbursement rates from Medi care, Medi caid and man- magnetic resonance imaging (“MRI”), computed tomogra- aged care pay sources (US$21 million), as well as a higher phy (“CT”), diagnostic and therapeutic injection procedures patient acuity mix. Ancillary services in creased US$10 mil- and other procedures such as PET/CT, conventional x-ray, lion in 2008 over 2007 due primarily to increased hospice mammography and ultrasound. CDI reported a 17 percent, business and rehabilitation therapy services revenue. or US$20 million, increase in revenues to US$135 mil- Skilled Healthcare’s cost of sales was up 23 percent lion in 2008 from US$115 million in 2007. Approximately to US$597 million in 2008 from US$486 million last year. US$16 million of the revenue growth was from new centres Long-term care services accounted for US$68 million of the acquired in 2008, and the balance was from higher rev- increase due primarily to the acquisitions (US$50 million) enues at existing centres. and increased labour costs (US$13 million). Labour costs Cost of sales at CDI was US$44 million in 2008, up increased due largely to a 5 percent increase in average US$8 million, or 22 percent, from US$36 million in 2007. hourly rates and additional staffing primarily in the nursing The increase in cost of sales was due primarily to the in - area to respond to the increased mix of high-acuity patients. crease in revenues associated with new centres. Cost of sales from ancillary services increased US$16 million CDI reported revenues of US$115 million in 2007, in 2008 due primarily to higher revenues. up 6 percent from US$109 million in 2006 due primarily to Skilled Healthcare reported revenues of US$635 mil- new centres (US$2 million) and a 6 percent increase in lion in 2007, up US$103 million, or 19 percent, from MRI volumes at existing centres. US$532 million in 2006. Long-term care services revenues Reported cost of sales for CDI was US$36 million increased US$87 million, or 19 percent, to US$557 million in for both 2007 and 2006. Cost of sales was 31 percent of rev- 2007 due primarily to US$57 million in revenues associated enues in 2007 compared to 33 percent in 2006. The decline with add-on acquisitions completed in 2006 and 2007 in in cost of sales as a percentage of revenues in 2007 was due Missouri and New Mexico and changes to a higher patient primarily to a 6 percent increase in revenues in the com- acuity mix. Ancillary services increased US$16 million, or pany’s functional currency while cost of sales remained 24 percent, in 2007 compared to 2006. essentially unchanged. 18 Onex Corporation December 31, 2008 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 Cost of sales at Skilled Healthcare totalled US$216 million of cost of sales reported in the Dental seg- US$486 million in 2007, up US$82 million from ment, which provides film products, digital products and US$404 million in 2006. Long-term care services cost of dental practice management software products to the den- sales increased 18 percent, or US$66 million, in 2007 over tal industry; US$475 million of revenues and US$329 mil- 2006 due primarily to higher operating costs per patient lion of cost of sales from the Digital Capture Solutions day and to the additional operations acquired. Much of the segment, which provides computed radiology and digital increase in operating costs per patient day at skilled nursing radiology systems and service to the medical and non- facilities was due to higher labour costs (US$13 million) destructive testing industry; and US$188 million of revenues resulting from a 6 percent increase in hourly rates, and addi- and US$141 million of cost of sales from the Health care tional staffing, particularly in the nursing area, for the higher Information Solutions segment, which provides solutions acuity patient mix. Cost of sales from ancillary services that address radiology and cross-enterprise information increased 28 percent in 2007 compared to 2006 due pri - technology needs of hospitals; and the balance was in the marily to higher ancillary revenues from new and existing other segment. rehabili tation therapy contracts. Carestream Health Since Carestream Health was acquired in late April 2007, there are no comparative results for 2006. Care - stream Health’s reported eight months of revenues and Carestream Health provides products and services for the cost of sales in 2007 totalled US$1.7 billion and US$1.1 bil- capture, processing, viewing, sharing, printing and storing lion, respectively. The breakdown of revenues (cost of sales) of images and information for medical and dental applica- by operating segment for 2007 is as follows: US$866 million tions. The company also has a non-destructive testing (US$570 million) from the Medical Film and Printing Solu - business, which sells x-ray film and digital radiology prod- tions segment; US$348 million (US$170 million) from the ucts to the non-destructive testing market. Carestream Dental segment; US$326 million (US$228 million) from Health’s revenues are in five reportable segments: Medical the Digital Capture Solutions segment; US$134 million Film and Printing Solutions, Dental, Digital Capture (US$99 million) from the Healthcare Infor mation Solutions Solutions, Healthcare Information Solutions and Other. segment; and the balance was in the other segment. Cost of Carestream Health reported a 45 percent, or sales as a percentage of revenues was 64 percent in 2007. US$764 million, increase in revenues to US$2.5 billion in Cost of sales was higher than normal due primarily to a 2008 compared to US$1.7 billion for the eight months of $102 million (US$96 million) one-time charge included in results in 2007 following the acquisition in April 2007. cost of sales in 2007 originating from the step-up in value Cost of sales reported a similar increase of 36 percent to of inventory on the company’s balance sheet at the date of US$1.5 billion in 2008 from US$1.1 billion in 2007. The acquisition. Accounting principles for acquisitions require inclusion of a full 12 months of results in 2008 compared that inventory be stepped up in value to the selling price of to eight months in 2007 is the primary reason for the the inventory less the direct cost to complete and sell the increase in the revenues and cost of sales. A breakdown of product. Therefore, when the stepped-up inventory is sub- Carestream Health’s 2008 revenues and cost of sales was: sequently sold in the normal course of business, cost of US$1.2 billion of revenues and US$751 million of cost sales is increased for the effect of the inventory step-up of sales from the Medical Film and Printing Solu tions with the result that the accounting for these sales will not segment, which provides digital and film products to report the typical profit margins for the company. the medical industry; US$538 million of revenues and Onex Corporation December 31, 2008 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 Financial Services The Warranty Group’s revenues consist of warranty rev- Customer Support Services Sitel Worldwide Corporation (“Sitel Worldwide”) reported enues, insurance premiums and administrative and mar - revenues of US$1.7 billion in each of 2008 and 2007. Rev - keting fees earned on warranties and service contracts for enues in 2008 included an additional month of operations F I N A N C I A L S E R V I C E S (US$ millions) 1,302 1,304 manufacturers, retailers and dis- related to the late January 2007 acquisition of SITEL Cor - tributors of consumer electronics, poration (US$95 million). Excluding these additional rev- appliances, homes and autos as enues, Sitel Worldwide would have reported a decline in well as credit card enhancements revenues in 2008 due primarily to lower call volumes as and travel and leisure programs existing customers curtailed new product launches and through a global organization. promotional offers in response to the economic downturn. The Warranty Group’s cost of sales This decline was partially offset by new customer volumes consists primarily of the change in 2008. 624 628 in reserves for future warranty and Cost of sales was US$1.1 billion in 2008, essen- insurance claims, current claims tially the same as 2007 with a similar decline related to the payments, administrative and mar - 2008 inclusion of an additional month of operations keting expenses, deferred acquisi- related to the late January 2007 acquisition of SITEL tion costs and related amortization Corporation (US$62 million). Cost of sales as a percentage 103 51 08 07 06 for warranties and service con- of revenue was 65 percent for both 2008 and 2007. Revenues Cost of Sales tracts for manufacturers, retailers Sitel Worldwide reported revenues of US$1.7 bil- and distributors of consumer elec- lion in 2007, up 165 percent from US$660 million in 2006. tronics, appliances, homes and autos as well as credit card The acquisition of SITEL Corporation in January 2007 enhancements and travel and leisure programs. accounted for the majority of the For the year ended December 31, 2008, The increase in revenues (US$1.0 bil- War ranty Group reported revenue and cost of sales of lion) in 2007. In addition, higher US$1.3 billion and US$624 million, respectively. This com- volumes from new and existing pares to US$1.3 billion and US$628 million, respectively, in customers, as well as favourable 2007. Approximately US$1.0 billion of total revenues was foreign currency translation from from premiums earned on warranty contracts in 2008 and the weakening of the U.S. dollar, the balance, approximately US$0.3 billion, in 2008 was boosted Sitel World wide’s rev- from contract fees and other income, which were essen- enues in 2007. tially unchanged from 2007. Sitel Worldwide reported During 2007, The Warranty Group reported rev- cost of sales of US$1.1 billion in enues of US$1.3 billion compared to US$103 million for 2007 compared to US$399 mil- the one month of operations in 2006. The Warranty Group lion in 2006. The significant in - reported cost of sales of US$628 million in 2007 compared crease in cost of sales was due to US$51 million for the one month of operations in 2006. to the acquisition of and merger The financial services segment was a new reportable seg- with SITEL Corporation in January C U S T O M E R S U P P O R T S E R V I C E S (US$ millions) 1,748 1,748 1,129 1,128 660 399 08 07 06 Revenues Cost of Sales ment in 2006 following Onex’ acquisition of The Warranty 2007. Sitel Worldwide’s cost of sales as a percentage of rev- Group in late November 2006. The 2007 results represent enues was 65 percent in 2007 compared to 60 percent in a full year of operations. 20 Onex Corporation December 31, 2008 2006. The increase in cost of sales as a percentage of rev- enues was driven by the acquired SITEL Corporation cus- tomer contracts carrying a lower margin contribution percentage than legacy ClientLogic customers. There was also the adverse impact of the weaker U.S. dollar on cus- tomer contracts billed in U.S. dollars but serviced from off-shore operations. 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 Metal Services Tube City IMS has two revenue categories: service revenue Cost of sales was US$2.8 billion, up 96 percent, or US$1.4 billion, from US$1.4 billion in 2007. Tube City IMS and revenue from the sale of materials. Service revenue procures scrap metal on behalf of its customers and much is generated from scrap man agement, scrap preparation, of its cost of sales is associated with that activity. M E TA L S E R V I C E S (US$ millions) 2,983 2,813 raw materials optimization, metal Therefore, the increase in the purchase cost of scrap metal recovery and sales, material han- increased cost of sales in 2008. The cost of scrap metal is dling or product handling, slag or passed on to Tube City IMS’ customers and thus drove a co-product processing and metal similar increase in revenues. In addition, since Onex pur- recovery services and surface chased Tube City IMS in late January 2007, the inclusion of conditioning. Revenue from the a full year of results in 2008 compared to 11 months in sale of materials is mainly gener- 2007 further augmented revenues and cost of sales in 1,575 1,437 ated by the company’s raw mate- 2008. This was partially offset by the global downturn in rials procurement business, but the fourth quarter of 2008 that resulted in a significant also includes revenue from two drop in North American steel production and demand for 08 07 Revenues Cost of Sales locations in Tube City IMS’ pre- raw materials. production materials handling Tube City IMS was a new reportable segment in business. 2007. Reported 2007 revenues for Tube City IMS represent Tube City IMS reported 11 months of revenues from the time of its acquisition in US$3.0 billion in revenues for January 2007, which totalled US$1.6 billion. During 2007, 2008 compared to 11 months of service revenue totalled US$0.4 billion and revenue from revenues of US$1.6 billion for 2007 following Onex’ acqui- raw materials procurement was US$1.2 billion. The cost sition of the company in January 2007. The significant of sales for Tube City IMS totalled US$1.4 billion for the increase in revenues in 2008 was primarily driven by the 11-month period following Onex’ acquisition of the company. strong North American steel production and demand for raw materials during the first nine months of 2008, which resulted in higher prices for scrap and other materials. Other Businesses The other businesses segment primarily includes the rev- However, during the fourth quarter of 2008, Tube City IMS’ enues of Cosmetic Essence, Inc. (“CEI”), the ONCAP II com- revenues experienced a signifi cant decline due to the dra- panies – CSI Global Education Inc. (“CSI”), EnGlobe Corp. matic drop in North American and global steel production (“EnGlobe”), Mister Car Wash, CiCi’s Pizza and Caliber that reduced de mand for scrap and lowered scrap pricing. Collision – Husky Injection Molding, Ltd. (“Husky”) and Revenue from the sale of materials generated US$2.6 bil- Radian Communication Services Corporation (“Radian”). lion of total revenues in 2008, up 110 percent, or US$1.4 bil- lion, from US$1.2 billion in 2007. The increase was due primarily to an 11 percent increase in tonnage sold of raw materials and an increase in underlying scrap prices during the first nine months of 2008. Service revenue totalled US$387 million in 2008, up 15 percent from US$338 million in 2007. This was due primarily to the company’s acquisi- tion of Hanson Re sources Management (US$12 million), new sites, increased volumes at existing sites and increases in prices that were partially offset by price escalators. Onex Corporation December 31, 2008 21 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Table 3 provides revenues and cost of sales by operating company in the other businesses segment for 2008, 2007 and 2006 in both Canadian dollars and the companies’ functional currency. Other Businesses Revenues and Cost of Sales for the Years Ended December 31, 2008 and 2007 Revenues TABLE 3 ($ millions) Canadian Dollars Functional Currency Year ended December 31 CEI ONCAP II companies(a) Husky(b) Other(c) Total 2008 $ 248 601 1,290 49 $ 2,188 2007 Change (%) 2008 2007 Change (%) $ 266 396 – 238 $ 900 (7)% 52 % – (79)% 143 % US$ 231 C$ 601 US$ 1,228 C$ 49 US$ 249 C$ 396 – C$ 238 (7)% 52 % – (79)% Cost of Sales ($ millions) Canadian Dollars Functional Currency Year ended December 31 CEI ONCAP II companies(a) Husky(b) Other(c) Total 2008 $ 209 359 1,026 56 $ 1,650 2007 Change (%) 2008 2007 Change (%) $ 200 222 – 221 $ 643 5 % 62 % – (75)% 157 % US$ 192 C$ 359 US$ 975 C$ 56 US$ 187 C$ 222 – C$ 221 3 % 62 % – (75)% Results are reported in accordance with Canadian generally accepted accounting principles. These results may differ from those reported by the individual operating companies. (a) 2008 ONCAP II companies include CSI, EnGlobe, Mister Car Wash, CiCi’s Pizza and Caliber Collision. 2007 ONCAP II companies include CSI, EnGlobe, Mister Car Wash and CiCi’s Pizza. (b) Husky’s financial results for the few days from its date of acquisition in mid-December 2007 to December 31, 2007 were not significant to Onex’ consolidated results. Accordingly, the company’s revenues for those days were not included in Onex’ audited annual consolidated statement of earnings for the year ended December 31, 2007. (c) 2008 other includes Radian and the parent company. 2007 other includes Cineplex Entertainment (three months of operations consolidated in 2007), Onex Real Estate, Radian and the parent company. 22 Onex Corporation December 31, 2008 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 Revenues and Cost of Sales for the Years Ended December 31, 2007 and 2006 TABLE 3 ($ millions) Canadian Dollars Functional Currency Revenues Year ended December 31 CEI ONCAP II companies(a) Other(b) Total 2007 $ 266 396 238 $ 900 2006 Change (%) 2007 2006 Change (%) $ 292 27 901 (9)% 1,367 % (74)% US$ 249 C$ 396 C$ 238 US$ 257 C$ 27 C$ 901 (3)% 1,367 % (74) % $ 1,220 (26)% Cost of Sales ($ millions) Canadian Dollars Functional Currency Year ended December 31 CEI ONCAP II companies(a) Other(b) Total 2007 $ 200 222 221 $ 643 2006 Change (%) 2007 2006 Change (%) $ 214 2 712 $ 928 (7)% 11,000 % (69)% (31)% US$ 187 C$ 222 C$ 221 US$ 189 C$ 2 C$ 712 (1)% 11,000 % (69)% 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 II companies include CSI, EnGlobe, Mister Car Wash and CiCi’s Pizza. 2006 ONCAP II companies include CSI. (b) 2007 other includes Cineplex Entertainment (three months of results), Onex Real Estate, Radian and the parent company. 2006 other includes Cineplex Entertainment, Onex Real Estate, Radian and the parent company. CEI ONCAP II companies Reported revenues and cost of sales at CEI were US$231 mil- ONCAP II’s companies – CSI, EnGlobe, Mister Car Wash, lion and US$192 million, respectively, in 2008. This com- CiCi’s Pizza and Caliber Collision – reported combined pares to US$249 million and US$187 million, respectively, revenues of $601 million in 2008, up $205 million from in 2007. The decline in revenues in 2008 was due primarily $396 million reported in 2007 and cost of sales of $359 mil- to lower volumes as a result of the weak U.S. consumer lion in 2008, up $137 million from $222 million in 2007. and retail environment. Cost of sales as a percentage of During 2008, the growth in revenues and cost of sales was revenues was 83 percent in 2008, up from 75 percent in from ONCAP II’s acquisition of Caliber Col lision in late 2007. This increase was due primarily to lower volumes, October 2008, as well as the inclusion of a full year of results underutilization of facilities and a revaluation of inventory of Mister Car Wash and CiCi’s Pizza, acquired in April and in light of current economic and market conditions, which June 2007, respectively. more than offset the benefits from the company’s cost During 2007, ONCAP II’s companies – CSI, EnGlobe, saving initiatives. Mister Car Wash and CiCi’s Pizza – reported combined CEI’s reported revenues were down 3 percent to revenues of $396 million, up $369 million from $27 mil- US$249 million in 2007 from US$257 million in 2006 due lion in 2006. The ONCAP II companies reported cost of sales primarily to the company’s decision to exit its licensed of $222 million in 2007 compared to $2 million in 2006. product business, slightly offset by net higher revenues from Substantially all of the revenue and cost of sales increase new and existing customers. CEI reported cost of sales of was associated with the acquisitions of Mister Car Wash and US$187 million compared to US$189 million in 2006. Cost of CiCi’s Pizza completed in 2007, as well as the inclusion of a sales was 75 percent of revenues in 2007 compared to 74 per- full year of revenues and cost of sales of EnGlobe. cent in 2006. The increase in CEI’s cost of sales percentage was due primarily to a shift in product mix. Onex Corporation December 31, 2008 23 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Husky Operating Earnings Reconciliation Husky is one of the world’s largest suppliers of injection molding equipment and services to the plastics industry. TABLE 4 ($ millions) 2008 2007 Husky reported revenues of US$1.2 billion and cost of sales Earnings before the undernoted items $ 2,418 $ 1,916 of US$975 million for the year ended December 31, 2008. Amortization of property, plant During 2008, Husky reported strong revenues in Asia and equipment Pacific and Latin America but lower revenues in Europe Interest income (624) 35 (535) 125 and North America. Included in Husky’s cost of sales in 2008 were charges of US$91 million originating from the Operating earnings $ 1,829 $ 1,506 step-up in value of inventory on the company’s balance Amortization of intangible assets sheet at the date of acquisition. Accounting principles for and deferred charges acquisitions require that inventory be stepped up in value to the selling price of the inventory less the direct cost to complete and sell the product. Therefore, when inventory is subsequently 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 not report the typical profit margins of the company. There are no comparative revenues or cost of sales for 2007 since the company’s operating financial results for the few days from Interest expense of operating companies Loss from equity-accounted investments Foreign exchange gains (loss) Stock-based compensation recovery (expense) Other income (expense) Gains on sales of operating investments, net (366) (550) (322) 83 142 (12) 4 (241) (537) (44) (118) (150) 6 1,144 (123) Acquisition, restructuring and other expenses (220) Writedown of goodwill, intangible assets and long-lived assets (1,649) (22) its mid-December 2007 acquisition date to December 31, Earnings (loss) before income taxes, 2007 were not significant to Onex’ consolidated results. non-controlling interests and discontinued operations $ (1,061) $ 1,421 Onex uses operating earnings as a measure to evaluate each operating company’s performance because it elimi- nates interest charges, which are a function of the oper - ating company’s particular financing structure, as well as any unusual or non-recurring charges. Onex’ method of determining operating earnings may differ from other companies’ methods and, accordingly, operating earn- ings may not be comparable to measures used by other companies. As operating earnings is not a performance mea sure under Canadian GAAP, it should not be consid- ered either in isolation of, or as a substitute for, net earnings prepared in accordance with Canadian GAAP. Operating earnings Operating earnings are not a defined measure under Cana dian GAAP. The term operating earnings as used here is defined as earnings before interest expense, amortiza- tion of intangible assets and deferred charges, and income taxes. As operating earnings are a key measure of perfor - mance for our businesses, Onex also excludes from oper- ating earnings accounting measures that do not reflect the actual operating performance of the business, such as earnings (loss) from equity-accounted investments, for- eign exchange gains (loss), stock-based compensation recovery (expense), non-recurring items such as acquisi- tion and restructuring charges, other income (expense), gains on sales of operating investments, writedown of goodwill, intangible assets and long-lived assets, as well as non-controlling interests and discontinued operations. Table 4 provides a reconciliation of the audited annual consolidated statements of earnings to operating earnings for the years ended December 31, 2008 and 2007. 24 Onex Corporation December 31, 2008 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 5 provides a breakdown of and the change in operating earnings by industry segment in Canadian dollars and in the functional currency of the companies for the years ended December 31, 2008 and 2007. Operating Earnings (Loss) by Industry Segment TABLE 5 ($ millions) Canadian Dollars Functional Currency Year ended December 31 2008 2007 Change ($) 2008 2007 Change ($) Electronics Manufacturing Services $ 309 $ 162 $ 147 Aerostructures Healthcare Financial Services Customer Support Services Metal Services Other (a) Total 465 732 251 77 44 (49) 552 453 234 97 35 (27) (87) 279 17 (20) 9 (22) $ 1,829 $ 1,506 $ 323 US$ 284 US$ 450 US$ 677 US$ 231 US$ 72 US$ 44 C$ (49) US$ 158 US$ 514 US$ 432 US$ 217 US$ 91 US$ 33 C$ (27) US$ 126 US$ (64) US$ 245 US$ 14 US$ (19) US$ 11 C$ (22) Results are reported in accordance with Canadian generally accepted accounting principles. These results may differ from those reported by the individual operating companies. (a) 2008 other includes CEI, Husky, Radian, ONCAP II and the parent company. 2007 other includes Cineplex Entertainment, CEI, Radian, ONCAP II, Onex Real Estate and the parent company. Consolidated operating earnings were $1.8 billion in 2008, balance sheet at the time of acquisition. Accounting prin- up 21 percent, or $323 million, from $1.5 billion in 2007. ciples for acquisitions require that inventory at the date of The growth in operating earnings in 2008 was driven pri- acquisition be stepped up in value to its selling price less marily by: the direct costs to complete and sell the product. (cid:129) a $147 million increase in operating earnings at Celes - tica resulting primarily from improvements in the com- Partially offsetting the above operating earnings growth in pany’s Mexican and European operations; 2008 were: (cid:129) $217 million of operating earnings growth at Carestream (cid:129) an $87 million, or US$64 million in the company’s func- Health included in the healthcare segment. The growth tional currency, decline at Spirit AeroSystems due primar - was due primarily to the inclusion of a full year of oper - ily to lower gross profit from softer sales volume driven ating earnings since the company was acquired in April by the strike at Boeing, partially offset by lower selling, 2007 and lower operating earnings in 2007 due to a one- general and administrative expenses and research and time $102 million charge originating from the company’s development expenses; opening balance sheet valuation of inventory at the time (cid:129) a decline in operating earnings at Sitel Worldwide of of acquisition; $20 million, or US$19 million in the company’s func- (cid:129) $46 million of growth in operating earnings at EMSC re - tional currency; this decline was due primarily to the ported in the healthcare segment resulting from higher impact of the slowdown in the economy on Sitel World - revenues as previously discussed; wide’s customers, particularly in the consumer segment. (cid:129) an increase in operating earnings of $17 million at The As Sitel Worldwide’s customers experienced lower sales, Warranty Group in 2008 due primarily to a lower amor - this resulted in reduced call volumes for the company. In tization of deferred acquisition costs on its European addition, the company continues to improve margins by credit business in 2008; and shifting business to lower cost locations through restruc - (cid:129) Onex’ acquisition of Husky in mid-December 2007, which turing actions; and contributed $17 million in operating earnings reported in (cid:129) an $80 million decline in interest income at Onex, the the other segment. Husky’s operating earnings in 2008 parent company, included in the other segment. The were reduced by a US$91 million charge originating from reduction in interest income was due primarily to lower increasing the valuation of inventory on the company’s Onex Corporation December 31, 2008 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 cash balances and rates of interest on cash investments, Consolidated interest expense was $550 million lower returns and losses generated on near-cash invest - in 2008, up $13 million from $537 million in 2007. Table 6 ments ($19 million) and Onex’ share of investment losses details the change in consolidated interest expense from at Onex Credit Partners ($19 million). Much of the losses 2007 to 2008. at Onex Credit Partners resulted from the deteriorating credit markets in the second half of 2008. Change in Interest Expense Amortization of intangible assets and deferred charges Amortization of intangible assets and deferred charges TABLE 6 ($ millions) Reported interest expense for 2007 Additional interest expense in 2008 due to: totalled $366 million in 2008, up 52 percent, or $125 mil- A full year of Husky interest expense lion, from $241 million in 2007. The increase resulted pri- A full year of Carestream Health interest expense marily from the inclusion of a full year of amortization of Acquisition of Caliber Collision intangible assets of Carestream Health ($73 million), ac - Interest expense reductions in 2008 due to: $ 537 34 53 2 Lower rates at Skilled Healthcare and repurchase of debt (8) quired in April 2007 and Husky ($55 million), acquired in De cem ber 2007. At the time of the acquisition of these busi- nesses, purchase accounting required the allocation of value to customer contracts and other finite-life intangible assets. For accounting purposes, these assets will be amortized over Lower interest rates on Celestica debt and gain on debt prepayment Gain on debt prepayment at Sitel Worldwide Other various periods of time. The amortized intangible assets at Reported interest expense for 2008 Carestream Health include developed technology, trade- marks and tradenames and customer relationships. Annually, Onex’ operating companies will assess intangible assets for impairment at the reporting unit level, or sooner if events or changes in circumstances or market conditions indicate that the carrying amount could exceed fair value. If the fair value is determined to be lower than the carrying value, then the intangible asset is con- sidered impaired and an impairment charge must be rec- ognized. As a result, any writedowns of intangible assets will result in lower amortization of intangible assets in future periods. Impairment charges recorded on intangi- ble assets in 2008 are discussed in detail on page 31 of this MD&A under writedown of goodwill, intangible assets and long-lived assets. Interest expense of operating companies Onex has a policy to structure the acquisition of each of its operating companies with sufficient equity in the com- pany to enable it to self-finance a significant portion of its acquisition cost with a prudent amount of debt. The level of debt assumed is commensurate with the operating company’s available cash flow, including consideration of funds required to pursue growth opportunities. It is the responsibility of the acquired operating company to ser - vice its own debt obligations. 26 Onex Corporation December 31, 2008 The increase in interest expense in 2008 was primarily driven by: (cid:129) the acquisition of Husky in mid-December 2007, which added $34 million in interest expense in 2008; (cid:129) Carestream Health, acquired in April 2007, which con- tributed $53 million of the interest expense growth due to the inclusion of a full 12 months of that company’s inter- est expense in 2008 compared to eight months in 2007; and (cid:129) ONCAP II’s acquisition of Caliber Collision in October 2008, which added $2 million in interest expense. Partially offsetting the increase in interest expense were: (cid:129) a decrease in interest expense at Skilled Healthcare of $8 million due to lower interest rates on its debt and the redemption of approximately US$70 million of its 11 per- cent debt in conjunction with the company’s initial public offering in May 2007; (cid:129) a $20 million decline in interest expense at Celestica due primarily to lower interest rates on the company’s debt, as well as a $9 million gain on the prepayment of debt; this gain resulted from Celestica’s repurchase of US$38 million face value of its senior subordinated notes in 2008 at a lower cost than its face value; and (20) (13) (35) $ 550 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 (cid:129) a $13 million reduction in interest expense at Sitel World - wide resulting from a gain on the prepayment of debt; during 2008, Sitel Worldwide repurchased US$27 million Earnings (loss) from equity-accounted investments Earnings (loss) from equity-accounted investments for the face value of its term loan as required under its amended year ended December 31, 2008 represent Onex’ and/or Onex debt agreement. Interest income Consolidated interest income was $35 million in 2008 com- Partners’ portion of the earnings (loss) of Allison Trans mis - sion, Inc. (“Allison Transmission”); Cineplex Enter tainment; Hawker Beechcraft Corporation (“Hawker Beech craft”); Res - Care; RSI; Cypress Insurance Group (“Cypress”); Onex Real pared to $125 million in 2007. Onex, the parent company, Estate’s investments in the Camden properties, Flushing reported $8 million in interest expense in 2008 compared Town Center, Urban Housing Platform, Town and Country to $72 million of interest income in 2007. The $80 million and NY Credit; and Onex Credit Partners. decline in interest income at Onex, the parent company, Onex reported a loss on equity-accounted invest- was due primarily to lower cash balances held, lower inter- ments of $322 million in 2008 compared to a loss on est rates on cash investments and lower returns and losses equity-accounted investments of $44 million in 2007. generated on near-cash investments ($19 million). In addi- Table 7 details the earnings (loss) from equity-accounted tion, included in interest income at Onex, the parent com- investments by company, as well as Onex’ share of these pany, was Onex’ share of investment losses of $19 million earnings (loss) for 2008 and 2007. at Onex Credit Partners in 2008. Earnings (Loss) from Equity-accounted Investments TABLE 7 ($ millions) Allison Transmission(b) Hawker Beechcraft(b) Onex Real Estate Other (c) Total 2008 2007 Net earnings (loss) Onex’ share of net earnings (loss) Net earnings (loss)(a) Onex’ share of net earnings (loss) $ (198)(a) $ (63) $ (75) $ (24) (80)(a) (68) 24 (32) (61) 14 (4) (4) 39 (2) (3) 30 $ (322) $ (142) $ (44) $ 1 (a) The net earnings (loss) represent Onex’ and Onex Partners’ share of the net earnings (loss) in those businesses. (b) Onex completed its investments in Hawker Beechcraft in March 2007 and Allison Transmission in August 2007. (c) Other includes Cineplex Entertainment, Cypress, Onex Credit Partners, ResCare and RSI. Onex Corporation December 31, 2008 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 Allison Transmission Foreign exchange gains (loss) Allison Transmission reported a loss of $198 million in 2008 Foreign exchange gains (loss) reflect the impact of changes compared to a loss of $75 million for the four months of in foreign currency exchange rates. A consolidated foreign operations in 2007 following the company’s acquisition pur- exchange gain of $83 million was recorded for the year chase in August 2007. Onex’ share of Allison Trans mis sion’s ended December 31, 2008. This compares to a consolidated loss was $63 million in 2008 and $24 million in 2007. A sig- net foreign exchange loss of $118 million in 2007. Table 8 nificant portion of the loss reported by Allison Trans mission provides a breakdown of and the change in foreign cur- in 2008 was due primarily to the company recording a rency gains (loss) by industry segment for the years ended US$180 million writedown of intangible assets. The write- December 31, 2008 and 2007. down of intangible assets was associated primar ily with Allison Transmission’s tradename. Foreign Exchange Gains (Loss) by Industry Segment Hawker Beechcraft TABLE 8 ($ millions) 2008 2007 Change ($) The investment in Hawker Beechcraft contributed $80 mil- Electronics Manufacturing lion of the loss on equity-accounted investments in 2008 Services $ (19) $ 3 $ (22) compared to a $4 million loss reported in 2007. Onex’ share Aerostructures of Hawker Beechcraft’s losses was $32 million in 2008 and Healthcare $2 million in 2007. Most of Hawker Beechcraft’s loss in 2008 Customer Support Services was from a US$109 million non-cash charge recorded by the company in 2008 for a reserve against the recoverability of deferred tax assets. In addition, the delayed certification Other (a) Total (6) (9) 10 107 (2) 28 (1) (146) (4) (37) 11 253 $ 83 $ (118) $ 201 of the Hawker 4000 and the associated in creased costs to Results are reported in accordance with Canadian generally accepted accounting conform specific early production Hawker 4000 units to final type design, as well as a four-week strike at Hawker Beechcraft in August 2008, contributed to the loss reported in 2008. Onex Real Estate principles. These results may differ from those reported by the individual operating companies. (a) 2008 other includes CEI, Husky, Radian, ONCAP II and the parent company. 2007 other includes Cineplex Entertainment, CEI, Radian, ONCAP II, Onex Real Estate and the parent company. Onex, the parent company, recorded a $105 million foreign Onex Real Estate’s investments in the Camden properties, exchange gain in 2008, which is included in the other seg- Flushing Town Center, Urban Housing Platform, Town and ment in table 8. The increase was due to the increase in Country and NY Credit contributed $68 million of the loss value of the U.S. dollar relative to the Canadian dollar. The on equity-accounted investments in 2008 compared to a exchange rate was 1.2180 Cana dian dollars at December 31, $4 million loss in 2007. Onex’ share of Onex Real Estate’s 2008 compared to 0.9913 Cana dian dollars at December 31, losses was $61 million in 2008 compared to $3 million 2007. Since Onex, the parent company, holds a significant in 2007. Approximately $42 million of the loss at Onex portion of its cash in U.S. dollars, this exchange rate move- Real Estate resulted from the writedown of a number of ment increased the value of the U.S. cash held resulting in Onex Real Estate investments as a result of the current eco- the foreign exchange gain in 2008. This compares to a for- nomic conditions. eign exchange loss of $132 million reported by Onex, the parent company, in 2007 due primar ily to the decline in value of the U.S. dollar relative to the Canadian dollar. During 2007, the U.S. dollar to Canadian dollar exchange rate declined from 1.1654 Cana dian dollars at December 31, 2006 to 0.9913 Canadian dollars at Decem ber 31, 2007. 