OncoCyte Annual Report 2009

Plain-text annual report

Management’s Discussion and Analysis and Financial Statements December 31, 2009 THE ONEX OPERATING COMPANIES Onex’ businesses generate annual revenues of $32 billion, have assets of $36 billion and employ over 210,000 people worldwide. Table of Contents 2 Management’s Discussion and Analysis IBC Shareholder Information 74 Consolidated Financial Statements CHAIRMAN’S LETTER Dear Shareholders, The ﬁrst days of 2009 were fraught with anxiety about the condition of the world ﬁnancial system. That anxiety turned to outright fear as capital markets plummeted throughout the ﬁrst quarter of the year. Busi nesses everywhere slowed precipitously as they focused on preserving cash, scrutinizing the credit-worthiness of their customers and waiting to see what would happen next. Fortunately, what happened next was an improvement in the most liquid markets followed by an improvement in business con ditions generally. The up-tick thus far has been modest, affecting the industrial economy more than the consumer economy and still leaving us with some concern about the strength of the recovery. But the slide has ended. Several of our operating companies were severely tested. With one exception, they met their challenges and sur- vived the worst recession since the Great Depression. They reduced their cost structures, improved margins and are well positioned for future growth. It helped that they weren’t over-leveraged going into the downturn. It also helped that our recently acquired businesses are amongst the best we’ve ever owned. Whatever the reason, we are proud of our oper - ating companies’ performance in 2009 and congratulate our management teams on a job well done. We were also gratiﬁed by the support Onex Part ners received from our existing investors and several new investors. We met our original target for third-party capital raised of US$3.5 billion. Very few funds were able to attract new investors during the last two years. Onex Part ners’ success speaks to the value of the Onex brand and its track record of providing a 29 percent return on invested capital for 25 years. In Decem ber, Onex increased its commitment to Onex Part ners III to US$800 million, making the total fund size US$4.3 billion. Our increased commitment reﬂects our excel- lent liquidity position and our belief that some great businesses will become available following the downturn. Some other highlights of the year: (cid:129) We sold shares in Cineplex, Celestica and Emer gency Medical Services Corporation for net proceeds to Onex of about $610 million, realizing very substantial returns on our invested capital; (cid:129) Onex Partners acquired the Tropicana Las Vegas Hotel and Casino through the purchase and subsequent conver- sion of its debt. We believe that we acquired Tropi cana Las Vegas during a cyclical low in the gaming sector and well below precedent levels; (cid:129) We raised over $200 million for the new Onex Credit Partners Credit Strategy Fund, a publicly traded Cana dian retail fund, and saw Onex Credit Partners’ assets under management triple to almost US$800 million – a testament to our credit team, its track record and another example of the strength of the Onex brand; and (cid:129) Our operating companies retired close to US$1.2 billion of debt and distributed US$114 million in dividends as a result of strong cash ﬂow generation. We wouldn’t want to live through too many years like 2009, but when we look back at the year and how we fared, we’re convinced that our strategy of focused value investing and moderate leverage is right for all times. It’s a strategy that lets us sleep at night and lets our businesses survive and gain strength during downturns. Onex has never been in better shape. We’re debt-free, have more than $1 billion in cash and cash-like investments, and enough management fee income to offset our ongoing operating expenses. It’s too soon to know how 2010 will shape up, but we’re conﬁdent we’ll ﬁnd opportunities to increase share- holder value. On behalf of the Onex team, thank you for your continued support. [signed] Gerald W. Schwartz Chairman & CEO, Onex Corporation Onex Corporation December 31, 2009 1 ONEX CORPORATION 25-Year History of Successful Investing Founded in 1984, Onex is one of North America’s oldest and most successful investment ﬁrms com- mitted to acquiring and building high-quality businesses. Onex has completed more than 260 acqui- sitions with a total value of approximately $43 billion. Employing a value-oriented and active ownership investment approach in acquiring and building industry-leading businesses in partner- ship with talented management teams, 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. As an investor ﬁrst and foremost, Onex invests its $3.9 billion of proprietary capital largely through Onex Partners, its ﬂagship private equity platform. Onex also invests through ONCAP, its mid-market private equity platform, Onex Real Estate Partners and Onex Credit Partners. Onex is in excel- lent ﬁnancial condition, with ample cash on hand and no debt at the parent company. Onex is entrusted with third-party capital from institutional investors from around the world. The Company currently has ap - proximately US$7.5 billion of invested and committed capital that it manages on be half of these limited partners. In return, Onex receives a stable and growing stream of annual management fees that offsets the ongoing operating expenses. In addition, Onex is entitled to a share of the proﬁts on the capital it manages for these in ves - tors. This is commonly referred to as car- ried interest. Carried interest, if realized, could signiﬁcantly enhance Onex’ invest- ment returns. Onex is a public company whose shares trade on the Toronto Stock Exchange under the symbol OCX. How Onex’ $3.9 billion of Capital is Deployed at December 31, 2009 Onex Credit Partners 3% Mid-cap Private Equity 4% Onex Real Estate 2% Cash and Near-cash Items 27% Large-cap Private Equity 64% Public 18% Private 46% Investments are valued at fair value as at December 31, 2009 with the exception of a limited number of Onex direct investments held at cost. The Components of Onex’ US$7.5 billion of Third-Party Assets under Management at December 31, 2009 Onex Credit Partners 7% ONCAP 4% Onex Partners I 18% Onex Partners II 26% Onex Partners III 45% Throughout this report, all amounts are in Canadian dollars unless otherwise indicated. 2 Onex Corporation December 31, 2009 MANAGEMENT ’S DISCUSSION AND ANALYSIS The Management’s Discussion and Analysis (“MD&A”) provides a review of how Onex Corpo ration (“Onex”) performed in 2009 and assesses future prospects. The ﬁnancial condition and results of operations are ana- lyzed noting the signiﬁcant changes in the consolidated statements of earnings, consolidated balance sheets and consolidated statements of cash ﬂows of 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 consoli- dated basis and should not be considered as providing sufﬁcient information to make an investment deci- sion in regard to any particular Onex operating company. The following MD&A is the responsibility of management and is as of February 24, 2010. Prepa ra tion of the MD&A includes the review of the disclosures on each business by senior managers of that business and the review of the entire document by each ofﬁcer of Onex and by the Onex Disclosure Committee. The Board of Directors carries out its responsibility for the review of this disclosure through its Audit and Corpo rate Governance Committee, comprised exclusively of independent directors. The Audit and Corpo rate Governance Committee has reviewed and recommended approval of the MD&A by the Board of Directors. The Board of Directors has approved this disclosure. The MD&A is presented in the following sections: 4 Onex Business Objective and Strategies 10 13 13 39 43 51 59 63 65 67 Industry Segments Financial Review Consolidated Operating Results Fourth-Quarter Results Consolidated Financial Position Liquidity and Capital Resources Transition to International Financial Reporting Standards Disclosure Controls and Procedures and Internal Controls over Financial Reporting Outlook Risk Management Onex Corporation’s ﬁnancial ﬁlings, including the 2009 MD&A and Financial Statements and interim quarterly reports, Annual Information Form and Management Information Circular, are available on Onex’ website, 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 operations, performance or results preceded by, followed by or that include words such as “believes”, “expects”, “potential”, “anticipates”, “estimates”, “intends”, “plans” and words of similar connotation, which would constitute forward-looking statements. Forward-looking statements are not guarantees. The reader should not place undue reliance on forward-looking statements and information because they involve risks and uncertainties that may cause actual operations, performance or results to be materially different from those indicated in these forward-looking statements. Onex is under no obli- gation to update any forward-looking statements contained herein should material facts change due to new information, future events or other factors. These cautionary statements expressly qualify all forward-looking statements in this MD&A. Cautionary Statement Regarding Use of Non-GAAP Accounting Measures This MD&A makes reference to operating earnings. Onex uses operating earnings as a measure to evaluate each operating company’s per- formance because it eliminates interest charges, which are a function of the operating company’s particular ﬁnancing structure, as well as certain non-cash charges including stock-based compensation, amortization of intangible assets and any unusual or non-recurring charges. Onex’ method of determining operating earnings may differ from other companies’ methods and, accordingly, operating earnings may not be comparable to measures used by other companies. Operating earnings is not a performance measure under Canadian GAAP and should not be considered either in isolation of, or as a substitute for, net earnings prepared in accordance with Canadian GAAP. Onex Corporation December 31, 2009 3 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S ONEX 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 2009. OUR STRATEGY: Investing + Asset Management Our strategy to deliver value to shareholders and partners is concentrated on investing and asset management. Our investing focuses on our value-oriented and active ownership approach of acquiring and building industry-leading businesses in partnership with talented management teams. We also seek to maintain Onex as a ﬁnancially strong parent company to support our busi- nesses. The objective of our asset management business is to manage and grow third-party capital, which earns management fees for Onex and enhances our overall returns through carried interest. The availability of committed third-party capital enables Onex to be efﬁcient and responsive to acquisition opportunities. INVESTING IN HIGH-QUALITY BUSINESSES: 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 having capital available to grow through acquiring new businesses and facilitating the growth of our existing businesses. 2009 Performance 1) Acquire attractive businesses 2009 was a slow year for private equity activity due to fewer attractive acquisition opportunities and tighter credit markets. During 2009, many vendors of attractive businesses deferred the possi- ble sale of their companies believing that they would not receive what they viewed as sufﬁcient value for their businesses. This may in part have been based on the expectation that earnings, and therefore sale price, would improve in 2010. The improvement in the equity markets in the latter part of 2009 likely also contributed to the slow investing activity. Some companies that may have otherwise required capital were able to issue equity. In addition, the tight credit markets that existed in the ﬁrst half of 2009 made ﬁnancing for acquisitions difﬁcult to obtain. We began to see credit markets recover during the second half of 2009, with some ﬁnancing being available for mid-sized acquisitions and selectively for larger transactions, albeit at higher costs and on more stringent credit terms. In this challenging environment, Onex completed the acquisition of Tropicana Las Vegas Hotel and Casino, one of the best-known casinos in Las Vegas. This acquisition was completed during a cyclical low for the gaming sector, an industry that Onex had focused on through its partner- ship with Alex Yemenidjian, former President of gaming giant MGM Mirage. Tropicana Las Vegas was a distressed-for-control opportunity that Onex identiﬁed in 2008. During 2008 and 2009, Onex acquired the majority of the debt of the business and successfully worked with other lenders to 4 Onex Corporation December 31, 2009 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 prepare a reorganization plan that enabled the company to emerge from bankruptcy protection under Onex’ control. This acquisition was the ﬁrst investment made through Onex Partners III LP. Onex, Onex Partners III, Onex management and Onex’ partner, Mr. Yemenidjian, invested a total of $225 million (US$205 million) in Tropicana Las Vegas during 2009, of which Onex’ share was $49 million (US$45 million). Onex’ strategy for acquiring attractive businesses begins with identifying an industry that has good growth opportunities. Today, Onex has a focus on several industries, including healthcare, aerospace, business services and gaming. We continue to evaluate other industries. 2) Build our businesses into industry leaders During 2009, Onex’ operating companies faced difﬁcult industry conditions with the global economic downturn. Our companies worked to re-align their cost structures to the current busi- ness volumes in order to continue to operate proﬁtably. We believe that these leaner cost structures will position the companies well as volumes increase with an economic recovery. In addition, Emergency Medical Services Corporation (“EMSC”) and Skilled Healthcare completed follow-on acquisitions valued at approximately $86 million to build their businesses. Our companies retired close to US$1.2 billion in debt during the year, strengthening their ﬁnancial position. Today many of our businesses are clear leaders in their markets. We believe these businesses have the manage- ment expertise, quality of products or services and ﬁnancial capital to continue as industry leaders. 3) Grow the value of our businesses While many of our industrial companies experienced a difﬁcult economic environment in 2009, there were events at certain of our businesses during the year that showed the value that has been created: (cid:129) EMSC completed two secondary share offerings at an average of approximately 6.3 times Onex’ original cost. Onex sold a portion of its ownership in EMSC in those offerings, receiving US$310 mil- lion in net proceeds, including carried interest, compared to a cost of US$46 million. (cid:129) Carestream Health paid a second dividend to its shareholders of US$72 million, of which Onex’ share was US$28 million. This is in addition to the US$72 million dividend (Onex’ share was US$28 million) distributed in 2008. (cid:129) In late December 2009, The Warranty Group distributed its third dividend to shareholders in the amount of US$42 million, of which Onex received US$13 million; this is in addition to the US$88 million of total dividends distributed in 2008 and 2007, of which Onex’ share was US$27 million. (cid:129) After more than 10 years of building a strong theatre exhibition business, Onex sold its remaining 13 million trust units of Cineplex Galaxy Income Fund through a secondary offering for approxi- mately $175 million of net proceeds. This sale brought to a close an investment platform that Onex established in 1998 with Galaxy Entertainment. Over more than a decade, Onex completed a number of acquisitions in the theatre exhibition industry, investing US$355 million and ultimately realized total proceeds of approximately US$900 million. Onex Corporation December 31, 2009 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 (cid:129) Onex sold approximately 11 million subordinate voting shares of Celestica in a secondary bought deal offering for net proceeds of $104 million. Since our acquisition of Celestica in 1996 we have realized $939 million and, combined with the value of our remaining ownership interest of $177 million at the end of 2009, have beneﬁted from a total value of $1.1 billion compared to our original cost of $199 million. Excluding the effect of realizations, the value of our public companies in the Onex Partners Funds increased 41 percent from the end of 2008. Much of that growth was driven by the 48 percent and 95 percent growth in share price at EMSC and Spirit AeroSystems, respectively. The overall value of the private companies in the Onex Partners Funds was up by approximately 14 percent at December 31, 2009 from last year. 4) Maintain substantial ﬁnancial strength Onex’ ﬁnancial strength comes from its own capital, as well as that of its third-party limited part- ners in the Onex Partners and ONCAP families of Funds. (cid:129) Onex: During 2009, cash at Onex, the parent company, grew 89 percent to $890 million following the Company’s realizations on Cineplex and a portion of its ownership in EMSC and Celestica. (cid:129) It has been Onex’ policy to maintain a debt-free parent company and not guarantee any of the debt of its operating companies. Onex, the parent company, remains debt-free at Decem ber 31, 2009. (cid:129) Onex Partners Funds: Onex closed its third large-cap private equity fund, Onex Partners III, during 2009 with US$3.5 billion of third-party capital. Including Onex’ US$800 million commit- ment to Onex Partners III, the total fund is US$4.3 billion. At year end, third-party uncalled committed capital through the Onex Partners Funds totalled US$3.8 billion for future Onex- sponsored investments, compared to US$3.5 billion at the end of 2008. (cid:129) ONCAP Funds: ONCAP has third-party committed, uncalled capital of $127 million at December 31, 2009 for future ONCAP-sponsored investments. 6 Onex Corporation December 31, 2009 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S ASSET MANAGEMENT: Manage and Grow Third-Party Capital Our management of third-party capital provides substantial value for Onex shareholders through the management fees we earn and the carried interest opportunity. We seek to grow assets under management and create new asset classes where we believe we can invest third-party capital to provide appropriate returns. We invest that third-party capital alongside Onex’ capital. The table that follows summarizes assets under management, Onex’ invested capital and uncalled third- party capital for the years ended December 31, 2009 and 2008. ($ millions) At December 31 Funds Assets Under Management (Onex and Limited Partners) Onex’ Invested Capital(a) Uncalled Third-Party Capital 2009 2008 2009 2008 2009 2008 Onex Partners ONCAP II Onex Credit Partners US$9,218 $ 491 US$ 782 US$8,573 $ 476 US$ 253 US$1,807 $ 161 US$ 218(b) US$1,756 US$3,766 US$3,500 $ 141 US$ 58 $ 127 n/a $ 156 n/a (a) Onex’ invested capital represents the fair market value in the respective year and excludes Onex’ potential participation in the carried interest. (b) Includes US$130 million of near-cash items. 2009 Performance 1) Good growth in third-party capital under management (cid:129) During 2009, Onex achieved its fundraising target of US$3.5 billion of third-party capital and held the ﬁnal close for its third large-cap private equity fund, Onex Partners III, despite a difﬁcult fundraising environment. This Fund, which represents an approximate 75 percent increase in the amount of third-party capital raised relative to Onex Partners II, includes commitments from both our long-standing partners and new investors from around the world. (cid:129) Onex Credit Partners, Onex’ credit investing platform, raised $208 million of third-party capital through the initial public offering of its Canadian retail fund, OCP Credit Strategy Fund (TSX: OCS.UN), during 2009. This new fund is invested in Onex Credit Partners ﬂagship debt oppor - tunity strategy. (cid:129) In the future, we will look to attract third-party capital for our real estate investing platform. 2) Signiﬁcant income from managing third-party capital (cid:129) Onex earned US$88 million in management fees in 2009 from the Onex Partners and ONCAP Funds, which is up from US$71 million in 2008. During 2009, Onex received a full year of man- agement fees on capital commitments to Onex Partners III. (cid:129) During 2009, Onex received carried interest of US$19 million from the two EMSC secondary offerings. This was net of an offset of US$7 million due to the loss on Cosmetic Essence, Inc. At December 31, 2009, there was approximately US$49 million of unrealized carried interest allocable to Onex based on the public companies held at market value in Onex Part ners I. Onex Corporation December 31, 2009 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 OUR OBJECTIVE: Have the Value Created from Investing and Asset Management Reﬂected in our Share Price 2009 Performance Onex’ Subordinate Voting Shares closed 2009 at $23.60, a 30 percent increase from the end of 2008. This compares to a 35 percent increase in the TSX and a 19 percent increase in the DJIA. The improvement in the market value of certain of our public companies, the results of many of our private businesses, the realizations achieved in 2009, as well as the positive effect of the increase in assets under management, are factors that contributed to the share value increase. We will continue to work in 2010 to have the Onex share price reﬂect the underlying value of our busi- nesses and growth prospects. We do not believe it is there yet. ONEX’ ABILITY TO CONTINUE TO DELIVER RESULTS Onex has a 25-year history of delivering results. Employing a value-oriented and active ownership investment approach in acquiring and building industry-leading businesses, Onex has generated 3.4 times the capital it has invested and managed on realized and publicly traded investments. Onex has an experienced management team and signiﬁcant ﬁnancial resources to continue to acquire and build businesses. The interests of Onex, the Onex management team, investors and shareholders are all aligned to continue to build value and deliver results. Value-oriented active ownership approach to acquiring and building businesses Onex has always adhered to the following basic investing principles: (cid:129) Maintain purchase discipline; (cid:129) Employ prudent ﬁnancial leverage; and (cid:129) Pursue unique opportunities: Onex has extensive experience with corporate carve-outs of mission- critical supply divisions from large multinationals, distressed-for-control investing and restruc - turings. These types of transactions tend to be complex in nature, require lengthy due diligence and negotiations and therefore a level of expertise to successfully complete. In the past, Onex has acquired subsidiaries or divisions of IBM, Boeing, Raytheon, GM, Kodak, Ameri can Airlines and others. In 2009, we acquired the Tropicana Las Vegas Hotel and Casino, a distressed-for-control opportunity in the gaming sector. We believe the current economic environment will provide similar opportunities where we can acquire businesses at reasonable purchase prices and create value through earnings growth. Onex differentiates itself through the active ownership of its businesses, as it primarily seeks to im - prove the competitive position and ﬁnancial performance of its businesses rather than rely on ﬁnan- cial leverage or market timing to create value. Onex’ active ownership approach is characterized by: (cid:129) Onex typically acquiring a control position in its businesses, which enables it to exercise the rights of ownership, particularly the ability to make strategic decisions. Onex does not get involved in the daily operating decisions of the business. 8 Onex Corporation December 31, 2009 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) Onex works in partnership with great management teams to build long-term value. We also look to have the managers of the business be owners in their business alongside Onex. (cid:129) Onex’ approach focuses on creating long-term value by building businesses into highly efﬁcient, proﬁtable and industry-leading enterprises. We also look to grow our businesses through strate- gic acquisitions. Experienced and stable management team Onex has an experienced and stable management team. Our managing directors have an average tenure of 16 years. There are close to 55 specialized investment professionals to evaluate opportu- nities and work with our current businesses. This team is supported by a group of 30 people with expertise in accounting, tax and legal due diligence matters. Substantial ﬁnancial resources available for future growth The Onex parent company remains debt-free with over $1 billion of cash and near-cash items at December 31, 2009 to support future acquisitions and the growth of existing businesses. In addi- tion, at that date, there was US$3.9 billion of uncalled committed third-party capital in the Onex Partners and ONCAP Funds for Onex-sponsored acquisitions. Management alignment There is signiﬁcant alignment of the interests of Onex, Onex shareholders, our third-party investors and Onex management. For 25 years, Onex has had a distinctive ownership culture that requires its management team to invest meaningfully in each business acquired and to have a signiﬁcant owner- ship in Onex. In particular: (cid:129) The Onex management team is the largest shareholder in Onex, with a combined holding of over 28 million shares. (cid:129) The management team members directly invest their own money in each Onex business with no “cherry picking” of investments permitted. (cid:129) Onex management con tinues to acquire more Onex shares by reinvesting 25 percent of any carry distributions received in shares until they individually have an ownership of at least one million Onex shares. These so acquired shares must be held until the individual’s retirement. (cid:129) The Onex stock option plan has a hurdle such that vested options are only exercisable when the market share value is at least 25 percent above the exercise price. We believe that our superior track record is a direct result of this strong alignment of interests between Onex and our shareholders, partners and management team. In sum, we believe we have the operating philosophy, human resources, ﬁnancial resources, track record and structure to enable Onex to continue to execute on its strategy and deliver results. Onex Corporation December 31, 2009 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 INDUSTRY SEGMENTS At December 31, 2009, Onex had seven reportable industry segments. A description of our oper- ating companies by industry segment, and the managed, economic and voting ownership of Onex in those businesses, is presented below. Industry Segments Companies Electronics Manufacturing Services Celestica Inc. (TSX/NYSE: CLS), a global provider of electronics manufacturing services (website: www.celestica.com). Onex shares held: 17.7 million Onex’ Economic/ Voting Ownership Onex Manages(a) – 8%(b)/69% Aerostructures Spirit AeroSystems, Inc. (NYSE: SPR), the world’s largest independent designer and 23% 6%(b)/76% manufacturer 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 emer- gency medical services in the United States (website: www.emsc.net). 32% 11%(b)/82% Onex shares held: 4.8 million Onex Partners I shares subject to a carried interest: 7.0 million Center for Diagnostic Imaging, Inc., a U.S. provider of diagnostic and therapeutic radi- ology services (website: www.cdiradiology.com). 81% 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.skilledhealth - caregroup.com). 40% 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 health- care information technology solutions (website: www.carestreamhealth.com). 97% 38%/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.(c) (NASDAQ: RSCR), the largest U.S. provider of residential, training, educational and support services for people with disabilities and special needs (web- site: www.rescare.com). 25% 6%/(d) Onex shares held: 2.0 million Onex Partners I shares subject to a carried interest: 6.2 million (a) “Onex manages” represents the economic ownership collectively held by Onex and the third-party limited partners of the Onex Partners Funds. (b) Onex’ economic ownership percentage excludes shares held in connection with the Management Investment Plan. (c) This investment is accounted for on an equity basis in Onex’ audited annual consolidated financial statements. (d) Onex exerts significant inﬂuence over this equity-accounted investment through its right to appoint members to the Board of Directors of the entity. 10 Onex Corporation December 31, 2009 Companies 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’ Economic/ Voting Ownership Onex Manages(a) The Warranty Group, Inc., the world’s largest provider of extended warranty contracts (web site: www.thewarrantygroup.com). 94% 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). 91% 36%/100% Total Onex, Onex Partners II and Onex management investment at cost: $297 million (US$249 million) Onex portion: $117 million (US$98 million) Onex Partners II portion subject to a carried interest: $168 million (US$140 million) Industry Segments Financial Services Customer Support Services Metal Services Other Businesses • Aircraft & Aftermarket Hawker Beechcraft Corporation(b), the largest privately owned designer and manufac- turer of business jet, turboprop and piston aircraft (website: www.hawkerbeechcraft.com). 49% 19%/(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 auto- matic transmissions for on-highway trucks and buses, off-highway equipment and mili- tary vehicles (website: www.allisontransmission.com). 49% 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., the leading global supplier of injection molding equipment and services to the PET plastics industry (website: www.husky.ca). 98% 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) • Gaming Tropicana Las Vegas, Inc., located directly on the Las Vegas Strip, is one of the best- known casinos in Las Vegas (www.troplv.com). 71% 15%/71% Total Onex, Onex Partners III and Onex management investment at cost: $225 million (US$205 million) Onex portion: $49 million (US$45 million) Onex Partners III portion subject to a carried interest: $159 million (US$144 million) (a) “Onex manages” represents the economic ownership collectively held by Onex and the third-party limited partners of the Onex Partners Funds. (b) These investments are 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 of each of the entities. Onex Corporation December 31, 2009 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 Industry Segments Other Businesses (cont’d) • Building Products Companies RSI Home Products, Inc.(b), a leading manufacturer of kitchen, bathroom and home organization cabinetry sold through home centre retailers, independent kitchen and bath dealers and other distributors (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 Onex Manages(a) 50% 20%/50%(c) • Mid-cap Opportunities ONCAP, a private equity fund focused on acquiring and building the value of mid-capital- ization 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. Total Onex, ONCAP II and Onex management investment at cost: $265 million Onex portion: $117 million ONCAP II portion: $132 million • Real Estate Onex Real Estate Partners, a platform dedicated to acquiring and improving real estate assets in North America. Onex investment in Onex Real Estate transactions at cost: $207 million (US$193 million) (d) • Credit Securities Onex Credit Partners, a credit investing platform focused on generating attractive risk- adjusted returns through the purchase of undervalued credit securities. Onex investment in Onex Credit Partners’ funds at market: $229 million (US$218 million), of which $137 million (US$130 million) is in an Onex Credit Partners’ unleveraged senior secured loan portfolio that purchases assets with greater liquidity – – – 44%/100% 86%/100% 50%(e)/50%(e) (a) “Onex manages” represents the economic ownership collectively held by Onex and the third-party limited partners of the Onex Partners Funds. (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 of each of the entities. (d) 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. (e) This represents Onex’ share of the Onex Credit Partners’ platform. 12 Onex Corporation December 31, 2009 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, 2009 compared to those for the year ended December 31, 2008 and, in selected areas, to those for the year ended December 31, 2007. 