28 Onex Corporation December 31, 2008 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 foreign exchange gains Onex, the parent company, recorded a stock-based com- at Onex, the parent company, was a $19 million foreign pensation recovery of $196 million in 2008 due to the exchange loss at Celestica in 2008. Celestica incurred the change in its stock-based compensation liability. Approx - majority of its exchange loss in the second half of 2008, imately $176 million of the recovery was from the change in which more than offset the exchange gains in the first half the market value of Onex shares in 2008. Onex is required of 2008. Approximately half of the loss resulted from the to revalue the liability for stock options based on changes precipitous decline in the value of the Brazilian real com- in the market value of Onex shares. The decline in Onex’ pared to the U.S. dollar from September through Novem - share price to $18.19 per share at December 31, 2008 from ber 2008, and a higher net asset position in the Brazilian $34.99 per share at December 31, 2007 resulted in a down- real. During the fourth quarter of 2008, the British pound ward revaluation of the liability for stock options. This sterling (GBP) weakened considerably against the U.S. dol- compares to an $89 million stock-based compensation lar. While Celes tica no longer has manufacturing opera- expense at Onex, the parent company, in 2007 due primar - tions in the United Kingdom, the company still maintains a ily to the 23 percent increase in the market value of Onex pension plan for former employees. Since Celestica has shares that year. recorded a pension asset in GBP, the weakening of the GBP relative to the U.S. dollar resulted in further foreign exchange losses at Celestica. Other income (expense) During 2008, Onex reported consolidated other expense The foreign exchange loss of $9 million recorded in of $12 million compared to other income of $6 million in the healthcare segment in 2008 was from Carestream 2007. During 2008, The Warranty Group recorded $16 mil- Health primarily as a result of the decline in value of the lion of this expense as a result of an impairment charge the euro relative to the U.S. dollar. company took on its holdings in certain long-term bonds included in its investment portfolio. Stock-based compensation recovery (expense) During 2008, Onex recorded a consolidated stock-based compensation recovery of $142 million compared to a Gains on sales of operating investments Consolidated gains on sales of operating investments $150 million expense in 2007. Table 9 provides a break- totalled $4 million in 2008 compared to $1.1 billion in down of and the change in stock-based compensation by 2007. Included in the 2007 gains on sales of operating com- industry segment for the years ended December 31, 2008 panies were: and 2007. (cid:129) a $36 million gain resulting from the investment by cer- tain investors, other than Onex, in the equity of Sitel Stock-based Compensation Recovery (Expense) Worldwide. In years prior to 2007, Onex had to record $ (14) $ (11) not receive the cash proceeds, for consolidation report- by Industry Segment TABLE 9 ($ millions) 2008 2007 Change ($) Electronics Manufacturing Services Aerostructures Healthcare Financial Services Customer Support Services Other (a) Total $ (25) (17) (5) (1) – 190 (36) (3) (3) (2) (92) 19 (2) 2 2 282 $ 142 $ (150) $ 292 Results are reported in accordance with Canadian generally accepted accounting principles. These results may differ from those reported by the individual operating companies. (a) 2008 other includes CEI, Husky, Radian, ONCAP II and the parent company. 2007 other includes Cineplex Entertainment, CEI, Radian, ONCAP II, Onex Real Estate and the parent company. the losses of non-controlling interests of ClientLogic prior to the acquisition of SITEL Corporation, as the non-controlling interests amount in the company can- not be recorded as a negative amount. While Onex did ing purposes, Onex is required to record the amount paid in by the investors in Sitel Worldwide as a gain. Onex will continue to record gains on third-party equity investment in Sitel Worlwide until the losses from non- controlling investors have been recovered; (cid:129) $68 million of gains on shares sold by Onex Partners I and Onex (of which Onex’ share was $13 million) in Skilled Healthcare’s initial public offering in May 2007; Onex Corporation December 31, 2008 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 (cid:129) a $20 million non-cash accounting dilution gain (of Celestica reported $39 million in restructuring expenses which Onex’ share was $5 million) resulting from the in both 2008 and 2007. Celestica identified restructuring new common share issuance in Skilled Healthcare’s ini- initiatives to drive further operational improvements tial public offering at a value above Onex’ net book value throughout its manufacturing network. These actions per share; include a reduction in workforce and the closure of certain (cid:129) $965 million of gains on shares sold by Onex Partners I facilities. During the fourth quarter of 2008, as Celestica and Onex (of which Onex’ share was $258 million) in was finalizing its 2009 plan, it determined that additional Spirit Aero Systems’ secondary public offering in May restructuring actions would be required throughout its 2007; and manufacturing network in response to declining customer (cid:129) $48 million of carried interest on the realized gains of demand resulting from end-market deterioration and Skilled Healthcare and Spirit AeroSystems, as discussed global economic uncertainty. In early 2008, Celestica pro- earlier. Onex determined that with these realizations, the vided a range of between US$50 million and US$75 million potential for clawback was remote on a significant por- of additional restructuring charges to be recorded by the tion of the carried interest received. Ac cord ingly, Onex company throughout 2008 and 2009. The company now recorded $48 million of carried interest in gains on sales expects that total restructuring costs will be at the higher of operating investments during 2007. end of the range, which Celestica expects to complete and Acquisition, restructuring and other expenses Acquisition, restructuring and other expenses are consid- record by the end of 2009. Celestica expects that its overall utilization and operating efficiency should improve as the company completes these restructuring actions. ered to be costs incurred by the operating companies to Carestream Health recorded $92 million of the total realign organizational structures or restructure manufac - acquisition, restructuring and other expense in 2008, up turing capacity to obtain operating synergies critical to $49 million from last year. These charges included $43 mil- building the long-term value of those businesses. Ac qui si - lion of non-recurring charges associated with the company’s tion, restructuring and other expenses totalled $220 million, transition to a stand-alone entity, as well as $49 million of up $97 million from $123 million in 2007. Table 10 provides a expenses primarily associated with various restructuring breakdown of and the change in acquisition, restructuring programs initiated in 2008 that are primarily focused on and other expenses by operating company for the years information technology, realignments of its sales and service ended December 31, 2008 and 2007. teams and reduction of other corporate functions. Acquisition, Restructuring and Other Expenses turing expenses, or $31 million of the total increase, in 2008. Sitel Worldwide reported $36 million of restruc - TABLE 10 ($ millions) Carestream Health Celestica Husky Sitel Worldwide Spirit AeroSystems Other Total 2008 $ 92 39 22 36 – 31 2007 Change ($) Much of the expenses related to initiatives taken to stream- line the company’s operations related to the January 2007 $ 43 $ 49 acquisition of SITEL Corporation, as well as reactions to the 39 – 5 12 24 – 22 31 (12) 7 continued softness in certain markets in which it operates. Husky, acquired in mid-December 2007, accounted for $22 million of the acquisition, restructuring and other expenses in 2008 due primarily to programs initiated to streamline Husky’s operations and optimize its procure- $ 220 $ 123 $ 97 ment activities. 30 Onex Corporation December 31, 2008 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 Writedown of goodwill, intangible assets and long-lived assets Writedown of goodwill, intangible assets and long-lived implied fair value of goodwill, determined in a manner similar to the purchase price allocation, and compared the residual amount to the carrying amount of goodwill. Based assets totalled $1.6 billion in 2008 compared to $22 mil- on that analysis, Celestica concluded that the entire good- lion in 2007. Table 11 provides a breakdown of the write- will balance was impaired. The goodwill impairment down of goodwill, intangible assets and long-lived assets charge is non-cash in nature and does not affect Celestica’s by operating company for the years ended December 31, liquidity, cash flows from oper ating activities, or the com- 2008 and 2007. pany’s compliance with debt covenants. In addition, during the fourth quarter Celestica conducted its annual recover- Writedown of Goodwill, Intangible Assets ability review of its long-lived assets. This review concluded and Long-lived Assets TABLE 11 ($ millions) Celestica CEI Carestream Health Sitel Worldwide Other(a) Total 2008 $ 1,061 206 142 129 111 2007 $ 15 – – – 7 $ 1,649 $ 22 that there was an impairment of $11 million in its long- lived assets, primarily associated with its property, plant and equipment in the Americas and Europe. This compares to a $15 million impairment charge taken in 2007 against property, plant and equipment primarily in Europe. During the fourth quarter of 2008, CEI performed its annual goodwill impairment test and concluded that good- will of $206 million was impaired and should be written off in its entirety. The impairment was driven by a combination of factors including significant end-market deterioration and (a) 2008 other includes EnGlobe, Husky, Tube City IMS and the parent company. economic uncertainties impacting expected future demand. 2007 other includes CDI. During 2008, Carestream Health performed an analysis of the carrying value of its goodwill compared to Celestica recorded a $1.1 billion goodwill impairment its fair value by each reporting unit. It determined that the charge in 2008, which was the company’s entire value of goodwill in its Molecular Imaging Systems (MIS) business goodwill on its balance sheet. The goodwill on Celes tica’s was impaired. As a result, during the fourth quarter of balance sheet was associated with its Asia reporting unit 2008, Carestream Health recorded a $142 million write- and was established primarily from an acquistion in 2001. down of goodwill and intangible assets. Celestica completed its annual impairment testing during Sitel Worldwide reported a $129 million write- the fourth quarter of 2008. Celes tica used a combination of down of goodwill and trademarks in 2008. During the valuation approaches in cluding a market capitalization fourth quarter of 2008, Sitel Worldwide completed its approach, a multiples approach and discounted cash flow annual review of the fair value of its goodwill by reporting as a first step in determining any impairment in its good- unit. Based on its analysis, the company determined that will. This analysis indicated a potential impairment in the fair value of goodwill and trademark in its Europe region its Asia reporting unit, corroborated by a combination of was less than its carrying value. This goodwill was primar- factors, including a significant and sustained decline in ily associated with the purchase of SITEL Corpo ration Celestica’s market capitalization, which was significantly in January 2007 and the impairment was due pri mar ily below its book value, and the deteri orating global eco- to the shift in customers from Europe to other regions as nomic environment, which has resulted in a decline in well as significant reductions in the quoted market price of expected future demand. The company then calculated the company peers. Onex Corporation December 31, 2008 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 Included in other shown in table 11 are: Non-controlling Interests in Earnings (Loss) (cid:129) a $22 million writedown of long-lived assets at Husky of Operating Companies by Industry Segment due primarily to the decision to shift production be - tween regional units under the company’s transforma- TABLE 12 ($ millions) 2008 2007 Change ($) tion plan; Earnings (loss) of non-controlling (cid:129) a $65 million mark-to-market adjustment associated interests in: with certain securities purchased by Onex Partners III in Electronics Manufacturing the fourth quarter of 2008 in relation to the possible Services $ (791) $ (18) $ (773) acquisition of a business; and (cid:129) ONCAP’s operating company, EnGlobe, recorded a $10 mil- lion writedown of goodwill and long-lived assets in Aerostructures Healthcare Financial Services 2008. EnGlobe’s management performed a comprehen- Customer Support Services 245 (34) 94 1 (5) (531) 265 36 87 4 (7) 650 (20) (70) 7 (3) 2 (1,181) Metal Services Other(a) Total $ (1,021) $ 1,017 $ (2,038) (a) 2008 other includes CEI, Husky, Radian, ONCAP II, Onex Credit Partners and the parent company. 2007 other includes Cineplex Entertainment, CEI, Radian, ONCAP II, Onex Real Estate and the parent company. Celestica, included in the electronics manufacturing seg- ment, reported $773 million of the change in the non- controlling interests amount. The higher share of losses in 2008 of other shareholders was due primarily to the $1.1 bil- lion writedown of goodwill, intangible assets and long-lived assets taken by the company as previously discussed. The healthcare segment reported a $70 million change in the controlling interests amount in 2008. The change was primarily driven by the non-controlling inter- ests’ share of Carestream Health’s writedown of goodwill and intangible assets as previously discussed. Included in the $531 million loss of the non-con trol ling inter- ests amount in the other segment in table 12 were: (cid:129) the $45 million non-controlling interests’ share of losses at Husky, acquired in mid-December 2007, primarily resulting from the US$91 million charge taken in the year asso ciated with the acquisition accounting valua- tion of inventory on the company’s opening balance at the date of acquisition; (cid:129) the share of the losses at Allison Transmission ($135 mil- lion) and Hawker Beechcraft ($48 million) of the limited partners of Onex Partners II; and (cid:129) the $185 million share of the reported loss at CEI due pri marily to the $206 million writedown of goodwill and intangible assets as previously discussed. sive review of the current performance and the strategic orientation of its business units. This review concluded that there was an impairment in goodwill and intangible assets in the company’s organic waste management divi- sion, which resulted in the writedown. Non-controlling interests in earnings (loss) of operating companies In the audited annual consolidated statements of earnings, the non-controlling interests amount represents the interests of shareholders other than Onex in the net earnings or losses of Onex’ operating companies. During 2008, this amount was a $1.0 billion share of Onex’ oper - ating companies’ losses compared to a share of earnings of $1.0 billion in 2007. Table 12 details the earnings (losses) by industry segment attributable to non-controlling share- holders in our oper ating companies. 32 Onex Corporation December 31, 2008 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 For the year ended December 31, 2007, the share of earnings The losses from continuing operations in the electronics of non-controlling interests totalled $1.0 billion due primar - manufacturing services segment, the healthcare segment ily to $762 million of gains of other limited partners of Onex and customer support services segment in 2008 were pri- Partners I resulting from the sales of shares in the Spirit marily driven by the significant writedowns of goodwill, Aero Systems secondary offering and the Skilled Healthcare intangible assets and long-lived assets as previously dis- initial public offering. In addition, a further $15 million gain cussed on page 31 of this report. resulted from the portion of other limited partners in the The earnings reported in the other segment were non-cash accounting dilution gain recorded as a result of due primarily to a $196 million stock-based compensation Skilled Health care’s new common share issuance at a value recovery at Onex, the parent company, as previously dis- per share above the net book value per share. cussed. Partially offsetting this was $142 million of losses from equity-accounted investments as detailed in table 7 Earnings (loss) from continuing operations Onex’ consolidated loss from continuing operations was on page 27 of this MD&A. $292 million ($2.37 per share) in 2008 compared to earnings of $109 million ($0.85 per share) in 2007 and earnings of Earnings from discontinued operations Earnings from discontinued operations were $9 million $256 million ($1.93 per share) in 2006. Table 13 details the ($0.07 per share) in 2008 compared to $119 million ($0.93 earnings (loss) from continuing operations by industry per share) in 2007. During 2008, the earnings from discon- segment for 2008, 2007 and 2006. tinued operations related to additional proceeds received in the year related to ONCAP L.P.’s 2007 sales of WIS Inter - Earnings (Loss) from Continuing Operations national and CMC Electronics, Inc. (“CMC Electronics”). by Industry Segment TABLE 13 ($ millions) 2008 2007 2006 Earnings (loss) from continuing operations: Electronics Manufacturing Services Aerostructures Healthcare Financial Services $ (119) $ (3) 17 (62) 40 28 (10) 38 (19) (4) 79 $ (24) (74) 27 6 15 – 306 Customer Support Services (170) Metal Services Other(a) (2) 4 Total $ (292) $ 109 $ 256 (a) 2008 other includes Cineplex Entertainment, CEI, Husky, Hawker Beechcraft, Allison Transmission, RSI, Radian, ONCAP II, Onex Real Estate, Onex Credit Partners and the parent company. 2007 other includes Cineplex Entertainment, CEI, Hawker Beechcraft, Allison Transmission, Radian, ONCAP II, Onex Real Estate and the parent company. 2006 other includes Cineplex Entertainment, CEI, Radian, ONCAP II, Onex Real Estate and the parent company. For the year ended December 31, 2007, the $119 million of earnings from discontinued operations were from the sale of WIS International, CMC Electronics and certain Town and Country properties. Onex Corporation December 31, 2008 33 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 (loss) A consolidated net loss of $283 million ($2.30 per share) was F O U R T H - Q U A R T E R R E S U L T S reported in 2008 compared to consolidated net earnings Table 16 presents the statements of earnings (loss) for the of $228 million ($1.78 per share) in 2007 and net earnings of fourth quarters ended December 31, 2008 and 2007. $1.0 billion ($7.55 per share) in 2006. Table 14 identifies the net earnings (loss) by industry segment. Fourth-Quarter Statements of Earnings (Loss) Consolidated Net Earnings (Loss) by Industry Segment TABLE 16 ($ millions) 2008 2007 TABLE 14 ($ millions) 2008 2007 2006 Consolidated net earnings (loss) in: Electronics Manufacturing Services Aerostructures Healthcare Financial Services Customer Support Services Metal Services Other(a) Discontinued operations $ (119) $ (3) $ (23) 17 (62) 40 (170) (2) 4 9 28 (10) 38 (19) (4) 79 119 (2) 19 6 4 – 252 746 Revenues Cost of sales Selling, general and administrative expenses $ 6,774 $ 5,994 (5,435) (701) (4,807) (666) Earnings before the undernoted items $ 638 $ 521 Amortization of property, plant and equipment Interest income (expense) (177) (6) (139) 30 Operating earnings $ 455 $ 412 Amortization of intangible assets and deferred charges Interest expense of operating companies Total $ (283) $ 228 $ 1,002 Loss from equity-accounted investments Foreign exchange gains (a) 2008 other includes Cineplex Entertainment, CEI, Husky, Hawker Beechcraft, Stock-based compensation recovery Allison Transmission, RSI, Radian, ONCAP II, Onex Real Estate, Onex Credit Partners and the parent company. 2007 other includes Cineplex Entertainment, CEI, Hawker Beechcraft, Allison Transmission, Radian, ONCAP II, Onex Real Other income (expense) Gains on sales of operating investments, net Estate and the parent company. 2006 other includes Cineplex Entertainment, Acquisition, restructuring and other expenses CEI, Radian, ONCAP II, Onex Real Estate and the parent company. Table 15 presents the earnings (loss) per share from Writedown of goodwill, intangible assets and long-lived assets (1,636) con tinuing operations, discontinued operations and net Earnings (loss) before income taxes, earnings (loss). non-controlling interests and Earnings (Loss) per Subordinate Voting Share TABLE 15 ($ per share) 2008 2007 2006 Basic and Diluted: Continuing operations Discontinued operations Net earnings (loss) $ (2.37) $ 0.07 $ (2.30) $ 0.85 $ 0.93 $ 1.78 $ 1.93 $ 5.62 $ 7.55 discontinued operations $ (1,659) $ 107 Provision for income taxes Non-controlling interests (25) 1,336 (99) (18) Loss from continuing operations $ (348) $ (10) Earnings from discontinued operations – – Loss for the Period $ (348) $ (10) Fourth-quarter consolidated revenues were $6.8 billion, up 13 percent, or $780 million, from the same quarter of 2007. 34 Onex Corporation December 31, 2008 (96) (171) (266) 58 89 (22) 4 (74) (78) (137) (26) 3 3 9 – (59) (20) 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 were $455 million in the fourth quarter of 2008, up 10 percent from $412 million in the fourth quarter of 2007. Table 17 provides a breakdown and change in fourth-quarter revenues and operating earnings by industry segment in Canadian dollars and the functional currency of the oper ating companies. Fourth-Quarter Revenues and Operating Earnings by Industry Segment Revenues TABLE 17 ($ millions) Canadian Dollars Functional Currency Quarter ended December 31 2008 2007 Change ($) 2008 2007 Change ($) Electronics Manufacturing Services $ 2,356 Aerostructures Healthcare Financial Services Customer Support Services Metal Services Other(a) Total 784 1,748 386 483 475 542 $ 2,175 963 1,420 321 464 435 216 $ 181 (179) 328 65 19 40 326 US$ 1,935 US$ 646 US$ 1,441 US$ 318 US$ 399 US$ 395 C$ 542 US$ 2,210 US$ 981 US$ 1,444 US$ 326 US$ 473 US$ 443 C$ 216 US$ (275) US$ (335) US$ (3) US$ (8) US$ (74) US$ (48) C$ 326 $ 6,774 $ 5,994 $ 780 Operating Earnings ($ millions) Canadian Dollars Functional Currency Quarter ended December 31 2008 2007 Change ($) 2008 2007 Change ($) Electronics Manufacturing Services $ 103 $ 63 $ 40 Aerostructures Healthcare Financial Services Customer Support Services Metal Services Other(a) Total 49 241 92 20 (6) (44) 124 172 47 30 5 (29) (75) 69 45 (10) (11) (15) $ 455 $ 412 $ 43 US$ US$ 83 41 US$ 197 US$ US$ 74 16 US$ (5) C$ (44) US$ 65 US$ 126 US$ 174 US$ 48 US$ 31 US$ 5 C$ (29) US$ 18 US$ (85) US$ 23 US$ 26 US$ (15) US$ (10) C$ (15) Results are reported in accordance with Canadian generally accepted accounting principles. These results may differ from those reported by the individual operating companies. (a) 2008 other includes CEI, Husky, Radian, ONCAP II and the parent company. 2007 other includes Cineplex Entertainment, CEI, Radian, ONCAP II, Onex Real Estate and the parent company. All of the growth in the fourth-quarter revenues was due in revenues in the company’s servers, enterprise communi- to the fluctuation of the U.S. dollar to the Canadian dollar cations and storage segments. This was partially offset by exchange rate. During the fourth quarter of 2008, the aver- higher revenues in the telecommunications and industrial age U.S. dollar to Canadian dollar exchange rate was 1.2125 segments resulting from new customer and program wins. Cana dian dollars compared to 0.9818 Canadian dollars in Spirit AeroSystems reported a US$335 million the fourth quarter of 2007. Excluding the impact of foreign decline in revenues in the fourth quarter of 2008 over the currency translation, many of Onex’ operating companies same quarter of 2007 due to decreased ship set deliveries reported lower revenues quarter-over-quarter due primar - to Boeing resulting primar ily from the eight-week strike ily to the economic downturn in the quarter. Celestica at Boeing in the quarter. reported a US$275 million decline in revenues during the The increase in the other segment is due to the fourth quarter of 2008 due primarily to a 16 percent decline inclusion of Husky in 2008. Onex Corporation December 31, 2008 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 operating earnings grew in the fourth quar- Fourth-Quarter Major Cash Flow Components ter of 2008 compared to 2007 due in part to foreign cur- rency translation as noted in revenues, as well as several other factors: (cid:129) a US$18 million increase in operating earnings at Celes - tica resulting primarily from improvements in Celestica’s TABLE 18 ($ millions) Cash from operating activities Cash from financing activities 2008 2007 $ 384 $ 20 $ 597 $ 211 Cash used in investing activities $ (350) $ (532) Mexican and European operations; Consolidated cash and short-term (cid:129) a US$23 million increase in the healthcare segment op - erating earnings driven primarily by higher revenues at EMSC; and (cid:129) an increase of US$26 million in operating earnings at The Warranty Group as a result of lower amortization of deferred acquisition costs on its European credit busi- ness in 2008. investments – continuing operations $ 2,921 $ 2,462 Cash from operating activities totalled $384 million in the fourth quarter of 2008 compared to cash from operating activities of $597 million in 2007. The decline in cash from operating activities was due primarily to reduced oper - ating results stemming from the economic downturn in the fourth quarter of 2008. Partially offsetting these factors was a US$85 million de - Cash from financing activities was $20 million cline in operating earnings at Spirit AeroSystems due pri- in the fourth quarter of 2008 compared to cash from marily to lower revenues as previously discussed. fi nancing activities of $211 million in 2007. Cash from During the fourth quarter of 2008, there was financing activities in the quarter primarily included: $1.6 billion of writedowns of goodwill, intangible assets (cid:129) cash received of $37 million from the limited partners of and long-lived assets recorded by Onex’ operating compa- ONCAP II for the acquisition of Caliber Collision; and nies. De tailed discussions of these writedowns by com- (cid:129) $76 million of capital called from the limited partners pany are provided on page 31 of this report. of Onex Partners, which included an additional invest- A stock-based compensation recovery of $89 mil- ment in Tube City IMS. lion was recorded in the fourth quarter of 2008 compared to recovery of $3 million for the same quarter last year. Onex, Partially offsetting this were: the parent company, recorded $107 million of the stock- based compensation recovery in the fourth quarter of 2008 (cid:129) $4 million of cash used by Onex, the parent company, on repurchases of 162,683 Subordinate Voting Shares under due primarily to the change in the market value of Onex its Normal Course Issuer Bid; shares. Onex is required to revalue its stock option liability (cid:129) $36 million of cash used by Celestica to repurchase based on changes in the market value of Onex shares. The its debt; decline in Onex’ share price to $18.19 per share at Decem- ber 31, 2008 from $27.47 per share at September 30, 2008 resulted in the downward revaluation of the liability for stock options and the recovery in stock-based compensa- (cid:129) $26 million of cash used to prepay debt by EMSC; and (cid:129) $39 million of cash distributed in December 2008 pri - mari ly by Onex Partners I and Onex Partners II to limited partners, other than Onex, from a dividend paid by The tion, respectively. Warranty Group. Foreign exchange gains of $58 million were re - corded in the fourth quarter of 2008 compared to $3 million in the same quarter last year. Onex, the parent company, recorded $65 million of these gains due primarily to the revaluation of its U.S. cash held at a higher U.S. dollar ex - change rate. During the fourth quarter of 2008, the value of the U.S. dollar relative to the Canadian dollar increased to 1.2180 Canadian dollars at December 31, 2008 compared to 1.0642 Canadian dollars at September 30, 2008. Cash used in investing activities was $350 million in the fourth quarter of 2008 due primarily to $62 million of cash used in the acquisition of Caliber Collision by ONCAP II and $338 million of cash used for the investment in RSI by Onex, Onex Partners II and management in October 2008. This compares to $532 million of cash used in investing activities in the same quarter last year primarily for Onex’ acquisition of Husky in mid-December 2007. 36 Onex Corporation December 31, 2008 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S S U M M A R Y Q U A R T E R L Y I N F O R M A T I O N Table 19 summarizes Onex’ key consolidated financial information for the last eight quarters. TABLE 19 ($ millions except per share amounts) 2008 2007 Dec. Sept. June Mar. Dec. Sept. June Mar. Revenues $ 6,774 $ 7,066 $ 6,815 $ 6,226 $ 5,994 $ 6,038 $ 5,870 $ 5,531 Earnings (loss) from continuing operations Net earnings (loss) $ (348) $ (348) $ $ 34 38 $ (18) $ 40 $ (10) $ (76) $ 162 $ 33 $ (18) $ 45 $ (10) $ (77) $ 166 $ 149 Earnings (loss) per Subordinate Voting Share Basic and Diluted: Continuing operations Net earnings (loss) $ (2.85) $ 0.26 $ (0.14) $ 0.32 $ (0.08) $ (0.59) $ 1.26 $ 0.26 $ (2.85) $ 0.30 $ (0.14) $ 0.36 $ (0.08) $ (0.60) $ 1.29 $ 1.16 Onex’ quarterly consolidated financial results do not fol- low any specific trends due to the acquisitions or disposi- Consolidated assets Consolidated assets totalled $29.7 billion at December 31, tions of businesses by Onex, the parent company; the 2008 compared to $26.2 billion at December 31, 2007 and volatility of the exchange rate between the U.S. dollar and $22.6 billion at December 31, 2006. A significant portion of the Canadian dollar; and varying business cycles at Onex’ the increase in Onex’ consolidated assets at December 31, operating companies. 2008 was due to the strengthening of the U.S. dollar com- pared to the Canadian dollar. The underlying currency for C O N S O L I D A T E D F I N A N C I A L P O S I T I O N most of Onex’ consolidated assets is the U.S. dollar as almost all of the activities of Onex’ operating companies This section should be read in conjunction with the report in U.S. dollars. The closing value of the U.S. dollar audited annual consolidated balance sheets and the corre- to Cana dian dollar exchange rate increased 23 percent to sponding notes thereto. Asset Diversification by Industry Segment CHART 1 ($ 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 M A N U FA C T U R I N G S T R U C T U R E S F I N A N C I A L S E R V I C E S S E R V I C E S 5,449 4,821 6,660 4,612 4,419 3,272 3,212 5,745 6,095 5,536 1.2180 Canadian dollars at December 31, 2008 from 0.9913 Cana dian dollars at December 31, 2007. Chart 1 shows Onex’ consolidated assets by industry segment. C U S T O M E R 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 6,615 1,020 1,039 1,026 5,498 5,307 29,732 881 4,159 26,199 22,578 2,887 256 08 07 06 08 07 06 08 07 06 08 07 06 08 07 06 08 07 08 07 06 08 07 06 (a) 2008 other includes Husky, CEI, Radian, ONCAP II and the parent company. 2007 other includes Husky, CEI, Radian, ONCAP II, Onex Real Estate and the parent company. 2006 other includes Cineplex Entertainment, CEI, Radian, ONCAP II, Onex Real Estate and the parent company. Onex Corporation December 31, 2008 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 The pie charts below show the percentage breakdown of total consolidated assets by industry segment as at December 31, 2008, 2007 and 20 06. Segmented Total Consolidated Assets Breakdown 20 0 8 20 07 2 0 0 6 a. 16% b. 16% c. 23% d. 20% e. 3% f. 3% x. 19% a. 17% b. 13% c. 22% d. 21% e. 4% f. 3% x. 20% a. Electronics Manufacturing Services b. Aerostructures c. Healthcare d. Financial Services e. Customer Support Services f. Metal Services x. Other (1) a. 24% b. 14% c. 13% d. 29% e. 1% x. 19% (1) 2008 other includes Husky, CEI, Radian, ONCAP II and the parent company. 2007 other includes Husky, CEI, Radian, ONCAP II, Onex Real Estate and the parent company. 2006 other includes Cineplex Entertainment, CEI, Radian, ONCAP II, Onex Real Estate and the parent company. Goodwill and intangible assets Consolidated goodwill and intangible assets on Onex’ capital, capital spending, making of investments and acqui- sitions and sales of assets. In addition, certain financial audited annual consolidated balance sheet totalled $5.7 bil- covenants must be met by the operating companies that lion at December 31, 2008 compared to $6.1 billion at have outstanding debt. Changes in business conditions rel- December 31, 2007. The decline in goodwill in 2008 was due evant to an operating company, including those resulting primarily to writedowns recorded in 2008 by several of from changes in financial markets and economic condi- Onex’ operating companies as previously discussed on tions generally, may result in non-compliance with certain page 31 of this report. This was partially offset by the impact covenants by that operating company. of the strengthening of the U.S. dollar relative to the Cana - Despite the economic turmoil in 2008, each of dian dollar at December 31, 2008. Consolidated long-term debt, without recourse to Onex It has been Onex’ policy to preserve a financially strong Onex’ operating companies, with the exception of CEI, closed the year within their covenant requirements. The debt maturities were such that there are no significant amounts that come due prior to 2011. Note 10 to the au - dited annual consolidated financial statements provides parent company that has funds available for new acquisi- more de tailed disclosure of the long-term debt at each of tions and to support the growth of its operating compa- our operating companies. nies. This policy means that all debt financing is within Total long-term debt (consisting of the current our operating companies and each company is required to portion of long-term debt and long-term debt) was $7.7 bil- support its own debt without recourse to Onex or other lion at December 31, 2008 compared to $6.4 billion at Onex operating companies. December 31, 2007 and $3.8 billion at December 31, 2006. The financing arrangements of each operating Since Onex reports in Canadian dollars, but the majority company typically contain certain restrictive covenants, of its operating companies report in U.S. dollars, all of which may include limitations or prohibitions on additional the increase in total long-term debt was caused by cur- indebtedness, payment of cash dividends, redemption of rency translation due to the strengthening of the U.S. dollar 38 Onex Corporation December 31, 2008 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S relative to the Canadian dollar. Table 20 summarizes consolidated long-term debt by industry segment in Canadian dollars and the functional currency of the operating companies. Consolidated Long-term Debt, Without Recourse to Onex TABLE 20 ($ millions) Electronics Manufacturing Services Aerostructures Healthcare Financial Services Customer Support Services Metal Services Other(a) Long-term debt of CEI, reclassified as current Current portion of long-term debt of operating companies Canadian Dollars 2007 2006 $ 752 567 2,835 194 688 380 960 6,376 – (217) $ 874 687 1,177 233 196 – 681 3,848 – (50) 2008 $ 892 697 3,367 237 796 519 1,167 7,675 (138) (394) Total $ 7,143 $ 6,159 $ 3,798 ($ millions) 2008 2007 2006 Functional Currency Electronics Manufacturing Services Aerostructures Healthcare Financial Services Customer Support Services Metal Services Other(a) Long-term debt of CEI, reclassified as current Current portion of long-term debt of operating companies US$ 732 US$ 572 US$ 2,764 US$ 195 US$ 654 US$ 426 US$ 958 US$ 6,301 US$ (113) US$ (323) US$ 759 US$ 572 US$ 2,860 US$ 196 US$ 694 US$ 383 US$ 968 US$ 750 US$ 589 US$ 1,010 US$ 200 US$ 168 – US$ 584 US$ 6,432 US$ 3,301 – – US$ (219) US$ (43) Total US$ 5,865 US$ 6,213 US$ 3,258 (a) 2008 other includes CEI, Husky, Radian, ONCAP II, Onex Credit Partners and Onex Partners. 2007 other includes CEI, Radian, ONCAP II and Onex Real Estate. 2006 other includes Cineplex Entertainment, CEI, Radian, ONCAP II and Onex Real Estate. Celestica’s long-term debt decline to US$732 million at In March 2008, Spirit AeroSystems entered into an December 31, 2008 was due primarily to the company’s amendment of its existing credit agreement. The amend- repurchase of approximately US$38 million of its senior ment provided for: (i) an increase in the company’s subordinated notes in 2008 for cash of approximately US$400 million revolving credit facility to US$650 million; US$30 million. (ii) an increase in the amount of indebtedness that Spirit Onex Corporation December 31, 2008 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 Aero Systems can incur to finance the purchase of capital It is secured by the ability of Onex Partners III to call capital assets from US$75 million to US$200 million; (iii) a provi- from its limited partners. At December 31, 2008, Onex, the sion allowing for up to US$300 million in additional parent company, as a limited partner in Onex Partners III, indebtedness outstanding; and (iv) a provision allowing was committed to fund US$23 million of the total amount Spirit AeroSystems to make investments in joint ventures outstanding on the line of credit. not to exceed a total of US$50 million. During the fourth quarter of 2008, CEI’s long-term The decline in long-term debt in the healthcare debt of US$113 million was reclassified as current debt on segment was driven primarily by the US$94 million debt the audited annual consolidated balance sheet as CEI was reduction at Carestream Health during 2008. not in compliance with various covenants of certain debt In December 2008, Sitel Worldwide amended its agreements. This situation arose due to the lower volume of debt agreement. The amendment included increases to business as CEI’s customers were affected by the decline in applicable rates and changes to provide increased leeway consumer expenditures. No change has been recorded to the in the financial covenants through September 2011. Sitel carrying value of the assets of CEI as a result of the non- World wide repurchased US$27 million of its term loan, compliance with debt covenants. As at December 31, 2008, which it funded with the issuance of US$30 million of CEI was in discussions with its lenders to achieve a solution mandatorily redeemable Series C preferred shares to Onex that would enable the company to be in compliance with its and certain other investors. Onex’ share was US$23 million. debt arrangements. The ability of CEI to operate through the Sitel Worldwide’s amended credit facility consists of a decline in the industry is dependent upon achieving a reso- US$675 mil lion term loan that matures in 2014 and a lution with CEI’s lenders. CEI’s debt will continue to be US$85 million revolving credit facility that ma tures in 2013. classified as current until such time that a resolution is The term loan and revolving credit facility bear interest achieved, the outcome of which was unknown at the time at a rate of LIBOR plus a margin of up to 5.5 percent or of this report. The debt of CEI is without recourse to Onex. prime plus a margin of 4.5 percent. At December 31, 2008, Sitel Worldwide had US$587 million and US$50 million outstanding under its term and revolving credit facility, Warranty reserves and unearned premiums Warranty reserves and unearned premiums represent The respectively. In addition, included in Sitel Worldwide’s Warranty Group’s gross warranty and property and casualty long-term debt is US$46 million of Series B preferred reserves, as well as gross warranty unearned premiums. shares (Onex’ share was US$30 million) and US$30 mil- At December 31, 2008, warranty reserves and unearned pre- lion of man datorily re deem able Series C preferred shares miums (consisting of the current and long-term portions) (Onex holds US$23 million of Series C preferred shares). totalled $4.3 billion compared to $3.9 billion at Decem- The Series B and Series C preferred shares accrue annual ber 31, 2007. Gross warranty and property and casualty dividends at a rate of 12 percent and 16 percent, respec- reserves are approximately $1.3 billion (2007 – $1.3 billion) tively, and are redeem able at the option of the holder on or of the total, which represent the estimated future losses on before July 2014 and May 2014, respectively. Outstanding warranty contracts and property and casualty insurance amounts related to preferred shares at Decem ber 31, 2008 policies. The Warranty Group has ceded 100 percent of the include accrued dividends. property and casualty reserves component of $1.1 billion During the fourth quarter of 2008, an entity con- (2007 – $1.0 billion) to third-party reinsurers, which there- trolled by Onex Partners III had approximately US$97 mil- fore has created a ceded claims recoverable assets. A sub- lion outstanding on a US$125 million line of credit. The sidiary of Aon Cor poration, The Warranty Group’s former amounts borrowed on this line of credit were used to pur- parent, is the primary reinsurer on approximately 44 per- chase investment securities pursuant to an acquisition cent of the reserves and provides guarantees on all of them opportunity. The line of credit bears interest at a base rate as part of the sales agreement with Onex. plus an applicable margin and matures in November 2009. 40 Onex Corporation December 31, 2008 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 Warranty Group’s liability for gross warranty The increase in the non-controlling interests balance and property and casualty unearned premiums totalled was driven by: $2.9 billion (2007 – $2.7 billion). All of the unearned (cid:129) the 23 percent increase in the value of the U.S. dollar rel- premiums are warranty business related and represent the ative to the Canadian dollar, which contributed $1.4 bil - portion of the revenue received that has not yet been earned lion of the increase. The value of the U.S. dollar was as revenue by The Warranty Group on extended warranty 1.2180 Canadian dollars at December 31, 2008 compared products sold through multiple distribution channels. Typi - to 0.9913 Canadian dollars at December 31, 2007. This cally, there is a time delay between when the warranty con- amount is included in other comprehensive earnings; tract starts to earn and the contract effective date. The (cid:129) $314 million in investments by the limited partners, other contracts generally commence earning after the original than Onex, of Onex Partners II, of which $205 million was manufacturer’s warranty on a product expires. Note 12 to the for the investment in RSI; and audited annual consolidated financial statements provides (cid:129) $61 million in investments by the limited partners of details of the gross warranty and property and casualty ONCAP II, of which $37 million was for the acquisition of reserves for loss and loss adjustment expenses and warranty Caliber Collision. unearned premiums as at December 31, 2008 and 2007. Partially offsetting these increases were: Non-controlling interests The non-controlling interests liability in Onex’ audited (cid:129) $1.0 billion of the non-controlling interests’ share of operating companies’ net losses in 2008 associated annual consolidated balance sheet as at December 31, primarily with the goodwill and intangible asset write- 2008 primarily represents the ownership interests of downs; and shareholders, other than Onex, in Onex’ consolidated (cid:129) $131 million of cash distributed in 2008 primarily to operating companies and equity-accounted investments. the limited partners, other than Onex, of Onex Part - At December 31, 2008, the non-controlling interests bal- ners I and II primarily from dividends paid by The ance increased to $6.6 billion compared to $6.1 billion at Warranty Group and Carestream Health. December 31, 2007. Table 21 details the change in the non- controlling interests balance from December 31, 2007 to December 31, 2008. Change in Non-controlling Interests TABLE 21 ($ millions) Shareholders’ equity Shareholders’ equity totalled $1.6 billion at December 31, 2008 compared to $1.7 billion at year-end 2007. Table 22 provides a reconciliation of the change in shareholders’ equity from December 31, 2007 to December 31, 2008. Non-controlling interests as at December 31, 2007 $ 6,149 Change in Shareholders’ Equity Non-controlling interests in net loss for 2008: Operating companies’ earnings Investments by shareholders other than Onex in: Onex Partners II ONCAP II Onex’ operating companies Distributions to limited partners of Onex Partners I and II Other comprehensive earnings Other (1,021) TABLE 22 ($ millions) Shareholders’ equity as at December 31, 2007 $ 1,703 314 61 94 (131) 1,170 (12) Regular dividends declared Shares repurchased and cancelled Net loss Other comprehensive earnings for 2008 (14) (101) (283) 248 Shareholders’ equity as at December 31, 2008 $ 1,553 Non-controlling interests as at December 31, 2008 $ 6,624 Onex’ audited annual consolidated statements of share- holders’ equity and comprehensive earnings also show the changes to the components of shareholders’ equity for the years ended December 31, 2008 and 2007. Onex Corporation December 31, 2008 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 Shares outstanding At January 31, 2009, Onex had 122,099,689 Subordinate During 2007, 3,952 Subordinate Voting Shares were issued under the Plan at an average cost of $34.67 per Voting Shares issued and outstanding. Table 23 shows the Subordinate Voting Share, creating cash savings of less change in the number of Subordinate Voting Shares out- than $1 million. During 2006, Onex issued 4,404 Subor di - standing from December 31, 2007 to January 31, 2009. nate Voting Shares under the Plan at an average cost of $22.12 per Subordinate Voting Share, creating cash savings Change in Subordinate Voting Shares Outstanding of less than $1 million. TABLE 23 Subordinate Voting Shares outstanding at December 31, 2007 125,574,087 In January 2009, Onex issued an additional 704 Subordinate Voting Shares under the Plan at an aver- age cost of $18.21 per Subordinate Voting Share. Shares repurchased and cancelled under Onex’ Normal Course Issuer Bid (3,481,381) Stock Option Plan Onex, the parent company, has a Stock Option Plan in place Issue of shares – Dividend Reinvestment Plan 6,983 that provides for options and/or share appreciation rights Subordinate Voting Shares outstanding at January 31, 2009 122,099,689 to be granted to Onex directors, officers and employees for the acquisition of Subordinate Voting Shares of the Com - pany for a term not exceeding 10 years. The options vest equally over five years with the exception of the 775,000 Onex also has 100,000 Multiple Voting Shares outstanding, remaining options granted in December 2007, which vest which have a nominal paid-in value, and 176,078 Series 1 over six years. The price of the options issued is at the mar- Senior Preferred Shares, which have no paid-in amount ket value of the Subordinate Voting Shares on the business reflected in Onex’ audited annual consolidated financial day preceding the day of the grant. Vested options are not statements. Note 15 to the audited annual consolidated exercisable unless the average five-day market price of financial statements provides additional information on Onex Subordinate Voting Shares is at least 25 percent Onex’ share capital. There was no change in the Multiple greater than the exercise price at the time of exercise. Voting Shares and Series 1 Senior Preferred Shares out- At December 31, 2008, Onex had 12,931,450 options from that of 2007 and 2006. Total payments for dividends TABLE 24 standing during 2008. Cash dividends During 2008, 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 Octo - ber 31 of each year. The dividend rate remained unchanged have decreased with the repurchase of Sub ordinate Voting Shares under the Normal Course Issuer Bids as discussed on page 43. Dividend Reinvestment Plan Onex’ Dividend Reinvestment Plan (the “Plan”) enables Canadian shareholders to reinvest cash dividends to acquire new Subordinate Voting Shares of Onex at a mar- ket-related price at the time of reinvestment. During 2008, Onex issued 6,279 Subordinate Voting Shares under the Plan at an average cost of $29.48 per Subordinate Voting Share, creating cash savings of less than $1 million. 42 Onex Corporation December 31, 2008 outstanding to acquire Subordinate Voting Shares, of which 9,363,717 options were vested, and none of those vested options was exercisable. Table 24 provides information on the activity during 2008 and 2007. Change in Stock Options Outstanding Number of Options 13,095,100 803,000 (1,090,600) (30,000) Weighted Average Exercise Price $ 16.43 $ 35.16 $ 10.84 $ 21.27 $ 18.07 $ 15.95 $ 14.97 $ 34.00 Outstanding at December 31, 2006 Granted Surrendered Expired Outstanding at December 31, 2007 12,777,500 Granted Surrendered Expired 702,500 (538,550) (10,000) Outstanding at December 31, 2008 12,931,450 $ 18.07 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 2008, 702,500 options were granted with an exercise Husky ($30 million) and Hawker Beechcraft ($25 million). price of $15.95 and which vest over five years. In addition, Table 25 provides a breakdown of other comprehensive 538,550 options were surrendered in 2008 at a weighted earnings (loss) for 2008 compared to 2007. average exercise price of $14.97 for aggregate cash consid- eration of $9 million and 10,000 options expired. Other Comprehensive Earnings (Loss) During 2007, 803,000 options were granted at a weighted average exercise price of $35.16. Furthermore, TABLE 25 ($ millions) 2008 2007 1,090,600 options were surrendered in 2007 for total cash Other comprehensive earnings (loss), paid of $26 million and 30,000 options expired. In 2006, net of taxes 435,000 options were granted, 738,000 options were surren- Currency translation adjustments $ 382 $ (202) dered for cash consideration of $14 million, 20,000 options Change in fair value of derivatives were exercised for Subordinate Voting Shares at a total designated as hedges value of less than $1 million and 16,500 options expired. Other (122) (12) (22) 10 Normal Course Issuer Bids Onex had Normal Course Issuer Bids (the “Bids”) in place Other comprehensive earnings (loss) $ 248 $ (214) during 2008 that enable it to repurchase up to 10 percent of its public float of Subordinate Voting Shares during the Management of capital Onex considers the capital it manages to be the amounts it period of the relevant Bid. Onex believes that it is advanta- has in cash, short-term and near-cash investments, and geous to Onex and its shareholders to continue to repur- the investments made by it in the operating companies, chase Onex’ Subordinate Voting Shares from time to time Onex Real Estate Partners and Onex Credit Partners. Onex when the Subordinate Voting Shares are trading at prices also manages the third-party capital invested in the Onex that reflect a significant discount to their intrinsic value. Partners and ONCAP Funds. During 2008, Onex repurchased 3,481,381 Sub - ordinate Voting Shares under the Bids at a total cost Onex’ objectives in managing capital are to: of $101 million. Under similar Bids, Onex repurchased (cid:129) preserve a financially strong parent company with 3,357,000 Subor dinate Voting Shares at a total cost of appropriate liquidity and no, or a limited amount of, $113 million during 2007 and 9,176,300 Subordinate Voting debt so that it has funds available to pursue new acqui- Shares at a total cost of $203 million in 2006. sitions and growth opportunities, as well as support the Accumulated other comprehensive earnings (loss) Accumulated other comprehensive earnings (loss) repre- building of its existing businesses. Onex does not gener- ally have the ability to draw cash from its operating companies. Accordingly, maintaining adequate liquidity at the parent company is important; sent the accumulated unrealized gains or losses, all net of (cid:129) achieve an appropriate return on capital invested com- income taxes, related to certain available-for-sale securi- mensurate with the level of risk taken on; ties, cash flow hedges and foreign exchange gains or losses (cid:129) build the long-term value of its operating companies; on the net investment in self-sustaining operations. (cid:129) control the risk associated with capital invested in any At December 31, 2008, accumulated other compre- particular business or activity. All debt financing is hensive loss was $161 million compared to an accumulated within the operating companies and each company is loss of $409 million at the end of 2007. The change was from required to support its own debt. Onex does not guaran- other comprehensive earnings of $248 million in 2008 pri- tee the debt of the operating companies and there are marily from positive currency translation adjustments of no cross-guarantees of debt between the operating com- $382 million as a result of the strengthening of the U.S. dol- panies; and lar. This was partially offset by Onex’ share of the declines (cid:129) have appropriate levels of committed third-party capital in the fair value of derivatives designated as hedges of available to invest along with Onex’ capital. This enables $122 million, primarily at Sitel Worldwide ($38 million), Onex to respond quickly to opportunities and pursue Onex Corporation December 31, 2008 43 Onex Corporation December 31, 2008 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 acquisitions of businesses it could not achieve using only its own capital. The management of third-party Cash from operating activities Cash from operating activities totalled $1.3 billion in 2008 capital also provides management fees to Onex and the compared to cash from operating activities of $1.2 billion ability to enhance Onex’ returns by earning a carried in 2007. Table 27 provides a breakdown of cash from oper- interest on the profits of third-party participants. ating activities by cash generated from operations and non-cash working capital items, warranty re serves and At December 31, 2008, Onex, the parent company, had premiums and other liabilities for the years ended Decem - approximately $470 million of cash on hand and approxi- ber 31, 2008 and 2007. mately $70 million of near-cash items at market value. The Com pany is currently liquidating its near-cash items, Components of Cash from Operating Activities which are invested in a number of hedge funds. Due to realizations, at the end of January 2009, Onex’ investment TABLE 27 ($ millions) 2008 2007 in the hedge funds was $37 million and it expects to receive Cash generated from operations $ 1,296 $ 1,096 over half of that by the end of October 2009 with the balance Increase in cash from non-cash working into 2010. Onex, the parent company, has a conservative capital items, warranty reserves and cash management policy that limits its cash investments premiums and other liabilities 43 88 to short-term high-rated money market instruments. This policy has been effective in maintaining liquidity and pre- serving principal in all of the money market investments at Cash from operating activities $ 1,339 $ 1,184 Onex, the parent company. Cash generated from operations excludes changes in non- At December 31, 2008, Onex had access to cash working capital items, warranty reserves and premi- US$3.6 billion of uncalled committed third-party capital ums and other liabilities. Cash generated from operations for acquisitions through the Onex Partners and ONCAP totalled $1.3 billion in 2008, up 18 percent from $1.1 billion Funds. This includes approximately US$3.0 billion of com- in 2007. Much of the increase was due to the inclusion of a mitted third-party capital from several closings of Onex full year of operations at Carestream Health and improve- Partners III completed in 2008. Onex anticipates that further ments at Celestica as discussed in “Operating Earnings” on third-party capital will be committed to Onex Part ners III. page 24 of this MD&A. The strategy for risk management of capital has Non-cash working capital items, warranty re - not changed in 2008. serves and premiums and other liabilities increased cash by $43 million in 2008 compared to $88 million in 2007. 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 lower amount in 2008 was due primarily to the build- This section should be read in conjunction with the continued investment in the B787, Gulfstream and other audited annual consolidated statements of cash flows and general aviation programs, partially offset by customer the corresponding notes thereto. Table 26 summarizes the advances associated with the 787 program. up of inventory at Spirit AeroSystems associated with the major consolidated cash flow components. Major Cash Flow Components Cash from financing activities Cash from financing activities was $9 million in 2008 compared to $1.3 billion in 2007. Included in cash from TABLE 26 ($ millions) 2008 2007 financing activities were: Cash from operating activities Cash from financing activities $ 1,339 $ 9 $ 1,184 $ 1,347 (cid:129) $314 million of cash received from the limited partners of Onex Partners II, of which $205 million was for the Cash used in investing activities $ (1,402) $ (2,673) investment in RSI; and Consolidated cash and short-term (cid:129) $37 million of cash received from the limited partners of investments – continuing operations $ 2,921 $ 2,462 ONCAP II for the acquisition of Caliber Collision. 44 Onex Corporation December 31, 2008 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 Offsetting these factors were: Celestica spent $124 million in capital expenditures in 2008 (cid:129) $143 million of cash distributed in 2008 primarily by (2007 – $67 million) primarily to expand manufacturing Onex Partners to limited partners, other than Onex, capabilities in China, Mexico and Europe to support new from dividends paid by The Warranty Group in 2008 and customer programs. 2007 and Carestream Health in 2008; Spirit AeroSystems invested $299 million in prop- (cid:129) $36 million spent by Celestica on the repurchase of its erty, plant and equipment, as well as software and pro- debt; and gram tooling in 2008, including costs associated with the (cid:129) $101 million of cash spent by Onex, the parent company, company’s 787 manufacturing equipment and the devel- on the repurchase of 3,481,381 Subordinate Voting Shares opment of stand-alone information technology systems. under the Company’s Normal Course Issuer Bid. Included in the healthcare segment was $109 mil- lion invested in capital expenditures by Carestream Health. Cash used in investing activities Cash used in investing activities totalled $1.4 billion in 2008 These expenditures were primarily associated with rental capital and information technology. Rental capital expendi- compared to $2.7 billion in 2007. Cash used in investing tures represent leased equipment and the capitalized cost activities included: of digital printers that the company provides certain of its (cid:129) $209 million of cash spent on acquisitions completed by customers in exchange for a contract, which obligates the CDI, EMSC, Sitel Worldwide, Skilled Healthcare, Tube customer to purchase film from Carestream Health. City IMS and ONCAP II; For the year ended December 31, 2007, acquisitions (cid:129) $338 million invested in RSI by Onex, Onex Part- completed in 2007 accounted for $1.8 billion of the $2.7 bil- ners II and management; and lion of cash used in investing activities. These acquisitions (cid:129) $859 million of cash spent on property, plant and equip- pri mar ily included Tube City IMS ($197 million), acquired in ment primarily by Onex’ operating companies (2007 – Janu ary 2007, Carestream Health ($442 million), purchased $633 million); table 28 details property, plant and equip- in April 2007, Husky ($521 million), acquired in mid-De cem - ment expenditures by industry segment. ber 2007, Sitel Worldwide’s acquisition of SITEL Cor pora tion, Property, Plant and Equipment Expenditures on acquisitions completed by EMSC and Skilled Health care as well as three add-on acquisitions ($435 million), and add- by Industry Segment TABLE 28 ($ millions) Electronics Manufacturing Services Aerostructures Healthcare Financial Services Customer Support Services Metal Services Other(a) Total 2008 $ 124 299 225 21 67 73 50 2007 $ 67 268 136 29 51 55 27 $ 859 $ 633 (a) 2008 other includes CEI, Husky, Radian, ONCAP II, Onex Credit Partners and the ($176 million). In addition, included in other investing activi- ties in 2007 was cash used for Onex’ and Onex Partners II’s investment in Hawker Beechcraft of $552 million and Allison Transmis sion of $790 million. Consolidated cash resources At December 31, 2008, consolidated cash with continuing operations was $2.9 billion, slightly above the level at Decem ber 31, 2007. The major components at December 31, 2008 were Onex, the parent company, which represented approximately $470 million of cash on hand, and Celestica, which had approximately $1.5 billion of cash. Onex believes that maintaining a strong financial position at the parent parent company. 2007 other includes CEI, Radian, ONCAP II, Onex Real Estate company with appropriate liquidity enables the Company and the parent company. to pursue new opportunities to create long-term value and support Onex’ existing oper ating companies. In addition to the $470 million of cash at the parent company at Decem - ber 31, 2008, there was approximately $70 million of near- cash items that are invested in segregated hedge funds. Onex Corporation December 31, 2008 45 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Onex has provided notice to liquidate these funds and investments on Onex’ consolidated balance sheet at expects to have converted the majority of them to cash by December 31, 2008 and are presented at fair value. October 2009. These fund investments are classified as A D D I T I O N A L U S E S O F C A S H Contractual obligations The following table presents the contractual obligations of Onex’ operating companies as at December 31, 2008: Contractual Obligations TABLE 29 ($ 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 Pension plan obligations(a) $ 7,813 1,629 339 35 $ 532 $ 1,327 $ 4,179 $ 1,775 317 189 35 454 79 – 275 4 – 583 67 – Total contractual obligations $ 9,816 $ 1,073 $ 1,860 $ 4,458 $ 2,425 (a) The pension plan obligations are those of the Onex operating companies with significant defined benefit pension plans. A breakdown of long-term debt by industry segment is pro- Capital and operating leases vided in table 20. In addition, notes 10 and 11 to the audited Spirit AeroSystems annual consolidated financial statements provide further In May 2008, Spirit AeroSystems and The North Carolina disclosure on long-term debt and lease commitments. All Global TransPark Authority (“GTPA”) entered into an in - our operating companies, with the exception of CEI, cur- duce ment agreement, a construction agency agreement rently believe they have adequate cash from operations, and a lease agreement for the construction and lease of a cash on hand and borrowings available to them to meet facility on an approximate 300-acre site in Kinston, North anticipated debt service requirements, capital ex penditures Carolina. Spirit AeroSystems intends to use this facility for and working capital needs. As noted earlier, at the time of a variety of aerospace manufacturing purposes, including this report, CEI was in discussions with its lenders to modify the manufacturing and assembly of aerospace parts for the terms of its debt to provide more leeway on its cov e - various customers. As part of the construction agency nants. The outcome of these discussions was unknown at agreement, the construction of the facility in North Caro - the time of this report. There is, however, no assurance that lina will be funded initially from a US$100 million grant our operating companies will generate sufficient cash flow awarded to GTPA, with an additional required minimum from operations or that future bor rowings will be available capital investment of US$80 million to be funded by Spirit to enable them to grow their businesses, service all indebt - AeroSystems by 2014. GTPA will retain title to the facility ed ness or make anticipated capital expenditures. and has leased the site to Spirit AeroSystems for an initial term of approximately 22 years. During the lease period, Spirit AeroSystems will make nominal rental payments to GTPA. Spirit AeroSys tems is subject to a number of per- formance criteria under the inducement agreement, of 46 Onex Corporation December 31, 2008 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 which failure to meet will result in additional payments to Spirit AeroSystems has several U.S. defined bene fit GTPA in future periods. The inducement agreement also pension plans that were frozen at the date of Onex’ acquisi- requires Spirit AeroSystems to make US$80 million in capi- tion of Spirit AeroSystems, with no future service benefits tal investments at the leased premises by the end of 2014. being earned in these plans. Pension assets are placed in In June 2008, a subsidiary of Spirit AeroSystems a trust for the purpose of providing liquidity sufficient to in Malaysia entered into a facility agreement for a term pay benefit obligations. Spirit Aero Sys tems’ U.S. defined loan facility of US$20 million to be used toward partial benefit pension plans remained over funded by approxi- financing of plant and equipment, materials, inventory mately $73 million at December 31, 2008 despite the vola - and administrative costs associated with the establish- tility and decline in the equity markets in 2008. Therefore, ment of an aerospace-related composite component required and discretionary contributions to those plans are assembly plant in Malaysia. Commitments At December 31, 2008, Onex and its operating companies not expected in 2009. In addition, Spirit AeroSystems had a U.K. defined benefit pension plan with expected contribu- tions of US$8 million in 2009. At December 31, 2008, Celestica’s defined benefit had total commitments of $666 million (2007 – $557 mil- pension plans were in a net unfunded position of $49 mil- lion). Commitments by Onex and its operating companies lion. Celestica’s pension funding policy is to contribute provided in the normal course of business include com- amounts sufficient to meet minimum local statutory fund- mitments to corporate investments and letters of credit, ing requirements that are based on actuarial calculations. letters of guarantee and surety and performance bonds. The company may make additional discretionary con - Approximately $547 million of the total commitments in tributions based on actuarial assessments. Celestica esti- 2008 were for contingent liabilities in the form of letters of mates a minimum funding requirement of US$20 million credit, letters of guarantee, and surety and performance for its defined benefit pension plans in 2009 based on the bonds provided by certain operating companies to various most recent actuarial valuations. Continued volatility in third parties, including bank guarantees. These guarantees the capital markets will impact the future asset values of are without recourse to Onex. Celestica’s multiple defined benefit pension plans. There - In addition, included in the commitments was fore, a significant deterioration in the asset values could $46 million of capital to be invested in Tube City IMS by Onex lead to higher than expected future contributions; how- and Onex Partners II to fund capital expenditures in support ever, Celestica does not expect this will have a material of new contracts that have been signed with steel mills. adverse impact on its cash flows or liquidity. As part of the Carestream Health purchase from Carestream Health’s defined benefit pension plans Kodak in 2007, the acquisition agreement provided that if were in an unfunded position of approximately $40 million Onex and Onex Partners II realize an internal rate of return in at Decem ber 31, 2008. The company’s pension plans are excess of 25 percent on their investment in Carestream broadly diversified in equity and debt secu rities, as well as Health, Kodak will receive payment equal to 25 percent of the other investments. Carestream Health ex pects to con- excess return up to US$200 million. Pension plans Six of Onex’ operating companies have defined benefit pen- tribute approximately US$1 million in 2009 to its defined benefit pension plans, and it does not be lieve that future pension contributions will materially impact its liquidity. Onex, the parent company, has no pension plan sion plans, of which the more significant plans are those and has no obligation to the pension plans of its operating of Spirit AeroSystems, Carestream Health and Celes tica. companies. At December 31, 2008, the defined benefit pension plans of the six Onex operating companies had combined assets of $1.3 billion against combined obligations of $1.3 billion, with a net unfunded obligation of $29 million. Onex Corporation December 31, 2008 47 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Recent events Registration statement filing by EMSC In late October 2008, EMSC filed a registration statement with the U.S. Securities and Exchange Commission with the intent to sell from time to time up to 10 million Class A common shares. The shares may be sold by the company or Private Equity Funds Commitments TABLE 30 ($ millions) Total Committed Capital Onex Committed Capital Available Uncalled Committed Capital (Excluding Onex)(a) selling stockholders, including Onex and Onex Partners I. If Onex Partners I US$ 1,655 US$ 400 US$ 94 shares are sold by EMSC, the company will use the net pro- Onex Partners II ceeds for general corporate purposes, which may include Onex Partners III working capital, capital expenditures, strategic investments ONCAP II US$ 3,450 US$ 1,407 US$ 306 US$ 4,000 US$ 1,000(b) US$ 3,100 C$ 574 C$ 252 C$ 156 and possible acquisitions. Cineplex Entertainment In early January 2009, Onex exchanged a portion of its interest in Cineplex Entertainment for units of Cineplex Galaxy Income Fund (“CGIF”) pursuant to the term of an exchange agreement entered into at the time of the initial public offering of CGIF. While the exchange does not affect Onex’ economic interest in Cineplex Entertainment, it did convert Onex’ holdings into publicly listed CGIF units. Onex has an aggregate 13 million units of CGIF and units of Cineplex Entertainment that are exchangeable for units of CGIF. A D D I T I O N A L S O U R C E S O F C A S H Private equity funds Onex has additional sources of cash from its private equity Funds. Private equity Funds provide capital to Onex-spon- sored acquisitions that are not related to Onex’ operating companies that existed prior to the formation of the Funds. The Funds provide a substantial pool of committed funds, which enables Onex to be more flexible and timely in responding to investment opportunities. Table 30 provides a summary of Onex’ private equity funds, with a breakdown of total committed capital, Onex’ share of the committed capital and uncalled com- mitted capital at December 31, 2008 in the funds’ func- tional currency. (a) Includes amounts uncalled from Onex management and directors. (b) Effective July 1, 2009, Onex’ commitment will decrease by US$500 million. During 2003, Onex raised its first large-cap Fund, Onex Partners I, with US$1.655 billion of committed capital, including committed capital from Onex of US$400 million. Since 2003, Onex Partners I has completed 10 investments or acquisitions with US$1.5 billion of equity being put to work. While Onex Partners I has concluded its investment period, the Fund still has uncalled third-party committed capital of US$94 million, which is largely reserved for pos- sible future funding for any of Onex Partners I’s existing businesses. During 2006, Onex raised its second large-cap Fund, Onex Partners II, a US$3.45 billion private equity fund, including committed capital from Onex of US$1.4 bil- lion. Onex Partners II has completed seven investments or acquisitions, investing US$2.9 billion of equity in those transactions. At December 31, 2008, Onex Partners II had concluded its investment period but had uncalled third- party committed capital of approximately US$306 million, which is largely reserved for possible future funding for any of the Onex Partners II’s existing businesses. During 2008, Onex commenced fundraising for its third large-cap private equity fund, Onex Partners III, which will provide capital for new Onex-sponsored acqui - sitions. By December 31, 2008, third-party capital commit- ments for this Fund totalled approximately US$3.0 billion. Onex had initially committed US$1.0 billion, which could 48 Onex Corporation December 31, 2008 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 be either increased or decreased by US$500 million with Onex’ mid-cap private equity Fund, ONCAP II, six months’ notice. On December 31, 2008, Onex noti fied has total committed capital of $574 million, of which its limited partners in Onex Partners III that it would be Onex had committed $252 million. ONCAP II has com- reducing its commitment to the Fund to approximately pleted five acquisitions, putting $264 million of equity to US$500 million effective July 1, 2009. Any transaction com- work. At December 31, 2008, this Fund has uncalled com- pleted prior to July 1, 2009 will be funded at Onex’ original mitted third-party capital of $156 million available for US$1.0 billion commitment to Onex Part ners III. Onex has future acquisitions. the right to increase its commitment to future transactions with six months’ notice, and anticipates doing so when appropriate. It is ex pected that Onex Partners III will com- Related party transactions Related party transactions are primarily investments by plete its fundraising in the third quarter of 2009. the management of Onex and of the operating companies in the equity of the operating companies acquired. The various investment programs are described in detail in the following pages and certain key aspects are summarized in table 31. Investment Programs Minimum Stock Price Appreciation/ Return Threshold Vesting Associated Investment by Management 25% Price Appreciation 5 years (6 years for 2007) • satisfaction of exercise price (market value at grant date) TABLE 31 Stock Option Plan Management Investment Plan Carried Interest Participation 15% Compounded Return 8% Compounded Return Management DSU Plan Director DSU Plan n/a n/a 6 years (4 years prior to November 2007) 4 years (Onex Partners I) 5 years (Onex Partners II) 6 years (Onex Partners III) Period of employment Period of directorship • personal “at risk” equity investment required • 25% of gross proceeds to be reinvested in Subordinate Voting Shares or Management DSUs until 1,000,000 shares or DSUs owned • corresponds to participation in minimum 1% “at risk” management team equity investment • 25% of gross proceeds to be reinvested in Subordinate Voting Shares or Management DSUs until 1,000,000 shares or DSUs owned • investment of elected portion of annual compensation in Management DSUs • value reflects changes in Onex’ share price • units not redeemable while employed • investment of elected portion of annual directors’ fees in Director DSUs • value reflects changes in Onex’ share price • units not redeemable until retirement Onex Corporation December 31, 2008 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 Management Investment Plan Management Deferred Share Unit Plan Onex has a Management Investment Plan (the “MIP”) in Effective December 2007, a Management Deferred Share place that requires its management members to invest in Unit Plan (“MDSU Plan”) was established as a further each of the operating companies acquired by Onex. means of encouraging personal and direct economic inter- The aggregate investment by management mem- ests by the Company’s senior management in the perfor - bers under the MIP is limited to 9 percent of Onex’ interest mance of the Subordinate Voting Shares. Under the MDSU 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 aggregate investment and investment rights for the remaining 5⁄6ths (7.5 percent) of the MIP’s share at the same price. Amounts invested under the 1 percent invest- Plan, the members of the Company’s senior management team are given the opportunity to designate all or a por- tion of their annual compensation to acquire MDSUs based on the market value of Onex shares at the time in lieu of cash. MDSUs vest immediately but are redeemable ment requirement in Onex Partners transactions are allo- by the participant only after he or she has ceased to be an cated to meet the 1.5 percent investment requirement officer or employee of the Company or an affiliate for under the MIP. For investments completed prior to a cash payment equal to the then current market price 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 Onex disposes of 90 per- of Subordinate Voting Shares. To hedge Onex’ exposure to changes in the trading price of Onex shares associated with the MDSU Plan, the Company enters into forward cent or more of an investment before the fifth year. During agreements with a counterparty financial institution for all 2007, the MIP was amended for investments completed grants under the MDSU Plan. The costs of those arrange- after November 7, 2007. For those investments, the invest- ment rights to acquire the remaining 5⁄6ths vest equally over six years. Under the MIP, the investment rights related ments are borne entirely by participants in the MDSU Plan. MDSUs are redeemable only for cash and no shares or other securities of Onex will be issued on the exercise, to a particular acquisition are exercisable only if Onex redemption or other settlement thereof. In early 2008, earns a minimum 15 percent per annum compound rate of 202,259 MDSUs were issued to management having an return for that acquisition after giving effect to the invest- aggregate value, at the date of grant, of $6 million in lieu of ment rights. cash compensation for the Company’s 2007 fiscal year. The funds required for investments under the MIP In early 2009, 68,601 MDSUs were issued to management, are not loaned to the management members by Onex or the having an aggregate value, at the date of grant, of $1 million operating companies. During 2008, there were investments in lieu of cash compensation for the Company’s 2008 fiscal made of $2 million under the MIP compared to $2 million year. Forward agreements were entered into to hedge Onex’ in 2007 (these amounts exclude amounts invested under exposure to changes in the value of the MDSUs. the Onex Partners’ 1 percent investment requirement). Man - agement members received less than $1 million under the The Onex Partners Funds MIP in 2008. This compares to $38 million in realizations The structure of the Onex Partners Funds requires Onex under the MIP primarily related to Spirit AeroSystems and management to invest a minimum of 1 percent in all acqui- Skilled Healthcare in 2007. Notes 1 and 25 to the audited sitions. This structure applies to Onex Partners I, II and III. annual consolidated financial statements provide additional Onex Partners I completed its investment period in 2006. details on the MIP. 50 Onex Corporation December 31, 2008 For Onex Partners II and III, Onex management and direc- tors have committed to invest an additional 3 percent and 2 percent, respectively, of the total capital invested by those Funds at December 31, 2008. The total amount invested in 2008 by Onex man- agement and directors on acquisitions and investments completed through the Onex Partners Funds was US$14 mil- lion (2007 – US$97 million). 