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, 2009 and 2008 was recorded by the operating companies. with Canadian generally accepted accounting principles Goodwill is not amortized, but is assessed for impairment (“GAAP”). The preparation of these ﬁnancial statements in at the reporting unit level annually, or sooner if events or conformity with Canadian GAAP requires management of changes in circumstances or market conditions indicate Onex and management of the operating companies to make that the carrying amount could exceed fair value. The test estimates and assumptions that affect the reported amounts for goodwill impairment used by our operating companies of assets and liabilities, disclosures of contingent assets is to assess the fair value of each reporting unit within an and liabilities, and the reported amounts of revenues and operating company and determine if the goodwill asso - expenses for the period of the consolidated ﬁnancial state- ciated with that unit is less than its carrying value. This ments. Signiﬁcant accounting policies and methods used in assessment takes into consideration several factors, the preparation of the ﬁnancial statements are described in including, but not limited to, future cash ﬂows and market note 1 to the December 31, 2009 audited annual consoli- conditions. If the fair value is determined to be lower than dated ﬁnancial statements. Onex and its operating compa- the carrying value at an individual reporting unit, then nies evaluate their estimates and assumptions on a regular goodwill is considered to be impaired and an impairment basis based on historical experience and other relevant fac- charge must be recognized. Each operating company has tors. Included in Onex’ consolidated ﬁnancial statements developed its own internal valuation model to determine are estimates used in determining the allowance for doubt- fair value. These models are subjective and require man- ful accounts, inventory valuation, the valuation of deferred agement of the particular operating company to exercise taxes, intangible assets and goodwill, the useful lives of judgement in making assumptions about future results, property, plant and equipment and intangible assets, rev- including revenues, operating expenses, capital expendi- enue recognition under contract accounting, pension and tures and discount rates. post-employment beneﬁts, losses and loss adjustment The impairment test for intangible assets and long- expenses reserves, restructuring costs and other matters. lived assets with limited lives is similar to that of goodwill. Actual results could differ materially from those estimates There were impairments in goodwill, intangible and assumptions. assets and long-lived assets recorded by certain operating The assessment of goodwill, intangible assets and companies in 2009. These are reviewed on page 36 and note 21 long-lived assets for impairment, the determination of to the audited annual consolidated ﬁnancial statements. income tax valuation allowances, contract accounting 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. Onex Corporation December 31, 2009 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 Income tax valuation allowance using individual case-basis valuations and statistical analy- An income tax valuation allowance is recorded against ses. These estimates are subject to the effects of trends in future income tax assets when it is more likely than not that loss severity and frequency and claims reporting patterns some portion or all of the future income tax assets recog- of The Warranty Group’s third-party administrators. While nized will not be realized prior to their expiration. The rever- there is considerable variability inherent in these esti- sal of future income tax liabilities, projected future taxable mates, management of The Warranty Group believes the income, the character of income tax assets, tax planning reserves for losses and loss adjustment expenses are ade- strategies and changes in tax laws are some of the factors quate and appropriate, and it continually reviews and taken into consideration when determining the valuation adjusts those reserves as necessary as experience develops allowance. A change in these factors could affect the esti- or new information becomes known. mated valuation allowance and income tax expense. During 2009, Onex, the parent company, reduced its future income tax liability by $146 million and recorded a corresponding New accounting policies in 2009 Goodwill and intangible assets amount as a recovery in income tax. This reduction resulted On January 1, 2009, Onex adopted the Canadian Institute from the enactment of lower income tax rates and those of Chartered Accountants Handbook (“CICA Handbook”) rates being applied to the recorded future income tax liabili- Section 3064, “Goodwill and Intangible Assets”, which ties to bring the liability in line with the current income tax replaces existing standards. This revised standard estab- rates. Note 14 to the audited annual consolidated ﬁnancial lishes guidance for the recognition, measurement and dis- statements provides additional disclosure on income taxes. closure of goodwill and intangible assets, including Contract accounting internally generated intangible assets. The adoption of this standard did not have a signiﬁcant effect on Onex’ audited The aerostructures segment recognizes revenue using annual consolidated ﬁnancial statements. the contract method of accounting since a signiﬁcant portion of Spirit AeroSystems Inc.’s (“Spirit AeroSystems”) Credit risk and fair value of ﬁnancial assets revenues is under long-term, volume-based contracts, requiring delivery of products over several years. Revenues and ﬁnancial liabilities In January 2009, Onex adopted the Emerging Issues Com - from each contract are recognized in accordance with the mittee Abstract 173, “Credit Risk and the Fair Value of Finan - percentage-of-completion method of accounting, using the cial Assets and Financial Liabilities” (“EIC-173”). EIC-173 units-of-delivery method. As a result, contract accounting states that an entity’s own credit risk and the credit risk of uses various estimating techniques to project costs to the counterparty should be taken into account in deter- completion and estimates of recoveries asserted against mining the fair value of ﬁnancial assets and ﬁnancial liabil- the customer for changes in speciﬁcations. These estimates ities, including derivative instruments. The adoption of this involve assumptions of future events, including the quan- standard did not have a signiﬁcant effect on Onex’ audited tity and timing of deliveries and labour performance annual consolidated ﬁnancial statements. and rates, as well as projections relative to material and overhead costs. Contract estimates are re-evaluated Financial instruments – disclosures periodically and changes in estimates are reﬂected in the In June 2009, the CICA issued an amendment to CICA current period. Handbook Section 3862, “Financial Instruments – Disclo - sures”. This amend ment requires enhanced disclosures on Losses and loss adjustment expenses reserves liquidity risk of ﬁnancial instruments and new disclosures The Warranty Group, Inc. (“The Warranty Group”) records on fair value measurements of ﬁnancial instruments. Notes 1 losses and loss adjustment expenses reserves, which rep re - and 26 to the audited annual consolidated ﬁnancial state- sent the estimated ultimate net cost of all reported and ments provide the additional disclosures on liquidity risk of unreported losses on warranty contracts. The reserves for ﬁnancial instruments, as well as the new disclosure on fair unpaid losses and loss adjustment expenses are estimated value measurements of ﬁnancial instruments. 14 Onex Corporation December 31, 2009 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 Variability of results Onex’ audited annual consolidated operating results may Acquisitions and dispositions The following paragraphs describe the signiﬁcant acquisi- vary substantially from year to year for a number of reasons, tion and dispositions in 2009. including some of the following: the current economic envi- ronment; acquisitions or dispositions of businesses by Sale of shares of Emergency Medical Services Onex, the parent company; the volatility of the exchange In early August 2009, EMSC completed a secondary offer- rate between the Canadian dollar and certain foreign cur- ing of 9.2 million shares at a price of US$40.00 per share, rencies, primarily the U.S. dollar; the change in market before underwriter commissions. Onex, Onex Partners I and value of stock-based compensation for both the parent certain limited partners of Onex Partners I sold shares in company and its operating companies; changes in the this offering for net cash proceeds of $381 million and market value of Onex’ publicly traded operating com - recorded a pre-tax gain of $275 million. The shares sold panies; and activities at Onex’ operating companies. These represented 29 percent of the selling shareholders’ initial activities may include the purchase or sale of businesses; ownership in EMSC. EMSC did not issue any new shares as ﬂuctuations in customer demand and in materials and part of this offering. Onex received net cash proceeds of employee-related costs; changes in the mix of products $148 million on its sale of 3.5 million shares in this offering and services produced or delivered; impairments of good- and recorded a pre-tax gain of $90 million on the sale of its will, intangible assets or long-lived assets; and charges to shares. Onex’ share of the gain and net proceeds include restructure operations. $5 million of carried interest received as a result of the proceeds distributed to third-party limited partners of Onex U.S. dollar to Canadian dollar exchange rate movement Partners I on this realization. Onex’ share of the carried Since most of Onex’ operating companies report in U.S. interest received reﬂected an $8 million reduction as a dollars, the upward or downward movement of the U.S. result of the loss on the Cosmetic Essence, Inc. (“CEI”) dollar to Canadian dollar exchange rate for the year com- investment realized earlier in 2009 by the third-party lim- pared to last year will affect Onex’ reported consolidated ited partners. results of operations. During 2009, the average U.S. dollar to Canadian dollar exchange rate was 1.1415 Canadian In November 2009, EMSC completed an additional secondary offering of 9.2 million shares at a price of dollars, approximately 7 percent higher compared to 1.0671 US$48.31 per share, before underwriter commissions. Onex, Canadian dollars for 2008. 2009 market environment Onex Partners I and certain limited partners of Onex Part - ners I sold shares in this offering for net cash proceeds of $446 million and recorded a pre-tax gain of $320 million. The economic downturn that began in 2008 continued in The shares sold represented 29 percent of the selling share- 2009. Onex’ operating companies have not been immune to holders’ initial ownership in EMSC. EMSC did not issue any the slowdown, which has been reﬂected in decreased rev- new shares as part of this offering. Onex received net cash enues for many of our businesses. The global credit markets proceeds of $183 million on its sale of 3.5 million shares in are improving but it is still difﬁcult to raise ﬁnancing for sig- this offering and recorded a pre-tax gain of $104 million on niﬁcant acquisitions, which also has the effect of damp - the sale of its shares. Onex’ share of the gain and net pro- ening opportunities for realizations. However, during the ceeds include $15 million of carried interest received as a second half of 2009, we began to see an improvement in the result of the proceeds distributed to third-party limited equity markets creating the opportunity for initial and sec- partners of Onex Partners I on this realization. ondary equity offerings. This enabled Onex to realize on a Onex, Onex Partners I and certain limited partners portion of its investments in Emergency Medical Services of Onex Partners I continue to own 13.7 million shares of Cor poration (“EMSC”) and Celestica in 2009. EMSC at December 31, 2009, which represents an ap prox - imate 32 percent equity interest, and continue to retain an 82 percent voting interest in the company. Onex’ portion of the EMSC shares held at December 31, 2009 is 5.2 million shares for a 12 percent equity interest. Onex Corporation December 31, 2009 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 Sale of shares of Celestica US$13 million. After Tropicana Las Vegas emerged from In early October 2009, Onex completed the sale of 11 million bankruptcy, a valuation was performed that assigned an subordinate voting shares of Celestica Inc. (“Celestica”) to enterprise value of US$230 million to the equity of a syndicate of underwriters at a gross price of $10.30 Tropicana Las Vegas, prior to the rights offering. per share. Onex received net proceeds of $104 million Tropicana Las Vegas is the ﬁrst investment made and recorded a pre-tax accounting gain of $6 million. The through Onex Partners III. Including the aforementioned accounting gain is based on the difference between the rights offering, Onex, Onex Partners III and Onex manage- proceeds and the book value for the portion sold, which ment’s investment in the new company at December 31, includes prior dilution gains and Onex’ share of annual net 2009 was $225 million for a 71 percent ownership interest. earnings or loss since the acquisition in 1996. Onex contin- This includes Mr. Yemenidjian’s 3 percent ownership inter- ues to own an 8 percent equity interest and a 69 percent est. Onex’ portion of this investment is $49 million, which voting interest in Celestica at December 31, 2009. represents a 15 percent ownership interest. Tropicana Las Vegas was consolidated in Onex’ audited annual ﬁnancial Acquisition of Tropicana Las Vegas statements beginning in the third quarter of 2009. In May 2008, Tropicana Entertainment, LLC and its Las Located directly on the Las Vegas Strip, Tropicana Vegas subsidiaries (collectively, “Tropicana”) ﬁled for relief Las Vegas is one of the best-known and most storied casinos under Chapter 11 of the U.S. Bankruptcy Code. Since Trop - in the United States. The 34-acre property is located at icana’s ﬁling, Onex and Onex Partners III, through a special perhaps the busiest pedestrian intersection in Las Vegas, purpose entity, acquired a majority of the company’s Tropi cana Avenue and Las Vegas Boulevard. Tropicana Las US$440 million secured term loan, which had its Las Vegas Vegas has more than 1,700 hotel rooms and an approximate hotel and casino property pledged as security for the loan. 50,000-square-foot casino. In January 2010, Tropi cana Las The debt was purchased at various discounts and ﬁnanced Vegas initiated a second rights offering for up to US$75 mil- through a credit facility established for the purpose of mak- lion of additional capital. While not yet ﬁnalized, Onex and ing the purchases. In late May 2009, the credit facility was Onex Partners III expect to contribute their pro-rata share of repaid by the equity capital contributed by Onex, Onex the offering, plus additional amounts should certain third- Partners III and Alex Yemenidjian, former President of MGM party investors not participate. Of the total Onex and Onex Mirage and Onex’ partner. Onex worked with Tropi cana and Partners III investment, Onex would contribute its share the other debt holders on a restructuring plan that provided based on its commitment level to Onex Partners III at the for Onex’ control of the Las Vegas property upon emergence time of the initial Tropicana Las Vegas investment. from bankruptcy. On May 5, 2009, the U.S. Bankruptcy Court con - Sale of Cineplex Entertainment ﬁrmed Tropicana’s plan of reorganization for the Las Vegas In April 2009, Onex sold its remaining approximately 13 mil- property. The plan provided for the secured creditors, lion trust units of Cineplex Galaxy Income Fund through a including Onex, to receive 100 percent of the equity in secondary offering at a gross price of $14.25 per trust unit. the Las Vegas property, and for Alex Yemenidjian to be Onex realized approximately $175 million of net proceeds appointed Chief Executive Ofﬁcer of the company. On July 1, and recorded a pre-tax gain of $160 million on this sale. This 2009, the new company, now operating as Tropicana Las sale brings to a close an investment platform in the theatre Vegas, Inc. (“Tropicana Las Vegas”), emerged from bank- exhibition industry that Onex established in 1998 with ruptcy with no debt. In addition, as part of the plan of reor- Galaxy Entertainment. Over the course of 10 years, Onex ganization, the secured creditors were given the opportunity invested US$355 million and realized total proceeds of to subscribe to a US$75 million rights offering of preferred approximately US$900 million from its theatre exhibition shares of Tropicana Las Vegas that would fund renovations businesses. Onex’ investment in Cineplex Enter tainment of the company’s facilities. In August 2009, the company was accounted for on an equity basis in Onex’ audited called capital from rights offering subscribers. Onex, Onex annual consolidated ﬁnancial statements up to the end of Partners III and Alex Yemenidjian’s investment under this the ﬁrst quarter of 2009. rights offering was US$60 million, of which Onex’ share was 16 Onex Corporation December 31, 2009 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 Disposition of CEI At the end of 2008, CEI was in violation of certain of its debt Consolidated revenues and cost of sales Consolidated revenues were $24.8 billion in 2009, down covenants. In 2009, CEI discussed a restructuring of its debt 8 percent from $26.9 billion in 2008, and up 6 percent from with its lenders but was unable to reach an agreement. $23.4 billion in 2007. Consolidated cost of sales was $19.5 bil- Therefore, in early May 2009, Onex contributed its owner- lion in 2009, a decrease of 10 percent from $21.7 billion in ship in CEI’s securities to an entity controlled by CEI’s 2008 and up 2 percent from $19.1 billion in 2007. lenders, who agreed to provide additional liquidity to CEI. At The reported revenues and cost of sales of Onex’ that time, Onex and Onex Partners I ceased to have an equity U.S.-based operating companies in Canadian dollars may ownership in the business. Onex’ and Onex Part ners I’s origi- not reﬂect the true nature of the operating results of those nal December 2004 investment in CEI was $138 million, of operating companies due to the translation of those which Onex’ portion was $32 million. As a result of previ- amounts and the associated ﬂuctuation of the U.S. dollar ously recorded losses of CEI, Onex’ investment in the com- to the Canadian dollar exchange rate. In table 1 below, pany had a negative carrying value of $20 million. Therefore, revenues and cost of sales by industry segment are pre- Onex recorded a non-cash ac counting gain of $20 million in sented in Canadian dollars as well as in the functional cur- the second quarter of 2009 arising from the disposition of its rency of the companies for the ownership interest in CEI. Review of December 31, 2009 Consolidated Financial Statements The discussions that follow identify those material factors years ended December 31, 2009, 2008 and 2007. The percentage change in revenues and cost of sales in Canadian dollars and in the functional currency of that affected Onex’ operating segments and Onex’ audited the companies for these peri- annual consolidated results for 2009. We will review the ods is also shown. The discus- major line items to the consolidated ﬁnancial statements sions of revenues and cost of T O TA L R E V E N U E S A N D C O S T O F S A L E S ($ millions) 26,881 24,831 23,433 21,719 19,468 19,133 by segment. sales by industry segment that follow are in the companies’ functional currencies in order to eliminate the impact of for- eign currency translation on those revenues and cost of sales. 09 08 07 Revenues Cost of Sales Revenues and Cost of Sales by Industry Segment for the Years Ended December 31, 2009 and 2008 Revenues TABLE 1 ($ millions) Canadian Dollars Functional Currency Year ended December 31 2009 2008 Change (%) 2009 2008 Change (%) Electronics Manufacturing Services $ 6,909 $ 8,220 Aerostructures Healthcare Financial Services Customer Support Services Metal Services Other (a) Total 4,641 6,590 1,359 1,780 1,472 2,080 3,965 6,152 1,388 1,856 3,112 2,188 $ 24,831 $ 26,881 (16)% 17 % 7 % (2)% (4)% (53)% (5)% (8)% US$ 6,092 US$ 4,080 US$ 5,795 US$ 1,192 US$ 1,559 US$ 1,298 C$ 2,080 US$ 7,678 US$ 3,772 US$ 5,758 US$ 1,302 US$ 1,748 US$ 2,983 C$ 2,188 (21)% 8 % 1 % (8)% (11)% (56)% (5)% Results are reported in accordance with Canadian generally accepted accounting principles. These results may differ from those reported by the individual operating companies. (a) 2009 other includes CEI (up to May 2009), Husky, Tropicana Las Vegas, ONCAP II and the parent company. 2008 other includes CEI, Husky, Radian, ONCAP II and the parent company. Onex Corporation December 31, 2009 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 Revenues and Cost of Sales by Industry Segment for the Years Ended December 31, 2009 and 2008 (cont’d) Cost of Sales TABLE 1 ($ millions) Canadian Dollars Functional Currency Year ended December 31 2009 2008 Change (%) 2009 2008 Change (%) Electronics Manufacturing Services $ 6,319 $ 7,556 Aerostructures Healthcare Financial Services Customer Support Services Metal Services Other (a) Total 3,946 4,766 656 1,140 1,329 1,312 3,215 4,504 665 1,197 2,932 1,650 $ 19,468 $ 21,719 (16)% 23 % 6 % (1)% (5)% (55)% (20)% (10)% US$ 5,572 US$ 3,474 US$ 4,188 US$ 574 US$ 999 US$ 1,173 C$ 1,312 US$ 7,061 US$ 3,055 US$ 4,219 US$ 624 US$ 1,129 US$ 2,813 C$ 1,650 (21)% 14 % (1)% (8)% (12)% (58)% (20)% Results are reported in accordance with Canadian generally accepted accounting principles. These results may differ from those reported by the individual operating companies. (a) 2009 other includes CEI (up to May 2009), Husky, Tropicana Las Vegas, ONCAP II and the parent company. 2008 other includes CEI, Husky, Radian, ONCAP II and the parent company. Revenues and Cost of Sales by Industry Segment for the Years Ended December 31, 2008 and 2007 TABLE 1 ($ millions) Canadian Dollars Functional Currency Year ended December 31 2008 2007 Change (%) 2008 2007 Change (%) Revenues 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 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 % (5)% (4)% 27 % (1)% (1)% 86 % 143 % 15 % 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. 18 Onex Corporation December 31, 2009 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Electronics Manufacturing Services Celestica delivers innovative supply chain solutions to origi- Cost of sales declined 21 percent to US$5.6 billion in 2009 (2008 – US$7.1 billion). This is consistent with the nal equipment manufacturers in the consumer, enterprise decline in revenues. Gross proﬁt for 2009 declined 16 per- computing, communications, industrial, aerospace and cent to US$520 million (2008 – US$617 million). However, defence and healthcare markets. These solutions include gross margin as a percentage of revenues improved in design, logistics, manufacturing, engineering, order ful - 2009 compared to 2008 due primarily to continued opera- ﬁllment and aftermarket ser vices. During 2009, Celestica’s tional improvements. operations were impacted by weak end-market demand Celestica reported a 5 percent decline in revenues primarily driven by the global eco- to US$7.7 billion in 2008 (2007 – US$8.1 billion). The rev- E L E C T R O N I C S nomic downturn. The company enue decline was due primarily to lower volumes associ- M A N U FA C T U R I N G S E R V I C E S (US$ millions) experienced declines in all its end- ated with weaker demand in Celestica’s servers, enterprise 8,070 markets and its forward visibility communications and storage end-markets, as well as 7,563 into end-market demand remains the impact of customer disengagements primarily in the 7,678 7,061 6,092 5,572 09 08 07 Revenues Cost of Sales limited. In addition, Celes tica’s cus- enterprise communications end-market. These factors tomers continue to adjust their more than offset the increase in revenue from customers strategies in this difﬁcult environ- in the company’s consumer, telecommunications and ment, and accordingly, the com- industrial end-markets. pany has experienced increased Cost of sales was down 7 percent to US$7.1 billion in pricing pressure and other compe - 2008 (2007 – US$7.6 billion). This compares to a 5 percent titive pressures. Although Celestica decline in revenues. Gross proﬁt for 2008 was US$617 million, has operated relatively well, the up US$110 million from 2007 due primarily to operational company expects that this environ- improvements in Mexico and Europe. Celes tica continued ment will continue to impact rev- to beneﬁt from cost reductions, restructuring actions, the enues and operating earnings. impact of renegotiating or exiting unproﬁtable accounts Celestica reported a 21 percent decline in rev- and the streamlining and simplifying of processes through- enues to US$6.1 billion in 2009 (2008 – US$7.7 billion). out the company. Celestica’s revenue and operating results vary from year to year depending on the level of demand and seasonality in each of its end-markets, the mix and complexity of the products being manufactured, as well as the impact asso- ciated with program wins or losses with new, existing or disengaging customers, among other factors. During 2009, the decline in Celestica’s reported revenue was due to lower production volumes in most of the company’s end- markets. This was driven by the slower economic environ- ment in 2009 compared to 2008. Onex Corporation December 31, 2009 19 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Aerostructures Spirit AeroSystems is an aircraft parts designer and manu- September and October 2008. As well, there were higher than forecasted costs on blocks completed in December facturer of commercial aero structures. Aerostructures are 2009, higher than expected costs on the Sikorsky CH-53K A E R O S T R U C T U R E S (US$ millions) 4,080 3,474 3,772 3,861 structural components, such as program, and the transition to a new ERP system that fuselages, propulsion systems reduced operating efﬁciencies at Spirit AeroSystems’ Wichita and wing systems, for commer- facility during 2009. cial, military and business jet Revenues at Spirit AeroSystems were down 2 per- aircraft. The company’s revenues cent to US$3.8 billion in 2008 (2007 – US$3.9 billion). The 3,055 3,112 are primarily derived through decrease in revenues was due primarily to the decrease in long-term supply agreements ship set deliveries to Boeing on its B737, B747, B767 and with Boeing and requirements B777 programs as a result of the strike at Boeing in 2008, contracts with Air bus. The down- which lasted for eight weeks. Partially offsetting this was a turn in the economy did not drive change in product mix, volume-based pricing adjustments major declines in 2009 in the pro- and an increase in ship set deliveries to Airbus on its A320, duction rates of large commercial A330/A340 and A380 programs. During 2008, Boeing ship aircraft at Boeing and Airbus due set deliveries decreased 7 percent, while ship set deliveries to long lead times on orders of to Airbus increased 5 percent. new aircraft as well as signiﬁcant Cost of sales declined 2 percent, or US$57 million, 09 08 07 Revenues Cost of Sales order backlogs. Spirit AeroSystems’ revenues were up 8 percent 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 to US$4.1 billion in 2009 (2008 – US$3.8 billion). The percentage of revenues in the company’s functional cur- increase is primarily attributable to higher ship set deliv- rency was 81 percent in both 2008 and 2007. eries for large commercial aircraft in 2009 compared to lower deliveries in 2008 that resulted from a strike at Boeing. Ship set deliveries to Boeing were up 13 percent Healthcare The healthcare segment revenues in 2009 over 2008. Ship set deliveries for Airbus were up and cost of sales consist of the 10 percent in 2009 over 2008. Deliveries to other cus- operations of Emergency Medical tomers were down. Ap proximately 96 percent of 2009 rev- Services Corporation (“EMSC”), enues were from Boeing and Airbus. Center for Diagnostic Imaging, Cost of sales, however, was up 14 percent to Inc. (“CDI”), Skilled Healthcare US$3.5 billion in 2009 (2008 – US$3.1 billion). A signiﬁcant portion of the increase was due to the higher sales volume. In Group, Inc. (“Skilled Healthcare”) Inc. and Carestream Health, addition, there were certain unusual charges. The company (“Care stream Health”). Res-Care, recorded a pre-tax charge of US$93 million during the Inc. (“ResCare”) is accounted for second quarter of 2009 to recognize a forward-loss on the on an equity basis and, accord- company’s Gulfstream G-250 business jet program. Spirit ingly, that company’s revenues Aero Systems believes that this contract is in a loss situation and cost of sales are not consol - due to signiﬁcant overruns in expected development costs. idated. The healthcare segment Also included in 2009 cost of sales were unfavourable cumu- reported a 1 percent increase in H E A LT H C A R E (US$ millions) 5,795 5,758 4,573 4,188 4,219 3,455 09 08 07 Revenues Cost of Sales lative catch-up adjustments of US$61 million related to consolidated revenues to US$5.8 billion in 2009 (2008 – periods prior to 2009 that were driven by the post-strike pro- US$5.8 billion). Cost of sales decreased 1 percent to duction ramp-up that resulted from the strike at Boeing in US$4.2 billion in 2009 (2008 – US$4.2 billion). 20 Onex Corporation December 31, 2009 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Table 2 provides revenues and cost of sales by operating company in the healthcare segment for the years ended Decem ber 31, 2009, 2008 and 2007 in both Canadian dollars and the companies’ functional currencies. Healthcare Revenues and Cost of Sales for the Years Ended December 31, 2009 and 2008 Revenues TABLE 2 ($ millions) Canadian Dollars Functional Currency Year ended December 31 2009 2008 Change (%) 2009 2008 Change (%) Emergency Medical Services $ 2,928 $ 2,574 Center for Diagnostic Imaging Skilled Healthcare Carestream Health 160 868 2,634 144 784 2,650 14 % 11 % 11 % (1)% US$ 2,570 US$ 141 US$ 760 US$ 2,324 US$ 2,410 US$ 135 US$ 733 US$ 2,480 Total $ 6,590 $ 6,152 7 % US$ 5,795 US$ 5,758 7 % 4 % 4 % (6)% 1 % Cost of Sales ($ millions) Canadian Dollars Functional Currency Year ended December 31 2009 2008 Change (%) 2009 2008 Change (%) Emergency Medical Services $ 2,530 $ 2,235 Center for Diagnostic Imaging Skilled Healthcare Carestream Health 52 728 1,456 48 638 1,583 13 % 8 % 14 % (8)% US$ 2,220 US$ 46 US$ 639 US$ 1,283 US$ 2,094 US$ 44 US$ 597 US$ 1,484 Total $ 4,766 $ 4,504 6 % US$ 4,188 US$ 4,219 6 % 3 % 7 % (14)% (1)% Results are reported in accordance with Canadian generally accepted accounting principles. These results may differ from those reported by the individual operating companies. Onex Corporation December 31, 2009 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 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. Emergency Medical Services During 2009, revenues at EMSC were up EMSC is a leading provider of emergency medical services in the United States. The company operates its business and US$160 million, or 7 percent, to US$2.6 billion (2008 – US$2.4 billion). EmCare reported US$218 million of revenue markets its services under the American Medical Response growth due primarily to 53 net new hospital contracts as (“AMR”) and EmCare brands. AMR provides ambulance well as higher patient visits to hospitals with existing con- transport services and EmCare provides outsourced hospital tracts. During the second half of 2009, part of the increase emergency department stafﬁng and management services, in volume of patient visits to hospitals year-over-year was as well as facility-based services for hospitalist/inpatient, driven by the H1N1 ﬂu pandemic. Par tially offsetting radiology and anesthesiology departments. EMSC’s oper - EmCare’s revenue growth was lower reported revenues at ating results are impacted by the number of patients the AMR of US$58 million. Much of the decline year-over-year company treats and transports, as well as by the costs at AMR was due to a higher level of revenues earned from incurred to provide the necessary care and transportation the company’s FEMA contract in 2008 (US$107 million). for each patient. In addition, AMR’s results may be impacted Excluding the impact of the 2008 FEMA hurricane rev- year-over-year by revenues generated under the company’s enues, AMR reported a 7 percent, or US$82 million, Federal Emergency Management Agency (“FEMA”) national increase in net revenues per weighted transport from contract. This contract provides ambulance, para-transit, increased reimbursement rates that became effective and rotary and ﬁxed-wing ambulance transportation ser - January 1, 2009 and growth in the company’s managed vices to supplement federal and military responses to disas- transportation business. This was partially offset by a ters, acts of terrorism and other public health emergencies. 3 percent (US$33 million) decline in weighted transport The difﬁcult economic environment did not materially impact EMSC due to the nature of its services. volume at AMR. 22 Onex Corporation December 31, 2009 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 was up 6 percent to US$2.2 billion in CDI reported a 17 percent, or US$20 million, 2009 (2008 – US$2.1 billion). This was in line with the increase in revenues to US$135 million in 2008 (2007 – growth in revenues in 2009. Cost of sales as a percentage of US$115 million). Approximately US$16 million of the rev- revenues was 86 percent in 2009 (2008 – 87 percent). enue growth was from new centres acquired in 2008, and the During 2008, EMSC’s revenues increased balance was from higher revenues at existing centres. Cost US$303 million, or 14 percent, to US$2.4 billion (2007 – of sales at CDI was US$44 million in 2008, up US$8 million, US$2.1 billion). AMR recorded US$183 million of EMSC’s or 22 percent (2007 – US$36 million). The increase in cost of revenue growth with a signiﬁcant portion of that resulting sales was due primarily to the increase in revenues associ- from increases in revenue earned from contracts with ated with new centres. FEMA (US$97 million). During the third and early fourth quarters of 2008, AMR dispatched an unprecedented num- Skilled Healthcare ber of ground, rotary and ﬁxed-wing air ambulances, and Skilled Healthcare has two revenue segments: long-term patient transport vehicles to assist people affected by hur- care services and ancillary services. During 2009, approxi- ricanes Gustav and Ike in three Gulf Coast states. The bal- mately 88 percent of its revenues were from long-term ance of the growth in revenue from AMR in 2008 was care services, which include skilled nursing care and inte- associated with higher transport revenue (US$86 million) grated rehabilitation therapy services to residents in the driven by increased volumes and rates on existing con- company’s network of skilled nursing facilities. In addi- tracts. EmCare accounted for US$120 million of EMSC’s tion, the company earns ancillary service revenue by pro- revenue growth in 2008 due primarily to 79 net new con- viding related healthcare services, such as rehabilitation tracts (US$65 million) and an increase in patient encoun- therapy services to third-party facilities and hospice care. ters and revenue per encounter under existing contracts Revenues from its skilled nursing facilities are generated (US$31 million). from Medicare, Medicaid, managed care providers, insur- Cost of sales at EMSC was US$2.1 billion in 2008, ers, private pay and other services, while revenues from up 14 percent (2007 – US$1.8 billion). Cost of sales as a per- its assisted living facilities are generated primarily from centage of revenues was 87 percent in both 2008 and 2007. private pay sources, with a small portion earned from Center for Diagnostic Imaging Medicaid or other state-speciﬁc programs. To increase its revenues, Skilled Healthcare focuses on acquiring and CDI operates 54 diagnostic imaging centres in 10 states in developing new facilities and improving its skilled mix, the United States, providing imaging services such as mag- which is the percentage of its skilled nursing patient popu- netic resonance imaging (“MRI”), computed tomography lation that is eligible to receive Medicare and managed (“CT”), diagnostic and therapeutic injection procedures care reimbursements. Medicare and managed care payors and other procedures such as PET/CT, conventional x-ray, typically provide higher reimbursements than other pay- mammography and ultrasound. The difﬁcult economic ors because patients in these programs typically require environment had a softening effect on industry revenue a greater level of care and service. The challenging eco- growth and has impacted discretionary procedures in nomic environment and competitive pressures impacted 2009. However, the company was able to grow same centre the company’s skilled mix, resulting in a decrease in the volumes, add additional centres and strengthen its bal- average length of stay for its skilled patients, as well as ance sheet in 2009. The company continues to generate lower acute-care admissions in 2009 compared to 2008. signiﬁcant cash ﬂow and is well positioned to capitalize on Skilled Healthcare’s revenues grew 4 percent to market consolidation opportunities. US$760 million in 2009 (2008 – US$733 million). Revenues CDI reported a 4 percent increase in revenues to from the long-term care services segment were up 4 per- US$141 million in 2009 (2008 – US$135 million) due pri- cent, or US$24 million, primarily from higher rates from marily to higher revenues from existing centres and new Medicare, Medicaid and managed care pay sources, as well centres acquired in 2008. Cost of sales increased 3 percent as revenues from acquisitions completed in 2008. Partially to US$46 million in 2009 (2008 – US$44 million). The in - offsetting these increases was the effect of a decline crease in cost of sales was slightly lower than revenues. in occupancy. Ancillary revenues increased 3 percent, or Onex Corporation December 31, 2009 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 US$3 million, from 2008. All of the growth in ancillary rev- radiography and digital radiography equipment, picture enues in 2009 resulted from an increase in rehabilitation archiving and communications systems, radiology informa- therapy services. tion systems, information management solutions, dental During 2009, cost of sales at Skilled Healthcare practice management software and services, as well as tra- increased 7 percent to US$639 million (2008 – US$597 mil- ditional medical products, including x-ray ﬁlm, equipment, lion) compared to a 4 percent increase in revenues in the chemistry and services. The company’s revenues are in ﬁve year. Included in cost of sales for 2009 was a one-time reportable segments: Medical Film and Printing Solutions charge of US$14 million associated with a restatement (47 percent of total revenue), Dental (23 percent of total from prior periods of the company’s reserves for accounts revenue), Digital Capture Solutions (21 percent of total rev- receivable. Receivable reserves were understated in prior periods due to the improper dating of accounts by a for- enue), Healthcare Information Solutions (8 percent of total revenue) and Other (1 percent of total revenue). mer ofﬁcer of Skilled Healthcare’s long-term care segment. Excluding that one-time charge, cost of sales was up 5 per- Carestream Health reported a 6 percent, or US$156 million, decrease in revenues to US$2.3 billion in cent, slightly above the increase in revenue. The net after- 2009 (2008 – US$2.5 billion). The decrease was anticipated tax effect of this charge was US$8 million, of which Onex’ as revenue declined in its Medical Film and Printing Solu - share was US$1 million. tions segment due to the ongoing transition from tradi- Revenues at Skilled Healthcare were up 15 per- tional ﬁlm used in medical and dental imaging procedures cent to US$733 million in 2008 (2007 – US$635 million). to digital technologies, compounded by the movement in Long-term care services accounted for US$88 million of foreign exchange rates on revenues from outside the United the revenue growth due primarily to revenues associated States. The decline in Medical Film and Printing Solu tions with acquisitions completed in New Mexico in September was 13 percent, or US$167 million, while Dental declined 2007 and Kansas in April 2008 (US$64 million), increased 1 percent, or US$5 million. Included in the revenue decline reimbursement rates from Medicare, Medicaid and man- was US$62 million due to lower foreign exchange rates on aged care pay sources (US$21 million), as well as a higher its non-U.S.