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 Carried interest time. Grants of DSUs may also be made to Onex directors The General Partners of the Onex Partners Funds, which from time to time. Holders of DSUs are entitled to receive, are controlled by Onex, are entitled to a carried interest of for each DSU upon redemption, a cash payment equivalent 20 percent on the realized gains of third-party limited to the market value of a Subordinate Voting Share at the partners in each Fund, subject to an 8 percent compound redemption date. The DSUs vest immediately, are only annual preferred return to those limited partners on all redeemable once the holder retires from the Board of Direc - amounts contributed in each particular Fund. Onex, as tors and must be redeemed by the end of the year following sponsor of the Onex Partners Funds, is entitled to 40 per- the year of retirement. Additional units are issued equiva- cent of the carried interest and the Onex management lent to the value of any cash dividends that would have team is entitled to 60 percent. Under the terms of the part- been paid on the Subordinate Voting Shares. Onex, the par- nership agreements, Onex may receive carried interest as ent company, has recorded a liability for the future settle- realizations occur. The ultimate amount of carried interest ment of DSUs at the balance sheet date by reference to the earned will be based on the overall performance of each of value of underlying shares at that date. The liability is Onex Partners I, II and III, independently, and includes adjusted up or down for the change in the market value of typical catch-up and clawback provisions. the underlying Subordinate Voting Shares, with the corre- sponding amount reflected in the consolidated statements Investment in Onex shares and acquisitions of earnings. During 2006, Onex adopted a program designed to further During 2008, Onex granted 45,000 DSUs to its align the interests of the Company’s senior management directors at a cost of approximately $2 million (2007 – and other investment professionals with those of Onex 43,550 DSUs at a cost of approximately $2 million) re - shareholders through increased share ownership. Under corded as stock-based compensation expense. In addition, this program, members of senior management of Onex 26,443 additional DSUs (2007 – 16,170 DSUs) were issued are required to invest at least 25 percent of all amounts to directors in lieu of directors’ fees and cash dividends received under the MIP and carried interests in Onex and no DSUs were redeemed in 2008 (2007 – 10,940 DSUs) Subordinate Voting Shares and/or Management DSUs for cash consid eration. Table 32 reconciles the changes in until they individually hold at least 1,000,000 Onex Sub - the DSUs outstanding at December 31, 2008 from Decem - ordinate Voting Shares and/or Management DSUs. Under ber 31, 2006. this program, during 2008 Onex management invested approximately $2 million (2007 – $18 million) in the pur- Change in Outstanding Director DSUs chase of Subordinate Voting Shares. Members of management and the Board of Direc - tors of Onex can invest limited amounts in partnership TABLE 32 with Onex in all acquisitions outside the Onex Partners Outstanding at December 31, 2006 Funds at the same cost as Onex and other outside inves tors. Granted During 2008, approximately $11 million in investments Additional units issued in lieu of (2007 – $13 million) were made by Onex management and compensation and cash dividends Onex Board members. Redeemed Weighted Average Price Number of DSUs 177,134 43,550 $ 39.24 16,170 (10,940) $ 34.85 $ 36.16 Director Deferred Share Unit Plan Onex, the parent company, established a Deferred Share Unit Plan (“DSU Plan”) in 2004, which allows Onex directors to apply directors’ fees to acquire Deferred Share Units (“DSUs”) based on the market value of Onex shares at the Outstanding at December 31, 2007 225,914 Granted 45,000 $ 32.54 Additional units issued in lieu of compensation and cash dividends 26,443 $ 24.30 Outstanding at December 31, 2008 297,357 Onex Corporation December 31, 2008 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 Management fees Onex receives management fees from Onex Partners I, II T R A N S I T I O N T O I N T E R N A T I O N A L F I N A N C I A L R E P O R T I N G S T A N D A R D S and III. Onex Partners I completed its investment period In February 2008, the Canadian Accounting Standards in 2006, and for the remainder of the life of this Fund, Board confirmed that the use of International Financial Onex will receive a 1 percent annual management fee Reporting Standards (“IFRS”) would be required for based on invested capital. Canadian publicly accountable enterprises for years During the investment period of Onex Part- beginning on or after January 1, 2011. Onex is working to ners II, Onex received a management fee of 2 percent on adopt IFRS as the basis for preparing its consolidated the committed capital of the Fund provided by third-party financial statements effective January 1, 2011. For the first investors. Thereafter, a 1 percent management fee is pay - quarter ended March 31, 2011, Onex is expected to issue its able based on the invested capital. Toward the end of 2008, financial results prepared on an IFRS basis with compara- the initial fee period for Onex Partners II was concluded tive data on an IFRS basis. when Onex began to receive a management fee from Onex In order to meet the new IFRS reporting, Onex, the Partners III. Onex, therefore, earns a 1 percent management parent company, developed a transition plan during 2008. fee on Onex Partners II’s invested capital, which is approxi- Since IFRS requires that certain policies be consistently mately $17 million based on invested capital at Decem- applied across all Onex operating companies, the transition ber 31, 2008. The management fee on Onex Part ners I and II plan includes establishing global accounting policies for all will decline over time as realizations occur. its operating companies to assist with their IFRS transition. Onex is now entitled to a management fee of By early December 2008, the global accounting policies to be 1.75 percent on the committed capital of the third-party adopted under IFRS had been determined and communi- limited partners of Onex Partners III. This management fee cated to the operating companies. will be earned during the investment period of Onex The transition to IFRS will be costly and difficult Partners III for a period of up to five years. Thereafter, a as it will be in addition to the U.S. GAAP reporting required 1 percent management fee is payable to Onex based on for Onex’ U.S.-based operating companies since it is being invested capital. applied in advance of the United States adopting IFRS. Management fees earned by Onex on the Onex Part - In addition, there are significant projects underway for ners and ONCAP Funds totalled approximately US$65 mil- proposed changes to IFRS in the period from 2010 to when lion in 2008 (2007 – US$52 million). Debt of operating companies the United States is proposing to adopt IFRS in 2014 to 2015. This will result in Canadian companies having to modify their IFRS policies for those changes after the ini- Onex does not guarantee the debt on behalf of its operating tial adoption of IFRS for 2011. companies, nor are there any cross-guarantees be tween Over the course of the next 12 months, Onex, the operating companies. Onex may hold the debt as part of its parent company, has established a timeline of deliverables investment in certain operating companies, which amounted from the operating companies to transition to IFRS. It to $268 million at December 31, 2008 compared to $138 mil- should be noted that each operating company is responsi- lion at December 31, 2007. Approximately $65 million of the ble for developing its own IFRS transition plan and most are increase in the debt of operating companies was related to only at the very initial stages of this. In addition, as part of Onex’ purchase of Sitel Worldwide’s mandatorily redeemable the implementation phase of IFRS, Onex, the parent com- Series B and C preferred shares issued in 2008. Note 10 to pany, is evaluating its information technology infrastruc- the audited annual consolidated financial statements pro- ture. We are currently not at a point to determine the impact vides information on the debt of operating companies held of IFRS on Onex’ consolidated financial results. by Onex. 52 Onex Corporation December 31, 2008 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 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 National Instrument 52-109, “Certification of Disclosure in Internal controls over financial reporting National Instrument 52-109 also requires CEOs and CFOs to certify that they are responsible for establishing and main- taining internal controls over financial reporting for the issuer, that those internal controls have been designed and are effective in providing reasonable assurance regarding Issuers’ Annual and Interim Filings”, issued by the Cana - the reliability of financial reporting and the preparation of dian Securities Administrators requires Chief Execu tive financial statements in accordance with Canadian generally Officers (“CEOs”) and Chief Financial Officers (“CFOs”) to accepted accounting principles, and that the issuer has dis- certify that they are responsible for establishing and main- closed any changes in its internal controls during its most taining disclosure controls and procedures for the issuer, recent interim period that has materially affected, or is rea- that disclosure controls and procedures have been de - sonably likely to materially affect, its internal control over signed and are effective in providing reasonable assurance financial reporting. that material information relating to the issuer is made During 2008, Onex management evaluated the known to them, that they have evaluated the effectiveness Com pany’s internal controls over financial reporting to of the issuer’s disclosure controls and procedures, and that ensure that they have been designed and are effective in their conclusions about the effectiveness of those disclo- providing reasonable assurance regarding the reliability of sure controls and procedures at the end of the period cov- financial reporting and the preparation of financial state- ered by the relevant annual filings have been disclosed by ments in accordance with Canadian generally accepted the issuer. accounting principles. While no changes occurred during Under the supervision of and with the participa- the last quarter of 2008 that, in the view of Onex manage- tion of management, including the Chief Executive Officer ment, have materially affected or are reasonably likely and Chief Financial Officer, we have evaluated the design to materially affect Onex’ internal control over financial of the Company’s disclosure controls and procedures as at reporting, the Com pany regularly acquires new businesses, December 31, 2008 and have concluded that those disclo- many of which were privately owned or were divisions of sure controls and procedures were effective in ensuring larger organizations prior to their acquisition by Onex. The that information required to be disclosed by the Company Company continues to assess the design and effectiveness of in its corporate filings is recorded, processed, summarized internal controls over financial reporting in its most recently and reported within the required time period for the year acquired businesses, including in particular those acquired then ended. during the last fiscal quarter. It has not identified in that A control system, no matter how well conceived review any weakness that has materially affected or is rea- and operated, can provide only reasonable, not absolute, sonably likely to materially affect Onex’ internal control over assurance that its objectives are met. Due to inherent limita- financial reporting. tions in all such systems, no evaluations of controls can pro- Under the supervision of and with the participa- vide absolute assurance that all control issues, if any, within tion of management, including the Chief Executive Officer a company have been detected. Accordingly, our disclosure and Chief Financial Officer, we have evaluated the internal controls and procedures are effective in providing reason- controls over financial reporting as at December 31, 2008 able, not absolute, assurance that the objectives of our dis- and have concluded that those internal controls were closure control system have been met. effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with Canadian gener- ally accepted accounting principles. Onex Corporation December 31, 2008 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 OUTLOOK It is widely accepted that the tumultuous economic envi- We also expect the upcoming markets to yield ronment that shocked the world in 2008 will continue to new opportunities particularly attractive to value investors have a significant impact on 2009. Global equity markets like Onex – namely distressed-for-control and corporate continue to suffer after facing some of the largest losses in carve-out situations. Onex has proven to be very success- history and, despite efforts by central banks to stabilize ful with these types of acquisitions, which have historically the global financial system, lending has not yet resumed in been larger investments. We also recognize that transac- any substantial manner. tions will require greater amounts of equity until the debt The period 2005 to 2007 were years of significant markets recover, which, when they do, will likely be with acquisition activity fuelled in part by credit that was abun- very different terms. dant and inexpensive. We were also active during this period Fortunately, during one of the most difficult but remained true to our conservative investment philoso- fundraising markets, we raised US$3.0 billion of third- phy of 25 years, despite the availability of this appealing party capital for our third large-cap private equity fund debt. We regularly accepted less financial leverage than and will continue to work toward our original US$3.5 bil- was offered, resulting in much lower debt/EBITDA multiples lion third-party capital target in 2009. Currently, Onex has for our businesses – 3.6x on average compared to 5.6x for approximately US$3.6 billion of total uncalled capital the private equity industry during this period. As well, we available through the Onex Partners and ONCAP Funds to maintained purchase price discipline, with a 6.4x average fund future investment opportunities. In addition, as we purchase price multiple (total enterprise value/EBITDA) rel- have done throughout our 25-year history, we will continue ative to the private equity industry average of 9.3x through to invest alongside our partners in each transaction. that period. With these basic investing principles, we have Realizations on our businesses will be at a much built a port folio of industry-leading businesses that we slower pace than in the period of 2005 to 2007. The public believe has long-term value creation potential. equity markets need to be more receptive to initial public What does this mean for Onex in 2009? This year will certainly be a trying time for businesses glob- offerings and there has to be greater access to financing on the part of purchasers for realization activity to resume in a meaningful way. ally and none of our operating companies will be immune. We believe that our success in building industry In preparation for this very challenging period, we directed leaders and our record of capital preservation and supe- all of our businesses last year to focus even more acutely rior returns over 25 years – a gross IRR of 29 percent and on cost reductions and the deferral of unnecessary capital a multiple of 3.4x invested capital – are direct results of the spending. We are encouraged by the overall strength of our alignment of interests between Onex, its investors and its operating companies and believe that they are, for the management team. Our fundamental investing and own- most part, conservatively capitalized and should be well ership philosophies have served us well through many positioned to survive the downturn and hopefully grow as cycles and, once again, we look forward to enjoying the industries consolidate. benefits of a recovery when it comes. 54 Onex Corporation December 31, 2008 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 ment of the Company, the ownership of its operating com- is 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, financial existing businesses. Onex’ primary interest is in acquiring structures and negotiations and acquisitions. In the early well-managed companies with a strong position in growing stages of ownership, Onex may provide resources for busi- industries. In addition, diversification among Onex’ oper- ness and strategic planning and financial reporting while ating companies enables Onex to participate in the growth an operating company builds these capabilities in-house. of a number of high-potential industries with varying busi- 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 in many factors as practical to minimize risk without ham- 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 product lowest price, for a high-quality business. Onex does not and service offerings and improving productivity. In certain commit all of its capital to a single acquisition and does instances, we may also encourage an operating company to have equity partners with whom it shares the risk of own- seek additional equity in the public markets in order to con- ership. The Onex Partners and ONCAP Funds streamline tinue its growth without eroding its balance sheet. One ele- Onex’ process of sourcing and drawing on commitments ment of this approach may be to use new equity investment, from such equity partners. when financial markets are favourable, to prepay existing An acquired company is not burdened with more debt and absorb related penalties. Specific strategies and debt than it can likely sustain, but rather is structured so policies to manage business risk at Onex and its operating that it has the financial and operating leeway to maximize companies are discussed in this section. Onex Corporation December 31, 2008 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 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 industry diversification chart cycles. Onex’ practice of owning companies in various that follows, Onex is well diversified among various indus- industries with differing business cycles reduces the risk of tries, with no single industry representing more than holding a major portion of Onex’ assets in just one or two 24 percent of its net asset base and no single business rep- industries. Similarly, the Company’s focus on building resenting more than 16 percent of its net asset base. Industry Diversification of Onex Mid-Cap Opportunities 3% – ONCAP II Injection Molding 6% – Husky Commercial Vehicles 7% – Allison Transmission Financial Services 5% – The Warranty Group Theatre Exhibition 5% – Cineplex Entertainment Other Industries 6% – RSI – Tube City IMS Customer Support Services 9% – Sitel Worldwide Credit Securities 2% – Onex Credit Partners Healthcare 24% – EMSC – CDI – Skilled Healthcare – Carestream Health – ResCare Aerospace 9% – Spirit AeroSystems – Hawker Beechcraft Real Estate 5% – Onex Real Estate Partners Electronics Manufacturing Services 4% – Celestica Cash and Near-cash Items 15% Private investments are valued at cost and publicly traded investments are valued at market as at December 31, 2008. Operating liquidity It is Onex’ view that one of the most important things taining liquidity is important because Onex, as a holding company, generally does not have guaranteed sources of Onex can do to control risk is to maintain a strong parent meaningful cash flow. The approximately US$80 million in company with an appropriate level of liquidity. Onex annualized management fees that Onex expects to earn in needs to be in a position to support its operating compa- 2009 as the general partner of the Onex family of private nies when, and if, it is appropriate and reasonable for equity funds will be used to offset the costs of running the Onex, as an equity owner with paramount duties to act in parent company. the best interests of Onex shareholders, to do so. Main - 56 Onex Corporation December 31, 2008 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 In completing acquisitions, it is generally Onex’ policy to finance a large portion of the purchase price with Timeliness of investment commitments Onex’ ability to create value for shareholders is dependent debt provided by third-party lenders. This debt, sourced in part on its ability to successfully complete large acquisi- exclusively on the strength of the acquired companies’ tions. Our preferred course is to complete acquisitions on financial condition and prospects, is assumed by the an exclusive basis. However, we also participate in large acquired company at closing and is without recourse to acquisitions through an auction or bidding process with Onex, the parent company, or to its other operating com- multiple potential purchasers. Bidding is often very com- panies or partnerships. The foremost consideration, how- petitive for the large-scale acquisitions that are Onex’ pri- ever, in developing a financing structure for an acquisition mary interest, and the ability to make knowledgeable, is identifying the appropriate amount of equity to invest. timely investment commitments is a key component in In Onex’ view, this should be the amount of equity that successful purchases. In such instances, the vendor often maximizes the risk/reward equation for both shareholders establishes a relatively short timeframe for Onex to and the acquired company. In other words, it allows the respond definitively. acquired company not only to manage its debt through In order to improve the efficiency of Onex’ inter- reasonable business cycles but also to have sufficient nal processes on both auction and exclusive acquisition financial latitude for the business to vigorously pursue its processes, and so reduce the risk of missing out on high- growth objectives. quality acquisition opportunities, during 2003 we created Over the period from 2005 to 2007, Onex’ current Onex Partners LP (“Onex Partners I”), a US$1.655 billion large-scale operating companies were purchased at an pool of capital raised from Onex and major institutional average purchase price multiple of 6.4x EBITDA, which was co-investors. The investment period for Onex Partners I notably less than the industry average of more than 9.3x was substantially completed in 2006. Onex raised a second EBITDA in the same period. Over the same timeframe, the fund, Onex Partners II LP (“Onex Partners II”), in 2006, leverage Onex applied to its acquisitions was 3.6x while the a US$3.45 billion pool of capital. Onex determined that industry average was 5.6x. This shows that Onex overall Onex Partners II was effectively fully invested in December paid less for businesses and applied less leverage than the 2008. In April 2008, Onex began fundraising for Onex Part - industry norm. ners III LP (“Onex Partners III”). At year-end, US$3.0 bil- While Onex seeks to optimize the risk/reward lion in third-party capital commitments were in place, equation in all acquisitions, there is the risk that the with a targeted final closing of US$3.5 billion during 2009. acquired company will not generate sufficient profitability or cash flow to service its debt requirements and/or related debt covenants or provide adequate financial flexi- Financial risks In the normal course of business, Onex and its operating bility for growth. In such circumstances, additional invest- companies may face a variety of risks related to financial ment by the equity partners, including Onex, may be management. In dealing with these risks, 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 speculative derivatives trading or other pany is at risk. speculative activities. Onex Corporation December 31, 2008 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 Default on known credit As previously noted, it is It has generally been Onex’ policy to fix the inter- generally Onex’ policy to finance a large portion of an est on some of the term debt or otherwise minimize the acquisition’s purchase price with third-party debt. During effect of interest rate increases on a portion of the debt of the term of such loans, lenders typically require that the its operating companies at the time of acquisition. This is acquired company meet ongoing tests of financial perfor - achieved by taking on debt at fixed interest rates or enter- mance as defined by the terms of the lending agreement, ing into interest rate swap agreements or financial con- such as ratios of total debt to operating income (“EBITDA”) tracts to control the level of interest rate fluctuation on and the ratio of EBITDA to interest costs. It is Onex’ practice variable rate debt. During 2008, approximately 70 percent not to burden acquired companies with levels of debt that (2007 – 63 percent) of Onex’ operating companies’ long- might put at risk their ability to generate sufficient levels of term debt had a fixed interest rate or the interest rate was profitability or cash flow to service their debts – and so meet effectively fixed by interest rate swap contracts. their related debt covenants – or which might hamper their The risk inherent in such a strategy is that, should flexibility to grow. interest rates decline, the benefit of such declines may not At year-end, all of Onex’ operating companies, be obtainable or may only be achieved at the cost of penal- with one exception, had leeway in their banking covenants ties to terminate existing arrangements. There is also the and so were not at any reasonable risk of de faulting on risk that the counterparty on an interest rate swap agree- their credit agreements. Cosmetic Essence, Inc. (“CEI”) ment may not be able to meet its commitments. Guide - was in breach of its covenants due to the signifi cant deteri- lines are in place that specify the nature of the financial oration of its consumer-focused markets in the current institutions that operating companies can deal with on economic downturn. CEI represents 8 percent of the cap - interest rate contracts. ital invested during Onex Partners I’s investment period Onex, the parent company, has some exposure to and $32 million of Onex’ capital. CEI is in discussions with interest rate changes primarily through its cash and short- its lenders with the intention of modifying its lending term investments, which are held in short-term deposits and covenants, the outcome of which was unknown at the time commercial paper. A 1 percent increase (1 percent decrease) of this report. in the interest rate, assuming no significant changes in cash Financing risk The severe tightening of global balance at the parent company, would result in a $5 million credit markets since the fourth quarter of 2007 has made increase ($5 million decrease) in annual interest income. new loans, even for creditworthy businesses, extremely In addition, The Warranty Group, which holds substantially difficult or expensive to obtain. This represents a risk to the all of its investments in interest-bearing securities, would ongoing viability of many otherwise healthy businesses also have some exposure to interest rate changes. A 0.25 per- whose loans or operating lines of credit are up for renewal cent increase in the interest rate would decrease the fair in the short term. None of Onex’ operating companies has value of the investments held by The Warranty Group by any significant refinancing requirements until 2011, by $12 million, with a corresponding de crease in other compre- which time Onex believes that the credit markets will have hensive earnings. However, as the investments are rein- resumed more normal levels of liquidity and cost. The vested, a 0.25 percent increase in the interest rate would major portion of Onex’ operating companies’ refinancing increase the annual interest income recorded by The War - will take place in 2013 and 2014. ranty Group by $6 million. Interest rate risk As noted above, Onex generally Currency fluctuations The majority of the activi- finances a significant portion of its acquisitions with debt ties of Onex’ operating companies were conducted outside taken on by the acquired operating company. An impor- Canada during 2008. Approximately 49 percent of consoli- tant element in controlling risk is to manage, to the extent dated revenues and 54 percent of consolidated assets were reasonable, the impact of fluctuations in interest rates on in the United States. Approximately 41 percent of consoli- the debt of the operating company. 58 Onex Corporation December 31, 2008 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 dated revenues were from outside North America; however, Capital commitment risk The limited partners in a substantial portion of that business is actually based on the Onex Partners family of funds comprise a relatively U.S. currency. This makes the value of the Cana dian dollar small group of high-quality, primarily institutional, inves - relative to the U.S. dollar the primary currency relationship tors. To date, each of these investors has met their com - affecting Onex’ operating results. Onex’ operating compa- mitments on called capital, and Onex has received no nies may use currency derivatives in the normal course of indications that any investors will be unable to meet their business to hedge against adverse fluctuations in key oper- capital commitments in the future. While Onex’ experience ating currencies but, as noted above, speculative activity is with its limited partners suggests that commitments will be not permitted. honoured, the severity of the current economic downturn Onex’ results are reported in Canadian dollars, provides the concern that a limited partner may not be able and fluctuations in the value of the Canadian dollar rela- to meet its entire commitment over the life of the Fund. tive to other currencies can have an impact on Onex’ Insurance claims The Warranty Group under- reported results and consolidated financial position. writes and administers extended warranties and credit During 2008, shareholders’ equity reflected a $382 million insurance on a wide variety of consumer goods including increase in the value of Onex’ net equity in its operating automobiles, consumer electronics and major home appli- companies and equity-accounted investments that oper- ances. Unlike most property insurance risk, the risk associ- ate in U.S. currency. ated with extended warranty claims is non-catastrophic and Onex holds a substantial amount of cash and mar- short-lived, resulting in predictable loss trends. The pre- ketable securities in U.S.-dollar-denominated securities. dictability of claims, which is enhanced by the large volume The portion of securities held in U.S. dollars is based on of claims data in the company’s database, enables The Onex’ view of funds it will require for future investments in Warranty Group to appropriately measure and price risk. the United States. Onex does not speculate on the direction of exchange rates between the Canadian dollar and the U.S. dollar when determining the balance of cash and mar- Commodity price risk Certain Onex operating companies are vulnerable to price ketable securities to hold in each currency, nor does it use fluctuations in major commodities. Individual operating foreign exchange contracts to protect itself against transla- companies may use financial instruments to offset the tion loss. A 5 percent strengthening (5 percent weakening) impact of anticipated changes in commodity prices of the Canadian dollar relative to the U.S. dollar at Decem - related to the conduct of their businesses. ber 31, 2008 would result in a $16 million decrease ($16 mil- Aluminum, titanium and raw materials such as car- lion increase) in net earnings of Onex, the parent company. bon fibres used to manufacture composites represent the In addition, there are two Onex operating companies, principal raw materials used in Spirit AeroSystems’ manu- Celestica and Husky, that have significant exposure to the facturing operations. Spirit AeroSystems has entered into U.S. dollar/Canadian dollar foreign currency exchange long-term supply contracts with its key suppliers of raw rate. Other comprehensive earnings at Celestica would materials, which limits the company’s exposure to rising raw increase US$11 million (decrease US$10 million) with a 5 per- materials prices. Most of the raw materials purchased are cent strengthening (5 percent weakening) of the Canadian based on a fixed pricing or at reduced rates through Boeing’s dollar relative to the U.S. dollar at December 31, 2008. or Airbus’ high-volume purchase contracts. A 5 percent strengthening (5 percent weakening) of the Canadian dollar relative to the U.S. dollar at December 31, 2008 would result in a US$23 million increase (US$23 mil- lion decrease) in other comprehensive earnings of Husky. Onex Corporation December 31, 2008 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 Diesel fuel is a key commodity used in Tube City IMS’ operations. The company consumes approximately Dependence on government funding Since 2005, Onex has acquired businesses, or interests in 11 million gallons of diesel fuel annually. To help mitigate businesses, in various segments of the U.S. healthcare the risk of price fluctuations in fuel, Tube City IMS incorpo- industry. Certain of the revenues of these companies are rates into substantially all of its contracts pricing escalators partially dependent on funding from federal, state and local based on published prices indices that would generally off- government agencies, especially those responsible for U.S. set some portion of the fuel price changes. federal Medicare and state Medicaid funding. Budgetary pressures, as well as economic, industry, political and other Integration of acquired companies An important aspect of Onex’ strategy for value creation is factors, could influence governments to not increase and, in some cases, to decrease appropriations for the services to acquire what we consider to be “platform” companies. offered by Onex’ operating subsidiaries, which could reduce Such companies often have distinct competitive advan- their revenues materially. Future revenues may be affected tages in products or services in their respective industries by changes in rate-setting structures, methodologies or that provide a solid foundation for growth in scale and interpretations that may be proposed or are under consider- value. In these instances, Onex works with company man- ation. While each of Onex’ operating companies in the U.S. agement to identify attractive add-on acquisitions that healthcare industry is subject to reimbursement risk directly may enable the platform company to achieve its goals related to its particular business segment, it is unlikely that more quickly and successfully than by focusing solely on all of these companies would be affected by the same event, the development and/or diversification of its customer or to the same extent, simultaneously. Ongoing pressure on base, which is known as organic growth. Growth by acqui- government appropriations is a normal aspect of business sition, however, may carry more risk than organic growth. for these companies, and all seek to minimize the effect of While as many of these risks as possible are considered in possible funding reductions through productivity improve- the acquisition planning, in Onex’ experience our oper - ments and other initiatives. ating companies also face risks such as unknown expenses related to the cost-effective amalgamation of operations, the retention of key personnel and customers, the future Significant customers Onex has acquired major operating companies and divi- value of goodwill paid as part of the acquisition price and sions of large companies. As part of these purchases, the the future value of the acquired assets and intellectual acquired company has often continued to supply its for- property, in addition to the risk factors associated with the mer owner through long-term supply arrangements. It has industry and combined business more generally. Onex been Onex’ policy to encourage its operating companies to works with company management to understand and quickly diversify their customer bases to the extent practi- attempt to mitigate such risks as much as possible. cal in order to manage the risk associated with serving a single major customer. Certain Onex operating companies have major customers that represent more than 10 percent of annual revenues. Spirit AeroSystems primarily relies on two major customers, Boeing and Airbus. The table in note 24 to the audited annual consolidated financial statements provides information on the concentration of business the oper - ating companies have with major customers. 60 Onex Corporation December 31, 2008 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 In 2007, Onex, Onex Partners II and certain limited Many of the operating companies are involved in partners together with The Carlyle Group completed the the remediation of particular environmental situations, acquisition of Allison Transmission from General Motors such as soil contamination. In almost all cases, these situ- Corporation (“GM”). Onex, Onex Partners II and certain ations have occurred prior to Onex’ acquisition of those limited partners own 49 percent of Allison Transmission. companies, and the estimated costs of remedial work and Onex’ share of the investment is accounted for by the related activities are managed either through agreements equity method. At Decem ber 31, 2008, Allison Transmission with the vendor of the company or through provisions had significant long-term receivables from GM. These established at the time of acquisition. Manufacturing receivables relate to agreements with GM to share future activities carry the inherent risk that changing environ- estimated costs between the two companies. These costs mental regulations may identify additional situations included employee post-retirement healthcare obligations requiring capital expenditures or remedial work and asso- and a long-term special coverage program for select cus- ciated costs to meet those regulations. tomers. Cash flows for these two items are expected to be spread over a number of years. The recoverability of these receivables would be in question if GM was unable to con- Other contingencies Onex and its operating companies are or may become par- tinue as a going concern. No provision has been recorded ties to legal claims arising in the ordinary course of busi- by Allison Transmission at December 31, 2008 for a loss on ness. The operating companies have recorded liability these receivables. provisions based upon their consideration and analysis of their exposure in respect of such claims. Such provisions are Environmental considerations Onex has an environmental protection policy that has reflected, as appropriate, in Onex’ consolidated financial statements. Onex, the parent company, has not currently been adopted by its operating companies; many of these recorded any further liability provision and we do not operating companies have also adopted supplemental believe that the resolution of known claims would reason- policies appropriate to these industries or businesses. ably be expected to have a material adverse impact on Senior officers at each of these companies are ultimately Onex’ consolidated financial position. However, the final responsible for ensuring compliance with these policies. outcome with respect to outstanding, pending or future They are required to report annually to their company’s actions cannot be predicted with certainty, and therefore board of directors and to Onex regarding compliance. there can be no assurance that their resolution will not have Environmental management by the operating an adverse effect on our consolidated financial position. com panies is accomplished through the education of employees about environmental regulations and appropri- ate operating policies and procedures; site inspections by environmental consultants; the addition of proper equip- ment or modification of existing equipment to reduce or eliminate environmental hazards; remediation activities as required; and ongoing waste reduction and recycling programs. Environ mental consultants are engaged to ad - vise on current and upcoming environmental regulations that may be applicable. Onex Corporation December 31, 2008 61 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 pro- duced. 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 over- seeing management’s performance of its financial reporting responsibilities. An Audit and Corporate Governance Com mittee 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 processes 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 state- ments 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 stan- dards 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] Donald W. Lewtas Chief Financial Officer February 25, 2009 Christine M. Donaldson Vice President Finance 62 Onex Corporation December 31, 2008 AUDITORS’ REPORT To the Shareholders of Onex Corporation: We have audited the consolidated balance sheets of Onex Corporation as at December 31, 2008 and 2007 and the consolidated 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, 2008 and 2007 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 25, 2009 Onex Corporation December 31, 2008 63 CONSOLIDATED BALANCE SHEETS As at December 31 (in millions of dollars) 2008 2007 $ 2,921 $ 2,462 842 4,014 3,471 1,695 12,943 4,066 3,897 3,125 2,755 2,946 813 3,463 2,539 1,461 10,738 3,489 3,203 2,634 2,692 3,443 $ 29,732 $ 26,199 $ 4,617 $ 4,033 1,196 532 25 1,698 8,068 7,143 46 2,561 2,287 1,450 21,555 6,624 1,553 864 217 104 1,544 6,762 6,159 26 2,364 1,663 1,373 18,347 6,149 1,703 $ 29,732 $ 26,199 Assets Current assets Cash and short-term investments Marketable securities Accounts receivable Inventories (note 4) Other current assets (note 5) Property, plant and equipment (note 6) Investments (note 7) Other long-term assets (note 8) Intangible assets (note 9) Goodwill Liabilities and Shareholders’ Equity Current liabilities Accounts payable and accrued liabilities Other current 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) 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) Non-controlling interests Shareholders’ equity Commitments and contingencies are reported in notes 11 and 25. Signed on behalf of the Board of Directors [signed] Director [signed] Director 64 Onex Corporation December 31, 2008 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 Loss from equity-accounted investments (note 17) Foreign exchange gains (loss) Stock-based compensation recovery (expense) (note 18) Other income (expense) Gains on sales of operating investments, net (note 19) Acquisition, restructuring and other expenses (note 20) Writedown of goodwill, intangible assets and long-lived assets (note 21) Earnings (loss) before income taxes, non-controlling interests and discontinued operations Provision for income taxes (note 14) Non-controlling interests Earnings (loss) from continuing operations Earnings from discontinued operations (note 3) Net Earnings (Loss) for the Year Net Earnings (Loss) per Subordinate Voting Share (note 22) Basic and Diluted: Continuing operations Discontinued operations Net earnings (loss) 2008 $ 26,881 (21,719) (2,744) 2,418 (624) (366) (550) 35 (322) 83 142 (12) 4 (220) (1,649) (1,061) (252) 1,021 (292) 9 2007 $ 23,433 (19,133) (2,384) 1,916 (535) (241) (537) 125 (44) (118) (150) 6 1,144 (123) (22) 1,421 (295) (1,017) 109 119 $ (283) $ 228 $ (2.37) $ 0.07 $ (2.30) $ $ $ 0.85 0.93 1.78 Onex Corporation December 31, 2008 65 CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE EARNINGS (in millions of dollars except per share data) Balance – December 31, 2006 Adoption of financial instrument accounting policies 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 Balance – December 31, 2007 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) $ 541 Accumulated Other Comprehensive Earnings (Loss) Total Shareholders’ Equity $ (195)(b) $ 1,815 Retained Earnings $ 1,469 – – (12) – – – – 529 – (14) – – – – 1 (14) (101) 228 – – – 1,583 (14) (87) (283) – – – – – – – (202) (22) 10 (409)(c) – – – 382 (122) (12) 1 (14) (113) 228 (202) (22) 10 1,703 (14) (101) (283) 382 (122) (12) Balance – December 31, 2008 $ 515 $ 1,199 $ (161)(d) $ 1,553 (a) Dividends declared per Subordinate Voting Share during 2008 totalled $0.11 (2007 – $0.11). In 2008, shares issued under the dividend reinvestment plan amounted to less than $1 (2007 – less than $1). (b) Accumulated Other Comprehensive Earnings (Loss) as at December 31, 2006 consisted of currency translation adjustments. (c) Accumulated Other Comprehensive Earnings (Loss) as at December 31, 2007 consisted 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. (d) Accumulated Other Comprehensive Earnings (Loss) as at December 31, 2008 consisted of currency translation adjustments of negative $15, unrealized losses on the effective portion of cash flow hedges of $142 and unrealized losses on available-for-sale financial assets and other of $4. Income taxes did not have a significant effect on these items. 66 Onex Corporation December 31, 2008 CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31 (in millions of dollars) Operating Activities Net earnings (loss) for the year Earnings from discontinued operations Items not affecting cash: Amortization of property, plant and equipment Amortization of intangible assets and deferred charges Amortization of deferred warranty costs Loss from equity-accounted investments (note 17) Foreign exchange loss (gains) Stock-based compensation expense (recovery) (note 18) Gains on sales of operating investments, net (note 19) Non-cash component of restructuring (note 20) Writedown of goodwill, intangible assets and long-lived assets (note 21) Non-controlling interests Future income taxes (note 14) Other Changes in non-cash working capital items: Accounts receivable Inventories Other current assets Accounts payable, accrued liabilities and other current liabilities Increase (decrease) in cash due to changes in working capital items Increase (decrease) in warranty reserves and 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 $5 (2007 – $326) (note 2) Purchase of property, plant and equipment Proceeds from sales of operating investments Decrease due to other investing activities Cash from discontinued operations (note 3) 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 and short-term investments Cash held by discontinued operations 2008 2007 $ 1(283) (9) $ 228 (119) 624 366 (22) 322 (105) (142) (4) 5 1,649 (1,021) (66) (18) 1,296 202 (311) 156 (340) (293) 336 1,339 1,047 (1,242) (14) (101) 458 (143) 4 9 (209) (859) – (345) 11 (1,402) (54) 513 2,462 – 2,921 – 535 241 (109) 44 132 150 (1,144) 5 22 1,017 68 26 1,096 (358) 176 242 270 330 (242) 1,184 1,927 (1,643) (14) (113) 2,123 (886) (47) 1,347 (1,840) (633) 1,311 (1,727) 216 (2,673) (142) (351) 2,944 11 2,462 – Cash and Short-term Investments Held by Continuing Operations $ 2,921 $ 2,462 Onex Corporation December 31, 2008 67 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in millions of dollars except per share data) Onex Corporation and its subsidiaries (collectively, 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”), Onex Partners II LP (“Onex Partners II”) and Onex Partners III LP (“Onex Partners III”), referred to collectively as “Onex Partners” (as described in note 25). All significant intercompany balances and transactions have been eliminated. The principal operating companies and Onex’ economic ownership and voting interests in these entities are as follows: Investments made through Onex Celestica Inc. (“Celestica”) Cineplex Entertainment Sitel Worldwide Corporation (“Sitel Worldwide”) Investments made through Onex and Onex Partners I Center for Diagnostic Imaging, Inc. (“CDI”) Cosmetic Essence, Inc. (“CEI”) Emergency Medical Services Corporation (“EMSC”) Res-Care, Inc. (“ResCare”) Skilled Healthcare Group, Inc. (“Skilled Healthcare”) Spirit AeroSystems, Inc. (“Spirit AeroSystems”) Investments made through Onex and Onex Partners II Allison Transmission, Inc. (“Allison Transmission”) Carestream Health, Inc. (“Carestream Health”) Hawker Beechcraft Corporation (“Hawker Beechcraft”) RSI Home Products, Inc. (“RSI”) Tube City IMS Corporation (“Tube City IMS”) Investments made through Onex, Onex Partners I and Onex Partners II Husky Injection Molding Systems Ltd. (“Husky”) The Warranty Group, Inc. (“The Warranty Group”) Other invesments ONCAP II L.P. Onex Real Estate Partners (“Onex Real Estate”) December 31, 2008 December 31, 2007 Onex Ownership Voting Onex Ownership Voting 13% 23% 66% 19% 21% 29% 6% 9% 7% 15% 39% 20% 20% 35% 36% 29% 44% 86% 79% (a) 88% 100% 100% 97% (a) 89% 76% (a) 100% (a) 50%(a) 100% 100% 100% 100% 100% 13% 23% 66% 19% 21% 29% 6% 9% 7% 15% 39% 20% – 35% 36% 30% 44% 86% 79% (a) 88% 100% 100% 97% (a) 90% 76% (a) 100% (a) – 100% 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. The ownership percentages are before the effect of any potential through multiple voting rights attached to particular shares. dilution relating to the Management Investment Plans (the “MIP”) In certain circumstances, the voting arrangements give Onex the as described in note 25(g). The voting interests include shares that right to elect the majority of the board of directors. Onex has the right to vote through contractual arrangements or 68 Onex Corporation December 31, 2008 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 Financial Instruments Presentation and Disclosures, and Capital Disclosures EMSC records gross revenue based on fee-for-service rate schedules that are generally negotiated with various contracting entities, including municipalities and facilities. Fees are billed for all On January 1, 2008, the Company adopted the Canadian Institute of revenue sources and to all payors under the gross fee schedules for Chartered Accountants Handbook (“CICA Handbook”) Section 3862, that specific contract; however, reimbursement in the case of cer- “Financial Instruments – Disclosures”; Section 3863, “Finan cial tain state and federal payors, including Medicare and Medicaid, will Instruments – Presentation”; and Section 1535, “Capital Disclo - not change as a result of the gross fee schedules. EMSC records the sures”. These sections require additional disclosures surrounding difference between gross fee schedule revenue and Medicare and the Company’s financial instruments and capital. The following Medicaid reimbursement as a contractual provision. disclosures are required under the new pronouncements: Uncompensated care or doubtful account provisions Credit risk are related principally to services provided to self-pay, uninsured patients and are estimated at the date of service based on histori- Credit risk is the risk that the counterparty to a financial instru- cal write-off experience and other economic data. ment will fail to perform its obligation and cause the Company to The following table outlines EMSC’s accounts receivable incur a loss. allowances, which have been deducted in arriving at EMSC’s net Substantially all of the cash, short-term investments and receivables balance of $576 at December 31, 2008: marketable securities consist of investments in debt securities. In addition, the long-term investments of The Warranty Group and the insurance collateral of EMSC, both included in the investments line in the consolidated balance sheet, consist primarily of invest- Balance at December 31, 2007 ments in debt securities. The investments in debt securities are subject to credit risk. A description of the investments held by Additions Reductions Allowance for uncompensated care Allowance for contractual discounts $ 428 1,523 (1,324) $ 825 3,387 (3,134) EMSC and The Warranty Group is included in note 7. At December 31, 2008, Onex, the parent company, held $470 of cash and short-term investments in short-term high-rated money market instruments. In addition, Celestica had $1,463 of Balance at December 31, 2008 $ 627 $ 1,078 Additions to the allowances consist primarily of provisions against earnings and reductions to these accounts are primarily due to cash and short-term investments, comprised of cash (approxi- write-offs. mately 35%) and short-term investments (approximately 65%). Celes tica’s current portfolio consists of certificates of deposit and Liquidity risk certain money market funds that hold exclusively U.S. govern- ment securities. The majority of Celestica’s and Onex’, the parent company’s, cash and short-term investments are held with finan- cial institutions each of which has a current Standard & Poor’s rating of A-1 or above. Accounts receivable are also subject to credit risk. At December 31, 2008, the aging of consolidated accounts receivable was as follows: Current 1–30 days past due 31–60 days past due >60 days past due Accounts receivable $ 3,427 310 112 165 $ 4,014 At December 31, 2008, the provision for uncollectible accounts totalled $1,791 and primarily related to accounts receivable at EMSC. Com panies in the emergency healthcare industry maintain provisions for contractual discounts and for uncompensated care, or doubtful accounts. EMSC is contractually required, in most cir- cumstances, to provide care regardless of the patient’s ability to pay. Liquidity risk is the risk that Onex and its subsidiaries will have insufficient funds on hand to meet their respective obligations as they come due. Accounts payable are primarily due within 90 days. The repayment schedules for long-term debt and capital leases of the operating companies have been disclosed in note 10 and note 11. Onex, the parent company, has no significant debt other than the line of credit associated with Onex Partners III as described in note 10(m) and has not guaranteed debt of the oper- ating companies. Market risk Market risk is the risk that the future cash flows of a financial instrument will fluctuate due to changes in market prices. The Company is primarily exposed to fluctuations in the foreign cur- rency exchange rate between the Canadian and U.S. dollars and fluctuations in the LIBOR and U.S. prime interest rate. Onex Corporation December 31, 2008 69 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 In addition, The Warranty Group holds substantially all 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 ) of its investments in interest bearing securities, as described in Foreign currency exchange rates note 7. A 0.25% (25 basis point) increase in the interest rate would decrease the fair value of the investments held by $12 and result Onex’ operating companies operate autonomously as self-sus - in a corresponding decrease to other comprehensive earnings of taining companies. In addition, the functional currency of sub- The Warranty Group. However, as the investments are reinvested, stantially all of Onex’ operating companies is the U.S. dollar. As a 0.25% increase in the interest rate would increase the annual investments in self-sustaining subsidiaries are excluded from the interest income recorded by The Warranty Group by $6. financial instrument disclosure, the Company’s exposure on finan- cial instruments to the Canadian/U.S. dollar foreign currency Commodity risk exchange rate is primarily at the parent company, through the Certain of Onex’ operating companies have exposure to commodi- holding of U.S.-dollar-denominated cash and short-term invest- ties. In particular, aluminum, titanium and raw materials such as ments. A 5% strengthening (5% weakening) of the Canadian dollar carbon fibres used to manufacture composites are the principal against the U.S. dollar at December 31, 2008 would result in a raw materials for Spirit AeroSystems’ manufac turing operations. To $16 decrease ($16 increase) in net earnings. As all of the U.S.-dol- limit its exposure to rising raw materials prices, Spirit AeroSystems lar-denominated cash and short-term investments at the parent has entered into long-term supply contracts directly with its key company are designated as held-for-trading, there would be no suppliers of raw materials and collective raw materials sourcing effect on other comprehensive earnings. contracts arranged through certain of its customers. In addition, two operating companies have significant In addition, diesel fuel is a key commodity used in Tube exposure to the U.S. dollar/Canadian dollar foreign currency City IMS’ operations. To help mitigate the risk of changes in fuel exchange rate. A 5% strengthening (5% weakening) of the Cana dian prices, substantially all of its contracts contain pricing escalators dollar against the U.S. dollar at December 31, 2008 would result based on published commodity or inflation price indices. in a US$11 increase (US$10 decrease) in other comprehensive earnings of Celestica. A 5% strengthening (5% weakening) of the Capital disclosures Canadian dollar against the U.S. dollar at December 31, 2008 would Onex considers the capital it manages to be the amounts it has in result in a US$23 increase (US$23 decrease) in other comprehen- cash, short-term investments and near-cash investments, the sive earnings of Husky. Interest rates investments made by it in the operating companies, Onex Real Estate and Onex Credit Partners. Onex also manages the third- party capital invested in the Onex Partners and ONCAP funds. The Company is exposed to changes in future cash flows as a result of changes in the interest rate environment. The parent Onex’ objectives in managing capital are to: company is exposed to interest rate changes primarily through its (cid:129) preserve a financially strong parent company with substantial cash and short-term investments, which are held in short-term liquidity and no, or a limited amount of, debt so that it can have term deposits and commercial paper. Assuming no significant funds available to pursue new acquisitions and growth opportu- changes in cash balances held by the parent company from those nities as well as support the growth of its existing businesses. at December 31, 2008, a 1% increase (1% decrease) in the interest Onex does not generally have the ability to draw cash from its rate (including the Canadian and U.S. prime rates) would result in operating companies. Accordingly, maintaining adequate liquid- a $5 increase ($5 decrease) in annual interest income. As all of the ity at the parent company is important; U.S. dollar cash and short-term investments at the parent compa- (cid:129) achieve an appropriate return on capital commensurate with ny are designated as held-for-trading, there would be no effect on the level of risk taken on; other comprehensive earnings. (cid:129) build the long-term value of its operating companies; The operating companies’ results are also affected by (cid:129) control the risk associated with capital invested in any particu- changes in interest rates. A change in the interest rate (including lar business or activity. All debt financing is within the oper - LIBOR and the U.S. prime interest rate) would result in a change ating companies and each operating company is required to in interest expense being recorded due to the variable-rate portion support its own debt. Onex does not normally guarantee the of the long-term debt of the operating companies. At Decem ber 31, debt of the operating companies and there are no cross-guar- 2008, approximately 70% (2007 – 63%) of the operating companies’ antees of debt between the operating companies; and long-term debt had a fixed interest rate or the interest rate was effectively fixed by interest rate swap contracts. The long-term debt of the operating companies is without recourse to Onex. 70 Onex Corporation December 31, 2008 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 (cid:129) have appropriate levels of committed third-party capital avail- In order to meet the new IFRS reporting, Onex, the able to invest along with Onex’ capital. This enables Onex to parent company, developed a transition plan during 2008. Since respond quickly to opportunities and pursue acquisitions of IFRS requires that certain policies be consistently applied across all businesses it could not achieve using only its own capital. The Onex operating companies, the transition plan includes establishing management of third-party capital also provides management global ac counting policies for all its operating companies to assist fees to Onex and the ability to enhance Onex’ returns by earning with their IFRS transition. By early December 2008, the global a carried interest on the profits of third-party participants. accounting policies to be adopted under IFRS had been determined and communicated to the operating companies. At December 31, 2008, Onex, the parent company, had approxi- mately $470 of cash and short-term investments on hand and Goodwill and Intangible Assets approximately $70 of near-cash investments. The Company is cur- In February 2008, the CICA issued Handbook Section 3064, rently liquidating its near-cash items. Onex, the parent company, “Goodwill and Intangible Assets”, which replaces the existing has a conservative cash management policy that limits its cash standards. This revised standard establishes guidance for the investments to short-term high-rated money market products. At recognition, measurement and disclosure of goodwill and intangi- December 31, 2008, Onex had access to approximately US$3,600 of ble assets, including internally generated intangible assets. This uncalled committed third-party capital for acquisitions through the standard is effective for 2009. The Company is currently evaluating Onex Partners and ONCAP funds, which included approximately the impact of adopting this standard on its consolidated finan- US$3,000 of committed third-party capital from several closings of cial statements. Onex Partners III completed in 2008. The strategy for risk management of capital has not changed significantly since December 31, 2007. 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 Inventories The Company’s operations conducted in foreign currencies, other than those operations that are associated with investment-hold- On January 1, 2008, the Company adopted CICA Handbook Sec- ing subsidiaries, are considered to be self-sustaining. Assets and tion 3031, “Inventories”, which requires inventory to be measured liabilities of self-sustaining operations conducted in foreign cur- at the lower of cost and net realizable value. The standard provides rencies are translated into Canadian dollars at the exchange rate guidance on the types of costs that can be capitalized and requires in effect at the balance sheet date. Revenues and expenses are the reversal of previous inventory writedowns if economic circum- translated at average exchange rates for the year. Unrealized gains stances have changed to support higher inventory values. The or losses on translation of self-sustaining operations conducted in Company is required to disclose the amount of inventory recog- foreign currencies are shown as currency translation adjustments, nized in cost of sales, as well as any inventory writedowns or rever- a component of other comprehensive earnings. sals. During the year ended December 31, 2008, $17,196 of inventory The Company’s integrated operations, including invest- was expensed in cost of sales. In addition, inventory writedowns of ment-holding subsidiaries, translate monetary assets and liabili- $113 were recorded, partially offset by inventory provision reversals ties denominated in foreign currencies at exchange rates in effect of $41 for a net provision of $72. at the balance sheet date and non-monetary items at historical The adoption of this standard did not have a significant rates. Revenues and expenses are translated at average exchange effect on the consolidated financial statements. rates for the year. Gains and losses on translation are included in the consolidated statement of earnings. Recently issued accounting pronouncements International Financial Reporting Standards Cash In February 2008, the Canadian Accounting Standards Board con - Cash includes liquid investments such as term deposits, money firmed that the use of International Financial Reporting Standards market instruments and commercial paper that mature in less (“IFRS”) would be required for Canadian publicly accountable than three months from the balance sheet date. The investments enterprises for years beginning on or after January 1, 2011. Onex is are carried at cost plus accrued interest, which approximates working to adopt IFRS as the basis for preparing its consolidated market value. financial statements effective January 1, 2011. For the first quarter ended March 31, 2011, Onex is expected to issue its financial results prepared on an IFRS basis with comparative data on an IFRS basis. Onex Corporation December 31, 2008 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 Impairment of long-lived assets 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 and intangible assets with limited Short-term investments life are reviewed for impairment whenever events or changes in cir- cumstances suggest that the carrying amount of an asset may not Short-term investments consist of liquid investments such as be recoverable. An impairment is recognized when the carrying money market instruments and commercial paper that mature in amount of an asset to be held and used exceeds the projected three months to a year. The investments are carried at cost plus 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 Inventories amount of the asset exceeds its fair value. Assets must be classified as either held for use or held- Inventories are recorded at the lower of cost and replacement cost 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 Assets held-for-sale are carried at the lower of carrying value and aerostructures segment, certain inventories in the healthcare seg- expected proceeds less direct costs to sell. ment and certain inventories in the metal services segment, inventories are stated using an average cost method. For substan- tially all other inventories, cost is determined on a first-in, first- out basis. Property, plant and equipment Other assets Acquisition costs relating to the financial services segment Certain costs of acquiring warranty business, principally commis- sions, underwriting, and sales expenses that vary, and are primar - ily related to the production of new business, are deferred and Property, plant and equipment are recorded at cost less accumu- amortized as the related premiums and contract fees are earned. lated amortization and provision for impairments, if any. For sub- The possibility of premium deficiencies and the related recover- stantially all property, plant and equipment, amortization is pro- ability of deferred acquisition costs is evaluated annually. Manage - vided for on a straight-line basis over the estimated useful lives of ment considers the effect of anticipated investment income in its the assets: five to 40 years for buildings and up to 20 years for evaluation of premium deficiencies and the related recoverability machinery and equipment. The cost of plant and equipment is of deferred acquisition costs. reduced by applicable investment tax credits more likely than not Certain arrangements with producers of warranty con- to be realized. tracts include profit-sharing provisions whereby the underwriting Leasehold improvements are amortized over the terms profits, after a fixed percentage allowance for the company and an of the leases. allowance for investment income, are remitted to the producers Leases that transfer substantially all the risks and benefits on a retrospective basis. Unearned premiums and contract fees of ownership are recorded as capital leases. Buildings and equip- subject to retrospective commission agreements totalled $797 at ment under capital leases are amortized over the shorter of the term Decem ber 31, 2008 (2007 – $568). of the lease or the estimated useful life of the asset. Amortization of assets under capital leases is on a straight-line basis. Goodwill and intangible assets Goodwill represents the cost of investments in operating com - Costs incurred to develop computer software for internal use panies in excess of the fair value of the net identifiable assets The Company capitalizes the costs incurred during the application acquired. Essentially all of the goodwill and intangible asset development stage, which include costs to design the software amounts that appear on the consolidated balance sheets were configuration and interfaces, coding, installation and testing. recorded by the operating companies. The recoverability of good- Costs incurred during the preliminary project stage, along with will and intangible assets with indefinite lives is assessed annually post-implementation stages of internal use computer software, are or whenever events or changes in circumstances indicate that the expensed as incurred. For the year ended December 31, 2008, the carrying amount may not be recoverable. Impairment of goodwill Company capitalized computer software costs of $26 (2007 – $35). is tested at the reporting unit level by comparing the carrying value of the reporting unit to its fair value. When the carrying value exceeds the fair value, an impairment exists and is mea - sured by comparing the carrying amount of goodwill to its fair value determined in a manner similar to a purchase price alloca- tion. Impairment of indefinite-life intangible assets is determined by comparing their carrying values to their fair values. 