-dollar-denominated revenues compared to patient acuity mix. Ancillary services increased US$10 mil- 2008, with most of that decline from a weakening of the lion in 2008 over 2007 due primarily to increased hospice euro. Partially offsetting the revenue decline in the Medical business and rehabilitation therapy services revenue. Film and Printing Solutions and Dental segments was a Skilled Healthcare’s cost of sales was up 23 percent US$20 million increase in revenues from the Digital Cap - to US$597 million in 2008 (2007 – US$486 million). Long- ture Solutions segment due to new product launches in term care services accounted for US$68 million of the 2009, as well as the shift from traditional ﬁlm business as increase due primarily to the acquisitions (US$50 million) previously discussed. and increased labour costs (US$13 million). Labour costs Cost of sales was down 14 percent to US$1.3 bil- increased due largely to a 5 percent increase in average lion in 2009 (2008 – US$1.5 billion), a greater percentage hourly rates and additional stafﬁng primarily in the nursing than the decline in revenue in 2009. Gross proﬁt in 2009 area to respond to the increased mix of high-acuity was up slightly to US$1,041 million (2008 – US$996 mil- patients. Cost of sales from ancillary services increased lion) due to the favourable impact of lower materials cost, US$16 million in 2008 due primarily to higher revenues. primarily silver and polyester, and increased productivity across Carestream Health’s businesses. Carestream Health Carestream Health reported a 45 percent, or Carestream Health provides products and services for the US$764 million, increase in revenues to US$2.5 billion in capture, processing, viewing, sharing, printing and storing 2008 (2007 – US$1.7 billion). Cost of sales reported a simi- of images and information for medical and dental applica- lar increase of 36 percent to US$1.5 billion in 2008 (2007 – tions. The company also has a non-destructive testing busi- US$1.1 billion). The inclusion of a full 12 months of results ness, which sells x-ray ﬁlm and digital radiology products to in 2008 compared to eight months in 2007 is the primary the non-destructive testing market. Carestream Health sells reason for the increase in revenues and cost of sales. digital products, including printers and media, computed 24 Onex Corporation December 31, 2009 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Financial Services The Warranty Group’s revenues consist of warranty rev- Customer Support Services Sitel Worldwide Corporation (“Sitel Worldwide”) is one of enues, insurance premiums and administrative and mar- the world’s largest and most diversiﬁed providers of cus- keting fees earned on warranties and service contracts for tomer care outsourcing services. The company offers its manufacturers, retailers and distributors of consumer clients a wide array of services, including customer service, electronics, appliances, homes and technical support and customer F I N A N C I A L S E R V I C E S (US$ millions) autos, as well as credit card en - acquisition, retention and rev- hancements and travel and leisure enue generation. Substantially 1,302 1,304 programs through a global orga - all of Sitel Worldwide’s customer nization. The Warranty Group’s cost care ser vices are inbound and of sales consists primarily of the delivered over the phone. In change in reserves for future war- addition, the company offers 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 1,559 1,129 1,128 ranty and insurance claims, current outbound services, usually for 999 claims payments and underwriting short-term marketing campaigns proﬁt sharing payments. and selected back ofﬁce services, Revenues at The War - such as receivables management ranty Group declined US$110 mil- and payment and order pro - lion to US$1.2 billion (2008 – cessing. The company’s solutions US$1.3 billion). The 8 percent de - encompass the entire customer cline was due primarily to lower lifecycle, from the acquisition earned premiums and administra- of its clients’ customers to the 09 08 07 Revenues Cost of Sales 1,192 574 624 628 09 08 07 Revenues Cost of Sales tive fees attributable to higher credit and underwriting ser vice, growth and retention of those customers. Sitel standards in Europe, currency translation of European rev- Worldwide’s clients include many large and well-known enues with a weakening in the value of both the British brands. Sitel World wide’s operating results are impacted by pound and the euro relative to the U.S. dollar, a decline in the demand for the products of its customers. As a result, U.S. auto sales and an overall decline in consumer spending during 2009 Sitel Worldwide experienced lower call volumes and conﬁdence. In addition, net investment income was and revenues from its customers as they were impacted by lower in 2009 compared to 2008 due to a decline in short- the slowdown in the economy. This slowdown in volumes term interest rates. Cost of sales was down 8 percent to and revenues also caused certain customers to bring services US$574 million in 2009 (2008 – US$624 million) due primar - back in-house to ﬁll internal capacity while others shifted ily to the same factors that affected revenues. For the year ended December 31, 2008, The their business between customer support service providers based on pricing concessions. Warranty Group reported revenues and cost of sales of Revenues at Sitel Worldwide declined US$189 mil- US$1.3 billion and US$624 million, respectively. This com- lion, or 11 percent, to US$1.6 billion in 2009 (2008 – pares to US$1.3 billion and US$628 million, respectively, in US$1.7 billion) while cost of sales had a corresponding 2007. Approximately US$1.0 billion of total revenues was decline of 12 percent to US$1.0 billion (2008 – US$1.1 bil- from premiums earned on warranty contracts in 2008 and lion). During 2009, the strengthening of the U.S. dollar the balance, approximately US$0.3 billion, in 2008 was against other currencies contributed US$86 million of the from contract fees and other income, which were essen- revenue decline in the year. Throughout 2009, Sitel World - tially unchanged from 2007. wide’s customers continued to be affected by the economic slowdown, which resulted in lower call volumes, delays in out sourcing decisions and ramping up of new programs, as well as some selective customer disengagements, particu- larly in Sitel Worldwide’s European operations. Lower cost of sales was primarily driven by the lower revenues, as well as the beneﬁt of restructuring programs initiated in 2008 and Onex Corporation December 31, 2009 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 2009 in response to lower call volumes and the selective dis- The vast majority of the decline in 2009 was attrib- engagements of contracts that provided inadequate margins. utable to lower sales in the raw materials business, where Sitel Worldwide reported revenues of US$1.7 bil- the cost of sales is passed through to Tube City IMS’ cus- lion in each of 2008 and 2007. Revenues in 2008 included an tomers. The balance was attributable to lower levels of steel additional month of operations related to the late January production affecting the services business. Tube City IMS’ 2007 acquisition of SITEL Corporation (US$95 million). service revenues are largely driven by the volume of raw Excluding these additional revenues, Sitel Worldwide would steel produced. The decline in steel production resulted have reported a decline in revenues in 2008 due primarily to in a 19 percent decline in Tube City IMS’ service revenues lower call volumes as existing customers curtailed new in 2009. Lower steel production also resulted in a decrease product launches and promotional offers in response to the in demand for the raw materials Tube City IMS procures for economic downturn. This decline was partially offset by its customers. Decreases in both the volume of raw mate - new customer volumes in 2008. Cost of sales was US$1.1 bil- rials sold and the selling prices of those materials resulted lion in 2008, essentially the same as 2007. The year 2008 in a decrease in revenue from raw materials sales of 62 per- included an additional month of operations compared to cent in 2009. Cost of sales for the raw materials business 2007 associated with the late January 2007 acquisition of decreased 63 percent in 2009. The decline in cost of sales SITEL Corporation (US$62 million). Cost of sales as a per- centage of revenue was 65 percent for both 2008 and 2007. Metal Services Tube City IMS Corporation (“Tube City IMS”) has two rev- for the raw materials business in 2009 was generally con- sistent with the decline in raw materials revenues since the vast majority of raw materials purchased by Tube City IMS are sold to its customers on a pass-through basis. In the services business, management responded enue categories: service revenue and revenue from the sale swiftly to the decline in raw steel production by reducing of materials. Service revenue is generated from scrap man- site-level costs by 22 percent from the level experienced agement, scrap preparation, raw materials optimization, in 2008, which is a little better than the reduction in ser- metal recovery and sales, material handling or product han- vice revenues. Speciﬁc actions taken included meaningful dling, slag or co-product processing, and metal recovery reductions in the company’s workforce, as well as signiﬁ- M E TA L S E R V I C E S (US$ millions) 2,983 2,813 1,575 1,437 1,298 1,173 09 08 07 Revenues Cost of Sales services and surface conditioning. cant reductions in maintenance expenditures and selling, Revenue from the sale of materials general and administrative expenses. As a result of these is mainly generated by the com- actions, the company has largely been able to maintain its pany’s raw mate rials procurement overall service margins (measured on the basis of revenues business, but also includes rev- after the cost of raw materials shipments). enue from two locations of Tube City IMS’ materials handling busi- ness. During 2009, economic con- Tube City IMS reported US$3.0 billion in revenues for 2008 (2007 – US$1.6 billion). The signiﬁcant increase in revenues in 2008 was primarily driven by strong North ditions resulted in a sharp de cline American steel production and demand for raw materials in the volume of raw steel pro- during the ﬁrst nine months of 2008, which resulted in duced worldwide. While produc- higher prices for scrap and other materials. However, dur- tion has gradually increased from ing the fourth quarter of 2008, Tube City IMS’ revenues its lowest point, steel pro duction experienced a signiﬁcant decline due to the dramatic drop remains well below 2008 lev els. in North American and global steel production that During 2009, North Amer ican steel reduced demand for scrap and lowered scrap pricing. production capacity uti li zation, a Revenue from the sale of materials was up 110 percent, or key statistic used to mea sure raw steel production, averaged US$1.4 billion to US$2.6 billion of total revenues in 2008 51 percent, compared to 81 percent in 2008. (2007 – US$1.2 billion). The increase was due primarily to During 2009, Tube City IMS reported a 56 percent an increase in underlying scrap prices during the ﬁrst nine decline in revenues to US$1.3 billion (2008 – US$3.0 bil- months of 2008. Service revenue totalled US$387 million in lion). Cost of sales had a similar decline of 58 percent to 2008, up 15 percent (2007 – US$338 million). This was due US$1.2 billion in 2009 (2008 – US$2.8 billion). 26 Onex Corporation December 31, 2009 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 primarily to the company’s acquisition of Hanson Re - sales in 2008. This was partially offset by the global down- sources Management (US$12 million), new sites, increased turn in the fourth quarter of 2008 that resulted in a signiﬁ- volumes at existing sites and increases in prices that were cant drop in North American steel production and demand partially offset by price escalators. for raw materials. Cost of sales in 2008 was up 96 percent, or US$1.4 billion, to US$2.8 billion (2007 – US$1.4 billion). Tube City IMS procures scrap metal on behalf of its cus- Other Businesses The other businesses segment primarily includes the rev- tomers and much of its cost of sales is associated with enues of Husky Injection Molding Systems, Ltd. (“Husky”), that activity. Therefore, the increase in the purchase cost of Tropicana Las Vegas and the ONCAP II companies – CSI scrap metal increased cost of sales in 2008. The cost of Global Education Inc. (“CSI”), EnGlobe Corp. (“EnGlobe”), scrap metal is passed on to Tube City IMS’ customers and Mister Car Wash, CiCi’s Pizza and Caliber Collision Centers thus drove a similar increase in revenues. In addition, since (“Caliber Collision”). Table 3 provides revenues and cost of Onex purchased Tube City IMS in late January 2007, the sales by operating company in the other businesses segment inclusion of a full year of results in 2008 compared to for 2009, 2008 and 2007 in both Canadian dollars and the 11 months in 2007 further augmented revenues and cost of companies’ functional currencies. Other Businesses Revenues and Cost of Sales for the Years Ended December 31, 2009 and 2008 Revenues TABLE 3 ($ millions) Canadian Dollars Functional Currency Year ended December 31 2009 2008 Change (%) 2009 2008 Change (%) Husky ONCAP II companies Tropicana Las Vegas(a) Other(b) Total $ 1,137 $ 1,290 839 36 68 601 – 297 $ 2,080 $ 2,188 (12)% 40 % – (77)% (5)% US$ 994 US$ 734 US$ 34 C$ 68 US$ 1,228 US$ 559 – C$ 297 (19)% 31 % – (77)% Cost of Sales ($ millions) Canadian Dollars Functional Currency Year ended December 31 2009 2008 Change (%) 2009 2008 Change (%) Husky ONCAP II companies Tropicana Las Vegas(a) Other(b) Total $ 781 $ 1,026 483 4 44 359 – 265 $ 1,312 $ 1,650 (24)% 35 % – (83)% (20)% US$ 681 US$ 423 US$ 3 C$ 44 US$ 975 US$ 334 – C$ 265 (30)% 27 % – (83)% Results are reported in accordance with Canadian generally accepted accounting principles. These results may differ from those reported by the individual operating companies. (a) Tropicana Las Vegas’ financial results are from the date of acquisition on July 1, 2009 to December 31, 2009. (b) 2009 other includes CEI (up to May 2009) and the parent company. 2008 other includes CEI, Radian and the parent company. Onex Corporation December 31, 2009 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 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 Husky(a) ONCAP II companies(b) Other(c) Total 2008 $ 1,290 601 297 $ 2,188 2007 Change (%) 2008 2007 Change (%) $ – 396 504 $ 900 – 52 % (41)% 143 % US$ 1,228 US$ 559 C$ 297 – US$ 377 C$ 504 – 48 % (41)% Cost of Sales ($ millions) Canadian Dollars Functional Currency Year ended December 31 Husky(a) ONCAP II companies(b) Other(c) Total 2008 $ 1,026 359 265 $ 1,650 2007 Change (%) 2008 2007 Change (%) $ – 222 421 $ 643 – 62 % (37)% 157 % US$ 975 US$ 334 C$ 265 – US$ 211 C$ 421 – 58 % (37)% Results are reported in accordance with Canadian generally accepted accounting principles. These results may differ from those reported by the individual operating companies. (a) 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 and costs of sales for those few days were not included in Onex’ audited annual consolidated statement of earnings for the year ended December 31, 2007. (b) 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. (c) 2008 other includes CEI, Radian and the parent company. 2007 other includes CEI, Cineplex Entertainment (up to March 31, 2007), Radian and the parent company. Husky on euro-denominated revenues (US$18 million), and the Husky provides highly engineered manufacturing systems company’s decision to discontinue certain product lines and services for the plastics injection molding equipment (US$20 million). Cost of sales at Husky declined 30 per- industry. The company engineers and manufactures com- cent, or US$294 million, to US$681 million in 2009 (2008 – plete system solutions that are comprised of injection mold- US$975 million). The percentage decline in cost of sales ing machines, molds, hot runners, temperature controllers in 2009 was more than the decrease in revenues due to and auxiliary equipment. Husky’s revenues are derived from additional cost reductions in the year from the company’s the sale of machines and complete systems, hot runners for transformation plan initiated in 2008 and a US$91 million systems and parts and aftermarket services. While Husky one-time inventory charge recorded by Husky in 2008 origi- signiﬁcantly improved its margins in 2009, sales were lower nating from the 2007 acquisition. Accounting principles for pri marily due to the global economic recession. acquisitions require that inventory be stepped up in value to Revenues at Husky declined 19 percent to the selling price of the inventory less the direct cost to com- US$1.0 billion in 2009 (2008 – US$1.2 billion) due primar ily plete and sell the product. This had the effect of reducing to the effect of the economic downturn in 2009 on the margins in 2008 on the subsequent sale of inventory on demand for the company’s products. Revenues were down hand at the date of acquisition. in North America (23 percent), Europe (31 percent) and Asia Husky reported revenues of US$1.2 billion and (3 percent), partially offset by a 13 percent increase in sales cost of sales of US$975 million for the year ended Decem - in Latin America. In addition, revenues at Husky in 2009 ber 31, 2008. During 2008, Husky reported strong revenues were impacted by unfavourable foreign currency changes in Asia Paciﬁc and Latin America but lower revenues in 28 Onex Corporation December 31, 2009 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 Europe and North America. As noted earlier, included in company’s particular ﬁnancing structure, as well as certain Husky’s cost of sales in 2008 were charges of US$91 million non-cash charges including stock-based compensation, originating from the acquisition accounting step-up in amortization of intangible assets and any unusual or non- value of inventory on the company’s balance sheet at the recurring charges. Operating earnings is not a deﬁned mea - date of acquisition. There are no comparative revenues or sure under Canadian GAAP. The term operating earnings, as cost of sales for 2007 since the company’s operating ﬁnan- used here, is deﬁned as earnings before interest expense, cial results for the few days from its mid-December 2007 amor tization of intangible assets and deferred charges, and acquisition date to December 31, 2007 were not signiﬁcant income taxes. Onex also excludes from oper ating earnings to Onex’ consolidated results. ONCAP II companies accounting mea sures that do not reﬂect the actual operating performance of the business, such as earnings (loss) from equity-accounted investments, foreign exchange gains The ONCAP II companies – CSI, EnGlobe, Mister Car Wash, (loss), stock-based compensation recovery (expense), non- CiCi’s Pizza and Caliber Collision – reported a 31 percent recurring items such as gains on dispositions of operating increase in revenues to US$734 million in 2009 (2008 – investments, acquisition and restructuring charges, other US$559 million). Cost of sales had a corresponding increase income (expense), writedown of goodwill, intangible assets of 27 percent to US$423 million in 2009 (2008 – US$334 mil- and long-lived assets, as well as non-controlling interests lion). Essentially all of the revenue and cost of sales growth and discontinued operations. in the year resulted from the inclusion of the operations of Table 4 provides a reconciliation of the audited Caliber Collision following ONCAP II’s purchase of that busi- annual consolidated statements of earnings to operating ness in October 2008. earnings for the years ended December 31, 2009 and 2008. During 2008, the ONCAP II companies’ revenues increased US$182 million to US$559 million (2007 – Operating Earnings Reconciliation US$377 million) and cost of sales were US$334 million in 2008, up US$123 million from US$211 million in 2007. TABLE 4 ($ millions) 2009 2008 During 2008, the growth in revenues and cost of sales was Earnings before the undernoted items $ 2,544 $ 2,418 due to ONCAP II’s acquisition of Caliber Collision in late Amortization of property, plant October 2008, as well as the inclusion of a full year of and equipment results of Mister Car Wash and CiCi’s Pizza, acquired in Interest income (636) 53 (624) 35 April and June 2007, respectively. Operating earnings $ 1,961 $ 1,829 Tropicana Las Vegas Amortization of intangible assets Tropicana Las Vegas is one of the best-known and most and deferred charges storied casinos in Las Vegas located directly on the Las Vegas Strip. Tropicana Las Vegas is a new business acquired Interest expense of operating companies Loss from equity-accounted investments by Onex on July 1, 2009. This acquisition is described Foreign exchange gains (loss) earlier on page 16. The company contributed revenues of US$34 million and cost of sales of US$3 million in 2009 for the six-month period of Onex’ ownership. Stock-based compensation recovery (expense) Other income (expense) Gains on dispositions of operating investments (364) (495) (497) (90) (161) 97 783 Operating earnings Management at Onex reviews the performance of individual Acquisition, restructuring and other expenses (219) Writedown of goodwill, intangible assets and long-lived assets (370) (1,584) operating companies based on an operating earnings mea - Earnings (loss) before income taxes, non-controlling sure. Onex uses operating earnings as a measure to evaluate interests and discontinued operations $ 645 $ (1,061) each operating company’s performance because it elimi- nates interest charges, which are a function of the operating Onex Corporation December 31, 2009 29 (366) (550) (322) 83 142 (77) 4 (220) 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 operating earnings (loss) by industry segment in Canadian dollars and the companies’ functional currencies for the years ended December 31, 2009 and 2008. Operating Earnings (Loss) by Industry Segment TABLE 5 ($ millions) Canadian Dollars Functional Currency Year ended December 31 2009 2008 Change ($) 2009 2008 Change ($) Electronics Manufacturing Services $ 280 $ 309 $ (29) Aerostructures Healthcare Financial Services Customer Support Services Metal Services Other (a) Total 374 860 181 97 29 140 465 732 251 77 44 (49) (91) 128 (70) 20 (15) 189 $ 1,961 $ 1,829 $ 132 US$ 252 US$ 324 US$ 760 US$ 160 US$ 85 US$ 26 C$ 140 US$ 284 US$ 450 US$ 677 US$ 231 US$ 72 US$ 44 C$ (49) US$ (32) US$ (126) US$ 83 US$ (71) US$ 13 US$ (18) C$ 189 Results are reported in accordance with Canadian generally accepted accounting principles. These results may differ from those reported by the individual operating companies. (a) 2009 other includes CEI (up to May 2009), Husky, Tropicana Las Vegas, ONCAP II and the parent company. 2008 other includes CEI, Husky, Radian, ONCAP II and the parent company. Consolidated operating earnings were up 7 percent to $2.0 billion in 2009 (2008 – $1.8 billion). Much of the Partially offsetting the above mentioned operating earnings growth factors in 2009 were: increase in operating earnings in 2009 resulted from a (cid:129) a US$32 million decline in operating earnings at Celes tica higher average U.S. dollar to Canadian dollar exchange due primarily to lower volume of business, partially offset rate compared to 2008. In addition, the following factors by continued operational improvements and increased affected the growth in operating earnings in 2009: (cid:129) a US$48 million increase in operating earnings at Care - stream Health resulting from the favourable impact of productivity; (cid:129) Skilled Healthcare’s US$18 million decline in operating earnings due primarily to the unusual and one-time productivity across all businesses, lower material costs for charge to cost of sales for the allowance for doubtful silver and polyester, and from the company’s restructuring accounts in 2009, as previously discussed under Rev - actions initiated in 2008, which focused on optimizing the enues and Cost of Sales; company’s cost structure as a stand-alone entity; (cid:129) lower operating earnings of US$71 million in the ﬁnan- (cid:129) EMSC’s operating earnings growth of US$47 million due cial services segment at The Warranty Group; much of primarily to the growth at EmCare, as discussed under the decline was due to reduced margins on the com- Revenues and Cost of Sales; pany’s European credit business and the effect of lower (cid:129) Higher operating earnings of US$13 million at Sitel revenues; World wide resulting from the beneﬁts of cost-saving (cid:129) a decline in operating earnings of US$126 million at initiatives implemented in 2008 and 2009; and Spirit AeroSystems in 2009, reported in the aerostruc- (cid:129) a US$97 million increase in operating earnings at Husky, tures segment, due primarily to several charges to cost as 2008 included a one-time reduction in margins by of sales associated with losses on certain contracts, as US$91 million originating from the acquisition account- previously discussed under Revenues and Cost of Sales; ing increase in the valuation of inventory on the com- and pany’s balance sheet at the time of acquisition in late (cid:129) a US$18 million decrease in operating earnings at Tube 2007, which subsequently reduced operating earnings in City IMS generally driven by a decline in raw steel pro- 2008 when the inventory was sold. duction by its customers. 30 Onex Corporation December 31, 2009 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 Interest expense of operating companies New investments are structured with the company having Partially offsetting these factors was a US$8 million increase in interest expense in 2009 resulting from the inclusion of sufﬁcient equity to enable it to self-ﬁnance a signiﬁcant Caliber Collision for a full year in 2009 following ONCAP II’s portion of its acquisition cost with a prudent amount of purchase of the business in October 2008. In addition, Sitel debt. The level of debt is commensurate with the operating Worldwide recorded higher interest expense of US$9 million com pany’s available cash ﬂow, including consideration of due primarily to higher debt and interest rates in 2009 com- funds required to pursue growth opportunities. It is the pared to 2008. responsibility of the acquired operating company to ser - vice its own debt obligations. Consolidated interest expense was down 10 per- Loss from equity-accounted investments Loss from equity-accounted investments for the year cent to $495 million in 2009 (2008 – $550 million). Ex - ended December 31, 2009 was $497 million (2008 – $322 mil- cluding the impact of foreign currency, Celestica’s interest lion). This represents Onex’ and/or Onex Partners’ portion expense declined by approximately US$18 million due pri- of the earnings (loss) of Allison Transmission, Inc. (“Allison marily to the repurchase of US$150 million in the principal Transmission”); Hawker Beechcraft Corporation (“Hawker value of its 2011 senior subordinated notes in the ﬁrst quar- Beechcraft”); ResCare; RSI Home Products, Inc. (“RSI”); ter of 2009 and an additional repurchase of US$339 million the manager of Onex Credit Partners; Cypress Insurance in the principal value of those notes in the fourth quarter Group (“Cypress”); and Onex Real Estate’s investments. of 2009. In addition, Care stream Health’s results reﬂected Table 6 details the earnings (loss) from equity-accounted a US$35 million decline in interest expense due primarily investments by company, as well as Onex’ share of these to lower interest rates in 2009 and the company’s debt earnings (loss) for 2009 and 2008. principal repayments from operating cash during the year. Earnings (Loss) from Equity-accounted Investments TABLE 6 ($ millions) Hawker Beechcraft Allison Transmission Onex Real Estate Other (b) Total 2009 2008 Net Earnings (Loss)(a) Onex’ Share of Net Earnings (Loss) Net Earnings (Loss)(a) Onex’ Share of Net Earnings (Loss) $ (237) $ (95) $ (80) $ (32) (181) (97) 18 (58) (82) 12 (198) (68) 24 (63) (61) 14 $ (497) $ (223) $ (322) $ (142) (a) The net earnings (loss) represent Onex’ and/or Onex Partners’ share of the net earnings (loss) in those businesses. (b) 2009 other includes Cypress, Onex Credit Partners, ResCare and RSI. 2008 other includes Cineplex Entertainment, Cypress, Onex Credit Partners, ResCare and RSI. Onex Corporation December 31, 2009 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 Hawker Beechcraft Allison Transmission The $237 million loss (of which Onex’ share was $95 million) A signiﬁcant portion of the loss reported by Allison Trans - for Hawker Beechcraft in 2009 was due largely to the com- mission in 2009 was due to the company recording a pany recording signiﬁcant impairment charges in the third US$190 million writedown of certain intangible assets that quarter of 2009 related to goodwill, intangible and other were determined to be impaired in the second quarter of assets, primarily in Hawker Beechcraft’s business and gen- 2009. In addition, the company wrote down certain long- eral aviation segment. During the third quarter of 2009, term receivables and established reserves for other matters Hawker Beechcraft completed a review of the carrying value that the company had with General Motors Cor po ration of its business and general aviation segment compared (“GM”) as a result of the GM bankruptcy. The net charge for to its fair value in light of the current decline in demand Allison Transmission from these GM items was US$37 mil- for new business aircraft. The company recorded a total of lion. These matters relate to agreements with GM to share US$726 million in impairment and other charges in the future estimated costs between the two companies and, in quarter. A component of these charges was a US$521 million particular, for certain employee post-retirement healthcare impairment charge for its business and general aviation seg- obligations that stem from the 2007 acquisition of Allison ment, which included an impairment charge of US$340 mil- Transmission from GM. lion for the full amount of the goodwill associated with this segment. The other component was charges of US$205 mil- Onex Real Estate lion that were necessary to reduce the carrying value of Onex Real Estate’s investments in the Camden properties, other assets in this segment, as well as increased reserves for Flushing Town Center, Urban Housing Platform, Town and losses on certain aircraft programs and potential supplier Country and NY Credit contributed $97 million of the loss claims. These charges were the result of the company’s on equity-accounted investments in 2009 compared to a updated expectations as to the timing of a general aviation $68 million loss in 2008. Onex’ share of Onex Real Estate’s market recovery, the resulting reduced production volumes losses was $82 million in 2009 compared to $61 million in and pricing pressure on new aircraft sales. 2008. The majority of the loss in Onex Real Estate resulted In addition, during the second quarter of 2009, the from provisions established against the carrying value of company recorded a one-time charge of US$31 million asso- a number of Onex Real Estate investments as a result of ciated with the restatement of the company’s fourth-quarter current economic conditions. 2008 and ﬁrst-quarter 2009 results due to an error that Hawker Beechcraft management identiﬁed in its calculation of a deferred tax valuation reserve, which caused the com- pany to understate its provisions for income taxes in those prior periods. Onex’ share of this charge was US$6 million, which was recorded in the third quarter of 2009. Partially offsetting the above charges in 2009 was a US$352 million gain by Hawker Beechcraft on its purchase of US$497 mil- lion of its debt securities at a signiﬁcant discount in the ﬁrst half of 2009. 32 Onex Corporation December 31, 2009 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 Foreign exchange gains (loss) Foreign exchange gains (loss) reﬂect the impact of changes In addition, Carestream Health, reported in the healthcare segment, and Sitel Worldwide, reported in the in foreign currency exchange rates. A consolidated foreign customer support services segment, recorded foreign exchange loss of $90 million was recorded for the year exchange losses of $6 million and $10 million, respectively, ended December 31, 2009 compared to a consolidated in 2009 primarily as a result of the decline in value of the foreign exchange gain of $83 million in 2008. Table 7 pro- euro relative to the U.S. dollar. vides a breakdown of and the change in foreign currency gains (loss) by industry segment for the years ended De - cem ber 31, 2009 and 2008. Foreign Exchange Gains (Loss) by Industry Segment TABLE 7 ($ millions) 2009 2008 Change ($) Electronics Manufacturing Services Aerostructures Healthcare Financial Services Customer Support Services Metal Services Other (a) Total $ (2) $ (19) $ 17 3 (6) 1 (10) (1) (75) (6) (9) – 10 – 107 9 3 1 (20) (1) (182) $ (90) $ 83 $ (173) Stock-based compensation recovery (expense) During 2009, Onex recorded a consolidated stock-based compensation expense of $161 million compared to a stock- based compensation recovery of $142 million in 2008. Table 8 provides a breakdown of and the change in stock-based compensation by industry segment for the years ended De cember 31, 2009 and 2008. Stock-based Compensation Recovery (Expense) by Industry Segment TABLE 8 ($ millions) 2009 2008 Change ($) Electronics Manufacturing Services Aerostructures Healthcare $ (43) $ (25) $ (18) (12) (7) (1) (98) (17) (5) (1) 190 5 (2) – (288) $ (161) $ 142 $ (303) Results are reported in accordance with Canadian generally accepted accounting Financial Services principles. These results may differ from those reported by the individual operating companies. (a) 2009 other includes CEI (up to May 2009), Husky, ONCAP II and the parent com- pany. 2008 other includes CEI, Husky, Radian, ONCAP II and the parent company. Other (a) Total Much of the change in foreign exchange year-over-year was principles. These results may differ from those reported by the individual due to the movement of the U.S. dollar relative to the Cana - operating companies. Results are reported in accordance with Canadian generally accepted accounting dian dollar, which primarily impacted Onex, the parent company. Onex, the parent company, holds a signiﬁcant portion of its cash in U.S. dollars as it anticipates that future (a) 2009 other includes CEI (up to May 2009), Husky, Tropicana Las Vegas, ONCAP II and the parent company. 