72 Onex Corporation December 31, 2008 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 Intangible assets, including intellectual property, are Pension and non-pension post-retirement benefits recorded at their allocated cost at the date of acquisition of the The operating companies accrue their obligations under em - related operating company. Amortization is provided for intangible ployee benefit plans and related costs, net of plan assets. The costs assets with limited life, including intellectual property, on a straight- of defined benefit pensions and other post-retirement benefits line basis over their estimated useful lives of up to 25 years. The earned by employees are accrued in the period incurred and are weighted average period of amortization at December 31, 2008 was actuarially determined using the projected benefit method pro- approximately seven years (2007 – 10 years). rated on service, based on management’s best estimates of items, Deferred financing charges including expected plan investment performance, salary escala- tion, retirement ages of employees and expected healthcare costs. Deferred financing charges consist of costs incurred by the oper- Plan assets are valued at fair value for the purposes of calculating ating companies relating to the issuance of debt and are deferred expected returns on those assets. Past service costs from plan and amortized over the term of the related debt or as the debt is amendments are deferred and amortized on a straight-line basis retired, if earlier. These deferred financing charges are recorded over the average remaining service period of employees active at against the carrying value of the long-term debt, as described in the date of amendment. note 10. Actuarial gains (losses) arise from the difference between the actual long-term rate of return on plan assets and the expected Losses and loss adjustment expenses reserves long-term rate of return on plan assets for a period or from changes Losses and loss adjustment expenses reserves relate to The War - in actuarial assumptions used to determine the benefit obligation. ranty Group and represent the estimated ultimate net cost of all Actuarial gains (losses) exceeding 10% of the greater of the benefit reported and unreported losses incurred and unpaid through obligation or the fair market value of plan assets are amortized over December 31, 2008. The company does not discount losses and the average remaining service period of active employees. loss adjustment expenses reserves. The reserves for unpaid losses Defined contribution plan accounting is applied to and loss adjustment expenses are estimated using individual multi-employer defined benefit plans, for which the operating case-basis valuations and statistical analyses. Those estimates are companies have insufficient information to apply defined benefit subject to the effects of trends in loss severity and frequency and accounting. claims reporting patterns of the company’s third-party adminis- The average remaining service period of active employees trators. Although considerable variability is inherent in such esti- covered by the significant pension plans is 15 years (2007 – 17 years) mates, management believes the reserves for losses and loss and for those active employees covered by the other sig nifi cant adjustment expenses are adequate. The estimates are continually post-retirement benefit plans, the average remaining service period reviewed and adjusted as necessary as experience develops or is 18 years (2007 – 18 years). new information becomes known; such adjustments are included in current operations. Warranty liabilities Income taxes Income taxes are recorded using the asset and liability method of income tax allocation. Under this method, assets and liabilities Certain operating companies offer warranties on the sale of prod- are recorded for the future income tax consequences attributable ucts or services. A liability is recorded to provide for future war- to differences between the financial statement carrying values of ranty costs based on management’s best estimate of probable assets and liabilities and their respective income tax bases. These claims under these warranties. The accrual is based on the terms future income tax assets and liabilities are recorded using sub- of the warranty, which vary by customer and product or service stantively enacted income tax rates. The effect of a change in and historical experience. The appropriateness of the accrual is income tax rates on these future income tax assets or liabilities is evaluated at each reporting period. included in income in the period in which the rate change occurs. Certain of these differences are estimated based on the current tax legislation and the Company’s interpretation thereof. The Com pany records a valuation allowance when it is more likely than not that the future tax assets will not be realized prior to their expiration. Onex Corporation December 31, 2008 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 Healthcare 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 ) Revenue in the healthcare segment consists primarily of EMSC’s Revenue recognition Electronics Manufacturing Services service revenue related to its healthcare transportation and hospi- tal-based physician services businesses, CDI’s patient service and healthcare provider management service revenue, Skilled Health - Revenue from the electronics manufacturing services segment care’s patient service revenue and Carestream Health’s product consists primarily of product sales, where revenue is recognized sales revenue. Service revenue is recognized at the time of service upon shipment, when title passes to the customer, receivables are and is recorded net of provisions for contractual discounts and esti- reasonably assured of collection and customer-specified test cri- mated uncompensated care. Revenue from product sales is recog- teria have been met. Celestica has contractual arrangements with nized when the following criteria are met: pervasive evidence of an certain customers that require the customer to purchase certain arrangement exists; delivery has occurred; the sales price is fixed or inventory that Celestica has acquired to fulfill forecasted manu- determinable; and collectibility is reasonably assured. facturing demand provided by that customer. Celestica accounts for purchased material returns to such customers as reductions in Financial Services inventory and does not record revenue on these transactions. Financial services segment revenue consists of revenue on Aerostructures The Warranty Group’s warranty contracts, primarily in North America and Europe. The company records revenue and associ - A significant portion of Spirit AeroSystems’ revenues is under ated un earned revenue on warranty contracts issued by North long-term, volume-based pricing contracts, requiring delivery of Amer ican obligor companies at the net amount remitted by the products over several years. Revenue from these contracts is rec- selling dealer or retailer “dealer cost”. Cancellations of these con- ognized under the contract method of accounting. Revenues and tracts are typically processed through the selling dealer or retailer, profits are recognized on each contract in accordance with the and the company refunds only the unamortized balance of the percentage-of-completion method of accounting, using the units- dealer cost. However, the company is primarily liable on these of-delivery method. The contract method of accounting involves contracts and must refund the full amount of customer retail if the use of various estimating techniques to project costs at com- the selling dealer or retailer cannot or will not refund their por- pletion and includes estimates of recoveries asserted against the tion. The amount the company has historically been required to customer for changes in specifications. These estimates involve pay under such circumstances has been negligible. The poten - various assumptions and projections relative to the outcome of tially refundable excess of customer retail price over dealer cost future events, including the quantity and timing of product deliv- at December 31, 2008 was US$1,530 (2007 – US$1,232). eries. Also included are assumptions relative to future labour The company records revenue and associated unearned performance and rates, and projections relative to material and revenue on warranty contracts issued by statutory insurance overhead costs. These assumptions involve various levels of companies domiciled in Europe at the customer retail price. expected performance improvements. The difference between the customer retail price and dealer cost The company reevaluates its contract estimates periodi- is recognized as commission and deferred as a component of cally and reflects changes in estimates in the current period, and deferred acquisition costs. uses the cumulative catch-up method of accounting for revisions The company has dealer obligor and administrator in estimates of total revenue, total costs or the extent of progress obligor service contracts with the dealers or retailers to facilitate on a contract. the sale of extended warranty contracts. Dealer obligor service For revenues not recognized under the contract method contracts result in sales of extended warranty contracts in which of accounting, Spirit AeroSystems recognizes revenues from the the dealer/retailer is designated as the obligor. Administrator sale of products at the point of passage of title, which is generally obligor service contracts result in sales of extended warranty con- at the time of shipment. Revenues earned from providing mainte- tracts in which the company is designated as the obligor. For both nance services, including any contracted research and develop- dealer obligor and administrator obligor, premium and/or con- ment, are recognized when the service is completed or other con- tract fee revenue is recognized over the contractual exposure tractual milestones are attained. 74 Onex Corporation December 31, 2008 period of the contracts. Unearned premiums and contract fees on single-premium insurance related to warranty agreements are calculated to result in premiums and contract fees being earned over the period at risk. Factors are developed based on historical analyses of claim payment patterns over the duration of the poli- cies in force. All other unearned premiums and contract fees are determined on a pro rata basis. 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 Reinsurance premiums, commissions, losses and loss Other adjustment expenses are accounted for on bases consistent with Other segment revenues consist of product sales and services. those used in accounting for the original policies issued and the Product sales revenue is recognized upon shipment, when title terms of the reinsurance contracts. Premiums ceded to other passes to the customer. Service revenue is recorded at the time companies have been reported as a reduction of revenue. Expense the services are performed. reimbursement received in connection with reinsurance ceded Depending on the terms under which the operating has been accounted for as a reduction of the related acquisition companies supply product, they may also be responsible for some costs. Reinsurance receivables and prepaid reinsurance premium or all of the repair or replacement costs of defective products. The amounts are reported as assets. Customer Support Services companies establish reserves for issues that are probable and estimable in amounts management believes are adequate to cover ultimate projected claim costs. The final amounts determined to The customer support services segment generates revenue pri- be due related to these matters could differ significantly from marily through its customer contact management services by recorded estimates. providing customer service and technical support to its clients’ customers through phone, e-mail, online chat and mail. These Research and development services are generally charged by the minute or hour, per em - Costs incurred on activities that relate to research and develop- ployee, per subscriber or user or on a per-item basis for each ment are expensed as incurred unless development costs meet transaction processed, and revenue is recognized at the time ser - certain criteria for capitalization. During 2008, $219 in research vices are performed. A portion of the revenue is often subject to and development costs (2007 – $172) were expensed and $174 in performance standards. Revenue subject to monthly or longer development costs (2007 – $143) were capitalized. Capitalized performance standards is recognized when such performance development costs relating to the aerostructures segment are standards are met. included in deferred charges. The costs will be amortized over the The company is reimbursed by clients for certain pass- anticipated number of production units to which such costs relate. through out-of-pocket expenses, consisting primarily of telecom- munication, postage and shipping costs. The reimbursement and Stock-based compensation related costs are reflected in the accompanying consolidated state- The Company follows the fair value-based method of accounting, ments of earnings as revenue and cost of services, respectively. which is applied to all stock-based compensation payments. Metal Services There are five types of stock-based compensation plans. The first is the Company’s Stock Option Plan (the “Plan”) described The metal services segment generates revenue primarily through in note 15(e), which provides that in certain situations the Com - raw materials procurement and slag processing, metal recovery pany has the right, but not the obligation, to settle any exercisable and metal sales. option under the Plan by the payment of cash to the option holder. Revenue from raw materials procurement represents The Company has recorded a liability for the potential future set- sales to third parties whereby the company either purchases scrap tlement of the value of vested options at the balance sheet date by iron and steel from a supplier and then immediately sells the scrap reference to the value of Onex shares at that date. The liability is to a customer, with shipment made directly from the supplier to adjusted up or down for the change in the market value of the the third-party customer, or the company earns a contractually underlying shares, with the corresponding amount reflected in the determined fee for arranging scrap shipments for a customer consolidated statement of earnings. directly with a vendor. The company recognizes revenue from The second type of plan is the MIP, which is described in raw materials procurement sales when title and risk of loss pass to note 25(g). The MIP provides that exercisable investment rights the customer. may be settled by issuance of the underlying shares or, in certain Revenue from slag processing, metal recovery and metal situations, by a cash payment for the value of the investment sales is derived from the removal of slag from a furnace and pro- rights. Under the MIP, once the targets have been achieved for the cessing it to separate metallic material from other slag compo- exercise of investment rights, a liability is recorded for the value of nents. Metallic material is generally returned to the customer and the investment rights by reference to the value of underlying the non-metallic material is generally sold to third parties. The investments, with a corresponding expense recorded in the con- company recognizes revenue from slag processing and metal solidated statement of earnings. recovery services when it performs the services and revenue from co-product sales when title and risk of loss pass to the customer. Onex Corporation December 31, 2008 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 The fifth type of plan is the employee stock option and 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 ) other stock-based compensation plans in place for employees at various operating companies, under which, on payment of the The third type of plan is the Director Deferred Share exercise price, stock of the particular operating company is Unit Plan. A Deferred Share Unit (“DSU”) entitles the holder to issued. The Company records a compensation expense for such receive, upon redemption, a cash payment equivalent to the mar- options based on the fair value over the vesting period. ket value of a subordinate voting share at the redemption date. The Director DSU Plan enables Onex directors to apply directors’ Financial assets and financial liabilities fees earned to acquire DSUs based on the market value of Onex Financial assets and financial liabilities are initially recognized at shares at the time. Grants of DSUs may also be made to Onex fair value and are subsequently accounted for based on their clas- directors from time to time. The DSUs vest immediately, are sification as described below. The classification depends on the redeemable only when the holder retires and must be redeemed purpose for which the financial instruments were acquired and within one year following the year of retirement. Additional units their characteristics. Except in very limited circumstances, the are issued for any cash dividends paid on the subordinate voting classification is not changed subsequent to initial recognition. shares. The Company has recorded a liability for the future settle- Financial assets purchased and sold, where the contract requires ment of the DSUs by reference to the value of underlying subordi- the asset to be delivered within an established timeframe, are rec- nate voting shares at the balance sheet date. On a quarterly basis, ognized on a trade-date basis. the liability is adjusted up or down for the change in the market value of the underlying shares, with the corresponding amount a) Held-for-trading reflected in the consolidated statement of earnings. Financial assets and financial liabilities that are purchased and The fourth type of plan is the Management Deferred incurred with the intention of generating profits in the near term Share Unit Plan (“Management DSU Plan”). The Management are classified as held-for-trading. Other instruments may be des- DSU Plan enables Onex management to apply all or a portion of ignated as held-for-trading on initial recognition. These instru- their annual compensation earned to acquire DSUs based on the ments are accounted for at fair value with the change in the fair market value of Onex shares at the time. The DSUs vest imme - value recognized in earnings. diately, are redeemable only when the holder retires and must During 2008, losses of $79 (2007 – $21) were recorded be redeemed within one year following the year of retirement. in the consolidated statement of earnings related to financial Additional units are issued for any cash dividends paid on the assets designated as held-for-trading. The 2008 losses were due subordinate voting shares. The Company has recorded a liability to market conditions while the 2007 losses were primarily due for the future settlement of the DSUs by reference to the value of to foreign exchange translations of certain U.S.-dollar-denomi- underlying subordinate voting shares at the balance sheet date. nated investments. On a quarterly basis, the liability is adjusted up or down for the change in the market value of the underlying shares, with the cor- b) Available-for-sale responding amount reflected in the consolidated statement of Financial assets classified as available-for-sale are carried at fair earnings. To hedge the Company’s exposure to changes in the value with the changes in fair value recorded in other comprehen- trading price of Onex shares associated with the Management sive earnings. Securities that are classified as available-for-sale and DSU Plan, the Company enters into forward agreements with a which do not have a quoted price in an active market are recorded counterparty financial institution for all grants under the Man - at cost. Available-for-sale securities are written down to fair value age ment DSU Plan. As such, the change in value of the forward through earnings whenever it is necessary to reflect an other-than- agreements will be recorded to offset the amounts recorded as temporary impairment. Gains and losses realized on disposal stock-based compensation under the Management DSU Plan. The of available-for-sale securities, which are calculated on an average costs of those arrangements are borne entirely by participants in cost basis, are recognized in earnings. Other-than-temporary the plan. Management DSUs are redeemable only for cash and no impairments are determined based upon all relevant facts and cir- shares or other securities of the Company will be issued on the cumstances for each investment and recognized when appropriate. exercise, redemption or other settlement thereof. 76 Onex Corporation December 31, 2008 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) Held-to-maturity Investments classified as held-to-maturity are written down to fair Securities that have fixed or determinable payments and a fixed value through earnings whenever it is necessary to reflect an maturity date, which the Company intends and has the ability to other-than-temporary impairment. Other-than-temporary impair- hold to maturity, are classified as held-to-maturity and accounted ments are determined based upon all relevant facts and circum- for at amortized cost using the effective interest rate method. stances for each investment and recognized when appropriate. Financial assets were classified as follows: Held-for-trading(2) Available-for-sale(3) Held-to-maturity(4) December 31, 2008 December 31, 2007 Carrying Value Fair Value(1) Carrying Value Fair Value(1) $ 242 $ 2,008 $ 6 $ 242 $ 2,008 $ 6 $ 170 $ 2,179 $ 132 $ 170 $ 2,179 $ 132 (1) The fair value of substantially all financial instruments is determined by using prices quoted in an active market. (2) Amounts are included in investments in the consolidated balance sheet. At December 31, 2008 and 2007, these securities classified as held-for-trading were optionally designated as such. (3) Amounts are included in marketable securities, investments and other long-term assets in the consolidated balance sheet. (4) Amounts are primarily included in investments in the consolidated balance sheet. In addition to the above, at December 31, 2008, cash and short- a) Fair value hedges term investments of $2,921 (2007 – $2,462) have been primarily The Company’s fair value hedges principally consist of interest classified as held-for-trading. rate swaps that are used to protect against changes in the fair Long-term debt has not been designated as held-for- value of fixed-rate long-term financial instruments due to move- trading and therefore is recorded at amortized cost subsequent to ments in market interest rates. initial recognition. Derivatives and hedge accounting Changes in the fair value 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 At the inception of a hedging relationship, the Company documents of the assets, liabilities or group thereof that are attributable to the relationship between the hedging instrument and the hedged the hedged risk. item, its risk management objectives and its strategy for under - taking the hedge. The Company also requires a documented assess- b) Cash flow hedges ment, both at hedge inception and on an ongoing basis, of whether The Company is exposed to variability in future interest cash or not the derivatives that are used in the hedging transactions are flows on non-trading assets and liabilities that bear interest at highly effective in offsetting the changes attributable to the hedged variable rates or are expected to be reinvested in the future. risks in the fair values or cash flows of the hedged items. The effective portion of changes in the fair value of Derivatives that are not designated in effective hedging derivatives that are designated and qualify as cash flow hedges is relationships continue to be accounted for at fair value with recognized in other comprehensive earnings. Any gain or loss in changes in fair value being included in other income in the con- fair value relating to the ineffective portion is recognized immedi- solidated statement of earnings. ately in the consolidated statement of earnings in other income. When derivatives are designated as hedges, the Com pany Amounts accumulated in other comprehensive earnings classifies them either as: (i) hedges of the change in fair value of are reclassified in the consolidated statement of earnings in the recognized assets or liabilities or firm commitments (fair value period in which the hedged item affects income. However, when hedges); (ii) hedges of the variability in highly probable future cash the forecasted transaction that is hedged results in the recogni- flows attributable to a recognized asset or liability or a forecasted tion of a non-financial asset or a non-financial liability, the gains transaction (cash flow hedges); or (iii) hedges of net investments in and losses previously deferred in other comprehensive earnings a foreign self-sustaining operation (net investment hedges). are transferred from other comprehensive earnings and included in the initial measurement of the cost of the asset or liability. Onex Corporation December 31, 2008 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 Use of estimates 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 ) The preparation of consolidated financial statements in conformity with Canadian generally accepted accounting principles requires When a hedging instrument expires or is sold, or when a management of Onex and its operating companies to make esti- hedge no longer meets the criteria for hedge accounting, any mates and assumptions that affect the reported amounts of assets cumulative gain or loss existing in other comprehensive earnings and liabilities, the disclosure of contingent assets and liabilities at at that time remains in other comprehensive earnings until the the date of the consolidated financial statements and the reported forecasted transaction is eventually recognized in the consoli - amounts of revenues and expenses during the reporting period. dated statement of earnings. When a forecasted transaction is no This includes the liability for claims incurred but not yet reported longer expected to occur, the cumulative gain or loss that was for the Company’s healthcare and financial services segments. reported in other comprehensive earnings is immediately trans- Actual results could differ from such estimates. ferred to the consolidated statement of earnings. Comparative amounts c) Net investment hedges Certain amounts presented in the prior year have been reclassi fied Hedges of net investments in foreign operations are accounted for to conform to the presentation adopted in the current year. similar to cash flow hedges. Any gain or loss on the hedging instru- ment relating to the effective portion of the hedge is recognized in 2 . C O R P O R AT E I N V E S T M E N T S other comprehensive earnings. The gain or loss relating to the ineffective portion is recognized immediately in the consolidated statement of earnings. Gains and losses accumulated in other comprehensive earnings are included in the consolidated state- ment of earnings upon the reduction or disposal of the investment During 2008 and 2007 several acquisitions, which were accounted for as purchases, were completed either directly by Onex or through subsidiaries of Onex. Any third-party borrowings in respect of ac quisitions are without recourse to Onex. in the foreign operation. Consolidation On April 2, 2007, Onex ceased to have voting rights on certain units of Cineplex Entertainment Limited Partnership (“CELP”) held by unitholders other than Onex. As a result, Onex no longer controls a sufficient number of units to elect the majority of the board of the General Partner of CELP and, therefore, Onex ceased consolidating CELP on April 2, 2007. As Onex continues to have significant influence over CELP, beginning in the second quarter of 2007, Onex accounts for its interest in CELP using equity accounting, with the results included in the other segment in note 29. Earnings per share Basic earnings per share is based on the weighted average number of Subordinate Voting Shares outstanding during the year. Diluted earnings per share is calculated using the treasury stock method. 2 0 0 8 A C Q U I S I T I O N S a) In October 2008, ONCAP II completed the acquisition of Caliber Collision Centers (“Caliber”). Caliber, headquartered in Irvine, California, is a leading provider of auto collision repair services in Texas and Southern California. The Company’s investment of $67 was made by Onex, ONCAP II and management for an initial con- trolling ownership interest. Onex’ net investment in the acquisi- tion was $30. In the first quarter of 2008, EnGlobe Corp. (“EnGlobe”) acquired a ground remediation contractor with operating loca- tions in the United Kingdom. In addition, during the year, Mister Car Wash Holdings, Inc. (“Mister Car Wash”) purchased additional car wash locations in the United States. The total purchase price for these investments was $20. b) During 2008, EMSC made five acquisitions for total considera- tion of $62. c) During 2008, Skilled Healthcare made two acquisitions for total consideration of $24. d) Other includes acquisitions made by CDI, Sitel Worldwide and Tube City IMS for total consideration of $41. 78 Onex Corporation December 31, 2008 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 purchase prices of the acquisitions previously described were and accounting adjustments could be recorded at that time. The allocated to the net assets acquired based on their relative fair results of operations for all acquired businesses are included in the values at the dates of acquisition. In certain circumstances where consolidated statement of earnings and the consolidated statement estimates have been made, the companies are obtaining third- of shareholders’ equity and comprehensive earnings of the Com - party valuations of certain assets, which could result in further pany from their respective dates of acquisition. refinement of the fair-value allocation of certain purchase prices Details of the 2008 acquisitions are as follows: Cash Other current assets Intangible assets with limited life Goodwill Property, plant and equipment and other long-term assets Current liabilities Long-term liabilities Non-controlling interests in net assets Interest in net assets acquired ONCAP II(a) EMSC(b) Healthcare(c) Other(d) Total Skilled $ 5 32 115 96 40 288 (39) (151) 98 (11) $ – 5 9 52 1 67 (5) – 62 – $ – – – 3 21 24 – – 24 – $ – 16 17 20 12 65 (14) (9) 42 (1) $ 5 53 141 171 74 444 (58) (160) 226 (12) $ 87 $ 62 $ 24 $ 41 $ 214 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 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 mills. Headquartered in Glassport, Pennsylvania, Tube City IMS headquartered in Rochester, New York and is a leading global provides raw materials procurement, scrap and materials man- provider of medical and dental imaging and healthcare informa- agement and slag processing services at mill sites throughout tion technology solutions. The equity investment of $527, for a the United States, Canada, Europe and South America. The total 100% equity ownership interest, was made by Onex, Onex Part - equity investment of $257, for a 100% equity ownership interest, ners II and management. Onex’ net investment in the acquisition was made by Onex, Onex Partners II and management. Onex’ net was $206 for an initial 39% equity ownership interest. The acquisi- investment in the acquisition was $92, for an initial 36% equity tion agreement provides that if Onex and Onex Partners II realize ownership interest. Onex has effective voting control of Tube City an internal rate of return in excess of 25% on their investment, IMS through Onex Partners II. Kodak will receive payment equal to 25% of the excess return up to US$200. b) In January 2007, ClientLogic Corporation (“ClientLogic”) com- pleted the acquisition of SITEL Corporation, a global provider of outsourced customer support services. The total equity invest- d) In April 2007, ONCAP II completed the acquisition of Mister Car Wash. Mister Car Wash owns and operates full-service and exterior ment of $401 was financed by ClientLogic, without any additional car wash locations in the United States operating under the Mister investment by Onex. The new combined entity now operates as Car Wash brand. In June 2007, ONCAP II completed the acquisition Sitel Worldwide. In connection with the transaction, Onex con- of CiCi’s Holdings, Inc. (“CiCi’s Pizza”). CiCi’s Pizza is a franchisor verted $63 of mandatorily redeemable preferred shares of Client - of low-cost quick ser vice restaurants in the United States. CiCi’s Logic into common shares of the combined entity. Pizza also operates a captive purchasing and distribution business In addition, Sitel Worldwide completed three other with distribution centres in the United States. At acquisition, Onex acquisitions for total consideration of $71. These acquisitions and ONCAP II had an initial 89% equity ownership in Mister Car related to the purchase of the non-controlling interests in three Wash and an initial 54% equity ownership in CiCi’s Pizza. businesses in which Sitel Worldwide had ownership interests. Onex Corporation December 31, 2008 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 ) In addition, Skilled Healthcare completed three other acquisitions for total consideration of $41. During the first quarter of 2007, CSI Global Education Inc. (“CSI”) completed the acquisition of The Institute of Cana dian Bankers, a division of Thomson Canada Ltd. In addition, subse- g) In December 2007, the Company completed the acquisition of Husky, one of the world’s largest suppliers of injection molding quent to the ONCAP II transaction, Mister Car Wash purchased equipment and services to the plastics industry. The total equity additional car wash locations in the United States. investment was $633 for a 100% ownership interest, provided The total consideration of these acquisitions was $120. through Onex, Onex Partners I, Onex Partners II and manage- Onex, ONCAP II and Onex management’s total equity investment ment. Onex’ net investment in the acquisition was $226 for an in these acquisitions was $85, of which Onex’ share was $38. In initial 36% equity ownership interest. Onex has effective voting addition, acquisition financing of $20 was provided by Onex, control of Husky through Onex Partners. ONCAP II and Onex management, of which Onex’ share was $9. e) In July 2007, EMSC completed two acquisitions: MedicWest Ambu lance (“MedicWest”) and Abbott Ambulance, Inc. (“Abbott Am bulance”). MedicWest is a franchised emergency ambulance h) Other includes acquisitions made by CDI, for total considera- tion of $3, and by Onex Real Estate, through its partnership with Cronus Capital, for total consideration of $28. transportation service provider based in Las Vegas, Nevada. Abbott The purchase prices of the acquisitions described above were allo- Am bu lance was the largest private provider of emergency and cated to the net assets acquired based on their relative fair values non-emergency ambulance services in St. Louis, Missouri. The at the dates of acquisition. In certain circumstances where esti- total purchase price of these acquisitions was $74, which was mates had been made, a further refinement of the fair-value allo- financed by EMSC. cation of certain purchase prices and accounting adjustments was In addition, EMSC completed three other acquisitions recorded subsequent to the acquisition. The adjustments made for total consideration of $5. were not material to Onex’ consolidated financial statements. The results of operations for all acquired businesses are included in the f) In September 2007, Skilled Healthcare completed the acquisition of 10 nursing facilities and a hospice company located primar ily in consolidated statement of earnings and the consolidated state- ment of shareholders’ equity and comprehensive earnings of the Albuquerque, New Mexico. The total purchase price of the acquisi- Company from their respective dates of acquisition. tion was $56, which was financed by Skilled Healthcare. 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) Interest 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. The cost of acquisitions made during the year includes restruc - liabilities include $9 and less than $1, respectively (2007 – $32 turing and integration costs of nil (2007 – $62). As at December 31, and $3, respectively), of restructuring and integration costs for 2008, accounts payable and accrued liabilities and other long-term these and earlier acquisitions. 80 Onex Corporation December 31, 2008 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. 2008 2007 2008 2007 WIS International(a) CMC Electronics(a) Town and Country Revenue $ – – – $ – $ – 33 1 $ 34 Gain (Loss), Net of Tax Onex’ Share of Earnings (Loss) $ 2 7 – $ 9 $ – – – $ – Total $ 2 7 – $ 9 Gain (Loss), Net of Tax Onex’ Share of Earnings (Loss) $ 41 76 4 $ 121 Total $ 41 76 2 $ – – (2) $ (2) $ 119 a) The 2008 gains consist of amounts received relating to the 2007 sales of the ONCAP I operating companies WIS International and CMC Electronics. The amounts are recorded net of a tax provi- 5 . O T H E R C U R R E N T A S S E T S Other current assets comprised the following: sion of $2. 4 . I N V E N T O R I E S Inventories comprised the following: As at December 31 Raw materials Work in progress Finished goods As at December 31 2008 2007 Current portion of ceded claims recoverable held by The Warranty Group (note 12) $ 373 $ 355 2008 2007 $ 1,067 $ 835 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) 1,834 570 1,124 580 Other $ 3,471 $ 2,539 259 252 255 556 244 140 228 494 $ 1,695 $ 1,461 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 2008 Cost Accumulated Amortization $ 243 $ 1,546 4,459 414 – 350 2,246 – Net Cost 2007 Accumulated Amortization $ 243 $ 235 $ 1,196 2,213 414 1,433 3,273 268 – 225 1,495 – Net $ 235 1,208 1,778 268 $ 6,662 $ 2,596 $ 4,066 $ 5,209 $ 1,720 $ 3,489 The above amounts include property, plant and equipment under As at December 31, 2008, property, plant and equipment capital leases of $257 (2007 – $175) and related accumulated amor- included $48 (2007 – $39) of assets held for sale. tization of $160 (2007 – $64). Onex Corporation December 31, 2008 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 7 . I N V E S T M E N T S Investments comprised the following: As at December 31 2008 2007 Equity-accounted investment in RSI(a) $ 388 $ – Equity-accounted investment in Hawker Beechcraft(b) Equity-accounted investment in Allison Transmission(c) Equity-accounted investment in ResCare(d) Other equity-accounted investments(e) EMSC insurance collateral(f) Long-term investments held by The Warranty Group(g) Other 406 599 147 274 162 1,646 275 460 658 110 216 161 1,366 232 The equity investment of US$1,040 was split equally between the Company and GS Capital 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. As a result of Onex’ signifi cant influence over Hawker Beechcraft, 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 change in the foreign exchange rate since its acquisition. c) In August 2007, the Company, together with The Carlyle Group, completed the acquisition of Allison Transmission, a division of General Motors Corporation. Allison Transmission, headquartered in Speedway, Indiana, designs and manufactures automatic trans- $ 3,897 $ 3,203 missions for on-highway trucks and buses, off-highway equipment a) In October 2008, the Company acquired an interest in RSI Home Products, Inc. (“RSI”). RSI, headquartered in Anaheim, Cali fornia, is and military vehicles worldwide. The equity investment 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, a leading manufacturer of cabinetry for the residential marketplace certain limited partners and management. Onex’ net investment in in North America. The Company’s investment of $338 was in the the acquisition was $250 for an initial 16% equity ownership form of convertible preferred shares and was made by Onex, Onex interest. As a result of Onex’ sig nificant influence over Allison Partners II and Onex management. The shares have a liquidation Trans mission, the investment is accounted for using the equity- preference to the common shares and earn a preferred 10% return. accounting method. In accordance with equity accounting, The preferred shares are convertible into 50% of the outstanding the carrying value of this U.S. dollar investment has been adjusted common shares of RSI. Onex’ net investment in the acquisition to account for the change in the foreign exchange rate since was $133 for an initial 20% equity ownership interest on an as- its acquistion. converted basis. As a result of Onex’ significant influence over RSI, the investment is accounted for using the equity-accounting method. In accordance with equity accounting, the carrying value of d) In June 2004, the Company and Onex Partners I made an initial $114 equity investment in ResCare. Onex’ portion of the investment this U.S. dollar investment has been adjusted to account for the was approximately $27. In accordance with equity accounting, change in the foreign exchange rate since its acquisition. the carrying value of this U.S. dollar investment has been adjusted to account for the change in the foreign exchange rate since b) In March 2007, the Company, together with GS Capital Partners, an affiliate of The Goldman Sachs Group, Inc., acquired Raytheon its acquisition. Aircraft Company, the business aviation division of Raytheon Company. The acquired business now operates as Hawker Beech - e) Other equity-accounted investments include investments in Cineplex Entertainment, Cypress Insurance Group (“Cypress”), craft. Hawker Beechcraft, headquartered in Wichita, Kansas, is a Onex Credit Partners and certain real estate partnerships. leading manufacturer of business jet, turboprop, and piston air- craft through its Hawker and Beechcraft brands. It is also a signifi- cant manufacturer of military training aircraft for the U.S. Air f) EMSC insurance collateral consists primarily of government and investment-grade securities and cash deposits with third par- Force and Navy and for a small number of foreign governments. ties, and supports its insurance program and reserves. 82 Onex Corporation December 31, 2008 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 g) The table below presents the amortized cost and fair value of all investments in securities held by The Warranty Group at December 31: U.S. government and agencies States and political subdivisions Foreign governments Corporate bonds Mortgage-backed securities Other Current portion(2) Long-term portion 2008 2007 Amortized Cost(1) Fair Value Amortized Cost(1) Fair Value $ 84 239 330 901 235 160 $ 1,949 (241) $ 1,708 $ 91 244 318 839 231 158 $ 1,881 (235) $ 1,646 $ 77 132 328 698 195 99 $ 1,529 (190) $ 1,339 $ 80 133 343 708 196 100 $ 1,560 (194) $ 1,366 (1) Amortized cost represents cost plus accrued interest and accrued discount or premium, if applicable. (2) 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. The amortized cost and fair value of fixed-maturity securi- At December 31, 2008, fixed-maturity securities with a ties owned by The Warranty Group at December 31, 2008, by con- carrying value of $39 (2007 – $57) were on deposit with various tractual maturity, are shown below: state insurance departments and Canadian insurance regulators Amortized Cost Fair Value to satisfy U.S. and Canadian regulatory requirements. Years to maturity: One or less After one through five After five through ten After ten Mortgage-backed securities Other $ 241 917 359 37 235 160 $ 235 878 348 31 231 158 $ 1,949 $ 1,881 Onex Corporation December 31, 2008 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 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 2008 2007 As at December 31 2008 2007 Intellectual property with limited life, net of accumulated amortization of $237 (2007 – $138) $ 406 $ 432 Intangible assets with limited life, net of accumulated amortization of $791 (2007 – $385) Intangible assets with indefinite life 2,008 341 1,980 280 $ 2,755 $ 2,692 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 (note 26) 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 $ 569 501 – 370 748 423 272 242 $ 377 413 98 264 718 397 151 216 $ 3,125 $ 2,634 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, 2008 was $133 (2007 – $207), of which the current portion of $133 (2007 – $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 primarily related to, the production of new business. These charges are deferred and amortized as the related premiums and contract fees are earned. At December 31, 2008, $524 (2007 – $291) of costs were deferred, of which $252 (2007 – $140) have been recorded as cur- rent (note 5). 84 Onex Corporation December 31, 2008 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 0 . 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 Carestream Health(a) Senior secured first lien term loan due 2013 Senior secured second lien term loan due 2013 Other Celestica(b) 7.875% subordinated notes due 2011 7.625% subordinated notes due 2013 Center for Diagnostic Imaging(c) Revolving credit facility and term loan due 2009 and 2010 Other Cosmetic Essence(d) Revolving credit facility and term loans due 2013 and 2014 Subordinated secured notes due 2014 Other Emergency Medical Services(e) Revolving credit facility and term loan due 2012 Subordinated secured notes due 2015 Other Husky(f) Sitel Worldwide(g) Skilled Healthcare(h) Revolving credit facility and term loan due 2012 Revolving credit facility and term loans due 2013 and 2014 Mandatorily redeemable preferred shares Other Revolving credit facility and term loan due 2010 and 2012 Subordinated notes due 2014 Other Spirit AeroSystems(i) Revolving credit facility and term loan due 2010 and 2013 Other The Warranty Group(j) Term loan due 2012 Tube City IMS(k) Revolving borrowings Senior secured term loan due 2014 Senior subordinated notes due 2015 Subordinated notes due 2020 ONCAP II companies (l) Revolving credit facility and term loans due 2011 to 2014 Subordinated notes due 2012 and 2013 Other Other(m) Other Less: long-term debt held by the Company Long-term debt, December 31 Less: deferred charges Current portion of long-term debt of operating companies 2008 $ 1,687 536 9 2,232 2007 $ 1,472 436 2 1,910 624 276 900 68 6 74 138 107 – 245 246 304 2 552 494 776 93 1 870 404 158 8 570 704 11 715 239 62 197 274 16 549 373 107 4 484 157 510 251 761 62 1 63 102 79 7 188 222 248 3 473 406 701 – 2 703 319 128 4 451 579 – 579 196 10 162 223 – 395 283 51 2 336 196 (268) 7,813 (138) 7,675 (532) (138) 6,519 (143) 6,376 (217) Consolidated long-term debt of operating companies, without recourse to Onex $ 7,143 $ 6,159 Onex Corporation December 31, 2008 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 1 0 . 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 , b) Celestica 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 ) Celestica has a secured, revolving credit facility for US$300 that matures in April 2009. There were no borrowings outstanding Onex does not guarantee the debt of its operating companies, nor under this facility at December 31, 2008. The facility has restrictive are there any cross-guarantees between operating companies. covenants relating to debt incurrence and sale of assets and also The financing arrangements for each operating company contains financial covenants that require Celestica to maintain typically contain certain restrictive covenants, which may include certain financial ratios. Based on the required minimum financial limitations or prohibitions on additional indebtedness, payment of ratios, at December 31, 2008, Celestica had full access to its cash dividends, redemption of capital, capital spending, making of US$300 facility. Celestica also has uncommitted bank overdraft investments and acquisitions and sale of assets. In addition, certain facilities available for operating requirements that total US$68 at financial covenants must be met by the operating companies that December 31, 2008. have outstanding debt. Celestica’s senior subordinated notes due 2011 have an Future changes in business conditions of an operating aggregate principal amount at December 31, 2008 of US$489 (2007 – company may result in non-compliance with certain covenants US$500) and a fixed interest rate of 7.875%. In connection with the by the company. No adjustments to the carrying amount or clas- 2011 notes offering, Celestica entered into interest rate swap agree- sification of assets or liabilities of any operating company have ments that swap the fixed interest rate on the notes with a variable been made in the consolidated financial statements with respect interest rate based on LIBOR plus a margin. The average interest to any possible non-compliance. a) Carestream Health rate on these notes was 6.5% for 2008 (2007 – 8.3%). The 2011 notes may be redeemed at various premiums above face value. Included in long-term debt is the change in the fair value of the debt obliga- In April 2007, Carestream Health entered into senior secured first tion attributable to movement in the benchmark interest rates, and second lien term loans with an aggregate principal amount of which resulted in a loss of US$24 for 2008. US$1,510 and US$440, respectively. Additionally, as part of the first Celestica’s senior subordinated notes due 2013 have an lien term loan, Carestream Health obtained a senior revolving aggregate principal amount at December 31, 2008 of US$223 credit facility with available funds of up to US$150. The first and (2007 – US$250) and a fixed interest rate of 7.625%. The 2013 notes second lien term loans bear interest at LIBOR plus a margin of may be redeemed on July 1, 2009 or later at various premiums 2.00% and 5.25%, respectively, or at or a base rate plus a margin of above face value. 1.00% and 4.25%, respectively. The first lien term loan matures in April 2013, with quar- c) Center for Diagnostic Imaging terly instalment payments of US$25, decreasing to US$18 in In January 2005, a US$95 credit agreement was executed by CDI. Decem ber 2009. The second lien term loan matures in October This agreement consists of a US$75 term loan with principal pay- 2013, with the entire balance due upon maturity. The senior ments due through 2010 and up to US$20 of revolving credit loans. revolving credit facility, with nil outstanding at December 31, 2007 Loans under the agreement currently bear interest at LIBOR plus a and 2008, matures in April 2012. margin of 3.5% and are secured by the assets of CDI. At Decem- At December 31, 2008, US$1,385 and US$440 (2007 – ber 31, 2008, US$55 and US$1 (2007 – US$62 and nil) were out - US$1,485 and US$440) were outstanding under the senior secured standing under the term loan and revolving credit loans, respectively. first and second lien term loans, respectively. CDI has entered into an interest rate swap agreement that Substantially all of Carestream Health’s assets are effectively fixes the interest rate on a portion of the bor rowings pledged as collateral under the term loans. under the credit agreement. The interest rate swap agreement has In connection with the term loans, Carestream Health a notional amount of US$45 and expires in 2010. entered into eight interest rate swap agreements that swap the variable rate for a fixed rate ranging from 2.8% to 5.2%. The agree- ments, with notional amounts totalling US$1,600, expire in 2009 and 2010. 86 Onex Corporation December 31, 2008 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) Cosmetic Essence prime or LIBOR plus 1.0% to 2.0%. As at December 31, 2008, US$202 In March 2007, CEI completed a refinancing of its credit agreement. and nil (2007 – US$224 and nil) were outstanding under the senior That credit agreement consisted of a term loan of US$122 and secured term loan and senior secured revolving credit facility, a revolving line of credit with maximum borrowings of US$35. The respectively. term loan, under its stated terms, is repayable with quarterly pay- In December 2007, EMSC entered into an interest rate ments of principal and interest with the balance due on maturity in swap agreement. The agreement, which matures in 2009, swaps March 2014. The revolving line of credit matures in March 2013. the variable portion of the rate with a fixed rate of 4.3% on US$200 Interest on the term loan is based, at the option of CEI, of the company’s variable rate debt. upon either LIBOR plus a margin of 2.25% or a base rate plus a Substantially all of EMSC’s assets are pledged as collat- margin of up to 1.25%. Interest on the revolving line of credit is eral under the credit agreement. based, at the option of CEI, upon either LIBOR plus a margin of 2.75% or a base rate plus a margin of up to 1.75%. Substantially all f) Husky of CEI’s assets are pledged as collateral for the borrowings. In December 2007, Husky entered into a US$520 committed, At December 31, 2008, CEI was in violation of certain of secured credit agreement comprised of a US$410 term loan and a its financial convenants under the credit agreement. As a result, all US$110 revolving credit facility. Borrowings under the credit agree- amounts outstanding under the credit agreement are classified as ment bear interest at LIBOR plus a margin that ranges from 3.00% current. The debt under the credit agreement is without recourse to 3.25% as determined by a consolidated leverage ratio. The term to Onex. At December 31, 2008, US$80 and US$34 (2007 – US$100 loan has mandatory quarterly principal repayments of US$12 in and US$2) were outstanding on the term loan and revolving line 2009 and US$21 in 2010 and 2011, with the outstanding principal of credit, respectively. The ability of CEI to continue in the normal balance due in 2012. Additionally, 25% to 50% of excess cash flows course of business will be dependent upon the support of its (as defined in the credit agreement and determined by a con - lenders in modifying the terms of its credit agreement. Those dis- solidated leverage ratio), if any, must be used to prepay the loan cussions were underway at the date of these consolidated financial annually. In 2008, Husky entered into interest rate swap agree- statements; however, the outcome was unknown. The net book ments that effectively fixed the interest rate on a portion of the value of the investment in CEI recorded in the consolidated finan- borrowings under the credit agreement. The credit agreements, cial statements at December 31, 2008 was negative $19. Thus, if with notional amounts of US$366, expire in 2011 and 2012. Onex’ investment in CEI is disposed of or eliminated in its entirety, The revolving credit facility is available to Husky and its an accounting gain would be recorded in the consolidated finan- key subsidiaries in Canada. At December 31, 2008, there were cial statements. US$13 in letters of credit issued under the credit facility, leaving CEI has entered into two interest rate swap agreements US$97 in available borrowing capacity. The revolving credit facility that effectively fix the interest rate on borrowings under the credit matures in December 2012. agreement. The notional amount covered under the first swap At December 31, 2008, US$406 and nil (2007 – US$410 agreement was US$36 at December 31, 2008 and expires in 2009. and nil) were outstanding under the term loan and revolving The notional amount covered under the second agreement was credit facility, respectively. US$39 at December 31, 2008 and expires in 2010. The credit agreement has restrictions on new debt CEI also has a promissory note outstanding in the incurrence, the sale of assets, capital expenditures, and the main- amount of US$88 (2007 – US$80), of which US$80 (2007 – US$73) tenance of certain financial ratios. Substantially all of Husky’s is held by the Company. The note is due in 2014, with interest of assets are pledged as collateral under the credit agreement. 9.55% per year, payable in additional notes due in 2014. g) Sitel Worldwide e) Emergency Medical Services In December 2008, Sitel Worldwide amended its credit facility. In February 2005, EMSC issued US$250 of senior subordinated The amendment includes increases to the applicable interest notes and executed a US$450 credit agreement. The senior subor- rates and changes to the financial covenants. The amendment dinated notes have a fixed interest rate of 10%, payable semi- was treated as a debt extinguishment and, as a result, unamor- annually, and mature in February 2015. tized fees of US$10 were expensed during the fourth quarter. As The credit agreement consists of a US$350 senior se cured required by the amendment, Sitel Worldwide repurchased US$27 term loan and a US$100 senior secured revolving credit facility. The worth of principal of the term loan for a gain of US$12. To fund senior secured term loan matures in February 2012 and requires the repurchase, Sitel Worldwide issued US$30 of mandatorily quarterly principal repayments. The revolving facility requires the redeemable preferred shares to Onex and certain other investors, principal to be repaid at maturity in February 2011. Interest is of which Onex’ portion was US$23. determined by reference to a leverage ratio and can range from Onex Corporation December 31, 2008 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 1 0 . 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 , can be reduced by as much as 0.50%, depending on the company’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 ) credit rating. At December 31, 2008, US$251 and US$81 (2007 – US$254 and US$68) were outstanding under the term loan and Sitel Worldwide’s credit facility, as amended, consists revolving loan, respectively. The first lien credit agreement is of a US$675 term loan maturing in January 2014, and a US$85 secured by the real property of Skilled Healthcare. revolving credit facility maturing in January 2013. As a result of In November 2007, Skilled Healthcare entered into an 2007 and 2008 repayments and repurchases, no quarterly pay- interest rate swap agreement with a notional amount of US$100, ments are due under the term loan until maturity. The term loan expiring in December 2009. Under the interest rate swap agree- and revolving credit facility bear interest at a rate of LIBOR plus a ment, the company will pay a fixed rate of 4.4% in exchange for margin of up to 5.5% or prime plus a margin of 4.5%. Borrowings receiving the floating rate based on LIBOR. under the facility are secured by substantially all of Sitel World - wide’s assets. i) Spirit AeroSystems Sitel Worldwide is required under the terms of the facility In June 2005, Spirit AeroSystems executed a US$875 credit agree- to maintain certain financial ratio covenants. The facility also ment that consists of a US$700 senior secured term loan and a contains certain additional requirements, including limitations or US$175 senior secured revolving credit facility. In November 2006, prohibitions on additional indebtedness, payment of cash divi- Spirit AeroSystems used a portion of the proceeds from its initial dends, redemption of stock, capital spending, investments, acqui- public offering to permanently repay US$100 of the senior secured sitions and asset sales. term loan and amended its credit agreement. In March 2008, Spirit At December 31, 2008, US$587 and US$50 (2007 – US$667 AeroSystems further amended the agreement. The significant com- and US$32) were outstanding under the term and revolving credit ponents of the amendments were to extend the maturity of the facility, respectively. senior secured term loan from 2011 to 2013, increase the amount Included in other long-term debt at December 31, 2008 available under the senior revolving credit facility to US$650 and was US$46 of mandatorily redeemable Series B preferred shares, add a provision allowing additional indebtedness of up to US$300. of which US$30 was held by Onex. The mandatorily redeemable At December 31, 2008, US$578 and nil (2007 – US$584 and nil) were Series B preferred shares accrue annual dividends at a rate of 12% outstanding under the term loan and revolving facility, respectively. and are redeemable at the option of the holder on or before July The senior secured term loan requires quarterly principal instal- 2014. Also included in other long-term debt at December 31, 2008 ments of US$1, with the balance due in four equal quarterly instal- was US$30 of mandatorily redeemable Series C preferred shares, ments of US$139 beginning in December 2012. The revolving facility of which US$23 was held by Onex. The mandatorily redeemable requires the principal to be repaid at maturity in June 2010. Series C preferred shares accrue annual dividends at a rate of 16% The borrowings under the agreement bear interest based and are redeemable at the option of the holder on or before May on LIBOR or a base rate plus an interest rate margin of up to 2.25%, 2014. Outstanding amounts related to preferred shares at Decem - payable quarterly. In connection with the term loan, Spirit Aero - ber 31, 2008 include accrued dividends. h) Skilled Healthcare Systems entered into interest rate swap agreements on US$500 of the term loan. The agreements, which mature in one to three years, swap the floating interest rate with a fixed interest rate that ranges In December 2005, Skilled Healthcare issued unsecured senior between 4.2% and 4.4%. subordinated notes in the amount of US$200 due in 2014. In June Substantially all of Spirit AeroSystems’ assets are pledged 2007, using proceeds from its May 2007 initial public offering, as collateral under the credit agreement. Skilled Healthcare redeemed US$70 of the notes. The notes bear interest at a rate of 11.0% per annum and are redeemable at the j) The Warranty Group option of the company at various premiums above face value In November 2006, The Warranty Group entered into a US$225 beginning in 2009. At December 31, 2008, US$129 (2007 – US$129) credit agreement consisting of a US$200 term loan and up to was outstanding under the notes. US$25 of revolving credit loans and swing line loans. The amounts Skilled Healthcare’s first lien credit agreement consists of out standing on the credit agreement bear interest at LIBOR plus a a US$260 term loan and a US$135 revolving loan. The term loan is margin based on The Warranty Group’s credit rating. The term due in 2012, with annual principal instalments of 1% of the bal- loan requires annual payments of US$2, with the balance due ance. Outstanding amounts on the revolving loan are due in 2010. in 2012. Revolving and swing loans, if outstanding, are due in 2011. The term loan bears interest at the prime rate plus an initial At Decem ber 31, 2008, US$196 and nil (2007 – US$198 and nil) margin of 1.25% or LIBOR plus an initial margin of 2.00%. The were out standing on the term loan and revolving and swing loans, revolving loan bears interest at the prime rate plus an initial mar- respectively. gin of 1.75% or LIBOR plus an initial margin of 2.75%. The margin 88 Onex Corporation December 31, 2008 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 debt is subject to various terms and conditions, In December 2008, Tube City IMS issued subordinated including The Warranty Group maintaining a minimum credit notes in the amount of US$13, of which US$12 are held by Onex. rating and certain financial ratios relating to minimum capitaliza- The notes are due in 2020 and bear interest at a rate of 15% in the tion levels. k) Tube City IMS first year, 17.5% in the second year and 20% in the third year and beyond. Cash interest payments are required beginning in 2014. Tube City IMS may prepay the notes, in whole or in part, without In January 2007, Tube City IMS entered into a senior secured premium penalty or discount, at any time. asset-based revolving credit facility with an aggregate principal amount of up to US$165, a senior secured term loan credit facility l) ONCAP II companies with an aggregate principal amount of US$165 and a senior ONCAP II’s investee companies consist of EnGlobe, CSI, CiCi’s secured synthetic letter of credit facility of US$20. The credit facil- Pizza, Mister Car Wash and Caliber. Each has debt that is included ities bear interest at a base rate plus a margin of up to 2.50%. in the Company’s consolidated financial statements. There are The senior secured asset-based revolving facility is separate arrangements for each of the investee companies with available through to January 2013. The maximum availability no cross-guarantees between the companies or by Onex. under the revolving facility is based on specified percentages of Under the terms of the credit agreements, combined eligible accounts receivable and inventory. As at December 31, term borrowings of $351 are outstanding and combined revolving 2008, US$46 (2007 – US$10) was outstanding under the revolving credit facilities of $22 are outstanding. The available facilities bear facility. The obligations under the senior secured asset-based interest at various rates based on a base floating rate plus a mar- revolving facility are secured on a first-priority lien basis by Tube gin. During 2008, interest rates ranged from 5.2% to 8.8% on bor- City IMS’ accounts receivable, inventory and cash proceeds there- rowings under the revolving credit and term facilities. The term from and on a second-priority lien basis by substantially all of loans have quarterly repayments and are due between 2011 and Tube City IMS’ other property and assets, subject to certain 2014. The companies also have subordinated notes of $107, due exceptions and permitted liens. between 2012 and 2014, that bear interest at rates ranging from The senior secured term loan facility and senior secured 7.5% to 15.0%, of which the Company owns $66. synthetic letter of credit facility are repayable quarterly, with Certain ONCAP II investee companies have entered into annual payments of US$2, and mature in January 2014. The facili- interest rate swap agreements to fix a portion of their interest ties require Tube City IMS to prepay outstanding amounts under expense. The total notional amount of these swap agreements at certain conditions. At December 31, 2008, US$162 (2007 – US$164) December 31, 2008 was $248, with portions expiring through 2012. was outstanding under the term loan and there were US$17 (2007 – The senior debt is generally secured by substantially all US$18) of letters of credit outstanding relating to the synthetic of the assets of the respective company. letter of credit facility. The obligations under the senior secured term loan facility and senior secured synthetic letter of credit facil- m) Other ity are secured on a first-priority lien basis by all of Tube City IMS’ Other long-term debt at December 31, 2008 included US$97 of property and assets (other than accounts receivable and inventory amounts outstanding on a US$125 line of credit held by an entity and cash proceeds therefrom) and on a second-priority lien basis controlled by Onex Partners III. The line of credit bears interest on all of Tube City IMS’ accounts receivable and inventory and at a base rate plus an applicable margin and matures in 2009. cash proceeds therefrom, subject to certain exceptions and per- Amounts borrowed on the line of credit were used to purchase mitted liens. investment securities pursuant to a proposed acquisition. The line In connection with the senior secured term loan credit of credit is secured by the ability of Onex Partners III to call capital facility, Tube City IMS entered into rate swap agreements that from its partners. Onex, as a limited partner in Onex Partners III, swap the variable rate portion of the interest for a fixed rate of would be committed to funding US$23 of the amounts out - 5.0% through March 2009 and 4.7% thereafter. The agreements standing on the line of credit at Decem ber 31, 2008. In addition, have total notional amounts of US$120 and expire in March 2010. included in other long-term debt at Decem ber 31, 2008 is $37 out- In addition, Tube City IMS has US$225 of unsecured standing relating to Radian of which $21 is held by Onex. The senior subordinated notes outstanding issued in 2007. The notes remaining debt is secured by certain investments held by Radian bear interest at a rate of 9.75% and mature in February 2015. The and is not guaranteed by Onex. notes are redeemable at the option of the company at various pre- miums above face value, beginning in 2011. Onex Corporation December 31, 2008 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 1 0 . 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 , 1 1 . L E A S E C O M M I T M E N T 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 ) The future minimum lease payments are as follows: Other long-term debt at December 31, 2007 consisted of $147 of debt related to Town and Country and Onex Real Estate partnerships with Cronus Capital. At December 31, 2008, these For the year: Capital Leases Operating Leases entities were accounted for using the equity-accounted method. In addition, included in other long-term debt at December 31, 2007 is $49 of debt related to Radian Communication Services Corporation (“Radian”), of which $20 was held by Onex. The annual minimum repayment requirements for the next five years on consolidated long-term debt are as follows: 2009 2010 2011 2012 2013 Thereafter $ 532 315 1,012 1,298 2,881 1,775 $ 7,813 2009 2010 2011 2012 2013 Thereafter Total future minimum lease payments Less: imputed interest Balance of obligations under capital leases, without recourse to Onex Less: current portion Long-term obligations under capital $ 32 $ 285 235 191 151 110 577 $ 1,549 18 10 9 5 6 $ 80 (9) 71 (25) leases, without recourse to Onex $ 46 Substantially all of the lease commitments relate to the operating companies. Operating leases primarily relate to premises. 1 2 . 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, 2008: Current portion of reserves, December 31, 2007 Long-term portion of reserves, December 31, 2007 Gross reserve for losses and LAE, December 31, 2007(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, 2007 Benefits to policy holders incurred, net of reinsured amounts Payments for benefits to policy holders, net of reinsured amounts Other, including increase due to changes in foreign exchange rates Net reserve for losses and LAE, December 31, 2008 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, 2008(2) Current portion of reserves, December 31, 2008 Property and Casualty(a) Warranty(b) Total Reserves $ 320 $ 216 $ 536 718 – 718 $ 1,038 $ 216 $ 1,254 $ $ (320) (718) – – – – – 334 748 1,082 (334) (35) – 181 (355) (718) 181 $ 617 $ 617 (614) 30 (614) 30 $ 214 $ 214 39 – 253 (253) 373 748 1,335 (587) Long-term portion of reserves, December 31, 2008 $ 748 $ – $ 748 (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. 90 Onex Corporation December 31, 2008 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 a) Property and casualty reserves represent estimated future losses on property and casualty policies. The property and casualty reserves and the corresponding ceded claims recoverable were acquired on acquisition of The Warranty Group. The property and casualty business is being run off and new business is not being booked. The reserves are 100% ceded to third-party reinsurers. 1 3 . O T H E R L I A B I L I T I E S Other liabilities comprise the following: As at December 31 Reserves(a) Boeing advance(b) A subsidiary of Aon Corporation, the former parent of The War - ranty Group, is the primary reinsurer on approximately 44% (2007 – 37%) of the reserves and provides guarantees on all of the reserves as part of the sales agreement with Onex. Deferred revenue and other deferred items Pension and non-pension post-retirement benefits (note 26) Stock-based compensation Other(c) 2008 2007 $ 239 $ 1,077 377 211 52 331 167 625 231 178 243 219 $ 2,287 $ 1,663 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. Unearned Premiums The following table provides details of the unearned premiums as at December 31. Unearned premiums Current portion of unearned premiums 2008 2007 $ 2,924 (1,111) $ 2,654 (1,008) a) Reserves consist primarily of US$139 (2007 – US$145) 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, 2008, US$1,095 (2007 – US$700) in such advance payments had been made, of which US$76 has been recognized as revenue and US$1,019 will be settled against future sales of Spirit AeroSystems’ Long-term portion of unearned premiums $ 1,813 $ 1,646 787 aircraft units to Boeing. US$135 of the payments has been recorded as a current liability. c) Other includes the long-term portion of acquisition and re struc turing accruals, amounts for liabilities arising from indemnifi cations, mark-to-market valuations of hedge contracts and warranty provisions. 1 4 . 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 Book to tax differences on PPE and intangibles Non-taxable gains Other, including permanent differences Provision for income taxes Classified as: Current Future Provision for income taxes 2008 $ 356 (116) (39) (265) (85) 4 (107) 2007 $ (513) (164) (3) 93 – 217 75 $ (252) $ (295) $ (318) 66 $ (252) $ (227) (68) $ (295) Onex Corporation December 31, 2008 91 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 4 . I N C O M E TA X E S ( c o n t ’ d ) The Company’s future income tax assets and liabilities comprise 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 2008 2007 $ 1,254 $ 39 463 217 (3) 15 8 95 42 64 (1,438) 756 (600) (81) (684) (114) (1,479) $ (723) $ 255 501 (29) (1,450) $ (723) 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) (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 when it is more likely than not that the non-capital losses will expire prior to utilization. At December 31, 2008, Onex and its investment-holding compa- the amount of $3,850, of which $961 had no expiry, $806 was nies had $233 of non-capital loss carryforwards and $230 of capi- available to reduce future income taxes between 2009 and 2013, tal loss carryforwards. inclusive, and $2,083 was available with expiration dates of 2014 At December 31, 2008, certain operating companies in through 2037. Canada and the United States had non-capital loss carryforwards Cash taxes paid during the year amounted to $313 available to reduce future income taxes of those companies in (2007 – $194). 92 Onex Corporation December 31, 2008 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 5 . 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 nomi- nal 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 thereupon be entitled to elect only 20% of the Directors and oth- erwise will cease to have any general voting rights. The Subordinate Voting Shares would then carry 100% of the general voting rights and be entitled to elect 80% of the Directors. iii) An unlimited number of Senior and Junior Preferred Shares issuable in series. The Directors are empowered to fix the rights to be attached to each series. There is no consolidated paid-in value for these shares. b) During 2008, under the Dividend Reinvestment Plan, the Com - pany issued 6,279 (2007 – 3,952) Subordinate Voting Shares at a total value of less than $1 (2007 – less than $1). In 2008 and 2007, no Subordinate Voting Shares were issued upon the exercise of stock options. Onex renewed its Normal Course Issuer Bid in April 2008 for one year, permitting the Company to purchase on the Toronto Stock Exchange up to 10% of the public float of its Sub - ordinate Voting Shares. The 10% limit represents approximately 9.4 million shares. The Company repurchased and cancelled under Nor mal Course Issuer Bids 3,481,381 (2007 – 3,357,000) of its Subor dinate Voting Shares at a cash cost of $101 during 2008 (2007 – $113). The excess of the purchase cost of these shares over the average paid-in amount was $87 (2007 – $101), which was charged to retained earnings. As at December 31, 2008, the Company had the capacity under the current Normal Course Issuer Bid to purchase approximately 7.4 million shares. c) At December 31, 2008, the issued and outstanding share capital consisted of 100,000 (2007 – 100,000) Multiple Voting Shares, 122,098,985 (2007 – 125,574,087) Subordinate Voting Shares and 176,078 (2007 – 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”) and a Management Deferred Share Unit Plan (“Man - age ment DSU Plan”) as described in note 1. Details of DSUs outstanding under the plans are as follows: Outstanding at December 31, 2006 Granted Additional units issued in lieu of compensation and cash dividends Redeemed Outstanding at December 31, 2007 Granted Additional units issued in lieu of compensation and cash dividends Outstanding at December 31, 2008 Director DSU Plan Management DSU Plan Number of DSUs Weighted Average Price Number of DSUs Weighted Average Price 177,134 43,550 16,170 (10,940) 225,914 45,000 26,443 297,357 $ 39.24 $ 34.85 $ 36.16 $ 32.54 $ 24.30 – – – – – – – – – – 202,902 202,902 $ 30.96 Onex Corporation December 31, 2008 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 1 5 . S H A R E C A P I TA L ( c o n t ’ d ) Details of options outstanding are as follows: e) The Company has a Stock Option Plan (the “Plan”) under which options and/or share appreciation rights for a term not exceeding 10 years may be granted to Directors, officers and employees for the acquisition of Subordinate Voting Shares of the Company at a price not less than the market value of the shares on the business 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 business days exceeds the exercise price of the options or the share appreciation rights by at least 25% (the “hurdle price”). At Decem - ber 31, 2008, 15,612,000 (2007 – 15,612,000) Subordinate Voting Shares were reserved for issuance under the Plan, against which options representing 12,931,450 (2007 – 12,777,500) shares were Outstanding at December 31, 2006 Granted Surrendered Expired Number of Options 13,095,100 803,000 (1,090,600) (30,000) Outstanding at December 31, 2007 12,777,500 Granted Surrendered Expired 702,500 (538,550) (10,000) Weighted Average Exercise Price $ 16.43 $ 35.16 $ 10.84 $ 21.27 $ 18.07 $ 15.95 $ 14.97 $ 34.00 Outstanding at December 31, 2008 12,931,450 $ 18.07 outstanding. The Plan provides that the number of options issued During 2008, the total cash consideration paid on options surren- to certain individuals in aggregate may not exceed 10% of the dered was $9 (2007 – $26). This amount represents the difference shares outstanding at the time the options are issued. between the market value of the Subordinate Voting Shares at the Options granted vest at a rate of 20% per year from the time of surrender and the exercise price, both as determined date of grant with the exception of the 775,000 remaining options under the Plan. granted in December 2007, which vest at a rate of 16.7% per year. When an option is exercised, 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. Options outstanding at December 31, 2008 consisted of the following: Number of Outstanding Options Exercise Price Number of Exercisable Options Hurdle Price Remaining Life (years) 203,000 609,500 505,000 7,260,000 2,436,450 135,000 285,000 20,000 775,000 702,500 12,931,450 $ 20.23 $ 20.50 $ 14.90 $ 15.87 $ 18.18 $ 19.25 $ 29.22 $ 33.40 $ 35.20 $ 15.95 – – – – – – – – – – – $ 25.29 $ 25.63 $ 18.63 $ 19.84 $ 22.73 $ 24.07 $ 36.53 $ 41.75 $ 44.00 $ 19.94 1.0 3.5 4.1 5.2 5.9 7.1 7.9 8.3 8.9 9.9 94 Onex Corporation December 31, 2008 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 6 . 