2008 other includes CEI, Husky, Radian, ONCAP II and the parent company. acquisitions it enters into will be primarily funded with U.S. Onex, the parent company, accounted for $93 million of the dollars. Onex, the parent company, recorded $76 million of expense in 2009 due to the change in its stock-based com- foreign exchange loss in 2009, which is included in the other pensation liability. Approximately $64 million of the expense segment in table 7. The value of the U.S. dollar relative to was due to the required revaluation of the liability for stock the Canadian dollar declined to 1.0510 Cana dian dollars at options and deferred share units based on changes in the Decem ber 31, 2009 from 1.2180 Cana dian dollars at Decem - market value of Onex shares. The increase in Onex’ share ber 31, 2008. This compares to a foreign exchange gain price to $23.60 per share at December 31, 2009 from $18.19 of $105 million recorded by Onex, the parent company, in per share at December 31, 2008 resulted in an upward revalu- 2008 due to the increase in value of the U.S. dollar from ation of the liability for stock options. The remaining amount 0.9913 Cana dian dollars at December 31, 2007. relates to the revaluation of the potential liability under the Management Investment Plan (the “MIP”) as described on page 56. This compares to a $179 million stock-based com- pensation recovery recorded in 2008 due to the 48 percent decline in the market value of Onex shares at December 31, 2008 from $34.99 per share at December 31, 2007. Onex Corporation December 31, 2009 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 Other income (expense) Consolidated other income totalled $97 million in 2009 and valuation allowances have been established against the beneﬁt of all of these losses in the audited annual con- compared to a $77 million expense in 2008. During 2009, solidated ﬁnancial statements. As such, Onex does not Onex, the parent company, accounted for $103 million of expect to generate sufﬁcient taxable income to fully utilize other income due primarily to a $93 million favourable these losses in the foreseeable future. In connection with mark-to-market and foreign exchange adjustment on the this transaction, Onex obtained a tax ruling from Canada Tropicana Las Vegas debt held by Onex and Onex Part- Revenue Agency, and Deloitte & Touche LLP, an indepen - ners III. Onex’ share of this income was $20 million. This dent accounting ﬁrm retained by Onex’ Audit and Corpo - adjustment was necessary to bring the carrying value of rate Governance Committee, provided an opinion that the Tropicana Las Vegas investment to the fair value of the the value received by Onex for the tax losses was fair. equity received in Tropicana Las Vegas on July 1, 2009. The transaction was unanimously approved by Onex’ Audit During 2008, other expense included a $65 million unfavour - and Corporate Governance Committee, all the members of able mark-to-market adjustment on the Tropicana Las Vegas which are independent directors. debt, of which Onex’ share was $15 million. Partially offsetting the other income in 2009 was In March 2009, Onex sold an entity, the sole assets $16 million of other expense recorded by Carestream of which were certain tax losses, to a public company Health due to the settlement with Kodak of acquisition- controlled by Mr. Gerald W. Schwartz, who is also Onex’ related working capital adjustments. controlling shareholder. Onex received approximately $3 million in cash for tax losses of approximately $23 mil- lion. The entire $3 million was recorded as a gain in other Gains on dispositions of operating investments Gains on dispositions of operating investments totalled income of Onex, the parent company, in 2009. Onex has sig- $783 million in 2009 (2008 – $4 million). Table 9 details the niﬁcant Canadian non-capital and capital losses available nature of these gains. Gains on Dispositions of Operating Investments TABLE 9 ($ millions) Gains on: Sale of Cineplex Entertainment Disposition of CEI Sale of shares of EMSC Sale of shares of Celestica Other, net Total Total Gains 2009 Onex’ Share of Gains 2009 Total Gains 2008 Onex’ Share of Gains 2008 $ 160 $ 160 $ – $ – 20 595 6 2 20 194 6 2 – – – 4 – – – 4 $ 783 $ 382 $ 4 $ 4 Sale of Cineplex Entertainment Disposition of CEI In April 2009, Onex sold its remaining approximately 13 mil- At the end of 2008, CEI was in violation of certain of its lion trust units of Cineplex Galaxy Income Fund. Onex debt covenants. In 2009, CEI discussed a restructuring of received approximately $175 million of net proceeds on this its debt with its lenders but was not able to reach an agree- sale and recorded a $160 million pre-tax gain on this trans- ment. As a result, in early May 2009, Onex contributed its action in the second quarter of 2009. ownership in securities of CEI to an entity controlled by CEI’s lenders that agreed to provide additional liquidity to 34 Onex Corporation December 31, 2009 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 CEI. As a result of this transfer, Onex and Onex Partners I ceased to have an equity ownership in the business. Onex’ Acquisition, restructuring and other expenses Acquisition, restructuring and other expenses are generally investment in the company had a negative carrying value considered to be costs incurred by the operating companies of $20 million due to previously recorded losses of CEI. to realign organizational structures or restructure manufac- Therefore, Onex recorded a non-cash accounting gain of turing capacity to obtain operating synergies critical to $20 million in the second quarter of 2009 on the disposi- building the long-term value of those businesses. Acquisi - tion of CEI. Sale of shares of EMSC tion, restructuring and other expenses totalled $219 million in 2009, down slightly from $220 million in 2008. Table 10 provides a breakdown of and the change in acquisition, In August 2009, EMSC completed a secondary public restructuring and other expenses by operating company for offering. Onex, Onex Partners I and certain limited partners the years ended Decem ber 31, 2009 and 2008. sold 9.2 million shares in the offering for net proceeds of $381 million. Onex’ portion of the shares sold was 3.5 mil- Acquisition, Restructuring and Other Expenses lion shares for net proceeds of $148 million. A $275 million pre-tax gain on the sale of EMSC shares was recorded in the TABLE 10 ($ millions) third quarter of 2009, of which Onex’ portion was $90 mil- Celestica lion. This included Onex’ net carried interest of $5 million Carestream Health on the realized gain on EMSC by third-party limited part- Husky ners. Onex’ share of the carried interest received reﬂected Sitel Worldwide an $8 million reduction as a result of the loss on the CEI Other 2009 $ 92 44 42 25 16 2008 Change ($) $ 39 $ 53 92 22 36 31 (48) 20 (11) (15) investment realized by the third-party limited partners. In November 2009, EMSC completed an addi- tional secondary public offering of 9.2 million shares. EMSC did not issue any shares in this offering. All the shares sold in the offering were by Onex, Onex Partners I and certain limited partners of Onex Partners I for net cash proceeds of $446 million. Onex sold 3.5 million of the total shares sold in the offering for net proceeds of $183 million. A pre-tax gain on the sale of EMSC shares of $320 million was recorded in the fourth quarter of 2009. Onex’ share of the pre-tax gain was $104 million, which included $15 mil- lion of carried interest on the realized gain by third-party limited partners of Onex Partners I. Sale of shares of Celestica In early October 2009, Onex completed the sale of 11 mil- lion subordinate voting shares of Celestica, which included shares held under the MIP, to a syndicate of underwriters at a gross price of $10.30 per share. Onex realized $104 million of net proceeds and recorded a pre-tax gain of $6 million. Total $ 219 $ 220 $ (1) Celestica reported an increase of $53 million in restruc - turing expenses in 2009 due primarily to the company’s restruc turing initiatives to improve capacity utilization principally in Celestica’s North American and European regions. In early 2008, the company had announced a range of between US$50 million and US$75 million of restructuring charges to be recorded throughout 2008 and 2009. During 2009, in light of the continuing uncertain eco- nomic envi ronment, Celestica determined that further restructuring charges were required to maintain the com- pany’s operational leverage and improve its overall utiliza- tion. In mid-2009, Celes tica announced additional charges in the range of US$75 million to US$100 million. Com bined, Celestica expects to incur total restructuring charges of between US$150 million and US$175 million associated with this program, of which US$118 million has been recorded during 2009 and 2008. The company expects to complete these restruc turing activities by the end of 2010. Restructuring costs at Carestream Health declined in 2009 due primarily to charges included in 2008 associ- ated with the company’s transition to a stand-alone entity. Restructuring expenses at Husky increased $20 mil- lion in 2009 due primarily to costs associated with the com- pany’s transformation plan to lower Husky’s cost structure. Onex Corporation December 31, 2009 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 Sitel Worldwide recorded a decline in restruc - to the $129 million writedown of goodwill and trademarks turing expenses of $11 million in 2009 resulting primarily in 2008. The goodwill was primar ily associated with the from 2008 expenses incurred associated with initiatives purchase of SITEL Corporation in January 2007 and that taken to streamline the company’s operations related to the impairment was due primarily to the shift of customers January 2007 acquisition of SITEL Corporation, as well as from Europe to other regions. addressing the softness in certain markets in which Sitel During the second quarter of 2009, Tube City Worldwide operates. IMS performed an analysis of the carrying value of its goodwill compared to its fair value by reporting unit. The Writedown of goodwill, intangible assets and long-lived assets Writedown of goodwill, intangible assets and long-lived company determined that the goodwill in one of its re porting units was impaired due to changes in the long- term outlook for certain customers and contracts. As assets totalled $370 million in 2009 (2008 – $1.6 billion). a result, the company recorded a $62 million goodwill Table 11 provides a breakdown of the writedown of good- impairment charge in 2009. will, intangible assets and long-lived assets by operating ONCAP’s operating company CiCi’s Pizza recorded company for the years ended December 31, 2009 and 2008. a non-cash impairment charge of $44 million to its intangi- Writedown of Goodwill, Intangible Assets its annual impairment test. The impairment was due pri - ble assets in the fourth quarter of 2009 as determined during and Long-lived Assets TABLE 11 ($ millions) Celestica Skilled Healthcare Sitel Worldwide Tube City IMS CiCi’s Pizza Cosmetic Essence Carestream Health Other(a) Total 2009 $ 14 180 64 62 44 – – 6 2008 $ 1,061 – 129 – – 206 142 46 $ 370 $ 1,584 marily to an increase in the discount rate used this year in the calculation of fair value as a result of market risks asso- ciated with the current economic environment. During the fourth quarter of 2009, Celestica con- ducted its annual recoverability review of long-lived assets. This review concluded that there was a $14 million impairment charge in its long-lived assets in 2009 (2008 – $11 million) primarily associated with its property, plant and equipment. During 2008, Celestica recorded a $1.1 billion goodwill impairment charge, which was the company’s entire value of goodwill on its balance sheet. The goodwill was associated with its Asia reporting unit and was estab- (a) 2009 other includes Husky. 2008 other includes EnGlobe and Husky. lished primarily from an acquisition in 2001. Celestica com- pleted its annual impairment testing during the fourth Skilled Healthcare completed its impairment analysis at the quarter of 2008. Celestica used a combination of valuation reporting unit level in the fourth quarter of 2009. Due to a approaches, including a market capitalization approach, a reduction in the expected future growth rates for Medi- multiples approach and discounted cash ﬂow, as a ﬁrst step care and Medicaid coverages and their effect on expected in determining any impairment in its goodwill. This analy- future cash ﬂows, the company revised its estimates with sis indicated a potential impairment in its Asia reporting respect to net revenues and gross margins, which negatively unit, corroborated by a combination of factors, including a im pacted its cash ﬂow forecasted for the long-term care signiﬁcant and sustained decline in Celestica’s market capi- reporting unit. As a result, the company recorded a goodwill talization, which was signiﬁcantly below its book value, impairment charge for that reporting unit of $180 million. and the then deterio rating global economic environment, Sitel Worldwide reported a $64 million writedown which resulted in a decline in expected future demand. The of goodwill associated primarily with its European opera- company then calculated the implied fair value of goodwill, tions due to revenue erosion driven by the economic down- determined in a manner similar to the purchase price allo- turn, especially among telecom customers. This compares cation, and compared the residual amount to the carrying 36 Onex Corporation December 31, 2009 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S amount of goodwill. Based on that analysis, Celestica Non-controlling Interests in Net Earnings (Loss) concluded that the entire goodwill balance was impaired. of Operating Companies by Industry Segment The goodwill impairment charge was non-cash in nature and did not affect Celestica’s liquidity, cash ﬂows from TABLE 12 ($ millions) 2009 2008 Change ($) operating activities or the company’s compliance with Net earnings (loss) of non-controlling debt covenants. interests in: During the fourth quarter of 2008, CEI performed Electronics Manufacturing its annual goodwill impairment test and concluded that Services goodwill of $206 million was impaired and should be written Aerostructures off in its entirety. The impairment was driven by a combina- Healthcare tion of factors, including signiﬁcant end-market deteriora- Financial Services tion and economic uncertainties impacting expected future Customer Support Services demand. During 2009, Onex disposed of its investment in CEI as previously discussed. Metal Services Other(a) During 2008, Carestream Health performed an Total analysis of the carrying value of its goodwill compared to $ 54 192 3 76 1 (59) 94 $ (791) $ 845 245 (34) 94 1 (5) (531) (53) 37 (18) – (54) 625 $ 361 $ (1,021) $ 1,382 its fair value by each reporting unit. It determined that the (a) 2009 other includes Cineplex Entertainment (up to March 31, 2009), CEI (up to goodwill in its Carestream Molecular Imaging business was impaired. As a result, during the fourth quarter of 2008, May 2009), Husky, Hawker Beechcraft, Allison Transmission, RSI, Tropicana Las Vegas, ONCAP II, Onex Real Estate and the parent company. 2008 other includes Cineplex Entertainment, CEI, Husky, Hawker Beechcraft, Allison Carestream Health recorded a $142 million writedown of Transmission, RSI, Radian, ONCAP II, Onex Real Estate and the parent company. goodwill and intangible assets. Income taxes Onex reported a consolidated income tax provision of $172 million in 2009 compared to a $252 million consoli- dated income tax provision in 2008. During 2009, Onex, the parent company, reduced its future income tax liability by $146 million and recorded a corresponding amount as a recovery in income tax. This reduction was the result of lower newly enacted income tax rates being applied to future income tax liabilities to bring the liability in line with enacted future income tax rates. Non-controlling interests in net earnings (loss) of operating companies In the audited annual consolidated statements of earnings, the non-controlling interests amount represents the inter- ests of shareholders other than Onex in the net earnings or losses of Onex’ operating companies. During 2009, the non- controlling interests share of Onex’ operating companies net earnings was $361 million compared to a share of net losses of $1.0 billion in 2008. Table 12 shows the net earnings (loss) by industry segment attributable to non-controlling share- holders in Onex’ operating companies for the years ended December 31, 2009 and 2008. During 2009, Celestica, included in the electronics manu- facturing segment, accounted for $845 million of the change in non-controlling interests amount. Much of the change was due to other shareholders’ share of the losses in 2008 resulting from Celestica’s $1.1 billion writedown of goodwill, intangible assets and long-lived assets in the fourth quarter of 2008 as previously discussed. Spirit AeroSystems, included in the aerostruc- tures segment, accounted for $53 million of the change in non-controlling interests amount in 2009 due to other shareholders’ share of the lower net earnings at Spirit Aero - Sys tems in 2009. The healthcare segment accounted for $37 mil- lion of the change in non-controlling interests amount in 2009. The change was primarily driven by the non-control- ling interests’ share of the 2008 writedown of goodwill and intangible assets recorded by Carestream Health. The metal services segment reported a $54 million change in non-controlling interests amount in 2009 due primarily to other shareholders’ share of the $62 million writedown of goodwill taken in the second quarter of 2009 as previously discussed. Onex Corporation December 31, 2009 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 other segment reported a $625 million change For the year ended December 31, 2007, the $119 mil- in non-controlling interests. The signiﬁcant components of lion of earnings from discontinued operations were primar - the change are detailed in table 13. ily from the sale of WIS International and CMC Electronics. Other businesses non-controlling interests in net earnings (loss) The following describes the signiﬁcant changes in the per share) in 2009 compared to a consolidated net loss of $283 million ($2.30 per share) in 2008 and net earnings of $228 million ($1.78 per share) in 2007. Table 14 identiﬁes the other segment of non-controlling interests. net earnings (loss) by industry segment. Consolidated net earnings were $112 million ($0.92 Other Businesses Non-controlling Interests in Net Earnings (Loss) TABLE 13 ($ millions) 2009 2008 Change ($) Net earnings (loss) of non-controlling Consolidated Earnings (Loss) from Continuing Operations and Net Earnings (Loss) by Industry Segment TABLE 14 ($ millions) 2009 2008 2007 $ (4) $ (185) $ 181 continuing operations: Earnings (loss) from interests in: CEI Husky Allison Transmission Hawker Beechcraft Gains on sales of EMSC shares by limited partners Other Total 10 (123) (142) 401 (48) (45) (135) (48) – (118) 55 12 (94) 401 70 $ 94 $ (531) $ 625 The other shareholders in CEI participated in the loss in 2008 caused by the write-off of goodwill by the company. CEI was disposed of in 2009. In the third quarter of 2009 Hawker Beechcraft recorded goodwill and other asset impairment charges Electronics Manufacturing Services Aerostructures Healthcare Financial Services Customer Support Services Metal Services Other(a) Net earnings (loss) from $ 6 $ (119) $ (3) 14 36 32 (126) (31) 181 17 (62) 40 (170) (2) 4 28 (10) 38 (19) (4) 79 continuing operations $ 112 $ (292) Discontinued operations – 9 $ 109 119 Net earnings (loss) $ 112 $ (283) $ 228 associated with its business and general aviation segment. (a) 2009 other includes Cineplex Entertainment (up to March 31, 2009), CEI (up to The interests of the other shareholders in Hawker Beech - craft were impacted by this loss. In the third and fourth quarters of 2009 EMSC completed secondary offerings of shares, in which Onex May 2009), Husky, Hawker Beechcraft, Allison Transmission, RSI, Tropicana Las Vegas, Radian, ONCAP II, Onex Real Estate, Onex Credit Partners and the parent company. 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, and Onex Partners I sold some of their EMSC shares. The Radian, ONCAP II, Onex Real Estate and the parent company. gain of $401 million is primarily the third-party limited partners’ portion of the gain on their EMSC shares sold. Earnings (loss) from continuing operations and consolidated net earnings (loss) Onex’ consolidated earnings from continuing operations were $112 million ($0.92 per share) in 2009 compared to a loss from continuing operations of $292 million ($2.37 per share) in 2008 and earnings of $109 million ($0.85 per share) in 2007. Table 14 details the earnings (loss) from continuing operations by industry segment before discon- tinued operations for 2009, 2008 and 2007. 38 Onex Corporation December 31, 2009 Table 15 presents the earnings (loss) per share from con- tinuing operations, discontinued operations and net earnings (loss). Earnings (Loss) per Subordinate Voting Share TABLE 15 ($ per share) 2009 2008 2007 Basic and Diluted: Continuing operations Discontinued operations Net earnings (loss) $ 0.92 $ – $ 0.92 $ (2.37) $ 0.07 $ (2.30) $ 0.85 $ 0.93 $ 1.78 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 F O U R T H - Q U A R T E R R E S U L T S Table 16 presents the statements of earnings (loss) for the fourth quarters ended December 31, 2009 and 2008. Fourth-Quarter Statements of Earnings (Loss) TABLE 16 ($ millions) Revenues Cost of sales Selling, general and administrative expenses Earnings before the undernoted items Amortization of property, plant and equipment Interest income (expense) Operating earnings Amortization of intangible assets and deferred charges Interest expense of operating companies Loss from equity-accounted investments Foreign exchange gains (loss) Stock-based compensation recovery (expense) Other income (expense) Gains on dispositions of operating investments Acquisition, restructuring and other expenses Writedown of goodwill, intangible assets and long-lived assets Earnings (loss) before income taxes and non-controlling interests Provision for income taxes Non-controlling interests Earnings (Loss) for the Period 2009 $ 6,153 (4,823) (673) $ 657 (153) 9 $ 513 (83) (97) (68) (17) (9) 7 323 (49) (255) $ 265 (69) (156) $ 40 2008 $ 6,774 (5,435) (701) $ 638 (177) (6) $ 455 (96) (171) (266) 58 89 (87) 4 (74) (1,571) $ (1,659) (25) 1,336 $ (348) Fourth-quarter consolidated revenues were $6.2 billion, down 9 percent, or $621 million, from the same quarter of 2008. Onex Corporation December 31, 2009 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 Operating earnings were $513 million in the fourth quarter of 2009, up 13 percent from $455 million in the fourth quarter of 2008. Table 17 provides a breakdown and change in fourth-quarter revenues and operating earnings by industry segment in Canadian dollars and the functional currency of the operating companies. Fourth-Quarter Revenues and Operating Earnings by Industry Segment Revenues TABLE 17 ($ millions) Canadian Dollars Functional Currency Quarter ended December 31 2009 2008 Change ($) 2009 2008 Change ($) Electronics Manufacturing Services $ 1,758 Aerostructures Healthcare Financial Services Customer Support Services Metal Services Other(a) Total 1,139 1,624 330 415 379 508 $ 2,356 784 1,748 386 483 475 542 $ (598) 355 (124) (56) (68) (96) (34) US$ 1,664 US$ 1,079 US$ 1,539 US$ 312 US$ 394 US$ 358 C$ 508 US$ 1,935 US$ 646 US$ 1,441 US$ 318 US$ 399 US$ 395 C$ 542 US$ (271) US$ 433 US$ 98 US$ (6) US$ (5) US$ (37) C$ (34) $ 6,153 $ 6,774 $ (621) ($ millions) Canadian Dollars Functional Currency Operating Earnings Quarter ended December 31 Electronics Manufacturing Services $ Aerostructures Healthcare Financial Services Customer Support Services Metal Services Other(a) Total 2009 95 92 248 44 19 13 2 2008 Change ($) 2009 2008 Change ($) $ 103 $ (8) 49 241 92 20 (6) (44) 43 7 (48) (1) 19 46 US$ US$ 91 86 US$ 234 US$ 41 US$ 19 US$ 11 C$ 2 US$ 83 US$ 41 US$ 197 US$ 74 US$ 16 US$ (5) C$ (44) US$ 8 US$ 45 US$ 37 US$ (33) US$ 3 US$ 16 C$ 46 $ 513 $ 455 $ 58 Results are reported in accordance with Canadian generally accepted accounting principles. These results may differ from those reported by the individual operating companies. (a) 2009 other includes Husky, Tropicana Las Vegas, ONCAP II and the parent company. 2008 other includes CEI, Husky, Radian, ONCAP II and the parent company. 40 Onex Corporation December 31, 2009 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 Part of the decline in fourth-quarter revenues was due to During the fourth quarter of 2009, gains on dis - the ﬂuctuation of the U.S. dollar to the Canadian dollar positions of operating investments totalled $323 million exchange rate. During the fourth quarter of 2009, the aver- compared to $4 million for the three months ended Decem - age U.S. dollar to Canadian dollar exchange rate was ber 31, 2008. The 2009 fourth-quarter gains included: 1.0563 Canadian dollars compared to 1.2125 Canadian dol- (cid:129) a $320 million pre-tax gain on the sale of a portion of lars in the fourth quarter of 2008. Excluding the impact of shares in EMSC by Onex, Onex Partners I and certain foreign currency translation, many of Onex’ operating limited partners in that company’s secondary offering companies reported lower revenues quarter-over-quarter in November 2009 (Onex’ portion of that pre-tax gain due primarily to the economic downturn. Celestica re - was $104 million); and ported a US$271 million decline in revenues during the (cid:129) a $6 million pre-tax gain on the sale of a portion of fourth quarter of 2009 compared to last year reﬂecting Celes tica shares by Onex. primarily the impact of weaker end-market demand. Spirit AeroSystems reported a US$433 million During the fourth quarter of 2009, there was $255 million increase in revenue in the fourth quarter of 2009 over the of writedowns of goodwill, intangible assets and long-lived same quarter in 2008. The 2008 results reﬂect the decreased assets recorded by Onex’ operating companies, compared deliveries to Boeing given the strike at Boeing that took to $1.6 billion for the three months ended December 31, place during much of that quarter. 2008. A detailed discussion of these writedowns by com- A foreign exchange loss of $17 million was re - pany is provided on page 36 of this report. corded in the fourth quarter of 2009 compared to $58 mil- lion of foreign exchange gains in the same quarter last Fourth-Quarter Cash Flow year. Onex, the parent company, recorded $12 million of Table 18 presents the major components of cash flow for the loss due primarily to the revaluation of its U.S. cash the fourth quarter. held at a lower U.S. dollar exchange rate. For the fourth quarter of 2009, the value of the U.S. dollar relative to the TABLE 18 ($ millions) 2009 2008 Canadian dollar decreased to 1.0510 Canadian dollars at Cash from operating activities December 31, 2009 compared to 1.0707 Canadian dollars Cash from (used in) financing activities at September 30, 2009. Cash from (used in) investing activities During the fourth quarter of 2009, Onex recorded a Consolidated cash and cash equivalents $ 562 $ (685) $ 129 $ 3,206 $ 384 $ 20 $ (350) $ 2,921 consolidated stock-based compensation expense of $9 mil- lion compared to a recovery of $89 million for the same Cash from operating activities totalled $562 million in the quarter of 2008. Celestica recorded a stock-based compen- fourth quarter of 2009 compared to cash from operating sation expense of $18 million during the fourth quarter of activities of $384 million in 2008. The increase in cash 2009. This was partially offset by Onex, the parent company, from operating activities was due primarily to higher which recorded a stock-based compensation recovery of operating earnings at many of Onex’ operating companies, $12 million for the fourth quarter of 2009 due to the change as shown in table 17 of this report, as well as less cash in its stock-based compensation liability. Onex is required invested in working capital. to revalue its stock option liability based on changes in the Cash used in ﬁnancing activities was $685 mil- market value of Onex shares. The decrease in Onex’ share lion in the fourth quarter of 2009 compared to cash from price to $23.60 per share at December 31, 2009 from $26.24 ﬁnancing activities of $20 million in 2008. Cash used in per share at Sep tember 30, 2009 resulted in the downward ﬁnancing activities in the quarter primarily included: revaluation of the liability for stock options and the recov- (cid:129) $263 million of cash distributed by Onex Partners I to its ery in stock-based compensation. limited partners, other than Onex, for their portion of the proceeds from the sale of EMSC shares in that company’s Novem ber 2009 secondary offering; Onex Corporation December 31, 2009 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 (cid:129) $18 million of cash distributed by Onex Part ners to its During the fourth quarter of 2008, cash used in limited partners, other than Onex, from a dividend paid investing activities totalled $350 million due primarily to by The Warranty Group in December 2009; $62 million of cash used in the acquisition of Caliber Colli - (cid:129) US$346 million of cash used by Celestica in November sion by ONCAP II and $338 million of cash used for the 2009 to redeem its remaining 7.875 percent senior subor- investment in RSI by Onex, Onex Partners II and manage- dinated notes due 2011; and ment in October 2008. (cid:129) $35 million of cash used by Onex, the parent company, Consolidated cash at December 31, 2009 totalled on repurchases of 1,471,300 Subordinate Voting Shares $3.2 billion. Onex, the parent company, accounted for under its Normal Course Issuer Bid. $890 million of the cash on hand. Table 19 provides a recon- ciliation of the change in cash at Onex, the parent company, Cash from investing activities totalled $129 million in the from September 30, 2009 to December 31, 2009. fourth quarter of 2009 due primarily to $446 million of cash proceeds received by Onex and Onex Partners I on the sale Change in Cash at Onex, the Parent Company of a portion of their shares in the EMSC secondary offering in November 2009 and Onex’ sale of a portion of its shares TABLE 19 ($ millions) in Celestica for proceeds of $104 million. This was partially Cash on hand at September 30, 2009 offset by the $137 million of cash invested in December 2009 Proceeds on sales of EMSC shares by Onex, the parent company, in an unleveraged se nior Proceeds on sale of Celestica shares secured loan portfolio managed by Onex Credit Partners. In addition, operating companies invested $193 million in the purchase of property, plant and equipment in the fourth quarter, primarily by Spirit AeroSystems ($82 million). The Warranty Group dividend Management fees received Investment managed by Onex Credit Partners Onex share repurchase Exchange loss on the value of USD cash held Other, net, including dividends paid Cash on hand at December 31, 2009 $ 770 183 104 13 55 (137) (35) (18) (45) $ 890 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 20 summarizes Onex’ key consolidated ﬁnancial information for the last eight quarters. TABLE 20 ($ millions except per share amounts) 2009 2008 Dec. Sept. June Mar. Dec. Sept. June Mar. Revenues $ 6,153 $ 6,078 $ 6,131 $ 6,469 $ 6,774 $ 7,066 $ 6,815 $ 6,226 Earnings (loss) from continuing operations $ 40 $ (180) $ 83 $ 169 $ (348) $ 34 $ (18) $ 40 Net earnings (loss) $ 40 $ (180) $ 83 $ 169 $ (348) $ 38 $ (18) $ 45 Earnings (loss) per Subordinate Voting Share Basic and Diluted: Continuing operations Net earnings (loss) $ 0.33 $ (1.48) $ 0.68 $ 1.38 $ (2.85) $ 0.26 $ (0.14) $ 0.32 $ 0.33 $ (1.48) $ 0.68 $ 1.38 $ (2.85) $ 0.30 $ (0.14) $ 0.36 Onex’ quarterly consolidated ﬁnancial results do not follow any speciﬁc trends due to the acquisitions or dispositions of businesses by Onex, the parent company; the volatility of the exchange rate between the U.S. dollar and the Canadian dollar; and varying business activities and cycles at Onex’ operating companies. 42 Onex Corporation December 31, 2009 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 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 2009 was due to the currency translation of U.S.-based assets with the weakening of the U.S. dollar relative to the This section should be read in conjunction with the au - Canadian dollar. The underlying currency for most of Onex’ dited annual consolidated balance sheets and the corre- consolidated assets is the U.S. dollar as almost all of Onex’ sponding notes thereto. operating companies report in U.S. dollars. The closing U.S. dollar to Canadian dollar exchange rate decreased 14 per- Consolidated assets Consolidated assets totalled $25.5 billion at December 31, cent to 1.0510 Canadian dollars at December 31, 2009 from 1.2180 Canadian dollars at December 31, 2008. In addition, 2009 compared to $29.7 billion at December 31, 2008 and approximately $128 million of the decline in assets from $26.2 billion at December 31, 2007. A signiﬁcant portion of December 31, 2008 was due to the disposition of CEI in the the decrease in Onex’ consolidated assets at December 31, second quarter of 2009. Asset Diversiﬁcation by Industry Segment CHART 1 ($ 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 4,612 4,419 4,821 4,821 6,660 5,616 5,745 6,095 5,536 5,206 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 1,020 1,039 1,026 891 881 O T H E R (a) T O TA L 5,498 5,307 4,937 29,732 25,481 26,199 3,265 3,272 745 09 08 07 09 08 07 09 08 07 09 08 07 09 08 07 09 08 07 09 08 07 09 08 07 (a) 2009 other includes Husky, Tropicana Las Vegas, ONCAP II and the parent company. 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. The pie charts below show the percentage breakdown of total consolidated assets by industry segment as at December 31, 2009, 2008 and 2007. Segmented Total Consolidated Assets Breakdown 20 09 20 0 8 2 0 0 7 a. 13% b. 19% c. 22% d. 20% e. 3% f. 4% x. 19% a. 16% b. 16% c. 23% d. 20% e. 3% f. 3% x. 19% a. Electronics Manufacturing Services b. Aerostructures c. Healthcare d. Financial Services e. Customer Support Services f. Metal Services x. Other (1) a. 17% b. 13% c. 22% d. 21% e. 4% f. 3% x. 20% (1) 2009 other includes Husky, Tropicana Las Vegas, ONCAP II and the parent company. 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. Onex Corporation December 31, 2009 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 Consolidated long-term debt, without recourse to Onex It has been Onex’ policy to preserve a ﬁnancially strong in ﬁnancial markets and economic conditions generally, may result in non-compliance with certain covenants by that operating company. parent company that has funds available for new acqui - Total long-term debt (consisting of the current and sitions and to support the growth of its operating com - long-term portions of long-term debt, net of deferred panies. This policy means that all debt ﬁnancing is within charges) was $5.9 billion at December 31, 2009 compared our operating companies and each company is required to $7.7 billion at December 31, 2008 and $6.4 billion at to support its own debt without recourse to Onex or other De cem ber 31, 2007. The decrease was due to two factors. Onex operating companies. Certain of the operating companies paid down debt, with The ﬁnancing arrangements of each operating most of that occurring in 2009. This is described in the para- company typically contain certain restrictive covenants, graphs that follow. As well, since Onex reports in Canadian which may include limitations or prohibitions on additional dollars, but the majority of its operating companies report in indebtedness, payment of cash dividends, redemption of U.S. dollars, a portion of the decrease in total long-term debt capital, capital spending, making of investments, and acqui- was caused by currency translation due to the weakening of sitions and sales of assets. In addition, the operating compa- the U.S. dollar relative to the Canadian dollar. Table 21 sum- nies that have outstanding debt must meet certain ﬁnancial marizes consolidated long-term debt by industry segment in covenants. Changes in business conditions relevant to an Canadian dollars and U.S. dollars for 2009, 2008 and 2007. operating company, including those resulting from changes Consolidated Long-term Debt, Without Recourse to Onex TABLE 21 ($ millions) Electronics Manufacturing Services Aerostructures Healthcare Financial Services Customer Support Services Metal Services Other(a) Portion of long-term debt of CEI, reclassified as current Current portion of long-term debt of operating companies Canadian Dollars 2009 2008 2007 $ 234 902 2,792 203 660 401 738 5,930 – (425) $ 892 697 3,367 237 796 519 1,167 7,675 (138) (394) $ 752 567 2,835 194 688 380 960 6,376 – (217) Total $ 5,505 $ 7,143 $ 6,159 (a) 2009 other includes Husky, Radian and ONCAP II. 2008 other includes CEI, Husky, Radian, ONCAP II and Onex Partners. 2007 other includes CEI, Radian, ONCAP II and Onex Real Estate. 44 Onex Corporation December 31, 2009 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 Long-term Debt, Without Recourse to Onex (cont’d) TABLE 21 ($ millions) Electronics Manufacturing Services Aerostructures Healthcare Financial Services Customer Support Services Metal Services Other(a) Portion of long-term debt of CEI, reclassified as current Current portion of long-term debt of operating companies Total U.S. Dollars 2008 2007 $ 732 572 2,764 195 654 426 958 $ 759 572 2,860 196 694 383 968 2009 $ 223 858 2,657 193 628 381 702 $ 5,642 $ 6,301 $ 6,432 – (404) (113) (323) – (219) $ 5,238 $ 5,865 $ 6,213 (a) 2009 other includes Husky, Radian and ONCAP II. 2008 other includes CEI, Husky, Radian, ONCAP II and Onex Partners. 2007 other includes CEI, Radian, ONCAP II and Onex Real Estate. Celestica’s total debt declined to US$223 million at Decem - through to June 2010, when it steps down to US$409 million ber 31, 2009 from US$732 million at December 31, 2008. through to June 2012. At December 31, 2009, no amounts This decline was due primarily to: (i) the company’s repur- were drawn under the facility. On Sep tember 30, 2009, Spirit chase of US$150 million in the principal amount of its 2011 AeroSystems completed an offering of US$300 million senior subordinated notes during the ﬁrst quarter of 2009; aggregate principal amount of 7.5 percent senior notes due and (ii) Celestica’s redemption in November 2009 of its 2017. The offering price to purchasers of the notes was remaining 2011 senior subordinated notes (US$339 million). 97.804 percent of par to yield 7.875 percent to maturity. Celestica renewed its revolving credit facility on generally A portion of the net proceeds of the notes offering was used similar terms and conditions and reduced the size to to repay US$200 million in borrowings under Spirit Aero - US$200 million from US$300 million in April 2009. No Systems’ existing senior secured revolving credit facility, amounts were drawn under this facility at December 31, without any reduction of the lenders’ commitment there - 2008 or December 31, 2009. This credit facility matures in under, and the remaining net proceeds were used for gen- April 2011. Under the terms of the renewed facility, bor - eral corporate purposes and to pay fees and expenses rowings bear a higher interest rate than the previous incurred in connection with the offering of the notes. The terms and Celestica is required to comply with certain notes bear interest at a rate of 7.5 percent per year, payable ﬁnancial cove nants related to indebtedness, interest cov- semi-annually, commencing April 1, 2010. erage and liquidity. In January 2010, Celestica announced In the healthcare segment, in 2009 Carestream its intention to redeem its outstanding 2013 senior subor- Health paid US$92 million of its US$1.8 billion of debt from dinated notes, with a principal amount of US$223 million, cash ﬂow generated from operations. This represents the in the ﬁrst quarter of 2010. majority of the decrease in debt in the healthcare segment. In June 2009, Spirit AeroSystems entered into an In 2009 Onex disposed of its interest in CEI as amendment of its existing credit agreement. The amendment discussed on page 34. CEI was included in the other seg- extends the maturity of the company’s revolving credit facil- ment in 2008 with debt in the amount of US$202 million at ity from June 2010 to June 2012. It also increases the re volving that time, of which US$80 million was held by the Company. credit facility to US$729 million from US$650 million Onex Corporation December 31, 2009 45 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Despite the economic slowdown in 2009, each of in U.S. dollars as the debt of most of Onex’ operating com - Onex’ operating companies closed the year within its panies is denominated in U.S. dollars. Below that, we have covenant requirements. Table 22 details the aggregate debt converted the amounts to Cana dian dollars at the Decem- maturities for Onex’ consolidated operating companies and ber 31, 2009 exchange rate. As can be seen from the fol - equity-accounted operating companies for each of the years lowing tables, most of the maturities are in years 2013 and up to 2014 and in total thereafter. As equity-accounted busi- 2014. Note 10 to the audited annual consolidated ﬁnancial nesses are included in the table, the total amount is in excess statements provides further disclosure of the long-term debt of the reported consolidated debt. The table is presented at each of our operating companies. Debt Maturity Amounts by Year TABLE 22 ($ millions) U.S. Dollars Consolidated operating companies(a) $ 404 $ 291 $ 1,219 $ 2,138 $ 1,043 $ 838 $ 5,933 Equity-accounted operating companies 167 88 47 430 4,169 1,455 6,356 Total $ 571 $ 379 $ 1,266 $ 2,568 $ 5,212 $ 2,293 $ 12,289 2010 2011 2012 2013 2014 Thereafter Total ($ millions) Above Table Converted to Canadian Dollars Consolidated operating companies(a) $ 425 $ 306 $ 1,281 $ 2,247 $ 1,096 $ 881 $ 6,236 Equity-accounted operating companies 176 92 49 452 4,382 1,529 6,680 Total $ 601 $ 398 $ 1,330 $ 2,699 $ 5,478 $ 2,410 $ 12,916 2010 2011 2012 2013 2014 Thereafter Total (a) Includes amounts held by Onex, the parent company, and are gross of deferred financing fees. Warranty reserves and unearned premiums Warranty reserves and unearned premiums represent The casualty reserves and provided guarantees on all of those reserves at December 31, 2008. In August 2009 the sub- Warranty Group’s gross warranty and property and casualty sidiary was sold to National Indem nity Company. As part of reserves, as well as gross warranty unearned premiums. the sale, National Indem nity Com pany became the primary At December 31, 2009, gross warranty reserves and unearned re-insurer for 42 percent of the non-warranty property and premiums (consisting of the current and long-term por- casualty reserves and provided guarantees on all of those tions) totalled $3.4 billion compared to $4.3 billion at reserves at December 31, 2009. December 31, 2008. Gross warranty and property and casu- The Warranty Group’s liability for gross warranty alty reserves are approximately $936 million (2008 – $1.3 bil- and property and casualty unearned premiums totalled lion) of the total, which represent the estimated case and $2.5 billion (2008 – $2.9 billion). All of the unearned premi- incurred but not reported reserves on warranty contracts ums are warranty business related and represent the por- and property and casualty insurance policies. The Warranty tion of the revenue received that has not yet been earned Group has ceded 100 percent of the property and casualty as revenue by The Warranty Group on extended warranty reserves component of $716 million (2008 – $1.1 billion) to products sold through multiple distribution channels. third-party re-insurers, which therefore has created a ceded Typi cally, there is a time delay between when the warranty claims recoverable asset. A subsidiary of Aon Corporation, contract starts to earn and the contract effective date. The the former parent of The War ranty Group, was the primary re-insurer for 44 percent of the non-warranty property and contracts generally commence earning after the original manufacturer’s warranty on a product expires. Note 12 to the 46 Onex Corporation December 31, 2009 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 audited annual consolidated ﬁnancial statements provides The decrease in the non-controlling interests balance was details of the gross warranty and property and casualty driven primarily by: reserves for loss and loss adjustment expenses and warranty (cid:129) $514 million of distributions to limited partners on the unearned premiums as at December 31, 2009 and 2008. sales of a portion of their interests in EMSC’s secondary offerings; Non-controlling interests The non-controlling interests liability in Onex’ audited (cid:129) $62 million of distributions to the limited partners of Onex Partners for their share of the dividends paid by annual consolidated balance sheet as at December 31, 2009 Carestream Health in September 2009 and The Warranty primarily represents the ownership interests of sharehold- Group in December 2009; and ers, other than Onex, in Onex’ consolidated operating com- (cid:129) $825 million of other comprehensive loss driven primar ily panies and equity-accounted investments. At December 31, by a 14 percent decline in the value of the U.S. dollar rela- 2009, the non-controlling interests balance decreased to tive to the Canadian dollar. The value of the U.S. dollar $6.4 billion from $6.6 billion at December 31, 2008. Table 23 was 1.0510 Canadian dollars at December 31, 2009 com- details the change in the non-controlling interests balance pared to 1.2180 Canadian dollars at December 31, 2008. from December 31, 2008 to December 31, 2009. Change in Non-controlling Interests (cid:129) the $361 million of non-controlling interests’ share of Partially offsetting these decreases were: TABLE 23 ($ millions) operating companies’ net earnings in 2009; approxi- mately $401 million of those earnings were from the Non-controlling interests as at December 31, 2008 $ 6,624 gains on the shares sold by other limited partners in the Non-controlling interests in 2009: Gains on sales of operating investments Operating companies’ net loss Investments by shareholders other than Onex in: Tropicana Las Vegas By Onex Partners III By other investors New shareholders’ purchase of Onex’ and Onex Partners I’s shares of EMSC sold in the public offering New shareholders’ purchase of Onex’ shares of Celestica sold in the public offering Other Onex operating companies Distributions to limited partners on the sales of EMSC shares Distributions to limited partners of Onex Partners for the Carestream Health and The Warranty Group dividends Other comprehensive loss 401 (40) 196 104 214 100 172 (514) (62) (825) Non-controlling interests as at December 31, 2009 $ 6,370 offerings of EMSC; (cid:129) $196 million in investments by limited partners of Onex Partners III, other than Onex, primarily for the invest- ment in Tropicana Las Vegas completed on July 1, 2009 and the subsequent rights offering; (cid:129) new shareholders’ purchase of shares sold by Onex and Onex Partners I in EMSC’s secondary offerings, which added $214 million to non-controlling interests; (cid:129) new shareholders’ purchase of shares sold by Onex in Celestica’s secondary offering, which added $100 million to non-controlling interests; and (cid:129) $276 million of investments by shareholders, other than Onex Partners, in Onex’ operating companies, of which $104 million was in Tropicana Las Vegas. Onex Corporation December 31, 2009 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 Shareholders’ equity Shareholders’ equity totalled $1.7 billion at December 31, Onex also has 100,000 Multiple Voting Shares outstanding, which have a nominal paid-in value, and 176,078 Series 1 2009 compared to $1.6 billion at December 31, 2008. The Senior Preferred Shares, which have no paid-in amount change in shareholders’ equity in 2009 was due primarily to reﬂected in Onex’ audited annual consolidated ﬁnancial the $112 million in net earnings reported in the year. Table 24 statements. Note 15 to the audited annual consolidated provides a reconciliation of the change in shareholders’ ﬁnancial statements provides additional information on equity from December 31, 2008 to Decem ber 31, 2009. Onex’ share capital. There was no change in the Multiple Voting Shares and Series 1 Senior Preferred Shares out- Change in Shareholders’ Equity standing during 2009. TABLE 24 ($ millions) Shareholders’ equity as at December 31, 2008 $ 1,553 Regular dividends declared Shares repurchased and cancelled Net earnings Other comprehensive income for 2009 (13) (41) 112 48 Shareholders’ equity as at December 31, 2009 $ 1,659 Cash dividends During 2009, 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 from that of 2008 and 2007. Total payments for dividends have decreased with the repurchase of Subor dinate Voting Shares under the Normal Course Issuer Bids as discussed Onex’ audited annual consolidated statements of share- on page 49. holders’ equity and comprehensive loss also show the changes to the components of shareholders’ equity for the years ended December 31, 2009 and 2008. Shares outstanding At January 31, 2010, Onex had 120,218,778 Subordinate 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 2009, Voting Shares issued and outstanding. Table 25 shows the Onex issued 3,060 Subordinate Voting Shares at an average change in the number of Subordinate Voting Shares out- cost of $20.61 per Subordinate Voting Share, creating cash standing from December 31, 2008 to January 31, 2010. savings of less than $1 million. Change in Subordinate Voting Shares Outstanding Shares under the Plan at an average cost of $29.48 per During 2008, Onex issued 6,279 Subordinate Voting TABLE 25 Subordinate Voting Shares outstanding Subordinate Voting Share, creating cash savings of less than $1 million. During 2007, 3,952 Subordinate Voting Shares were issued under the Plan at an average cost of $34.67 per at December 31, 2008 122,098,985 Subordinate Voting Share, creating cash savings of less than Shares repurchased and cancelled under Onex’ $1 million. Normal Course Issuer Bid Issue of shares – Dividend Reinvestment Plan (1,883,900) 3,693 In January 2010, Onex issued an additional 633 Sub- ordinate Voting Shares under the Plan at an average cost of Subordinate Voting Shares outstanding at January 31, 2010 120,218,778 $24.88 per Subordinate Voting Share. 48 Onex Corporation December 31, 2009 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 Stock Option Plan Onex, the parent company, has a Stock Option Plan in place During 2008, 702,500 options were granted with an exercise price of $15.95 and which vest over ﬁve years. In that provides for options and/or share appreciation rights to addition, 538,550 options were surrendered in 2008 at a be granted to Onex directors, ofﬁcers and employees for the weighted average exercise price of $14.97 for aggregate cash acquisition of Subordinate Voting Shares of the Com pany for consideration of $9 million and 10,000 options expired. In a term not exceeding 10 years. The options vest equally over 2007, 803,000 options were granted at a weighted average ﬁve years with the exception of the 774,500 remaining exercise price of $35.16. Furthermore, 1,090,600 options options granted in December 2007, which vest over six were surrendered in 2007 for total cash paid of $26 million years. The price of the options issued is at the market value and 30,000 options expired. of the Subordinate Voting Shares on the business day pre- ceding the day of the grant. Vested options are not exercis- able unless the average ﬁve-day market price of Onex Normal Course Issuer Bids Onex had Normal Course Issuer Bids (the “Bids”) in place Subor dinate Voting Shares is at least 25 percent greater during 2009 that enable it to repurchase up to 10 percent than the exercise price at the time of exercise. of its public ﬂoat of Subordinate Voting Shares during the At December 31, 2009, Onex had 13,450,050 options period of the relevant Bid. Onex believes that it is advanta- outstanding to acquire Subordinate Voting Shares, of which geous to Onex and its shareholders to continue to repur- 11,464,617 options were vested, and 10,338,950 of those chase Onex’ Subordinate Voting Shares from time to time vested options were exercisable. Table 26 provides informa- when the Subordinate Voting Shares are trading at prices tion on the activity during 2009 and 2008. that reﬂect a signiﬁcant discount to their intrinsic value. Change in Stock Options Outstanding TABLE 26 Number of Options 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 Granted Surrendered Expired 727,500 (197,900) (11,000) Weighted Average Exercise Price $ 18.07 $ 15.95 $ 14.97 $ 34.00 $ 18.07 $ 23.35 $ 20.20 $ 20.76 Outstanding at December 31, 2009 13,450,050 $ 18.33 During 2009, 727,500 options were granted with an exercise price of $23.35 and which vest over ﬁve years. In addition, 197,900 options were surrendered in 2009 at a weighted average exercise price of $20.20 for aggregate cash consid- eration of $1 million and 11,000 options expired. On April 14, 2009, Onex renewed its Normal Course Issuer Bid (“NCIB”) following the expiry of its previous NCIB on April 13, 2009. At March 31, 2009, Onex had issued and outstanding 122,099,689 Subordinate Voting Shares and a public ﬂoat of 92,574,885 Subordinate Voting Shares. Under the new NCIB, Onex will be permitted to purchase up to 10 percent of its public ﬂoat of its Subordinate Voting Shares, or 9,257,488 Subordinate Voting Shares. Onex may purchase up to 62,634 Subordinate Voting Shares during any trading day, being 25 percent of its average daily trading volume for the six-month period ended March 31, 2009. Onex may also purchase Subor dinate Voting Shares from time to time under the Toronto Stock Exchange’s block purchase exemption, if available, under the new NCIB. The new NCIB commenced on April 14, 2009 and will conclude on the earlier of the date on which purchases under the NCIB have been completed and April 13, 2010. A copy of the Notice of Intention to make the Normal Course Issuer Bid ﬁled with the Toronto Stock Exchange is available at no charge to shareholders by contacting Onex. Under the previous NCIB that expired on April 13, 2009, Onex repurchased 1,788,281 Subordinate Voting Shares at a total cost of $48 million, or an average pur- chase price of $26.70 per share. Onex Corporation December 31, 2009 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 During 2009, Onex, the parent company, repur- Onex’ objectives in managing capital are to: chased 1,784,600 Subordinate Voting Shares under its Nor - (cid:129) preserve a ﬁnancially strong parent company with mal Course Issuer Bids at an average cost per share of appropriate liquidity and no, or a limited amount of, $23.04 for a total cost of $41 million. Under similar Bids, debt so that it has funds available to pursue new acqui- Onex repurchased 3,481,381 Subordinate Voting Shares at a sitions and growth opportunities, as well as support the total cost of $101 million during 2008 and 3,357,000 Sub - building of its existing businesses. Onex does not gener- ordinate Voting Shares at a total cost of $113 million in 2007. ally have the ability to draw cash from its operating Accumulated other comprehensive earnings (loss) Accumulated other comprehensive earnings (loss) repre- companies. Accordingly, maintaining adequate liquidity at the parent company is important; (cid:129) achieve an appropriate return on capital invested com- mensurate with the level of risk taken on; sent the accumulated unrealized gains or losses, all net of (cid:129) build the long-term value of its operating companies; income taxes, related to certain available-for-sale securi- (cid:129) control the risk associated with capital invested in any ties, cash ﬂow hedges and foreign exchange gains or losses particular business or activity. All debt ﬁnancing is on the net investment in self-sustaining operations. within the operating companies and each company is At December 31, 2009, accumulated other compre- required to support its own debt. Onex does not guaran- hensive loss was $113 million compared to an accumulated tee the debt of the operating companies and there are loss of $161 million at the end of 2008. Table 27 provides a no cross-guarantees of debt between the operating com- breakdown of other comprehensive earnings (loss) for 2009 panies; and compared to 2008. (cid:129) have appropriate levels of committed third-party capital Other Comprehensive Earnings (Loss) TABLE 27 ($ millions) 2009 2008 Other comprehensive earnings (loss), net of income taxes: available to invest along with Onex’ capital. This enables Onex to respond quickly to opportunities and pursue acquisitions of businesses it could not achieve using only its own capital. The management of third-party capital also provides management fees to Onex and the ability to enhance Onex’ returns by earning a carried Currency translation adjustments $ (74) $ 382 interest on the proﬁts of third-party participants. Change in fair value of derivatives designated as hedges Other 109 13 (122) (12) At December 31, 2009, Onex, the parent company, had $890 million of cash on hand and $148 million of near-cash Other comprehensive earnings $ 48 $ 248 Management of capital Onex considers the capital it manages to be the amounts items at market value. Onex, the parent company, has a con- servative cash management policy that limits its cash invest- ments to short-term, high-rated money market instru ments. This policy is driven toward maintaining liquid ity and pre- serving prin cipal in all of the money market investments. it has in cash and near-cash investments, and the invest- At December 31, 2009, Onex had access to ments made by it in the operating companies, Onex Real US$3.9 billion of uncalled committed third-party capital Estate Partners and Onex Credit Partners. Onex also man- for acquisitions through the Onex Partners and ONCAP ages the third-party capital invested in the Onex Partners Funds. This includes approximately US$3.4 billion of com- and ONCAP Funds. mitted third-party capital for Onex Partners III. The strategy for risk management of capital did not change in 2009. 50 Onex Corporation December 31, 2009 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S L I Q U I D I T Y A N D C A P I T A L R E S O U R C E S Cash generated from operations excludes changes in non- This section should be read in conjunction with the au - premiums and other liabilities. The increase in cash gener- dited annual consolidated statements of cash ﬂows and ated from operations for the year ended December 31, 2009 the corresponding notes thereto. Table 28 summarizes the compared to 2008 was due to higher operating earnings, major consolidated cash ﬂow components. changes in deferred costs at The Warranty Group and lower cash working capital items, warranty reserves and un earned Major Cash Flow Components TABLE 28 ($ millions) 2009 2008 interest costs. Non-cash working capital items increased cash by $48 million in 2009. This compares to a decrease of $293 million in 2008. The change in cash from non-cash Cash from operating activities $ 1,340 $ 1,339 working capital items in 2009 was due to: Cash from (used in) financing activities $ (857) $ 9 (cid:129) a $381 million decrease in accounts receivable, primarily Cash from (used in) investing activities Consolidated cash and cash equivalents $ 223 $ 3,206 $ (1,402) $ 2,921 at Celestica. The decrease in receivables at Celestica was due primarily to lower revenues and continued strong Cash from operating activities Table 29 provides a breakdown of cash from operating activities by cash generated from operations and non-cash working capital items, warranty reserves and unearned premiums and other liabilities for the years ended Decem - ber 31, 2009 and 2008. Components of Cash from Operating Activities TABLE 29 ($ millions) 2009 2008 Cash generated from operations $ 1,715 $ 1,296 Changes in non-cash working capital items Accounts receivable Inventories Other current assets Accounts payable, accrued liabilities 381 (166) 58 202 (311) 156 collections; (cid:129) a $166 million increase in inventory, primarily at Spirit AeroSystems, which continued to build up inventory associated with its B787, Gulfstream and other general aviation programs. Partially offsetting this increase was lower inventory at Celestica ($127 million); and (cid:129) a $225 million decrease in accounts payable, accrued lia- bilities and other current liabilities, primarily at Celes tica, which reduced its accounts payable consistent with lower business levels. Cash from (used in) ﬁnancing activities Cash used in ﬁnancing activities totalled $857 million in 2009 compared to cash from ﬁnancing activities of $9 mil- lion in 2008. Cash used in ﬁnancing activities in 2009 was primar ily due to: (cid:129) $576 million of cash distributed by Onex Partners to lim- ited partners, other than Onex, from the sales of EMSC and other current liabilities (225) (340) shares in that company’s secondary offerings and divi- Increase (decrease) in cash due to changes in non-cash working capital items $ 48 $ (293) Increase (decrease) in warranty reserves and unearned premiums and other liabilities (423) 336 dends paid by Carestream Health and The Warranty Group in 2009; (cid:129) the $143 million repayment of the credit facility that was established for the purchase of Tropicana Las Vegas debt from cash received from the limited partners of Onex Cash from operating activities $ 1,340 $ 1,339 Partners III, other than Onex; (cid:129) US$496 million of cash used by Celestica to repurchase all of its 2011 senior subordinated notes; and (cid:129) a US$200 million debt repayment by Spirit AeroSystems of its revolving credit facility from proceeds on the com- pany’s offering of US$300 million aggregate principal amount of 7.5 percent senior notes due 2017, as previ- ously discussed under Consolidated Long-term Debt. Onex Corporation December 31, 2009 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 Partially offsetting these were: Property, Plant and Equipment Expenditures (cid:129) $179 million of cash received primarily from the limited by Industry Segment partners of Onex Partners III, other than Onex, for the acquisition of Tropicana Las Vegas completed on July 1, TABLE 30 ($ millions) 2009; and Electronics Manufacturing Services (cid:129) Spirit AeroSystems’ offering of US$300 million aggregate Aerostructures principal amount of 7.5 percent senior notes. Healthcare Financial Services Cash from (used in) investing activities Cash from investing activities totalled $223 million in Customer Support Services Metal Services 2009 compared to $1.4 billion of cash used in investing activities in 2008. Included in cash from investing activi- Other(a) Total ties in 2009 was: 2009 $ 69 235 163 12 25 43 66 2008 $ 124 299 225 21 67 73 50 $ 613 $ 859 (cid:129) cash proceeds of $175 million received by Onex, the par- (a) 2009 other includes CEI (up to May 2009), Husky, ONCAP II, Onex Real Estate, ent company, on the sale of its remaining trust units of Cineplex Galaxy Income Fund; (cid:129) $827 million of cash proceeds received by Onex and Onex Partners I on the sales of a portion of their shares in EMSC’s secondary offerings in August and November 2009; and (cid:129) $104 million of cash proceeds received by Onex, the parent company, on the sale of a portion of its shares in Celes tica in October 2009. Partially offsetting these proceeds was US$130 million of cash invested in an unleveraged senior secured loan port - folio managed by Onex Credit Partners in the fourth quarter of 2009. In addition, there was $613 million of cash used for the purchase of property, plant and equipment by Onex’ operating companies (2008 – $859 million). Table 30 details property, plant and equipment expenditures by industry segment. Onex Credit Partners, Tropicana Las Vegas and the parent company. 2008 other includes CEI, Husky, Radian, ONCAP II, Onex Real Estate, Onex Credit Partners and the parent company. Celestica used $69 million of cash on capital expenditures in 2009 (2008 – $124 million) primarily for machinery, equip- ment and facilities in lower-cost geographies to support new customer programs. During 2009, Spirit AeroSystems invested $235 mil- lion in property, plant and equipment, as well as software and program tooling, primarily associated with the com- pany’s programs with Boeing. Skilled Healthcare spent $45 million in capital ex penditures in 2009. These expenditures consisted of the construction of new healthcare facilities, the expan- sion of the company’s Express Recovery Unit program, and routine capital expenditures. For the year ended December 31, 2008, acquisi- tions completed by CDI, EMSC, Sitel Worldwide, Skilled Healthcare, Tube City IMS and ONCAP II in 2008 ac counted for $209 million of cash used in investing activities. In addi- tion, other investing activities included $338 million of cash used by Onex and Onex Partners II for their investment in RSI. The balance of cash used in investing activities in 2008 was primarily from cash spent on property, plant and equipment expenditures by Onex’ operating companies ($859 million), as shown in table 30. 52 Onex Corporation December 31, 2009 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 cash resources At December 31, 2009, consolidated cash was $3.2 billion, 10 percent higher than the level at December 31, 2008. The Change in Cash at Onex, the Parent Company TABLE 31 ($ millions) major components at Decem ber 31, 2009 were: Cash on hand at December 31, 2008 (cid:129) $890 million of cash on hand at Onex, the parent com- Proceeds on sales of EMSC shares pany; and (cid:129) $1.0 billion of cash at Celestica. Onex believes that maintaining a strong ﬁnancial position at the parent company with appropriate liquidity enables the Company to pursue new opportunities to create long- term value and support Onex’ existing operating compa- nies. In addition to the approximately $890 million of cash at the parent company at December 31, 2009, there was $148 million of near-cash items, of which $137 million is an Proceeds on Cineplex Entertainment sale Proceeds on sale of Celestica shares Carestream Health dividend The Warranty Group dividend Management fees received Investment managed by Onex Credit Partners Investment in Tropicana Las Vegas Onex share repurchases Exchange loss on value of USD cash held Other, net, including dividends paid investment in a segregated unleveraged fund managed by Cash on hand at December 31, 2009 $ 470 331 175 104 29 13 100 (137) (55) (41) (76) (23) $ 890 Onex Credit Partners. The investments are focused on liquid senior debt securities. Table 31 provides a reconciliation of the change in cash at Onex, the parent company, from Decem ber 31, 2008 to December 31, 2009. C O N T R A C T U A L O B L I G A T I O N S The following table presents the contractual obligations of Onex’ consolidated operating companies as at December 31, 2009: Contractual Obligations TABLE 32 ($ 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(a) Capital and operating leases Purchase obligations Pension plan obligations(b) $ 6,236 1,178 383 33 $ 425 $ 1,587 $ 3,343 $ 881 267 298 33 349 20 – 190 7 – 372 58 – Total contractual obligations $ 7,830 $ 1,023 $ 1,956 $ 3,540 $ 1,311 (a) Includes amounts held by Onex, the parent company, and are gross of deferred financing fees. (b) The pension plan obligations are those of the Onex operating companies with significant defined benefit pension plans. Onex Corporation December 31, 2009 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 A breakdown of long-term debt by industry segment is a trust for the purpose of providing liquidity sufﬁcient to provided in table 21. In addition, notes 10 and 11 to the pay beneﬁt obligations. Spirit AeroSystems’ U.S. deﬁned audited annual consolidated ﬁnancial statements provide beneﬁt pension plans remained overfunded by approxi- further disclosure on long-term debt and lease commit- mately $180 million at December 31, 2009 de spite the ments. All our operating companies currently believe they volatility in the equity markets in 2008 and 2009. Therefore, have adequate cash from operations, cash on hand and required and discretionary contributions to those plans are borrowings available to them to meet anticipated debt not expected in 2010. In addition, Spirit Aero Systems had a service requirements, capital expenditures and working U.K. deﬁned beneﬁt pension plan with expected contribu- capital needs. There is, however, no assurance that our tions of US$8 million in 2010. operating companies will generate sufﬁcient cash ﬂow At December 31, 2009, Celestica’s deﬁned beneﬁt from operations or that future borrowings will be available pension plans were in a net unfunded position of $31 mil- to enable them to grow their business, service all indebt- lion. Celestica’s pension funding policy is to contribute edness or make anticipated capital expenditures. amounts sufﬁcient to meet minimum local statutory fund- ing requirements that are based on actuarial calculations. Commitments At December 31, 2009, Onex and its operating companies The company may make additional discretionary contri- butions based on actuarial assessments. Celestica esti- had total commitments of $527 million (2008 – $666 mil- mates a minimum funding requirement of US$22 million lion). Commitments by Onex and its operating companies for its deﬁned beneﬁt pension plans in 2010 based on the provided in the normal course of business include com- most recent actuarial valuations. Continued volatility in mitments for corporate investments and letters of credit, the capital markets will impact the future asset values of letters of guarantee, and surety and performance bonds. Celestica’s multiple deﬁned beneﬁt pension plans. There - Approximately $467 million of the total commitments in fore, a signiﬁcant deterioration in the asset values could 2009 (2008 – $547 million) were for contingent liabilities in lead to higher than expected future contributions; how- the form of letters of credit, letters of guarantee, and surety ever, Celestica does not expect this will have a material and performance bonds provided by certain operating adverse impact on its cash ﬂows or liquidity. companies to various third parties, including bank guar- Carestream Health’s deﬁned beneﬁt pension plans antees. These guarantees are without recourse to Onex. were in an unfunded position of approximately $47 million As part of the Carestream Health purchase from at December 31, 2009. The company’s pension plans are Kodak in 2007, the acquisition agreement provided that if broadly diversiﬁed in equity and debt securities, as well as Onex and Onex Partners II realize an internal rate of return in other investments. Carestream Health expects to contribute excess of 25 percent on their investment in Carestream approximately US$2 million in 2010 to its deﬁned beneﬁt Health, Kodak will receive payment equal to 25 percent of pension plans, and it does not believe that future pension the excess return up to US$200 million. As of December 31, contributions will materially impact its liquidity. 