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 1 9 . 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 2008 2007 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 2008 and 2007, Onex completed a number of transactions by selling all or a portion of its ownership interests in certain $ 513 $ 503 companies. The major transactions and the resulting pre-tax gains are summarized and described as follows: 6 31 6 28 Year ended December 31 2008 2007 Interest expense of operating companies $ 550 $ 537 Gains on: Cash interest paid during the year amounted to $514 (2007 – $461). 1 7 . E A R N I N G S ( L O S S ) F R O M E Q U I T Y - A C C O U N T E D I N V E S T M E N T S Year ended December 31 2008 2007 Allison Transmission Hawker Beechcraft Onex Real Estate Other $ (198) $ (75) (80) (68) 24 (4) (4) 39 $ (322) $ (44) 1 8 . S T O C K - B A S E D C O M P E N S AT I O N E X P E N S E ( R E C O V E R Y ) Year ended December 31 2008 2007 Parent company(a) Celestica Spirit AeroSystems Other $ (196) $ 25 17 12 89 14 36 11 $ (142) $ 150 a) Parent company includes a recovery of $176 (2007 – expense of $94) relating to Onex’ Stock Option Plan, as described in note 15(e), primarily due to the decrease in the market price of Onex shares during the year. 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) Other, net $ $ – – – – – 4 4 $ 36 68 20 965 48 7 $ 1,144 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 19(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, 2008 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 1 9 . 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 ) e) As described in note 25(d), Onex defers gains associated with the carried interest until such time as the potential for repayment of amounts received is remote. Upon receiving the proceeds from c) In May 2007, as part of Skilled Healthcare’s initial public offering, Skilled Healthcare issued 8.3 million new common shares. As a the sale of Spirit AeroSystems and Skilled Healthcare in May 2007, a significant portion of the carried interest received has a remote result of the dilution of the Company’s ownership interest in Skilled possibility for repayment. As a result, $48 of carried interest was Healthcare from the issuance, a non-cash dilution gain of $20 was recognized as income in 2007. At December 31, 2008, $58 of car- recorded, of which Onex’ share was $5. This reflects Onex’ share of ried interest continued to be deferred. the increase in book value of the net assets of Skilled Healthcare due to the issue of additional shares at a value above book value. 2 0 . 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 As a result of the dilutive transaction above and Onex’ O T H E R E X P E N S E S sale of shares as described in note 19(b), Onex’ economic owner- ship in Skilled Healthcare was reduced to 9% from 21% and Onex’ Year ended December 31 2008 2007 voting interest was reduced to 90% from 100%. Onex continues to Carestream Health $ control and consolidate Skilled Healthcare. d) In May 2007, Spirit AeroSystems completed a secondary offering of common stock. As part of the offering, Onex, Onex Partners I and certain limited partners sold 31.8 million shares, of which Onex’ share was 9.2 million shares. Net proceeds of $1,107 were received by Onex, Onex Partners I and certain limited partners, resulting in a pre-tax gain of $965. Onex’ share of the net proceeds Celestica Husky Sitel Spirit AeroSystems The Warranty Group Other 92 39 22 36 – 7 24 $ 43 39 – 5 12 5 19 $ 220 $ 123 and pre-tax gain was $319 and $258, respectively. Onex recorded a Acquisition, restructuring and other expenses are typically to pro- tax provision of $52 on the gain. vide for the costs of facility consolidations, workforce reductions As a result of this transaction, Onex’ economic ownership and transition costs incurred at the operating companies. in Spirit AeroSystems was reduced to 7% from 13% and Onex’ voting The operating companies record restructuring charges interest was reduced to 76% from 90%. Onex continues to control relating to employee terminations, contractual lease obligations and consolidate Spirit AeroSystems. and other exit costs when the liability is incurred. The recognition Amounts paid on account of the MIP totalled $24 and of these charges requires management to make certain judge- have been deducted from the gain. Additional amounts received on ments regarding the nature, timing and amounts associated with account of the transactions related to the carried interest totalled the planned restructuring activities, including estimating sublease $105, of which Onex’ portion was $42 and management’s portion income and the net recovery from equipment to be disposed of. was $63. As a result of this transaction, Onex recorded a portion of At the end of each reporting period, the operating companies its carried interest into income as described in note 19(e). evaluate the appropriateness of the remaining accrued balances. 96 Onex Corporation December 31, 2008 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 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 2007 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, 2008 Reconciliation of accrued liability Closing balance – December 31, 2007 $ Cash payments Charges Other adjustments Closing balance – December 31, 2008 $ (a) (b) Includes Celestica $1,612 and Sitel Worldwide $24. Includes Celestica $1,562 and Sitel Worldwide $24. 873 848 35 9 (25) 35 3 22 $ $ 223 214 2 38 (13) 2 8 $ 35 $ $ $ 77 75 2 11 (12) 2 – 1 Non-cash Charges $ 486 473 1 Initiated in 2007 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, 2008 Reconciliation of accrued liability Closing balance – December 31, 2007 $ Cash payments Charges Other adjustments Closing balance – December 31, 2008 $ 26 26 1 10 (9) 1 – 2 (a) (b) Includes Carestream Health $68 and Sitel Worldwide $7. Includes Carestream Health $68 and Sitel Worldwide $7. $ 9 9 1 $ $ $ 7 6 3 2 – 3 (1) 4 $ $ $ 58 57 3 2 (4) 3 1 2 Total $ 1,659(a) 1,610(b) 40 58 (50) 39 11 58 Total 100(a) 98(b) 8 14 (13) 7 – 8 $ $ $ $ $ Onex Corporation December 31, 2008 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 2 0 . 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 2008 Employee Termination Costs Lease and Other Contractual Obligations Facility Exit Costs and Other Non-cash Charges $ 3 3 3 Non-cash Charges $ 498 485 5 Total estimated expected costs $ Cumulative costs expensed to date Expense for the year ended December 31, 2008 Reconciliation of accrued liability Cash payments Charges Other adjustments Closing balance – December 31, 2008 $ 73 72 72 $ 8 8 8 $ (39) $ (2) 72 1 34 8 2 8 $ $ $ 120 89 89 (72) 89 (2) $ 15 (a) (b) Includes Carestream Health $92, Sitel Worldwide $36 and Husky $53. Includes Carestream Health $92, Sitel Worldwide $34 and Husky $22. 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, 2008 Reconciliation of accrued liability Closing balance – December 31, 2007 $ Cash payments Charges Other adjustments Closing balance – December 31, 2008 $ 972 946 108 19 (73) 108 4 58 $ $ $ 238 228 13 40 (15) 13 9 47 $ $ 255 221 94 13 (88) 94 (1) $ 18 98 Onex Corporation December 31, 2008 $ Total 204(a) 172(b) 172 $ (113) 169 1 57 $ Total $ 1,963 1,880 220 $ 72 (176) 215 12 $ 123 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 1 . W R I T E D O W N O F G O O D W I L L , I N TA N G I B L E A S S E T S A N D L O N G - L I V E D A S S E T S Year ended December 31 2008 2007 c) In the fourth quarter of 2008, as a result of its annual good- will and intangible asset impairment test, Carestream Health recorded non-cash impairment charges of goodwill and intangi- ble assets relating to its Molecular Imaging Systems business unit. Celestica(a) CEI(b) Carestream Health(c) Sitel Worldwide(d) Other(e) $ 1,061 $ 15 206 142 129 111 – – – 7 $ 1,649 $ 22 d) In the fourth quarter of 2008, as a result of its annual goodwill and intangible asset impairment test, Sitel Worldwide recorded non-cash impairment charges of goodwill and intangible assets primarily related to the European operations with the purchase of SITEL Corporation in January 2007. The impairment was due to the shift in customers from Europe to other regions. e) Other primarily consists of impairments of long-lived assets. In the fourth quarter of 2008, an Onex Partners entity invested in certain securities with the intention that this would lead to a potential operating company acquisition. As a result of market conditions, the market price of the securities decreased in value and the Company recorded an impairment charge of $65, of which Onex’ share was $14. In addition, Husky recorded a long- lived asset impairment relating to the decision to shift production between regional units under Husky’s transformation plan. a) In the fourth quarter of 2008, as a result of its annual goodwill impairment test, Celestica recorded a non-cash charge relating to goodwill associated with its Asia reporting unit. The impairment was driven by a combination of factors, including Celestica’s declining market capitalization in 2008 as well as the significant end-market deterioration and economic uncertainties impacting expected future demand. At December 31, 2008, the remaining goodwill balance at Celestica was nil. The goodwill impairment charge is non-cash in nature and does not affect Celestica’s liquidity, cash flows from operating activities, or its compliance with debt covenants. b) In the fourth quarter of 2008, as a result of its annual goodwill impairment test, CEI recorded a non-cash charge relating to good- will. The impairment was driven by a combination of factors, including significant end-market deterioration and economic uncertainties impacting expected future demand. At December 31, 2008, the remaining goodwill balance at CEI was nil. 2 2 . 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 2008 123 123 2007 128 128 Onex Corporation December 31, 2008 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 2 3 . 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, 2008 and 2007 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 Financial liabilities (assets): Long-term debt Foreign currency contracts Interest rate swap agreements 2008 2007 Carrying Amount Fair Value Carrying Amount Fair Value $ 7,813 $ $ 57 159 $ 5,934 $ $ 57 159 $ 6,519 $ $ (7) (24) $ 6,387 $ $ (7) (24) 2 4 . 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 EMSC Skilled Healthcare Spirit AeroSystems Tube City IMS 2008 Number of Significant Customers 1 2 – 1 2 2 2 Percentage of Revenues 11% 37% – 23% 68% 97% 39% 2007 Number of Significant Customers 1 3 2 1 2 2 2 Percentage of Revenues 16% 45% 21% 25% 68% 98% 37% Accounts receivable from the above significant customers at December 31, 2008 totalled $762 (2007 – $741). 100 Onex Corporation December 31, 2008 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 In 2007, Onex, Onex Partners II and certain limited partners together with The Carlyle Group completed the acquisition of b) Onex and its operating companies are or may become parties to legal claims, product liability and warranty claims arising from Allison Transmission from General Motors Cor poration (“GM”). the ordinary course of business. Certain operating companies, as Onex, Onex Partners II and certain limited partners own 49% of conditions of acquisition agreements, have agreed to accept cer- Allison Transmission. Onex’ share of the in vestment is accounted tain pre-acquisition liability claims against the acquired compa- for by the equity method. At Decem ber 31, 2008, Allison Trans - nies. The operating companies have recorded liability provisions mission had significant long-term receivables from GM. These based on their consideration and analysis of their exposure in receivables relate to agreements with GM to share future estimated respect of such claims. Such provisions are reflected, as appropri- costs between the two companies. These costs included employee ate, in Onex’ consolidated financial statements. Onex, the parent post-retirement healthcare obligations and a long-term special company, has not currently recorded any further liability provi- coverage program for select customers. Cash flows for these two sion and we do not believe that the resolution of known claims items are expected to be spread over a number of years. The recov- would reasonably be expected to have a material adverse impact erability of these receiveables would be in question if GM was on Onex’ consolidated financial position. However, the final out- unable to continue as a going concern. No provision has been come with respect to outstanding, pending or future actions can- recorded by Allison Transmission at December 31, 2008 for a loss not be predicted with certainty, and therefore there can be no on these receivables. assurance that their resolution will not have an adverse effect on 2 5 . 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 R E L AT E D PA R T Y T R A N S A C T I O N S a) Contingent liabilities in the form of letters of credit, letters of guarantee and surety and performance bonds are primarily pro- vided by certain operating companies to various third parties and include certain bank guarantees. At December 31, 2008, the amounts potentially payable in respect of these guarantees totalled $547. Certain operating companies and Onex have guar- antees with respect to employee share purchase loans that amounted to $1 at December 31, 2008. The Company, which includes the operating companies, has commitments in the total amount of approximately $119 with respect to corporate investments. A significant portion of this amount is to be funded by third-party limited partners of the Onex funds. The Company, which includes the 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 esti- mated at this time. However, in certain circumstances, the Com - pany and its operating companies have recourse against other parties to mitigate the risk of loss from these indemnifications. The Company, which includes the operating companies, have commitments with respect to real estate operating leases, which are disclosed in note 11. Onex’ consolidated financial position. 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 opera- tions. As conditions of acquisition agreements, certain operating companies have agreed to accept certain pre-acquisition liability claims on the acquired companies after obtaining indemnification from prior owners. The Company and its operating companies also have insurance to cover costs incurred for certain environmental mat- 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 provided committed capital for Onex-sponsored acquisitions not related to Onex’ operating companies at Decem - ber 31, 2003 or to ONCAP. As at December 31, 2008, approximately US$1,477 had been invested of the total approximately 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. The total amount invested in Onex Partners I’s remaining investments by Onex management and directors at The aggregate capital commitments at December 31, December 31, 2008 was US$41. 2008 amounted to $339. Onex Corporation December 31, 2008 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 5 . 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 Onex received annual management fees based upon 2% R E L AT E D PA R T Y T R A N S A C T I O N S ( c o n t ’ d ) of the capital committed to Onex Partners II by investors other 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 associ ated with the carried interest until such time as the potential for repayment of amounts received is remote. For the year ended December 31, 2008, nil (2007 – $46) had been received by Onex as carried interest while management received nil (2007 – $69) with respect to the car- ried interest. At December 31, 2008, the total amount of carried interest that has been deferred from income was $58 (2007 – $58). As de scribed in note 19(e), $48 of carried interest was recognized as income during 2007. e) In August 2006, Onex completed the closing of Onex Partners II with funding commitments totalling approximately US$3,450. Onex Partners II provides committed capital for Onex-sponsored acquisitions not related to Onex’ operating companies at Decem - ber 31, 2003, ONCAP or to Onex Partners I. As at December 31, 2008, approximately US$2,903 had been invested of the total approximately US$3,450 of capital committed. Onex has funded US$1,148 of its US$1,407 commitment. Onex controls the General Partner and Manager of Onex Partners II. Onex management has committed, as a group, to invest a minimum of 1% of Onex Part - ners II, which may be adjusted annually up to a maximum of 4%. As at December 31, 2008, management and directors had commit- ted 4%. The total amount invested in Onex Partners II’s invest- ments by Onex management and directors at December 31, 2008 was US$115, of which US$14 was invested in the year ended December 31, 2008. 102 Onex Corporation December 31, 2008 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 2008, when Onex established a successor fund, Onex Partners III. Onex is entitled to receive a carried interest on overall gains achieved by Onex Partners II investors other than Onex to the extent of 20% of the gains, pro- vided that Onex Part ners II investors have achieved a minimum 8% return on their investment in Onex Partners II over the life of Onex Partners II. The investment by Onex Partners II investors for this purpose takes into consideration management fees and other amounts paid by Onex Partners II investors. The returns to Onex Partners II investors other than Onex and Onex management are based upon all investments made through Onex Partners II, with the result that initial carried inter- ests achieved by Onex on gains could be recovered from Onex if subsequent Onex Partners II investments do not exceed the overall target return level of 8%. Consistent with market practice and Onex Partners I, Onex, as sponsor of Onex Partners II, will be 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. As at December 31, 2008, no amount has been received as carried interest related to Onex Partners II. f) In 2008, Onex completed certain closings of Onex Partners III with funding commitments totalling approximately US$4,000 at December 31, 2008, which included Onex’ commitment of US$1,000 at that time. Onex Partners III is to provide committed capital for future Onex-sponsored acquisitions not related to Onex’ operating companies at December 31, 2003 or to ONCAP, Onex Partners I or Onex Part ners II. As at December 31, 2008, no amounts had been invested. Onex has a US$1,000 commitment for the peri- od from January 1, 2009 to June 30, 2009. On December 31, 2008, Onex gave notice to the limited partners of Onex Partners III that Onex’ commitment would decrease by approximately US$500 commencing July 1, 2009. This commitment may be increased by up to approximately US$1,000, at the option of Onex but could not be decreased thereafter. Onex controls the General Partner and Manager of Onex Partners III. Onex management has committed, as a group, to invest a minimum of 1% of Onex Partners III, which may be adjusted annually up to a maximum of 6%. At December 31, 2008, management and directors had committed 3%. Onex receives annual management fees based upon 1.75% of the capital committed to Onex Partners III by investors other than Onex and Onex management. The annual manage- ment fee is reduced to 1% of the net funded commitment at the earlier of the end of the commitment period, when the funds are 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 fully invested, or if Onex establishes a successor fund. Onex is enti- Under the terms of the MIP, the total amount paid by tled to receive a carried interest on overall gains achieved by Onex management members for the interest in the investments in 2008 Partners III investors other than Onex to the extent of 20% of the was $2 (2007 – $2). Investment rights exercisable at the same gains, provided that Onex Partners III investors have achieved a price for 7.5% (2007 – 7.5%) of the Company’s interest in acquisi- minimum 8% return on their investment in Onex Partners III over tions were issued at the same time. Realizations under the MIP the life of Onex Partners III. The investment by Onex Partners III including the value of units distributed were less than $1 in 2008 investors for this purpose takes into consideration management (2007 – $38). fees and other amounts paid by Onex Partners III investors. The returns to Onex Partners III investors other than Onex and Onex management are based upon all investments h) Members of management and the Board of Directors of the Company invested $11 in 2008 (2007 – $13) in Onex’ investments made through Onex Partners III, with the result that initial carried made outside of Onex Partners at the same cost as Onex and interests achieved by Onex on gains could be recovered from other outside investors. Those investments by management and Onex if subsequent Onex Partners III investments do not exceed the Board are subject to voting control by Onex. the overall target return level of 8%. Consistent with market prac- tice and Onex Partners I and Onex Partners II, Onex, as sponsor of Onex Partners III, will be allocated 40% of the carried interest with i) Each member of Onex management is required to reinvest 25% of the proceeds received related to their share of the MIP and 60% allocated to management. Onex defers all gains associated carried interest to acquire Onex shares in the market or Manage - with the carried interest until such time as the potential for repay- ment DSUs until the management member owns one million ment of amounts received is remote. As at December 31, 2008, no Onex shares and/or Management DSUs. During 2008, Onex man- amount has been received as carried interest related to Onex agement reinvested $2 (2007 – $18) to acquire Onex shares. Partners III. g) Under the terms of the MIP, management members of the Company invest in all of the operating entities acquired by the Company. j) 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, 2008 The aggregate investment by management members was $16 (2007 – $11). 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 invest- ment rights for the remaining 5⁄6ths (7.5%) of the MIP’s share at the same price. Amounts invested under the minimum invest- ment requirement in Onex Partners transactions are allocated to meet the 1.5% Onex investment requirement under the MIP. For investments made 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 investment before the fifth year. The MIP was amended in 2007. For investments made 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 disposes of all of an investment before the seventh year. Under the MIP, the investment rights related to a particular acquisition are exercisable only if the Company earns a minimum 15% per annum compound rate of return for that acquisition after giving effect to the investment rights. 2 6 . 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 2008 for defined contribution pension plans were $142 (2007 – $120). Accrued benefit obligations and the fair value of the plan assets for accounting purposes are measured at December 31 of each year. The most recent actuarial valuations of the largest pen- sion plans for funding purposes was as of April 2007 to December 2008, and the next required valuations will be as of December 2008 and January 2009. In 2008, 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 $177 (2007 – $164). In cluded in the total was $32 (2007 – $33) contributed to multi- employer plans. Onex Corporation December 31, 2008 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 6 . 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 ) 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 2008 2007 2008 2007 2008 2007 $ 789 $ 910 $ 390 $ 418 $ 128 $ 120 2 50 – (14) – 139 – – – – (50) 3 4 49 – (13) (108) (103) 36 – – – 14 – 16 23 1 (19) (50) (8) 1 – 1 (6) 50 1 15 20 1 (15) (25) (42) 67 (35) – (2) (14) 2 5 7 – (4) 2 14 – – – (1) – – 6 7 – (4) (1) (9) 10 – – (1) – – $ 919 $ 789 $ 400 $ 390 $ 151 $ 128 $ 1,129 $ 1,166 $ 279 $ 294 $ (221) 4 – (14) 173 – – – (59) (4) 71 7 – (13) (149) 36 – – 13 (2) (55) 40 1 (19) (14) 2 – (6) 59 (5) 15 30 1 (15) (34) 35 (33) (1) (13) – – – 4 – (4) – – – – – – – $ $ – – 4 – (4) – – – – – – – Closing plan assets $ 1,008 $ 1,129 $ 282 $ 279 $ Asset category Equity securities Debt securities Real estate Other Percentage of Plan Assets 2008 46% 47% 2% 5% 100% 2007 51% 41% 4% 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. 104 Onex Corporation December 31, 2008 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 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 2008 2007 2008 2007 2008 2007 $ 1,008 $ 1,129 $ 282 (919) (789) (400) $ 279 (390) $ – (151) $ – (128) $ 89 – 240 41 $ 340 $ (118) $ (111) $ (151) $ (128) (4) (98) 26 (6) 88 (41) – 70 (26) (9) 26 – (10) 27 – Deferred benefit amount – asset (liability) $ 370 $ 264 $ (77) $ (67) $ (134) $ (111) The deferred benefit asset is included in the Company’s consolidated balance sheets under “Other long-term assets” (note 8). The deferred benefit liabilities are included in the Company’s consolidated balance sheets under “Other liabilities” (note 13). 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 2008 2007 2008 2007 2008 2007 $ 2 50 221 (307) 6 (11) – – – $ $ 4 49 (71) (15) – 1 – – – 16 23 55 (75) (48) 49 1 – – $ 15 20 (15) (1) 4 – – – – $ 5 7 – – 2 (1) – (1) – $ 6 7 – – 1 – (1) (1) (1) Net periodic costs (income) $ (39) $ (32) $ 21 $ 23 $ 12 $ 11 Onex Corporation December 31, 2008 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 6 . 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 Weighted average discount rate Weighted average rate of compensation increase Benefit cost Weighted average discount rate Weighted average expected long-term Pension Benefits Non-Pension Post-Retirement Benefits 2008 2007 2008 2007 4.10%–7.50% 4.56%–6.60% 5.50%–6.46% 5.00%–6.40% 0.00%–4.80% 0.00%–4.80% 0.00%–4.68% 0.00%–3.40% 4.10%–6.60% 4.56%–6.00% 5.60%–7.50% 5.00%–6.00% rate of return on plan assets 5.00%–8.50% 4.97%–8.50% n/a n/a Weighted average rate of compensation increase 0.00%–4.80% 0.00%–4.80% 0.00%–5.30% 0.00%–3.60% 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 2008 2007 3.50%–15.00% 3.50%–5.00% 3.50%–13.00% 3.50%–5.00% Between 2009 and 2019 Between 2008 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 2008 $ $ 2 20 1% Increase 2007 $ $ 2 21 2008 $ (2) $ (16) 1% Decrease 2007 $ (1) $ (17) 2 7 . VA R I A B L E I N T E R E S T E N T I T I E S 2 8 . 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 to develop residential units on property acquire or make investments in other businesses. These transac- in the United States. The partnerships are considered variable tions are subject to a number of conditions, many of which are interest entities (“VIEs”) under Accounting Guideline 15. However, beyond the control of Onex or the operating companies. The the Com pany is not the primary beneficiary of these VIEs and, effect of these planned transactions, if completed, may be signifi - accordingly, the Company accounts for its interest in the partner- cant to the consolidated financial position of Onex. ships using the equity-accounting method. The partnerships have combined assets of $340 as at December 31, 2008. The Company’s maximum exposure to loss is its carrying value of $6. 106 Onex Corporation December 31, 2008 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 9 . I N F O R M AT I O N B Y I N D U S T R Y A N D consists of The Warranty Group, which underwrites and adminis- G E O G R A P H I C S E G M E N T S 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 2008 (2007 – seven): electronics manufacturing services; aerostruc- tures; healthcare; financial services; customer support services; metal services; and other. The electronics manufacturing services segment consists of Celestica, which provides manufacturing ser - vices for electronics original equipment manufacturers (“OEMs”). The aerostructures segment consists of Spirit Aero Sys tems, which manufactures aerostructures. The healthcare segment consists of EMSC, a leading provider of ambulance transport services and outsourced hospital emergency department physician staffing and management services in the United States; Carestream Health, a leading global provider of medical imaging and health- care 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, education and support services for people with disabilities and special needs. The financial services segment ters 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 ser - vices for telecommunications, consumer goods, retail, technology, transportation, finance and utility companies. The metal ser vices segment consists of Tube City IMS, a leading provider of out- sourced 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 Transmission, a leading designer and manufacturer of automatic transmissions for on- highway trucks and buses, off-highway equipment and military vehicles worldwide; Hawker Beechcraft, a leading manufacturer of business jet, turboprop and piston aircraft; RSI, a leading man- ufacturer of cabinetry for the residential marketplace in North America; Cineplex Entertainment, Canada’s largest film exhibition company; as well as Radian, CEI, Onex Real Estate, ONCAP II and the parent company. The operations of ResCare, Allison Trans - mission, Hawker Beechcraft, RSI and Cine plex Entertain ment are accounted for using the equity-accounting method as described in note 1. Onex Corporation December 31, 2008 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 9 . 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 S ( c o n t ’ d ) 2008 Industry Segments Electronics Manufacturing Services Aero- structures Healthcare Financial Services Customer Support Services Metal Services Other Consolidated Total Revenues Cost of sales $ 8,220 $ 3,965 $ 6,152 $ 1,388 $ 1,856 $ 3,112 $ 2,188 $ 26,881 (8,(7,556)) (3,(3,215)) (3,(4,504)) (727(665)) (1,(1,197) (2,932) (1,650)) (21,719)) Selling, general and administrative expenses (278(274)) (193(188)) (561(740)) (260(460)) (516(520)) (49(71)) (306(491)) (2,744)) Earnings before the undernoted items 260390 610562 606908 412263 147139 98109 (4947) 2,082,418 Amortization of property, plant and equipment Amortization of intangible assets and deferred charges Interest expense of operating companies Interest income (expense) Earnings (loss) from equity-accounted investments Foreign exchange gains (loss) (114(97)) (89(117)) (160(186)) (10(12)) (52(64)) (63(65)) (47(83)) (535(624)) (23(16)) (73(53)) 1616 3120 710 (5(5)) (152(229)) (186(19)) (39(42)) (239(255)) (14(9)) (15(19)) (65(69)) (12(13)) (41(41)) (16(65)) (409(366)) (66(81)) (537(550)) 1413 28(9) (3(5)) 6(1) –– –– –– –– (3(1)) (2(16)) –– (5(7)) 22 –– (110) (2–) 2– –– (5(36)) –– –– –– –– –– –– –– 69(13) 12535 (58(335)) (44(322)) (146107) (11883) (92190) (150142) (111) 1,1444 6(12) 1,1444 (17(46)) (123(220)) –– (19) –– (2(6) Stock-based compensation recovery (expense) (14(25)) (36(17)) Other income (expense) Gains on sales of operating investments, net –– –– 114 –– Acquisition, restructuring and other expenses (39(39)) (12–) (45(92)) Writedown of goodwill, intangible assets and long-lived assets (15(1,061)) –– –(142) –– –(129) –(1) –(316) (15(1,649)) Earnings (loss) before income taxes, non-controlling interests and discontinued operations Recovery of (provision for) income taxes Non-controlling interests Earnings (loss) from continuing operations Earnings from discontinued operations Net earnings (loss) Total assets Long-term debt (a) Property, plant and equipment additions Goodwill additions Goodwill $ (904) $ 399 $ 12 $ 199 $ (166) $ (11) $ (590) $ (1,061) (6) 791 (119) – (119) (137) (245) 17 – 17 (108) 34 (62) – (62) (65) (94) 40 – 40 (3) (1) (170) – (170) 4 5 (2) – (2) 63 531 4 9 13 (252) 1,021 (292) 9 (283) $ 4,612 $ 4,821 $ 6,660 $ 6,095 $ 1,020 $ 1,026 $ 5,498 $ 29,732 $ $ $ $ 892 124 – – $ $ $ $ 697 $ 3,367 299 – 3 $ $ 225 64 $ 1,398 $ $ $ $ 237 21 – 419 $ $ $ $ 796 67 7 199 $ $ $ $ 519 $ 1,167 $ 7,675 73 4 355 $ $ $ 50 96 $ $ 859 171 572 $ 2,946 (a) Long-term debt includes current portion, excludes capital leases and is net of deferred charges. 108 Onex Corporation December 31, 2008 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 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 $ 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 expense Other income (expense) Gains on sales of operating investments, net Acquisition, restructuring and other expenses Writedown of goodwill, intangible assets and 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) (152) (239) 7 14 28 (3) 6 – (45) (7) (674) (481) 244 (10) (18) (14) – – – (3) (2) – (5) – (1,205) (516) 147 (52) (15) (65) 2 – (1) (2) 2 – (5) – (1,529) (49) 98 (63) (12) (41) – – – – – – – – 900 (643) (306) (49) (47) (16) (66) 69 (58) (146) (92) (11) 1,144 (17) $ 23,433 (19,133) (2,384) 1,916 (535) (241) (537) 125 (44) (118) (150) 6 1,144 (123) – (22) discontinued operations $ 1 $ 469 $ 55 $ 192 $ 11 $ (18) $ 711 $ 1,421 Recovery of (provision for) income taxes Non-controlling interests Earnings (loss) from continuing operations Earnings from discontinued operations Net earnings (loss) Total assets Long-term debt (a) Property, plant and equipment additions Goodwill additions Goodwill (22) 18 (3) – (3) 4,419 752 67 – 831 $ $ $ $ $ $ (176) (265) 28 – 28 3,272 567 268 – 4 $ $ $ $ $ $ (29) (36) (10) – (10) 5,745 2,835 136 356 1,097 $ $ $ $ $ $ (67) (87) 38 – 38 5,536 194 29 – 341 $ $ $ $ $ $ (26) (4) (19) – (19) 1,039 688 51 381 307 $ $ $ $ $ $ $ $ $ $ $ $ 7 7 (4) – (4) 881 380 55 341 289 18 (650) 79 119 198 (295) (1,017) 109 119 $ 228 5,307 $ 26,199 960 27 408 574 $ $ $ $ 6,376 633 1,486 3,443 $ $ $ $ $ $ (a) Long-term debt includes current portion, excludes capital leases and is net of deferred charges. Onex Corporation December 31, 2008 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 9 . 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 S ( c o n t ’ d ) Geographic Segments 2008 2007 Canada U.S. Europe Asia and Oceania Other Total Canada U.S. Europe Asia and Oceania Other Total Revenue $ 1,346 $ 13,259 $ 4,412 $ 5,978 $ 1,886 $ 26,881 $ 1,619 $ 11,235 $ 3,607 $ 5,358 $ 1,614 $ 23,433 Property, plant and equipment $ 363 $ 2,583 $ 506 $ 467 $ 147 $ 4,066 $ 337 $ 2,301 $ 459 $ 325 $ 67 $ 3,489 Intangible assets $ 432 $ 1,766 $ 408 $ 108 $ 41 $ 2,755 $ 434 $ 1,638 $ 458 $ 118 $ 44 $ 2,692 Goodwill $ 212 $ 2,224 $ 357 $ 117 $ 36 $ 2,946 $ 191 $ 1,853 $ 441 $ 930 $ 28 $ 3,443 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 24. 110 Onex Corporation December 31, 2008 SUMMARY OF 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) 2008 2007 2006 2005 2004 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 recovery (expense) Other income (expense) Gains on sales of operating investments, net Acquisition, restructuring and other expenses Writedown of goodwill, intangible assets and 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 from discontinued operations (a) $ 26,881 $ 23,433 $ 18,620 $ 15,451 $ 12,590 (21,719) (2,744) (19,133) (2,384) (16,160) (1,098) $ 2,418 $ 1,916 $ 1,362 $ (624) (366) (550) 35 (322) 83 142 (12) 4 (220) (1,649) (1,061) (252) 1,021 (292) 9 (535) (241) (537) 125 (44) (118) (150) 6 1,144 (123) (22) 1,421 (295) (1,017) 109 119 (370) (81) (339) 122 25 22 (634) 9 1,307 (292) (13) 1,118 (24) (838) 256 746 (13,732) (11,671) (913) 806 (333) (81) (229) 72 5 (35) (44) 76 921 (252) (8) 898 (70) (1) 827 138 $ (643) 276 (294) (63) (84) 25 (5) (130) (55) 105 108 (195) (479) (791) (295) 838 (248) 283 Net earnings (loss) for the year $ (283) $ 228 $ 1,002 $ 965 $ 35 Total assets Shareholders’ equity Dividends declared per Subordinate Voting Share Earnings (loss) per Subordinate Voting Share: Continuing operations Net earnings (loss) Fully diluted $ 29,732 $ 26,199 $ 22,578 $ 14,845 $ 11,809 $ $ $ $ $ 1,553 0.11 (2.37) (2.30) (2.30) $ $ $ $ $ 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 (a) The earnings from discontinued operations for 2004 include the sale of Dura Automotive, Loews Cineplex Group and InsLogic. The earnings from discontinued operations from 2004 to 2005 include the sale of Commercial Vehicle Group and Magellan. The earnings from discontinued operations from 2004 to 2006 include the disposition of J.L. French Automotive and the discontinued operations of Cineplex Entertainment and Sitel Worldwide. The earnings from discontinued operations from 2004 to 2008 include the discontinued operations of certain ONCAP companies. The 2006 earnings from discontinued operations also include the 2006 recovery of taxes relating to the 2001 sale of Sky Chefs and the discontinued operations of Town and Country. Certain amounts reported for the years 2004 to 2007 have been reclassified to conform to the presenta- tion adopted in the current period. Year-end closing share price As at December 31 Toronto Stock Exchange 2008 2007 2006 2005 2004 $ 18.19 $ 34.99 $ 28.35 $ 18.92 $ 19.75 Onex Corporation December 31, 2008 111 SHAREHOLDER INFORMATION Shares Registrar and Transfer Agent Duplicate communication Subordinate Voting Shares of CIBC Mellon Trust Company Registered holders of Onex Corporation the Company are listed and traded P.O. Box 7010 on the Toronto Stock Exchange. Adelaide Street Postal Station Toronto, Ontario M5C 2W9 (416) 643-5500 or call toll-free throughout 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 Share symbol OCX Dividends Dividends on Subordinate Voting Shares are payable quarterly on or about January 31, April 30, July 31 and Canada and the United States mailings result. Shareholders who 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 2008 the indicated dividend rate for certificates or dividend cheques mailing purposes. each Subordinate Voting Share was should be directed to the Registrar $0.11 per annum. and Transfer Agent. Shares held in nominee name To ensure that shareholders whose Shareholder Dividend Reinvestment Plan Investor Relations Contact shares are not held in their name receive Requests for copies of this report, all Company reports and releases The Dividend Reinvestment Plan provides 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 (416) 362-7711 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 May 21, 2009 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, 2008