2009 no liability was recorded. Onex, the parent company, has no pension plan and has no obligation to the pension plans of its oper- Pension plans Six of Onex’ operating companies have deﬁned beneﬁt ating companies. pension plans, of which the more signiﬁcant plans are those of Spirit AeroSystems, Carestream Health and Celes tica. At Debt of operating companies Onex does not guarantee the debt on behalf of its operating December 31, 2009, the deﬁned beneﬁt pension plans of companies, nor are there any cross-guarantees between the six Onex operating companies had combined assets of operating companies. Onex may hold debt as part of its $1.4 billion against combined obligations of $1.3 billion, investment in certain operating companies, which amounted with a net surplus of $93 million. to $197 million at December 31, 2009 compared to $247 mil- Spirit AeroSystems has several U.S. deﬁned beneﬁt lion at December 31, 2008. Note 10 to the audited annual pension plans that were frozen at the date of Onex’ acquisi- consolidated ﬁnancial statements provides information on tion of Spirit AeroSystems, with no future service beneﬁts the debt of operating companies held by Onex. being earned in these plans. Pension assets are placed in 54 Onex Corporation December 31, 2009 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 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 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 Funds. Private equity Funds provide capital to Onex-spon- acquisitions, investing US$2.9 billion of equity in those sored acquisitions that are not related to Onex’ operating transactions. At December 31, 2009, Onex Partners II has companies that existed prior to the formation of the concluded its investment period but has uncalled third- Funds. The Funds provide a substantial pool of committed party committed capital of approximately US$291 million, capital, which enables Onex to be more ﬂexible and timely which is largely reserved for possible future funding for any in responding to investment opportunities. of Onex Partners II’s existing businesses. At December 31, 2009, the third-party limited During 2009, Onex completed fundraising for its partners in the Onex Partners and ONCAP Funds had third large-cap private equity fund, Onex Partners III, remaining commitments to provide funding for future a US$4.3 billion private equity fund. Onex had initially Onex-sponsored acquisitions as follows: committed US$1.0 billion to this Fund; this amount could be either increased or decreased by US$500 million with Private Equity Funds Uncalled Third-party six months’ notice. On December 31, 2008, Onex notiﬁed Committed Capital TABLE 33 ($ millions) Onex Partners I Onex Partners II Onex Partners III ONCAP II (a) Includes amounts from Onex management and directors. Available Uncalled Committed Capital (Excluding Onex)(a) US$ 86 US$ 291 US$ 3,389 $ 127 its limited partners in Onex Partners III that it would be reducing its commitment to the Fund to approximately US$500 million effective July 1, 2009. Any transaction com- pleted prior to July 1, 2009 was funded at Onex’ original US$1.0 billion commitment to Onex Partners III. As a result of the increase in Onex’ cash position during 2009, Onex was in a position to increase its commitment to Onex Partners III. In December 2009, Onex noti ﬁed its lim- ited partners in Onex Partners III that it would be increas- ing its commitment up to US$800 million. This would The committed amounts by the third-party limited part- become effective for new acquisitions completed after ners are not included in Onex’ consolidated cash and will be funded as acquisitions are made. June 16, 2010. This commitment may be increased up to US$1.5 billion at the option of Onex but cannot be decreased. During 2003, Onex raised its ﬁrst large-cap Fund, Onex’ mid-cap private equity Fund, ONCAP II, Onex Partners I, with US$1.655 billion of committed capital, has total committed capital of $574 million, of which Onex including committed capital from Onex of US$400 million. had committed $252 million. ONCAP II has completed ﬁve Since 2003, Onex Partners I has completed 10 investments acquisitions, putting $265 million of equity to work. At or acquisitions with US$1.5 billion of equity being put December 31, 2009, this Fund has uncalled committed to work. While Onex Partners I has concluded its invest- third-party capital of $127 million available for future ment period, the Fund still has uncalled third-party com- acquisitions. mitted capital of US$86 million, which is largely reserved for possible future funding for any of Onex Partners I’s existing businesses. Onex Corporation December 31, 2009 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 Related party transactions Related party transactions are primarily investments by 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 sum- marized in table 34. Investment Programs TABLE 34 Management Investment Plan Carried Interest Participation Minimum Stock Price Appreciation/ Return Threshold 15% Compounded Return 8% Compounded Return Vesting Associated Investment by Management • 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 6 years (4 years prior to November 2007) 4 years (Onex Partners I) 5 years (Onex Partners II) 6 years (Onex Partners III) Stock Option Plan 25% Price Appreciation 5 years (6 years for 2007) • satisfaction of exercise price (market value at grant date) Management DSU Plan Director DSU Plan n/a n/a Period of employment Period of directorship • 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 Management Investment Plan amended for investments completed after November 7, Onex has a Management Investment Plan (the “MIP”) in place that requires its management members to invest in each of the operating companies acquired by Onex. The 2007. For those investments, the investment rights to acquire the remaining 5⁄6ths vest equally over six years. Under the MIP, the investment rights related to a particular aggregate investment by management members under the acquisition are exercisable only if Onex earns a minimum MIP is limited to 9 percent of Onex’ interest in each acqui- 15 percent per annum compound rate of return for that sition. 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 acquisition after giving effect to the investment rights. The funds required for investments under the MIP are not loaned to the management members by Onex or the operating companies. During 2009, there were investments invested under the 1 percent investment requirement made of $1 million under the MIP (2008 – $2 million). These in Onex Part ners transactions are allocated to meet the amounts exclude amounts invested under the Onex Part - 1.5 percent in vestment requirement under the MIP. For ners’ 1 percent investment requirement. Man age ment mem - investments completed prior to November 7, 2007, the investment rights to acquire the remaining 5⁄6ths vest equally over four years with the investment rights vesting bers received $20 million under the MIP in 2009 (2008 – less than $1 million). Notes 1 and 24 to the audited annual consolidated ﬁnancial statements provide additional details in full if Onex disposes of 90 percent or more of an in- on the MIP. vestment before the ﬁfth year. During 2007, the MIP was 56 Onex Corporation December 31, 2009 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S The Onex Partners Funds Carried Interest The structure of the Onex Partners Funds requires Onex management to invest a minimum of 1 percent in all acquisitions. This structure applies to Onex Partners I, II TABLE 35 (US$ millions) and III. Onex Partners I completed its investment period Carried interest – 2003 in 2006. For Onex Partners II and III, Onex management Carried interest – 2004 and directors have committed an additional 2 per cent of Carried interest – 2005 the total capital to be invested by those Funds for the year ending December 31, 2010. The total amount invested in 2009 by Onex man- agement and directors in acquisitions and investments Carried interest – 2006 Carried interest – 2007 Carried interest – 2008 Carried interest – 2009 completed through the Onex Partners Funds was US$5 mil- Total lion (2008 – US$14 million). Cash Carried Interest Received Carried Interest Recognized in Income $ 1 $ 1 4 16 55 77 – 19 4 7 11 76 – 19 $ 172 $ 118 Carried interest participation The General Partners of the Onex Partners Funds and ONCAP Funds, which are controlled by Onex, are entitled to a carried interest of 20 percent on the realized gains of third-party limited partners in each Fund, subject to an 8 percent compound annual preferred return to those lim- ited partners on all amounts contributed in each particular Fund. Onex, as sponsor of the Onex Partners Funds, is enti- tled to 40 percent of the carried interest and the Onex man- agement team is entitled to 60 percent. Under the terms of the partnership agreements, Onex may receive carried inter- est as realizations occur. The ultimate amount of carried interest earned will be based on the overall performance of each of Onex Partners I, II, III and ONCAP I and II, inde- pendently, and includes typical catch-up and clawback provisions within each Fund but not between Funds. During 2009, Onex, the parent company, received US$19 million of carried interest on the two realizations by third-party limited partners’ sale of shares of EMSC. This was reduced by approximately US$7 million due to the requirement to offset the effect of the loss on CEI. There was no carried interest earned in 2008. Table 35 shows a reconciliation of carried interest received by Onex, the parent company, and recognized into income by year. At December 31, 2009, Onex, the parent company, had US$54 million of carried interest that had been received as cash but deferred from inclusion in income. This amount is reported as deferred revenue on the consolidated balance sheet. There is also US$49 million of unrealized carried interest to Onex based on the market value of public com- pany holdings in Onex Partners I. This value is not recog- nized in Onex’ consolidated ﬁnancial statements. Stock Option Plan Onex, the parent company, has a Stock Option Plan in place that provides for options and/or share appreciation rights to be granted to Onex directors, ofﬁcers and em - ployees for the acquisition of Subordinate Voting Shares of the Company for a term not exceeding 10 years. The options vest equally over ﬁve years with the exception of the options granted in December 2007, which vest over six years. The price of the options issued is at the market value of the Subordinate Voting Shares on the business day pre- ceding the day of the grant. Vested options are not exercis- able unless the average ﬁve-day market price of Onex Subordinate Voting Shares is at least 25 percent greater than the exercise price at the time of exercise. Table 26 on page 49 of this MD&A provides details of the change in the stock options outstanding at December 31, 2009 and 2008. Management Deferred Share Unit Plan Effective December 2007, a Management Deferred Share Unit Plan (“MDSU Plan”) was established as a further means of encouraging personal and direct economic inter- ests by the Company’s senior management in the perfor - mance of the Subordinate Voting Shares. Under the MDSU Plan, the members of the Company’s senior management Onex Corporation December 31, 2009 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 team are given the opportunity to designate all or a por- Director Deferred Share Unit Plan tion of their annual compensation to acquire MDSUs Onex, the parent company, established a Director Deferred based on the market value of Onex shares at the time in Share Unit Plan (“DSU Plan”) in 2004, which allows Onex lieu of cash. MDSUs vest immediately but are redeemable directors to apply directors’ fees to acquire Deferred Share by the participant only after he or she has ceased to be an Units (“DSUs”) based on the market value of Onex shares at ofﬁcer or employee of the Company, or an afﬁliate, for a the time. Grants of DSUs may also be made to Onex direc- cash payment equal to the then current market price of tors from time to time. Holders of DSUs are entitled to Subordinate Voting Shares. Additional units are issued receive, for each DSU upon redemption, a cash payment equivalent to the value of any cash dividends that would equivalent to the market value of a Subordinate Voting have been paid on the Subordinate Voting Shares. To Share at the redemption date. The DSUs vest immediately, hedge Onex’ exposure to changes in the trading price of are only redeemable once the holder retires from the Board Onex shares associated with the MDSU Plan, the Company of Directors and must be redeemed by the end of the year enters into forward agreements with a counterparty ﬁnan- following the year of retirement. Additional units are issued cial institution for all grants under the MDSU Plan. The equivalent to the value of any cash dividends that would annual costs of those arrangements are borne entirely by have been paid on the Subordinate Voting Shares. Onex, participants in the MDSU Plan. MDSUs are redeemable the parent company, has recorded a liability for the future only for cash and no shares or other securities of Onex will settlement of DSUs at the balance sheet date by reference be issued on the exercise, redemption or other settlement to the value of underlying shares at that date. The liability thereof. In early 2009, 68,601 MDSUs were issued to man- is adjusted up or down for the change in the market value of agement, having an aggregate value, at the date of grant, the underlying Subordinate Voting Shares, with the corre- of $1 million in lieu of cash compensation for the Com - sponding amount reﬂected in the consolidated statements pany’s 2008 ﬁscal year. In early 2010, 119,967 MDSUs were of earnings. issued to management having an aggregate value, at the During 2009, Onex granted 40,000 DSUs to its direc - date of grant, of $3 million in lieu of cash compensation tors at a cost of approximately $1 million (2008 – 45,000 DSUs for the Company’s 2009 ﬁscal year. Forward agreements at a cost of approximately $2 million), recorded as stock- were entered into to hedge Onex’ exposure to changes in based compensation expense. In addition, 31,662 additional the value of the MDSUs. Table 36 reconciles the changes DSUs (2008 – 26,443 DSUs) were issued to directors in lieu in MDSUs outstanding at December 31, 2009 from Decem - of cash paid directors’ fees and cash dividends and no DSUs ber 31, 2007. Change in Outstanding Deferred Share Units TABLE 36 Outstanding at December 31, 2007 Granted Additional units issued in lieu of compensation and cash dividends Outstanding at December 31, 2008 Granted Additional units issued in lieu of compensation and cash dividends Outstanding at December 31, 2009 were redeemed in 2009 (2008 – no DSUs) for cash consider- ation. Table 36 reconciles the changes in the DSUs out- standing at December 31, 2009 from December 31, 2007. Director DSU Plan Management DSU Plan Number of DSUs Weighted Average Price Number of DSUs Weighted Average Price 225,914 45,000 26,443 297,357 40,000 31,662 369,019 $ 32.54 $ 24.30 $ 22.98 $ 20.01 – – 202,902 202,902 – 69,978 272,880 $ – $ 30.96 $ – $ 18.62 58 Onex Corporation December 31, 2009 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 Investment in Onex shares and acquisitions Onex is now entitled to a management fee of In 2006, Onex adopted a program designed to further align 1.75 percent on the committed capital of the third-party the interests of the Company’s senior management and limited partners of Onex Partners III. This management fee other investment professionals with those of Onex share- will be earned during the investment period of Onex holders through increased share ownership. Under this pro- Partners III for a period of up to ﬁve years. Thereafter, a gram, members of senior management of Onex are required 1 percent management fee is payable to Onex based on to invest at least 25 percent of all amounts received under invested capital. the MIP and carried interest in Onex Subor dinate Voting Management fees earned by Onex on the Onex Part - Shares and/or Management DSUs until they individually ners and ONCAP Funds totalled approximately US$88 mil- hold at least 1,000,000 Onex Sub ordinate Voting Shares lion in 2009 (2008 – US$71 million). and/or Management DSUs. Under this program, during 2009 Onex management reinvested approximately $2 mil- lion (2008 – $2 million) in the purchase of Subordinate Voting Shares. 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 Members of management and the Board of Direc - In February 2008, the Canadian Accounting Standards Board tors of Onex can invest limited amounts in partnership conﬁrmed that the use of International Financial Reporting with Onex in all acquisitions outside the Onex Partners Standards (“IFRS”) would be required for Cana dian publicly Funds at the same time and cost as Onex and other out- accountable enterprises for years beginning on or after side investors. During 2009, approximately $8 million in January 1, 2011. Onex is working to adopt IFRS as the basis investments (2008 – $11 million) were made by Onex man- for preparing its consolidated ﬁnancial statements effective agement and Onex Board members. January 1, 2011. For the ﬁrst quarter ended March 31, 2011, Management fees Onex will issue its ﬁnancial results prepared on an IFRS basis with comparative data on an IFRS basis. Onex receives management fees from Onex Partners I, II, In order to meet the new IFRS reporting, Onex, III and ONCAP Funds. the parent company, developed a transition plan during Onex Partners I completed its investment period 2008. Onex continued to execute that plan during 2009 in 2006, and for the remainder of the life of this Fund, and will continue through 2010. By December 31, 2009, Onex will receive a 1 percent annual management fee decisions on the selection of signiﬁcant IFRS accounting based on invested capital. During the investment period of policies had been reached at both the parent company Onex Partners II, Onex received a management fee of and oper ating companies. A description of signiﬁcant IFRS 2 percent on the committed capital of the Fund provided policies to be adopted is provided below. These policies by third-party investors. Thereafter, a 1 percent manage- are based on the IFRS as issued at December 31, 2009. ment fee is payable based on the invested capital. Toward Onex has not yet quantiﬁed the ﬁnancial impact of these the end of 2008, the initial fee period for Onex Partners II policies. Onex will update the policies as required based was concluded when Onex began to receive a manage- on any new standards issued in 2010 and effective for the ment fee from Onex Partners III. Onex, therefore, earns a year ended December 31, 2011. 1 percent management fee on Onex Partners II’s invested There are a number of signiﬁcant IFRS accounting capital. The management fee on Onex Partners I and II will policies that are currently under review by the Inter national decline over time as realizations occur. Accounting Standards Board, including the application of consolidation to controlled entities. The impact, if any, of such accounting policy revisions cannot be predicted at this time. Onex Corporation December 31, 2009 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 IFRS 1 (First-time adoption of IFRS) IFRS 1 requires that an entity apply all IFRS effective at the Borrowing costs IAS 23, Borrowing Costs, requires an entity to capitalize the end of its ﬁrst IFRS reporting period retrospectively. How - borrowing costs related to all qualifying assets. Onex plans ever, IFRS 1 does provide certain mandatory exceptions and to adopt IAS 23 prospectively. Accordingly, borrowing costs limited optional exemptions in speciﬁc areas of certain related to qualifying assets on or after January 1, 2010 will standards that will not require retroactive application of be capitalized. IFRS. The following are the exceptions and exemptions under IFRS 1 that are signiﬁcant to us and that we will apply Leases in preparing our ﬁrst ﬁnancial statements under IFRS: International Financial Reporting Interpretations Com mit - Business combinations tee (“IFRIC”) 4, Determining Whether an Arrangement Con - tains a Lease, requires a company to assess all arrangements IFRS 1 allows for the guidance under IFRS 3 (revised), Busi - to determine if they are, or contain, a lease. Onex will elect ness Combinations, to be applied either retrospectively or to use the IFRS 1 exemption so IFRIC 4 need only be applied prospectively. Onex has elected to adopt IFRS 3 (revised) to those arrangements that had not previously been assessed prospectively. Accordingly, all business combinations on or under similar Canadian GAAP requirements. after January 1, 2010 will be accounted for in accordance with IFRS 3 (revised). Employee beneﬁts Hedge accounting IFRS 1 requires hedge accounting to be applied prospec- tively from the date of transition to transactions that satisfy IFRS 1 provides the option to retrospectively apply either the the hedge accounting criteria at that date in accordance with corridor approach under International Accounting Standard IAS 39, Financial Instruments: Reco gni tion and Measure - (“IAS”) 19, Employee Beneﬁts, for the recognition of actuarial ment. Only hedging relationships that satisfy the hedge gains and losses, or recognize all cumulative gains and accounting criteria as of its date of transition (January 1, losses deferred under Canadian GAAP in opening retained 2010) will be reﬂected as hedges in Onex’ results under earnings at the date of transition. Onex will elect to recog- IFRS. Any derivatives not meeting the IAS 39 criteria for nize all cumulative actuarial gains and losses that existed at hedge accounting will be recorded at fair value in the state- the date of transition in opening retained earnings for all ment of ﬁnancial position as a non-hedging derivative employee beneﬁt plans at the operating companies. ﬁnancial instrument. Cumulative translation differences Estimates IAS 21, The Effects of Changes in Foreign Exchange Rates, Hindsight is not to be used to create or revise estimates. requires an entity to determine the translation differences The estimates previously made by Onex under Canadian in accordance with IFRS from the date on which a sub- GAAP will not be revised for application of IFRS except sidiary was formed or acquired. IFRS 1 allows cumulative where necessary to reﬂect any difference in accounting translation differences for all foreign operations to be policies between IFRS and Canadian GAAP. deemed zero at the date of transition to IFRS, with future gains or losses on subsequent disposal of any foreign IFRS to Canadian GAAP differences operations to exclude translation differences arising from In addition to the exemptions and exceptions discussed periods prior to the date of transition to IFRS. Onex will above, the following discussion explains the signiﬁ- deem all cumulative translation differences to be zero on cant accounting policy differences between Canadian transition to IFRS. GAAP and IFRS as they apply to Onex’ consolidated ﬁnan- cial statements. 60 Onex Corporation December 31, 2009 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 combinations and non-controlling interests Canadian GAAP – Under Onex’ application of Canadian GAAP, transaction costs are capitalized as part of the cost of Actuarial gains and losses Canadian GAAP – Actuarial gains and losses that arise in calculating the present value of the deﬁned beneﬁt obliga- the acquisition, when applicable. In addition, the non-con- tion and the fair value of plan assets are recognized on a trolling interests’ share of net assets is recognized as a sepa- systematic and consistent basis, subject to a minimum rate line item on the balance sheet, outside of equity and required amortization based on a “corridor” approach. The the non-controlling interests’ share of earnings is recorded “corridor” is 10 percent of the greater of the accrued on the statement of net earnings, above net earnings. beneﬁt obligation at the beginning of the year and the fair Additionally, when Onex divests a portion of an operating value of plan assets at the beginning of the year. This company, but retains control, a gain or loss is recorded in excess of 10 percent is amortized as a component of pen- the statement of income for the difference between the sion expense on a straight-line basis over the expected carrying value for the portion sold and the proceeds. average service life of active participants. Actuarial gains and losses below the 10 percent corridor are deferred. IFRS – Under IFRS, all transaction costs relating to acquisi- tions are expensed as incurred. In addition, the non-con- trolling interests’ share of the net assets is considered a IFRS – Onex will elect to recognize all actuarial gains and losses immediately in a separate statement of comprehen- component of equity. As a result, the non-controlling inter- sive income without recognition to the income statement ests’ share of earnings is recorded as an allocation after in subsequent periods. As a result, actuarial gains and arriving at net earnings. Also, when a divestiture is made of losses are not amortized to the income statement but a portion of a subsidiary and control is retained, the result- rather are recorded directly to comprehensive income at ing change is recorded in the statement of equity, outside of the end of each reporting period. As a result, Onex’ oper - the statement of net earnings. ating companies will adjust their pension expense to remove the amortization of actuarial gains and losses. Equity-accounted investments Canadian GAAP – Under Canadian GAAP, investments over which Onex exercises signiﬁcant inﬂuence are accounted for using the equity-accounted method. As a result, Onex Cash-settled share based payments Canadian GAAP – A liability for cash-settled share based payments is accrued based on the intrinsic value of the records its proportionate share of earnings or loss from award, with changes recognized in the income statement the investment. each period. IFRS – For certain investments over which Onex holds sig- niﬁcant inﬂuence, but not control, IFRS allows the invest- IFRS – An entity must measure the liability incurred at fair value by applying an option pricing model. Until the liabil- ments to be recorded at fair value. As a result, changes in ity is settled, the fair value of the liability is re-measured at the fair value of the investments will be in the statement of each reporting date, with changes in fair value recognized earnings. Onex expects to record at fair value certain of its as the awards vest. Changes in fair value of vested awards equity-accounted investments, including Hawker Beech - are recognized immediately in earnings. As a result, Onex’ craft, Allison Transmission, RSI and ResCare. operating companies will adjust expenses associated with cash-settled share based payments to reﬂect the changes Employee future beneﬁts of the fair values of these awards. As previously stated, Onex’ businesses will elect to recog- nize all cumulative actuarial gains and losses that existed at the date of transition in opening retained earnings for all of their employee beneﬁt plans. Onex Corporation December 31, 2009 61 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Impairments of intangible and long-lived assets, excluding goodwill IFRS – Previously unrecognized deferred tax assets of an acquired company are recognized as part of the cost of the Recoverable amount Canadian GAAP – A recoverability test is performed by ﬁrst comparing the undiscounted expected future cash ﬂows to acquisition if realization is more likely than not as a result of the business combination. If an unrecognized deferred tax asset becomes realizable subsequent to the acquisition be derived from the asset to its carrying amount. If an asset’s date, such beneﬁt is recognized in the consolidated state- undiscounted expected future cash ﬂows do not exceed its ment of earnings and a corresponding amount of goodwill carrying value, an impairment loss is calculated as the is recognized as an operating expense. The acquirer recog- excess of the asset’s carrying amount over its fair value. nizes deferred tax assets of its own that become realizable IFRS – A recoverability test is performed by comparing the carrying amount to the asset’s recoverable amount. The impairment loss is calculated as the excess of the asset’s as a result of the acquisition through earnings. As a result, Onex will recognize deferred tax assets that become realiz- able as a result of future acquisitions in earnings. carrying amount over its recoverable amount. The recover- able amount is deﬁned as the higher of the asset’s fair value less costs to sell and its value-in-use. Under the value-in- Accounting for uncertainty in income tax positions Canadian GAAP – Beneﬁts for uncertain tax positions are determined by reference to a two-step process. First, the use calculation, the expected future cash ﬂows from the company determines whether it is more likely than not that asset are discounted to their net present value. As a result of an uncertain tax position will be sustained upon examina- the change in measurement methodology, impairments tion. Where the position meets that criterion of likelihood, under IFRS may be recognized sooner than under Canadian the amount of provision is measured as the largest amount GAAP and the impairment amounts may differ. of provision that is greater than 50 percent likely to be real- ized. Where the criterion of likelihood is not met, no provi- Reversal of impairments of intangible sion is recognized for the uncertain tax position. and long-lived assets, excluding goodwill Canadian GAAP – Reversal of impairment losses is not permitted. IFRS – Reversal of impairment losses is required if the cir- cumstances that led to the impairment no longer exist. Income taxes Deferred tax assets not previously recognized Canadian GAAP – Previously unrecognized deferred tax assets of an acquired company are recognized as part of the IFRS – The provision for uncertain tax positions is a best estimate of the amount expected to be paid based on a qualitative assessment of all relevant factors. As a result, Onex will recalculate its provision under IFRS. Accounting for uncertainty in income taxes in business combinations Canadian GAAP – Changes to provisions for uncertain tax positions relating to pre-acquisition periods are adjusted through the purchase price allocation, ﬁrst reducing good- cost of the acquisition when such assets are more likely than will and intangible assets associated with the business not to be realized as a result of a business combination. If an combination and, only after exhausting those amounts, unrecognized deferred tax asset becomes realizable subse- reducing income tax expense. quent to the acquisition date, such beneﬁt is also recognized through goodwill. The acquirer recognizes deferred tax assets of its own that become realizable as a result of the IFRS – Changes to pre-acquisition provisions for uncertain tax positions beyond 12 months of the acquisition date are acquisition as part of the cost of the acquisition. recorded to the income statement. As a result, Onex may be required to adjust its tax expense to reflect this difference. 62 Onex Corporation December 31, 2009 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 Presentation reclassiﬁcations for IFRS Tax reclassiﬁcation – Deferred tax Canadian GAAP – Future taxes are split between current and non-current components on the basis of either (1) the underlying asset or liability or (2) the expected reversal of items when not related to an asset or liability. IFRS – All deferred tax assets and liabilities will be clas- siﬁed as non-current. Non-controlling interests Canadian GAAP – Non-controlling interests in the equity of a consolidated subsidiary are classiﬁed as a separate com- 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 Issuers’ Annual and Interim Filings, issued by the Cana dian Securities Administrators requires Chief Execu tive Ofﬁcers (“CEOs”) and Chief Financial Ofﬁcers (“CFOs”) to certify that they are responsible for establishing and maintaining disclo- sure controls and procedures for the issuer, that disclosure controls and procedures have been de signed and are effec- tive in providing reasonable assurance that material infor- ponent between liabilities and equity in the statement mation relating to the issuer is made known to them, that of ﬁnancial position and as a component of net earnings they have evaluated the effectiveness of the issuer’s disclo- within the income statement. IFRS – Non-controlling interests will be classiﬁed as a component of equity separate from the equity of the parent sure controls and procedures, and that their conclusions about the effectiveness of those disclosure controls and pro- cedures at the end of the period covered by the relevant annual ﬁlings have been disclosed by the issuer. and will not be included in net earnings, but rather will be Under the supervision of and with the participation presented as an allocation of net earnings and comprehen- of management, including the CEO and CFO, we have evalu- sive earnings. Discontinued operations Canadian GAAP – To qualify as a discontinued operation an entity may not have any signiﬁcant continuing involvement ated the design and effectiveness of the Company’s disclo- sure controls and procedures as at December 31, 2009 and have concluded that those disclosure controls and proce- dures were effective in ensuring that information required to be disclosed by the Company in its corporate ﬁlings is in the operations of the entity after the disposal transaction. recorded, processed, summarized and reported within the Additionally, dispositions are classiﬁed as discontinued required time period for the year then ended. operations if certain criteria are met. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, IFRS – Continuing involvement with a sold entity does not preclude presentation as a discontinued operation. Addi - assurance that its objectives are met. Due to inherent limi- tations in all such systems, no evaluations of controls can tionally, only disposals of signiﬁcant operations meet the provide absolute assurance that all control issues, if any, IFRS requirements to present the results as discontinued within a company have been detected. Accordingly, our disclosure controls and procedures are effective in provid- ing reasonable, not absolute, assurance that the objectives of our disclosure control system have been met. operations. Information technology systems and internal controls During 2008 and 2009, Onex, the parent company, began to identify and assess IFRS differences that will require changes to the ﬁnancial systems. As a result, an informa- tion technology solution is currently being implemented at Onex, the parent company, that will accommodate accounting under IFRS for 2010. In addition, Onex will be documenting its internal control processes surrounding its IFRS reporting concurrently with the implementation. Onex Corporation December 31, 2009 63 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 Internal controls over ﬁnancial reporting National Instrument 52-109 also requires CEOs and CFOs to accordance with Canadian generally accepted accounting principles. While no changes occurred during the last quarter certify that they are responsible for establishing and main- of 2009 that, in the view of Onex management, have materi- taining internal controls over ﬁnancial reporting for the ally affected or are reasonably likely to materially affect issuer, that those internal controls have been designed and Onex’ internal control over ﬁnancial reporting, the Company are effective in providing reasonable assurance regarding regularly acquires new businesses, many of which were pri- the reliability of ﬁnancial reporting and the preparation of vately owned or were divisions of larger organizations prior ﬁnancial statements in accordance with Canadian generally to their acquisition by Onex. The Com pany continues to accepted accounting principles, and that the issuer has dis- assess the design and effectiveness of internal controls over closed any changes in its internal controls during its most ﬁnancial reporting in its most recently acquired businesses. recent interim period that has materially affected, or is rea- Under the supervision of and with the participa- sonably likely to materially affect, its internal control over tion of management, including the CEO and CFO, we have ﬁnancial reporting. evaluated the internal controls over ﬁnancial reporting as During 2009, Onex management evaluated the at December 31, 2009 and have concluded that those inter- Com pany’s internal controls over ﬁnancial reporting to nal controls were effective in providing reasonable assur- ensure that they have been designed and are effective in pro- ance regarding the reliability of ﬁnancial reporting and the viding reasonable assurance regarding the reliability of ﬁnan- preparation of ﬁnancial statements in accordance with cial reporting and the preparation of ﬁnancial statements in Canadian generally accepted accounting principles. 64 Onex Corporation December 31, 2009 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 Looking back at 2009, we are pleased that, for the most Allison Transmission’s industry leadership posi- part, our operating companies are conservatively capital- tion, the diversity of its end-markets, its signiﬁcant number ized. As business activity improves for many of our oper - of customers and broad geographic reach enabled it to per- ating companies, they are focused on maintaining their form better than others in its industry. Sales demand is leaner cost structures with the goal of improving margins linked to the number of commercial vehicles built by its and strengthening their leadership positions within their customers, which depends on general economic conditions respective industries. Those efforts help frame our expec- and, to a lesser extent, the level of demand for military vehi- tations for our major businesses as we enter 2010. cles. In the coming year, the company anticipates resuming As we highlighted last quarter, we expect that growth, albeit at a slow pace. Allison Trans mission made Hawker Beechcraft’s markets will be slower to improve than adjustments to its cost structure during 2009 that should others. Although the company is partially insulated due to allow it to beneﬁt from any growth in volumes. its signiﬁcant aftermarket, military and government busi- Sitel Worldwide is one of the largest customer care nesses, the reduced demand for business jets will affect providers in the world, operating 126 facilities in 27 coun- 2010 results. During this challenging period, the company tries. This enables Sitel Worldwide to provide a full range of has done a very good job of aggressively man aging its costs, customer care solutions for its clients as they seek to adjust working capital and capital expenditures. costs or services. Volume growth with many of its existing In our healthcare portfolio, we expect that EMSC customers is dependent on a pick-up in consumer acti vity. will continue to grow by adding new contracts for its ambu- Sitel Worldwide’s management continues to assess its cost lance transport services and in its services for faci lity-based structure in areas that are not generating adequate margins physician services. EMSC growth may also be achieved and to actively solicit new customers. through selective acquisitions. Carestream Health will con- The Warranty Group’s volume of new business in tinue to build its digital imaging business, while we expect the U.S. is signiﬁcantly dependent not only on consumer volumes of traditional ﬁlm x-ray products to continue to purchases of autos, major appliances and electronics but gradually decline as medical and dental imaging continues also on these customers purchasing associated extended to migrate to digital capturing. Overall, proposed healthcare warranty products. While new vehicle sales in the U.S. reform in the United States has created some uncertainty for reported year-over-year growth in the fourth quarter of our healthcare businesses, in particular surrounding the 2009, the overall level of sales for 2009 was at historic Medi care and Medicaid reimbursement rates. lows. Retail spending in the U.S. on major appliances and Global economic uncertainty continues to affect electronics is not yet showing much growth and will con- Celestica customers. While there have been recent tinue to be affected by high unemployment levels. Overall, demand increases in some end-markets, there is limited the company does not contemplate U.S. demand for its overall visibility on future demand. Celestica has strong products and services dropping from 2009 levels and has relationships with existing customers and is actively pur- targeted areas for growth. In its European and Latin Amer - suing new customers to expand end-market penetration i can markets, The Warranty Group is seeing some signs of and diversify its end-market mix. The company believes it economic improvement, which should be positive for the is well-positioned to compete effectively in the EMS company. Further, interest income rates are expected to industry given its ﬁnancial strength and its position as one remain low for the ﬁrst half of 2010, which would curtail of the major EMS providers worldwide. any increase in returns on the company’s investment port- Our industrial businesses, including Tube City IMS folio. The Warranty Group, by the nature of the industry, and Allison Transmission, will be affected by the cycles in has a large block of business that was booked in prior their industries. Tube City IMS made signiﬁcant progress in years and is amortized to income over the duration of the 2009 reducing its cost structure in line with the lower level of contracts. This works to moderate the impact on earnings activity. Further improvement in proﬁtability will be signiﬁ- of higher or lower new volumes of business written in any cantly dependent on the overall level of steel production. particular period. Onex Corporation December 31, 2009 65 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Spirit AeroSystems has a healthy order backlog as Onex is in excellent ﬁnancial condition with over it enters 2010. Demand for the commercial aerostructures $1 billion of its own cash and near-cash items at the end Spirit AeroSystems produces is highly correlated to demand of January 2010, no debt at the parent company and approx - for new aircraft. From 2005 to 2008, Boeing and Airbus imately US$3.9 billion of third-party uncalled capital for experienced an unprecedented order intake and backlog acquisitions through Onex Part ners and ONCAP Funds. growth. Despite a signiﬁcant slowdown in new aircraft We were encouraged by the tremendous interest orders in 2009, high order backlog levels are expected to in the new Onex Credit Partners Credit Strategy Fund, continue to drive stable production and delivery forecasts a publicly traded Canadian retail fund that raised over in the near-term from Boeing and Airbus, which account for $200 million in the Fall. We believe this is a testament to the substantial portion of Spirit AeroSystems’ revenues. our credit team, its track record and the strength of the We remain optimistic that there will be attractive Onex brand. We will continue to evaluate future opportu- acquisition prospects for Onex in this environment. Many of nities to raise funds for our platforms – private equity, the potential transactions we are currently considering are credit investing and real estate. proprietary and are the result of our industry focus and our We believe we have built a portfolio of excellent reputation for complex corporate carve-outs from large businesses that we expect will create long-term value for multinationals. We are working to ﬁnd similar opportunities Onex, our shareholders and our limited partners. where we can acquire businesses at reasonable purchase prices and create value through earnings growth. The swift rebound of the capital markets has been both beneﬁcial and detrimental to trans action activity. The ongoing recovery of the equity markets has created an appetite for public offerings. If the markets continue to be receptive, this may provide an opportunity for some of Onex’ businesses to pursue equity offerings. Conversely, sellers’ pricing expectations appear to be ahead of their businesses’ current perfomance, making it difﬁcult for value investors like Onex to ﬁnd attractive acquisition opportunities. As well, with debt more readily available, struggling companies may be able to turn to reﬁnancing options rather than sale alternatives. 66 Onex Corporation December 31, 2009 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S RISK MANAGEMENT As managers, it is our responsibility to identify and manage business risk. As shareholders, we require an appropriate return for the risk we accept. Managing risk Onex’ general approach to the management of risk is to long-term growth in value. Finally, Onex invests in ﬁnan- cial partnership with management. This strategy not only apply common-sense business principles to the manage- gives Onex the beneﬁt of experienced managers but also is ment of the Company, the ownership of its operating com- designed to ensure that an operating company is run panies and the acquisition of new businesses. Each year, entrepreneurially for the beneﬁt of all shareholders. detailed reviews are conducted of many opportunities to Onex maintains an active involvement in its oper- purchase either new businesses or add-on acquisitions for ating companies in the areas of strategic planning, ﬁnan- existing businesses. Onex’ primary interest is in acquiring cial structures, and negotiations and acquisitions. In the well-managed companies with a strong position in growing early stages of ownership, Onex may provide resources for industries. In addition, diversiﬁcation among Onex’ oper- business and strategic planning and ﬁnancial reporting ating companies enables Onex to participate in the growth while an operating company builds these capabilities in- of a number of high-potential industries with varying busi- house. In almost all cases, Onex ensures there is oversight ness cycles. of its investment through representation on the acquired As a general rule, Onex attempts to arrange as company’s board of directors. Onex does not get involved many factors as practical to minimize risk without hamper- in the day-to-day operations of acquired companies. ing its opportunity to maximize returns. When a purchase Operating companies are encouraged to reduce opportunity meets Onex’ criteria, for example, typically risk and/or expand opportunity by diversifying their cus- a fair price is paid, though not necessarily the lowest tomer bases, broadening their geographic reach or product price, for a high-quality business. Onex does not commit and service offerings and improving productivity. In certain all of its capital to a single acquisition and has equity part- instances, we may also encourage an operating company ners with whom it shares the risks and rewards of owner- to seek additional equity in the public markets in order to ship. The Onex Partners and ONCAP Funds streamline continue its growth without eroding its balance sheet. One Onex’ process of sourcing and drawing on commitments element of this approach may be to use new equity invest- from such equity partners. ment, when ﬁnancial markets are favourable, to prepay An acquired company is not burdened with more existing debt and absorb related penalties. Some of the debt than it can likely sustain, but rather is structured so strategies and policies to manage business risk at Onex and that it has the ﬁnancial and operating leeway to maximize its operating companies are discussed in this section. Onex Corporation December 31, 2009 67 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 economic downturns in strategy at Onex to reduce the risk inherent in business speciﬁc regions. As shown on the industry diversiﬁcation cycles. Onex’ practice of owning companies in various chart that follows, Onex is well diversiﬁed among various industries with differing business cycles reduces the risk of industries, with no single industry representing more than holding a major portion of Onex’ assets in just one or two 16 percent of its net asset base and no single business repre- industries. Similarly, the Company’s focus on building senting more than 8 percent of its net asset base. Industry Diversification of Onex Mid-cap Opportunities 3% – ONCAP II Injection Molding 6% – Husky Commercial Vehicles 6% – Allison Transmission Financial Services 5% – The Warranty Group Other Industries 9% – RSI – Tube City IMS – Tropicana Las Vegas Customer Support Services 5% – Sitel Worldwide Credit Securities 3% – Onex Credit Partners Healthcare 16% – EMSC – CDI – Skilled Healthcare – Carestream Health – ResCare Aerospace 11% – Spirit AeroSystems – Hawker Beechcraft Real Estate 3% – Onex Real Estate Partners Electronics Manufacturing Services 5% – Celestica Cash and Near-cash Items 28% Private investments are valued at cost and publicly traded investments are valued at market as at December 31, 2009. Operating liquidity It is Onex’ view that one of the most important things Onex A large portion of the purchase price for new acquisitions is generally funded with debt provided by can do to control risk is to maintain a strong parent com- third-party lenders. This debt, sourced exclusively on the pany with an appropriate level of liquidity. Onex needs to be strength of the acquired company’s ﬁnancial condition in a position to support its operating companies when and if and prospects, is a debt of the acquired company at clos- it is appropriate and reasonable for Onex, as an equity ing and is without recourse to Onex, the parent company, owner with paramount duties to act in the best interests of or to its other operating companies or partnerships. The Onex shareholders, to do so. Maintaining liquidity is also foremost consideration, however, in developing a ﬁnanc- important to fund Onex’ portion of the investment in new ing structure for an acquisition is identifying the appropri- acquisitions. Onex, as a holding company, generally does ate amount of equity to invest. In Onex’ view, this should not have guaranteed sources of meaningful cash ﬂow and be the amount of equity that maximizes the risk/reward cannot predict the timing of realizations. The approximate equation for both shareholders and the acquired company. US$88 million in management fees that Onex expects to In other words, it allows the acquired company not only to earn in 2010 as the general partner of the Onex family of manage its debt through reasonable business cycles but private equity funds will be used to offset the ongoing costs also to have sufﬁcient ﬁnancial latitude for the business to of running the parent company. vigorously pursue its growth objectives. 68 Onex Corporation December 31, 2009 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’ largest acquisitions over the period from In order to improve the efﬁciency of Onex’ inter- 2005 to 2007 were purchased at an average purchase price nal processes on both auction and exclusive acquisition multiple of 6.4 times EBITDA, which was notably less than processes, and so reduce the risk of missing out on high- the industry average of more than 9.3 times EBITDA. Over quality opportunities, during 2003 we created Onex Part - the same timeframe, the leverage associated with those ners LP (“Onex Partners I”), a US$1.655 billion pool of acquisitions was 3.6 times while the industry average was capital raised from Onex and major institutional investors. 5.6 times. This shows that Onex generally paid less for busi- The investment period for Onex Partners I was substan- nesses and applied less leverage than the industry norm. tially completed in 2006. Onex raised a second fund, Onex While Onex seeks to optimize the risk/reward Part ners II LP (“Onex Partners II”), in 2006, a US$3.45 bil- equation in all acquisitions, there is always the risk that lion pool of capital. Onex determined that Onex Partners II the acquired company will not generate sufﬁcient proﬁt - was effectively fully invested in December 2008. In late 2009, ability or cash ﬂow to service its debt requirements and/or Onex completed the ﬁnal close on its third fund, Onex Part - meet related debt covenants or to provide adequate ﬁnan- ners III LP (“Onex Partners III”), a US$4.3 billion pool of cial ﬂexibility for growth. In such circumstances, addi- third-party capital and capital committed from Onex. tional investment by the equity partners, including Onex, may be appropriate. In severe circumstances, the recovery of Onex’ equity and any other investment in that operating company is at risk. Financial risks In the normal course of business, Onex and its operating companies may face a variety of risks related to ﬁnancial management. In dealing with these risks, it is a matter of Timeliness of investment commitments Onex’ ability to create value for shareholders is dependent Company policy that neither Onex nor its operating com- panies engages in speculative derivatives trading or other in part on its ability to successfully complete large acquisi- speculative activities. tions. Our preferred course is to complete acquisitions on Default on known credit As previously noted, new an exclusive basis. However, we also participate in acquisi- investments generally include a meaningful amount of tions through an auction or bidding process with multiple third-party debt. Those lenders typically require that the potential purchasers. Bidding is often very competitive for acquired company meet ongoing tests of ﬁnancial perfor - the large-scale acquisitions that are Onex’ primary interest, mance as deﬁned by the terms of the lending agreement, and the ability to make knowledgeable, timely investment such as ratios of total debt to operating income (“EBITDA”) commitments is a key component in successful purchases. and the ratio of EBITDA to interest costs. It is Onex’ practice In such instances, the vendor often establishes a relatively not to burden acquired companies with levels of debt that short timeframe for Onex to re spond deﬁnitively. might put at risk their ability to generate sufﬁcient levels of proﬁtability or cash ﬂow to service their debts – and so meet their related debt covenants – or which might hamper their ﬂexibility to grow. At year end, all of Onex’ operating companies had satisﬁed their debt covenants. As we look forward to 2010, Sitel Worldwide projects that it will be close to meeting a performance covenant related to its debt. We believe the company has a number of alternatives to address that situation should it arise. Onex Corporation December 31, 2009 69 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 Financing risk The severe tightening of global Onex, the parent company, has some exposure to credit markets from the fourth quarter of 2007 through the interest rate changes primarily through its cash and cash ﬁrst half of 2009 has made new large loans, even for credit equivalents, which are held in short-term deposits and worthy businesses, extremely difﬁcult or expensive to obtain. commercial paper. A 0.25 percent increase (0.25 percent While debt markets improved in the last half of 2009, the decrease) in the interest rate, assuming no signiﬁcant ability to reﬁnance debt at reasonable terms and cost repre- changes in cash balance at the parent company, would sents a risk to the ongoing viability of many otherwise result in a $2 million increase ($2 million decrease) in healthy businesses whose loans or operating lines of credit annual interest income. In addition, The Warranty Group, are up for renewal in the short term. None of Onex’ oper - which holds substantially all of its investments in interest- ating companies has any signiﬁcant reﬁnancing require- bearing securities, would also have some exposure to inter- ments until 2012, by which time Onex believes that the est rate changes. A 0.25 percent change in the interest rate credit markets will have returned to more normal levels of would change the fair value of the investments held by The liquidity and cost. The major portion of Onex’ operating Warranty Group by US$11 million, with a corresponding companies’ reﬁnancings will take place in 2013 and 2014. change to other comprehensive earnings. However, as the Table 22 on page 46 of this MD&A provides the aggregate investments are reinvested, a 0.25 percent change in the debt maturities for Onex’ consolidated operating compa- interest rate would change the annual interest income nies and equity-accounted operating companies for each recorded by The Warranty Group by US$5 million. year up to 2014 and in total thereafter. Currency ﬂuctuations The majority of the activi- Interest rate risk As noted earlier, new investments ties of Onex’ operating companies were conducted outside generally include a meaningful amount of third-party debt Canada during 2009, primarily in the United States. Approxi - taken on by the acquired operating company. An important mately 37 percent of consolidated revenues were from out- element in controlling risk is to manage, to the extent rea- side North America; however, a substantial portion of that sonable, the impact of ﬂuctuations in interest rates on the business is actually based on U.S. currency. This makes the debt of the operating company. value of the Canadian dollar relative to the U.S. dollar the Onex’ operating companies generally seek to ﬁx primary currency relationship affecting Onex’ operating the interest on some of their term debt or otherwise mini- results. Onex’ operating companies may use currency deriv- mize the effect of interest rate increases on a portion of atives in the normal course of business to hedge against their debt at the time of acquisition. This is achieved by adverse ﬂuctuations in key operating currencies but, as taking on debt at ﬁxed interest rates or entering into interest noted above, speculative activity is not permitted. rate swap agreements or ﬁnancial contracts to control the Onex’ results are reported in Canadian dollars, and level of interest rate ﬂuctuation on variable rate debt. At ﬂuctuations in the value of the Canadian dollar relative to December 31, 2009, approximately 66 percent (2008 – 70 per- other currencies can have an impact on Onex’ reported con- cent) of Onex’ operating companies’ long-term debt had a solidated results and ﬁnancial position. During 2009, share- ﬁxed interest rate or the interest rate was effectively ﬁxed by holders’ equity reﬂected a $74 million decrease in the value interest rate swap contracts. The risk inherent in such of Onex’ net equity in its operating companies and equity- a strategy is that, should interest rates decline, the beneﬁt accounted investments that operate in U.S. currency. of such declines may not be obtainable or may only be Onex holds a substantial amount of cash and achieved at the cost of penalties to terminate existing marketable securities in U.S.-dollar-denominated securi- arrangements. There is also the risk that the counterparty on ties. The portion of securities held in U.S. dollars is based an interest rate swap agreement may not be able to meet on Onex’ view of funds it will require for future invest- its commitments. Guidelines are in place that specify the ments in the United States. Onex does not speculate on nature of the ﬁnancial institutions that operating companies the direction of exchange rates between the Canadian can deal with on interest rate contracts. dollar and the U.S. dollar when determining the balance 70 Onex Corporation December 31, 2009 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 of cash and marketable securities to hold in each cur- rency, nor does it use foreign exchange contracts to Commodity price risk Certain Onex operating companies are vulnerable to price protect itself against translation loss. A 5 percent strength- ﬂuctuations in major commodities. Individual operating ening (5 percent weakening) of the Canadian dollar rela- companies may use ﬁnancial instruments to offset the tive to the U.S. dollar at Decem ber 31, 2009 would result impact of anticipated changes in commodity prices related in a $33 million decrease ($33 million increase) in net earn- to the conduct of their businesses. Aluminum, titanium and ings of Onex, the parent company. In addition, two Onex raw materials such as carbon ﬁbres used to manufacture operating com panies, Celes tica and Husky, have signiﬁcant composites represent the principal raw materials used in exposure to the U.S. dollar/Canadian dollar ex change rate. Spirit AeroSystems’ manufacturing operations. Spirit Aero - Other comprehensive earnings at Celes tica would increase Systems has entered into long-term supply contracts with US$10 million (decrease US$9 million) with a 5 percent its key suppliers of raw materials, which limits the com- strengthening (5 percent weakening) of the Canadian dol- pany’s exposure to rising raw materials prices. Most of the lar relative to the U.S. dollar at December 31, 2009. A 5 per- raw materials purchased are based on a ﬁxed pricing or at cent strengthening (5 percent weak ening) of the Canadian reduced rates through Boeing’s or Airbus’ high-volume pur- dollar relative to the U.S. dollar at Decem ber 31, 2009 chase contracts. would result in a US$26 million increase (US$26 million Diesel fuel is a key commodity used in Tube City decrease) in other comprehensive earnings of Husky. IMS’ operations. The company consumes approximately Capital commitment risk The limited partners in six million to 10 million gallons of diesel fuel annually. To the Onex Partners and ONCAP Funds comprise a relatively help mitigate the risk of price ﬂuctuations in fuel, Tube City small group of high-quality, primarily institutional, inves - IMS incorporates into substantially all of its contracts pric- tors. To date, each of these investors has met its com - ing escalators based on published price indices that would mitments on called capital and Onex has received no generally offset some portion of fuel price changes. indi cations that any investors will be unable to meet its Silver is a signiﬁcant commodity used in Care - capital commitments in the future. While Onex’ experience stream Health’s manufacture of x-ray ﬁlm. The company’s with its limited partners suggests that commitments will be management continually monitors movement and trends in honoured, the current economic downturn raises the con- the silver market and enters into forward agreements when cern that a limited partner may not be able to meet its considered appropriate to mitigate some of the risk of future entire commitment over the life of a fund. price ﬂuctuations generally for periods of up to a year. Insurance claims The Warranty Group underwrites and administers extended warranties and credit insurance on a wide variety of consumer goods including automo- biles, consumer electronics and major home appliances. Unlike most property insurance risk, the risk associated with extended warranty claims is non-catastrophic and short-lived, resulting in predictable loss trends. The pre- dictability of claims, which is enhanced by the large volume of claims data in the company’s database, enables The Warranty Group to appropriately measure and price risk. Onex Corporation December 31, 2009 71 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 Integration of acquired companies An important aspect of Onex’ strategy for value creation is government appropriations is a normal aspect of business for these companies, and all seek to minimize the effect to acquire what we consider to be “platform” companies. of possible funding reductions through productivity im - Such companies often have distinct competitive advan- provements and other initiatives. It is not known what tages in products or services in their respective industries impact, if any, proposed healthcare reform in the United that provide a solid foundation for growth in scale and States will have on the companies. value. In these instances, Onex works with company man- agement to identify attractive add-on acquisitions that may enable the platform company to achieve its goals Signiﬁcant customers Some of Onex’ major acquisitions have been divisions of more quickly and successfully than by focusing solely on large companies. As part of these purchases, the acquired the development and/or diversiﬁcation of its customer company has often continued to supply its former owner base, which is known as organic growth. Growth by acqui- through long-term supply arrangements. It has been Onex’ sition, however, may carry more risk than organic growth. policy to encourage its operating companies to quickly While as many of these risks as possible are considered in diversify their customer bases to the extent practical in the acquisition planning, oper ating companies undertaking order to manage the risk associated with serving a single these acquisitions also face such risks as unknown expenses major customer. related to the cost-effective amalgamation of operations, Certain Onex operating companies have major the retention of key personnel and customers, the future customers that represent 10 percent or more of annual value of goodwill, intangible assets and intellectual prop- revenues. In particular, Spirit AeroSystems primarily relies erty. There are also risk factors associated with the industry on two major customers, Boeing and Airbus. The table in and combined business more generally. Onex works with note 23 to the audited annual consolidated ﬁnancial state- company management to understand and attempt to miti- ments provides information on the concentration of busi- gate such risks as much as possible. ness the oper ating companies have with major customers. Dependence on government funding Since 2005, Onex has acquired businesses, or interests in Environmental considerations Onex has an environmental protection policy that has businesses, in various segments of the U.S. healthcare been adopted by its operating companies; many of these industry. Certain of the revenues of these companies are operating companies have also adopted supplemental partially dependent on funding from federal, state and local policies appropriate to these industries or businesses. government agencies, especially those responsible for U.S. Senior ofﬁcers at each of these companies are ultimately federal Medicare and state Medicaid funding. Budgetary responsible for ensuring compliance with these policies. pressures, as well as economic, industry, political and other They are required to report annually to their company’s factors, could inﬂuence governments to not increase or, in board of directors and to Onex regarding compliance. some cases, to decrease appropriations for the services Environmental management by the operating com - offered by Onex’ operating companies, which could reduce panies is accomplished through the education of em ployees their revenues materially. Future revenues may be affected about environmental regulations and appropriate operating by changes in rate-setting structures, methodologies or policies and procedures; site inspections by environmental interpretations that may be proposed or are under consider- consultants; the addition of proper equipment or modiﬁ ca - ation. While each of Onex’ operating companies in the U.S. tion of existing equipment to reduce or eliminate environ - healthcare industry is subject to reimbursement risk directly men tal hazards; remediation activities as re quired; and related to its particular business segment, it is unlikely that ongoing waste reduction and recycling programs. Environ - all of these companies would be affected by the same event, mental consultants are engaged to advise on current and up - or to the same extent, simultaneously. Ongoing pressure on coming environmental regulations that may be applicable. 72 Onex Corporation December 31, 2009 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 Many of the operating companies are involved in the remediation of particular environmental situations, Other contingencies Onex and its operating companies are or may become par- such as soil contamination. In almost all cases, these situa- ties to legal claims arising in the ordinary course of busi- tions have occurred prior to Onex’ acquisition of those ness. The operating companies have recorded liability companies, and the estimated costs of remedial work and provisions based upon their consideration and analysis of related activities are managed either through agreements their exposure in respect of such claims. Such provisions with the vendor of the company or through provisions are reﬂected, as appropriate, in Onex’ consolidated ﬁnan- established at the time of acquisition. Manufacturing activi- cial statements. Onex, the parent company, has not cur- ties carry the inherent risk that changing environmental rently recorded any further liability provision and we do not regulations may require additional capital expenditures or believe that the resolution of known claims would reason- remedial work and associated costs. ably be expected to have a material adverse impact on Income taxes The Company has investments in companies that operate in outcome of outstanding, pending or future actions cannot be predicted with certainty, and therefore there can be no a number of tax jurisdictions. Onex provides for the tax on assurance that their resolution will not have an adverse undistributed earnings of its subsidiaries that are not per- effect on our consolidated ﬁnancial position. Onex’ consolidated ﬁnancial position. However, the ﬁnal manently reinvested based on the expected future income tax rates that are substantively enacted at the time of the income/gain recognition events. Changes to the expected future income tax rate will affect the provision for future tax, both in the current year and in respect of prior year amounts that are still outstanding, either positively or neg- atively, depending on whether rates decrease or increase. Changes to tax legislation or the application of tax legisla- tion may affect the provision for future tax and the taxation of deferred amounts. Onex Corporation December 31, 2009 73 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 mit tee of three non-management independent Directors is appointed by the Board. The Audit and Corporate Governance Committee reviews the consolidated ﬁnancial statements, adequacy of internal controls, audit process and ﬁnancial reporting with management and with the external auditors. The Audit and Corporate Governance Committee reports to the Directors prior to the approval of the audited consolidated ﬁnancial statements for publication. PricewaterhouseCoopers llp, the Company’s external auditors, who are appointed by the holders of Subordinate Voting Shares, audited the consolidated ﬁnancial statements in accordance with Canadian generally accepted auditing 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 24, 2010 Christine M. Donaldson Vice President Finance 74 Onex Corporation December 31, 2009 AUDITORS’ REPORT To the Shareholders of Onex Corporation: We have audited the consolidated balance sheets of Onex Corporation as at December 31, 2009 and 2008 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, 2009 and 2008 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 24, 2010 Onex Corporation December 31, 2009 75 CONSOLIDATED BALANCE SHEETS As at December 31 (in millions of dollars) 2009 2008 $ 3,206 $ 2,921 636 3,062 3,085 1,384 11,373 3,759 3,255 2,696 2,086 2,312 842 4,014 3,471 1,695 12,943 4,066 3,897 3,125 2,755 2,946 $ 25,481 $ 29,732 $ 3,832 $ 4,617 992 425 21 1,410 6,680 5,505 41 2,034 1,955 1,237 17,452 6,370 1,659 1,196 532 25 1,698 8,068 7,143 46 2,561 2,287 1,450 21,555 6,624 1,553 $ 25,481 $ 29,732 Assets Current assets Cash and cash equivalents 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 24. Signed on behalf of the Board of Directors [signed] Director [signed] Director 76 Onex Corporation December 31, 2009 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 dispositions of operating investments (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) 2009 $ 24,831 (19,468) (2,819) 2,544 (636) (364) (495) 53 (497) (90) (161) 97 783 (219) (370) 645 (172) (361) 112 – 2008 $ 26,881 (21,719) (2,744) 2,418 (624) (366) (550) 35 (322) 83 142 (77) 4 (220) (1,584) (1,061) (252) 1,021 (292) 9 $ 112 $ (283) $ $ $ 0.92 – 0.92 $ $ $ (2.37) 0.07 (2.30) Onex Corporation December 31, 2009 77 CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE EARNINGS (in millions of dollars except per share data) Balance – December 31, 2007 Dividends declared(a) Purchase and cancellation of shares Comprehensive Earnings (Loss) Net loss 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, 2008 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) $ 529 – (14) – – – – 515 – (7) – – – – Accumulated Other Comprehensive Earnings (Loss) Total Shareholders’ Equity $ (409)(b) $ 1,703 Retained Earnings $ 1,583 (14) (87) (283) – – – 1,199 (13) (34) 112 – – – – – – 382 (122) (12) (161)(c) – – – (74) 109 13 (14) (101) (283) 382 (122) (12) 1,553 (13) (41) 112 (74) 109 13 Balance – December 31, 2009 $ 508 $ 1,264 $ (113)(d) $ 1,659 (a) Dividends declared per Subordinate Voting Share during 2009 totalled $0.11 (2008 – $0.11). In 2009, shares issued under the dividend reinvestment plan amounted to less than $1 (2008 – less than $1). (b) 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. (c) 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. (d) Accumulated Other Comprehensive Earnings (Loss) as at December 31, 2009 consisted of currency translation adjustments of negative $89, unrealized losses on the effective portion of cash flow hedges of $33 and unrealized gains on available-for-sale financial assets and other of $9. Income taxes did not have a significant effect on these items. 78 Onex Corporation December 31, 2009 CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31 (in millions of dollars) 2009 2008 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 dispositions of operating investments (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 unearned premiums and other liabilities Financing Activities Issuance of long-term debt Repayment of long-term debt Cash dividends paid Repurchase of share capital Issuance of share capital provided by L.P. investors and operating companies Distributions by operating companies and to L.P. investors Increase (decrease) due to other ﬁnancing activities Investing Activities Acquisition of operating companies, net of cash in acquired companies of $108 (2008 – $5) (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) Increase (Decrease) in Cash for the Year Increase (decrease) in cash due to changes in foreign exchange rates Cash and cash equivalents, beginning of the year Cash and Cash Equivalents $ 1112 – $ (283) (9) 636 364 86 497 76 161 (783) 5 370 361 (104) (66) 1,715 381 (166) 58 (225) 48 (423) 1,340 1,390 (1,962) (13) (41) 368 (576) (23) (857) (90) (613) 1,110 (184) – 223 706 (421) 2,921 $ 3,206 624 366 (22) 322 (105) (142) (4) 5 1,584 (1,021) (66) 47 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 Onex Corporation December 31, 2009 79 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 24). 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: December 31, 2009 December 31, 2008 Investments made through Onex Celestica Inc. (“Celestica”) Cineplex Entertainment(a) Sitel Worldwide Corporation (“Sitel Worldwide”) Investments made through Onex and Onex Partners I Center for Diagnostic Imaging, Inc. (“CDI”) Cosmetic Essence, Inc. (“CEI”)(a) 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”) Investments made through Onex and Onex Partners III Tropicana Las Vegas, Inc. (“Tropicana Las Vegas”) Other investments ONCAP II L.P. Onex Real Estate Partners (“Onex Real Estate”) (a) Disposed of in 2009 (see note 19). Onex Ownership Voting Onex Ownership 8% – 66% 19% – 12% 6% 9% 7% 15% 38% 19% 20% 36% 36% 29% 15% 44% 86% 69% – 88% 100% – 82% (b) 89% 76% (b) 100% (b) 50%(b) 100% 100% 100% 71% 100% 100% 13% 23% 66% 19% 21% 29% 6% 9% 7% 15% 39% 20% 20% 35% 36% 29% – 44% 86% Voting 79% (b) 88% 100% 100% 97% (b) 89% 76% (b) 100% (b) 50%(b) 100% 100% 100% – 100% 100% (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 each of the entities. The ownership percentages are before the effect of any potential through multiple voting rights attached to particular shares. In dilution relating to the Management Investment Plans (the “MIP”) certain circumstances, the voting arrangements give Onex the as described in note 24(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 80 Onex Corporation December 31, 2009 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 LY A D O P T E D A C C O U N T I N G P R O N O U N C E M E N T S Goodwill and Intangible 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 Foreign currency translation On January 1, 2009, the Company adopted the Canadian Institute The Company’s operations conducted in foreign currencies, of Chartered Accountants Handbook (“CICA Handbook”) Sec- other than those operations that are associated with investment- tion 3064, “Goodwill and Intangible Assets”, which replaced existing holding subsidiaries, are considered to be self-sustaining. Assets standards. This revised standard established guidance for the and liabilities of self-sustaining operations conducted in foreign recognition, measurement and disclosure of goodwill and intan- currencies are translated into Canadian dollars at the exchange gible assets, including internally generated intangible assets. The rate in effect at the balance sheet date. Revenues and expenses are adoption of this standard did not have a signiﬁcant effect on the translated at average exchange rates for the year. Unrealized gains consolidated ﬁnancial statements. Credit Risk and the Fair Value of Financial Assets and Financial Liabilities or losses on translation of self-sustaining operations conducted in foreign currencies are shown as currency translation adjustments, a component of other comprehensive earnings. The Company’s integrated operations, including invest- In January 2009, the Company adopted the Emerging Issues Com - ment-holding subsidiaries, translate monetary assets and liabili- mittee Abstract 173 (“EIC-173”), “Credit Risk and the Fair Value of ties denominated in foreign currencies at exchange rates in effect Financial Assets and Financial Liabilities”. EIC-173 states that an at the balance sheet date and non-monetary items at historical entity’s own credit risk and the credit risk of the counterparty rates. Revenues and expenses are translated at average exchange should be taken into account in determining the fair value of rates for the year. Gains and losses on translation are included in ﬁnancial assets and ﬁnancial liabilities, including derivative the income statement. instruments. The adoption of this standard did not have a signiﬁ- cant effect on the consolidated ﬁnancial statements. Cash and cash equivalents Financial Instruments – Disclosures Cash and cash equivalents include liquid investments such as term deposits, money market instruments and commercial paper In December 2009, the Company adopted amendments to CICA that mature in less than three months from the balance sheet Handbook Section 3862, “Financial Instruments – Disclosures”, date. The investments are carried at cost plus accrued interest, which requires enhanced disclosures on liquidity risk of ﬁnancial which approximates market value. instruments and new disclosures on fair value measurements of ﬁnancial instruments. The additional disclosures are included Inventories in note 26. R E C E N T LY I S S U E D A C C O U N T I N G P R O N O U N C E M E N T S International Financial Reporting Standards Inventories are recorded at the lower of cost and replacement cost for raw materials, and at the lower of cost and net realizable value for work in progress and ﬁnished goods. For inventories in the aerostructures segment, certain inventories in the healthcare In February 2008, the Canadian Accounting Standards Board con - segment and certain inventories in the metal services segment, ﬁrmed that the use of International Financial Reporting Standards inventories are stated using an average cost method. For sub - (“IFRS”) would be required for Canadian publicly accountable stantially all other inventories, cost is determined on a ﬁrst-in, enterprises for years beginning on or after January 1, 2011. Onex is ﬁrst-out basis. working to adopt IFRS as the basis for preparing its consolidated During the year ended December 31, 2009, $12,736 of ﬁnancial statements effective January 1, 2011. For the quarter inventory was expensed in cost of sales. In addition, inventory ended March 31, 2011, Onex expects to issue its ﬁnancial results writedowns of $71 were recorded, partially offset by inventory pro- prepared on an IFRS basis with comparative data on an IFRS basis. vision reversals of $70, for a net provision of $1. Signiﬁcant IFRS policies are described in Management’s Discus - sion and Analysis. Property, plant and equipment Property, plant and equipment are recorded at cost less accumu - lated amortization and provision for impairments, if any. For substantially all property, plant and equipment, amortization is provided for on a straight-line basis over the estimated useful lives of the assets: two to 45 years for buildings and up to 20 years for machinery and equipment. The cost of plant and equipment is reduced by applicable investment tax credits that are more likely than not to be realized. Onex Corporation December 31, 2009 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 1. B A S I S O F P R E PA R AT I O N A N D S I G N I F I C A N T A C C O U N T I N G P O L I C I E S ( c o n t ’d ) Other assets Acquisition costs relating to the financial services segment Certain costs of acquiring warranty business, principally commis- Leasehold improvements are amortized over the terms sions, underwriting and sales expenses that vary and are primarily of the leases. related to the production of new business, are deferred and amor- Leases that transfer substantially all the risks and bene - tized as the related premiums and contract fees are earned. The ﬁts of ownership are recorded as capital leases. Buildings and possibility of premium deﬁciencies and the related recoverability equipment under capital leases are amortized over the shorter of of deferred acquisition costs is evaluated annually. Management the term of the lease or the estimated useful life of the asset. Amor - considers the effect of anticipated investment income in its evalu- tization of assets under capital leases is on a straight-line basis. ation of premium deﬁciencies and the related recoverability of deferred acquisition costs. Costs incurred to develop computer software for internal use Certain arrangements with producers of warranty con- The Company capitalizes the costs incurred during the application tracts include proﬁt-sharing provisions whereby the underwriting development stage, which include costs to design the software proﬁts, after a ﬁxed percentage allowance for the company and an conﬁguration and interfaces, coding, installation and testing. allowance for investment income, are remitted to the producers Costs incurred during the preliminary project stage, along with on a retrospective basis. Unearned premiums subject to retro- post-implementation stages of internal use computer software, are spective commission agreements were approximately US$500 at expensed as incurred. December 31, 2009 (2008 – US$600). Impairment of long-lived assets Goodwill and intangible assets Property, plant and equipment and intangible assets with limited Goodwill represents the cost of investments in operating compa- life are reviewed for impairment whenever events or changes in nies in excess of the fair value of the net identiﬁable assets circumstances suggest that the carrying amount of an asset may acquired. Essentially all of the goodwill and intangible asset not be recoverable. An impairment is recognized when the car - amounts that appear on the consolidated balance sheets were rying amount of an asset to be held and used exceeds the projected recorded by the operating companies. The recoverability of good- undiscounted future net cash ﬂows expected from its use and dis- will and intangible assets with indeﬁnite lives is assessed annually posal, and is measured as the amount by which the carrying or whenever events or changes in circumstances indicate that the amount of the asset exceeds its fair value. carrying amount may not be recoverable. Impairment of goodwill Assets must be classiﬁed as either held-for-use or held- is tested at the reporting unit level by comparing the carrying for-sale. Impairment losses for assets held-for-use are measured value of the reporting unit to its fair value. When the carrying based on fair value, which is measured by discounted cash ﬂows. value exceeds the fair value, an impairment exists and is mea - Held-for-sale assets are carried at the lower of carrying value and sured by comparing the carrying amount of goodwill to its fair expected proceeds less direct costs to sell. value determined in a manner similar to a purchase price alloca- In addition, equity-accounted investments are assessed tion. Impairment of indeﬁnite-life intangible assets is determined for impairment whenever events or changes in circumstances by comparing their carrying values to their fair values. suggest a decline in value. Equity-accounted investments are writ- Intangible assets, including intellectual property, are ten down when there is evidence of an other-than-temporary re corded at their allocated cost at the date of acquisition of the decline in value. 82 Onex Corporation December 31, 2009 related operating company. Amortization is provided for intangi- ble assets with limited life, including intellectual property, on a straight-line basis over their estimated useful lives of up to 25 years. The weighted average initial period of amortization at Decem ber 31, 2009 was 10 years (2008 – 10 years). Deferred financing charges Deferred ﬁnancing charges consist of costs incurred by the oper - ating companies relating to the issuance of debt and are deferred and amortized over the term of the related debt or as the debt is retired, if earlier. These deferred ﬁnancing charges are recorded against the carrying value of the long-term debt, as described in note 10. 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 Losses and loss adjustment expenses reserves The average remaining service period of active employees Losses and loss adjustment expenses reserves relate to The covered by the signiﬁcant pension plans is 15 years (2008 – 15 years), Warranty Group and represent the estimated ultimate net cost of and for those active employees covered by the other signiﬁcant all reported and unreported losses incurred and unpaid through post-retirement beneﬁt plans, the average remaining service period December 31, 2009. The company does not discount losses and is 16 years (2008 – 18 years). loss adjustment expenses reserves. The reserves for unpaid losses and loss adjustment expenses are estimated using individual Income taxes case-basis valuations and statistical analyses. Those estimates are Income taxes are recorded using the asset and liability method of subject to the effects of trends in loss severity and frequency and income tax allocation. Under this method, assets and liabilities claims reporting patterns of the company’s third-party adminis- are recorded for the future income tax consequences attributable trators. Although considerable variability is inherent in such esti- to differences between the ﬁnancial statement carrying values of mates, management believes the reserves for losses and loss assets and liabilities and their respective income tax bases. These adjustment expenses are adequate. The estimates are continually future income tax assets and liabilities are recorded using sub- reviewed and adjusted as necessary as experience develops or stantively enacted income tax rates. The effect of a change in new information becomes known; such adjustments are included income tax rates on these future income tax assets or liabilities is in current operations. Warranty liabilities 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 Certain operating companies offer warranties on the sale of prod- Company records a valuation allowance when it is more likely ucts or services. A liability is recorded to provide for future war- than not that the future tax assets will not be realized prior to ranty costs based on management’s best estimate of probable their expiration. claims under these warranties. The accrual is based on the terms of the warranty, which vary by customer and product or service and historical experience. The appropriateness of the accrual is evaluated at each reporting period. Revenue recognition Electronics Manufacturing Services Revenue from the electronics manufacturing services segment consists primarily of product sales, where revenue is recognized Pension and non-pension post-retirement benefits upon shipment, when title passes to the customer, receivables are The operating companies accrue their obligations under employ- reasonably assured of collection and customer speciﬁed test crite- ee beneﬁt plans and related costs, net of plan assets. The costs ria have been met. Celestica has contractual arrangements with of deﬁned beneﬁt pensions and other post-retirement beneﬁts certain customers that require the customer to purchase certain earned by employees are accrued in the period incurred and are inventory that Celestica has acquired to fulﬁll forecasted manu- actuarially determined using the projected beneﬁt method pro- facturing demand provided by that customer. Celestica accounts rated on length of service, based on management’s best estimates for raw material returns to such customers as reductions in inven- of items, including expected plan investment performance, salary tory and does not record revenue on these transactions. escalation, retirement ages of employees and expected healthcare costs. Plan assets are valued at fair value for the purposes of cal- Aerostructures culating expected returns on those assets. Past service costs from A signiﬁcant portion of Spirit AeroSystems’ revenues is under long- plan amendments are deferred and amortized on a straight-line term volume-based pricing contracts requiring delivery of products basis over the average remaining service period of employees over several years. Revenue from these contracts is recognized under active at the date of amendment. the contract method of accounting. Revenues and proﬁts are recog- Actuarial gains (losses) arise from the difference be - nized on each contract in accordance with the percentage-of-com- tween the actual long-term rate of return on plan assets and the pletion method of accounting, using the units-of-delivery method. expected long-term rate of return on plan assets for a period or The contract method of accounting involves the use of various esti- from changes in actuarial assumptions used to determine the mating techniques to project costs at completion and includes esti- beneﬁt obligation. Actuarial gains (losses) exceeding 10% of the mates of recoveries asserted against the customer for changes in greater of the beneﬁt obligation or the fair market value of plan speciﬁcations. These estimates involve various assumptions and assets are amortized on a straight-line basis over the average projections relative to the outcome of future events, including the remaining service period of active employees. quantity and timing of product deliveries. Also included are assump- Deﬁned contribution plan accounting is applied to multi- tions relative to future labour performance and rates, and projec- employer deﬁned beneﬁt plans, for which the operating companies tions relative to material and overhead costs. These assumptions have insufﬁcient information to apply deﬁned beneﬁt accounting. involve various levels of expected performance improvements. Onex Corporation December 31, 2009 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 1. B A S I S O F P R E PA R AT I O N A N D The company has dealer obligor and administrator 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 ) obligor service contracts with the dealers or retailers to facilitate the sale of extended warranty contracts. Dealer obligor service The company periodically reevaluates its contract esti- contracts result in sales of extended warranty contracts in which mates and reﬂects changes in estimates in the current period, and the dealer/retailer is designated as the obligor. Administrator uses the cumulative catch-up method of accounting for revisions obligor ser vice contracts result in sales of extended warranty con- in estimates of total revenue, total costs or extent of progress on tracts in which the company is designated as the obligor. For both a contract. dealer obligor and administrator obligor, premium and/or con- For revenues not recognized under the contract method tract fee revenue is recognized over the contractual exposure of accounting, Spirit AeroSystems recognizes revenues from the period of the contracts. Unearned premiums and contract fees on sale of products at the point of passage of title, which is generally single-premium insurance related to warranty agreements are at the time of shipment. Revenues earned from providing main - calculated to result in premiums and contract fees being earned tenance services, including any contracted research and devel - over the period at risk. Factors are developed based on historical opment, are recognized when the service is complete or other analyses of claim payment patterns over the duration of the poli- contractual milestones are attained. cies in force. All other unearned premiums and contract fees are determined on a pro rata method. Healthcare Reinsurance premiums, commissions, losses and loss Revenue in the healthcare segment consists primarily of EMSC’s adjustment expenses are accounted for on bases consistent with service revenue related to its healthcare transportation and facility- those used in accounting for the original policies issued and the based physician services businesses, CDI’s patient service and terms of the reinsurance contracts. Premiums ceded to other healthcare provider management service revenue, Skilled Health - companies have been reported as a reduction of revenue. Expense care’s patient service revenue and Carestream Health’s product reimbursement received in connection with reinsurance ceded sales revenue. Service revenue is recognized at the time of service has been accounted for as a reduction of the related acquisition and is recorded net of provisions for contractual discounts and esti- costs. Reinsurance receivables and prepaid reinsurance premium mated uncompensated care. Revenue from product sales is recog- amounts are reported as assets. nized when the following criteria are met: pervasive evidence of an arrangement exists; delivery has occurred; the sales price is ﬁxed or Customer Support Services determinable; and collectibility is reasonably assured. The customer support services segment generates revenue primar - Financial Services ily through its customer contact management services by providing customer service and technical support to its clients’ customers Financial services segment revenue consists of revenue on The through phone, e-mail, online chat and mail. These services Warranty Group’s warranty contracts primarily in North America are generally charged by the minute or hour, per employee, per and Europe. The company records revenue and associated subscriber or user, or on a per item basis for each transaction unearned revenue on warranty contracts issued by North Ameri - processed, and revenue is recognized at the time services are per- can obligor companies at the net amount remitted by the selling formed. A portion of the revenue is often subject to performance dealer or at retailer dealer cost. Cancellations of these contracts standards. Revenue subject to monthly or longer performance are typically processed through the selling dealer or retailer, and standards is recognized when such performance standards are met. the company refunds only the unamortized balance of the dealer The company is reimbursed by clients for certain pass- cost. However, the company is primarily liable on these contracts through out-of-pocket expenses, consisting primarily of telecom- and must refund the full amount of customer retail price if the munication, postage and shipping costs. The reimbursement and selling dealer or retailer cannot or will not refund its portion. The related costs are reﬂected in the accompanying consolidated state- amount the company has historically been required to pay under ments of earnings as revenue and cost of services, respectively. such circumstances has been negligible. The potentially refundable excess of customer retail price over dealer cost at De cem ber 31, Metal Services 2009 was approximately US$1,700 (2008 – US$1,800). The metal services segment generates revenue primarily through The company records revenue and associated unearned raw materials procurement and slag processing, metal recovery revenue on warranty contracts issued by statutory insurance com- and metal sales. panies domiciled in Europe at the customer retail price. The Revenue from raw materials procurement represents dif ference between the customer retail price and dealer cost is rec- sales to third parties whereby the company either purchases scrap ognized as commission and deferred as a component of de ferred iron and steel from a supplier and then immediately sells the scrap acquisition costs. to a customer, with shipment made directly from the supplier to the 84 Onex Corporation December 31, 2009 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 third-party customer, or the company earns a contractually deter- The second type of plan is the MIP, which is described in mined fee for arranging scrap shipments for a customer directly note 24(g). The MIP provides that exercisable investment rights with a vendor. The company recognizes revenue from raw materials may be settled by issuance of the underlying shares or, in certain procurement sales when title and risk of loss pass to the customer. situations, by a cash payment for the value of the investment Revenue from slag processing, metal recovery and metal rights. Under the MIP, once the targets have been achieved for the sales is derived from the removal of slag from a furnace and pro- exercise of investment rights, a liability is recorded for the value of cessing it to separate metallic material from other slag compo- the investment rights by reference to the value of the underlying nents. Metallic material is generally returned to the customer and investments, with a corresponding expense recorded in the con- the non-metallic material is generally sold to third parties. The solidated statement of earnings. company recognizes revenue from slag processing and metal The third type of plan is the Director Deferred Share recovery services when it performs the services and revenue from Unit Plan. A Deferred Share Unit (“DSU”) entitles the holder to co-product sales when title and risk of loss pass to the customer. receive, upon redemption, a cash payment equivalent to the mar- Other ket value of a subordinate voting share at the redemption date. The Director DSU Plan enables Onex directors to apply directors’ Other segment revenues consist of product sales and services. fees earned to acquire DSUs based on the market value of Onex Product sales revenue is recognized upon shipment, when title shares at the time. Grants of DSUs may also be made to Onex passes to the customer. Service revenue is recorded at the time directors from time to time. The DSUs vest immediately, are the services are performed. redeemable only when the holder retires and must be redeemed Depending on the terms under which the operating within one year following the year of retirement. Additional units companies supply product, they may also be responsible for some are issued for any cash dividends paid on the subordinate voting or all of the repair or replacement costs of defective products. The shares. The Company has recorded a liability for the future settle- companies establish reserves for issues that are probable and ment of the DSUs by reference to the value of underlying subordi- estimable in amounts management believes are adequate to cover nate voting shares at the balance sheet date. On a quarterly basis, ultimate projected claim costs. The ﬁnal amounts determined to the liability is adjusted up or down for the change in the market be due related to these matters could differ signiﬁcantly from value of the underlying shares, with the corresponding amount recorded estimates. Research and development reﬂected in the consolidated statement of earnings. The fourth type of plan is the Management Deferred Share Unit Plan (“Management DSU Plan”). The Management Costs incurred on activities that relate to research and development DSU Plan enables Onex management to apply all or a portion of are expensed as incurred unless development costs meet certain their annual compensation earned to acquire DSUs based on the criteria for capitalization. During 2009, $234 (2008 – $219) in re - market value of Onex shares at the time. The DSUs vest immedi- search and development costs were expensed and $44 of develop- ately, are redeemable only when the holder retires and must be ment costs (2008 – $174) were capitalized. Capitalized development redeemed within one year following the year of retirement. costs relating to the aerostructures segment are included in deferred Additional units are issued for any cash dividends paid on the charges. The costs will be amortized over the anticipated number of subordinate voting shares. The Company has recorded a liability production units to which such costs relate. for the future settlement of the DSUs by reference to the value of Stock-based compensation the underlying subordinate voting shares at the balance sheet date. On a quarterly basis, the liability is adjusted up or down for The Company follows the fair value-based method of accounting, the change in the market value of the underlying shares, with the which is applied to all stock-based compensation payments. corresponding amount reﬂected in the consolidated statement of There are ﬁve types of stock-based compensation plans. earnings. To hedge the Company’s exposure to changes in the The ﬁrst is the Company’s Stock Option Plan (the “Plan”) described trading price of Onex shares associated with the Management in note 15(e), which provides that in certain situations the DSU Plan, the Company enters into forward agreements with a Company has the right, but not the obligation, to settle any exer- counterparty ﬁnancial institution for all grants under the Man - cisable option under the Plan by the payment of cash to the option age ment DSU Plan. As such, the change in value of the forward holder. The Company has recorded a liability for the potential agreements will be recorded to offset the amounts recorded as future settlement of the value of vested options at the balance stock-based compensation under the Management DSU Plan. The sheet date by reference to the value of Onex shares at that date. costs of those arrangements are borne entirely by participants in The liability is adjusted up or down for the change in the market the plan. Management DSUs are redeemable only for cash and no value of the underlying shares, with the corresponding amount shares or other securities of the Company will be issued on the reﬂected in the consolidated statement of earnings. exercise, redemption or other settlement thereof. Onex Corporation December 31, 2009 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. B A S I S O F P R E PA R AT I O N A N D During 2009, gains of $23 (2008 – losses of $14), which 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 ) exclude the impact of the debt investment in Tropicana Las Vegas, a consolidated operating company, were recorded in the consoli- The ﬁfth type of plan is employee stock option and dated statement of earnings related to ﬁnancial assets desig nated other stock-based compensation plans in place for employees as held-for-trading. The 2009 gains and 2008 losses were due to at various operating companies, under which, on payment of market conditions. the exercise price, stock of the particular operating company is issued. The Company records a compensation expense for such b) Available-for-sale options based on the fair value over the vesting period. Financial assets classiﬁed as available-for-sale are carried at fair Earnings per share value with changes in fair value recorded in other comprehensive earnings. Securities that are classiﬁed as available-for-sale and do Basic earnings per share is based on the weighted average number not have a quoted price in an active market are recorded at cost. of Subordinate Voting Shares outstanding during the year. Diluted Available-for-sale securities are written down to fair value through earnings per share is calculated using the treasury stock method. earnings whenever it is necessary to reﬂect an other-than-tempo- Use of estimates rary impairment. Gains and losses realized on disposal of avail- able-for-sale securities, which are calculated on an average cost The preparation of consolidated ﬁnancial statements in conformity basis, are recognized in earnings. Other-than-temporary impair- with Canadian generally accepted accounting principles requires ments are determined based on all relevant facts and circum- management of Onex and its operating companies to make esti- stances for each investment and recognized when appropriate. mates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at c) Held-to-maturity the date of the consolidated ﬁnancial statements and the reported Securities that have ﬁxed or determinable payments and a ﬁxed amounts of revenues and expenses during the reporting period. maturity date, which the Company intends and has the ability to This includes the liability for claims incurred but not yet reported hold to maturity, are classiﬁed as held-to-maturity and accounted for the Company’s healthcare and ﬁnancial services segments. for at amortized cost using the effective interest rate method. Actual results could differ from such estimates. Investments classiﬁed as held-to-maturity are written down to fair Comparative amounts value through earnings whenever it is necessary to reﬂect an other-than-temporary impairment. Other-than-temporary impair- Certain amounts presented in the prior year have been reclas- ments are determined based on all relevant facts and circum- siﬁed to conform to the presentation adopted in the current year. stances for each investment and recognized when appropriate. Financial assets and financial liabilities Derivatives and hedge accounting Financial assets and ﬁnancial liabilities are initially recognized at At the inception of a hedging relationship, the Company documents fair value and are subsequently accounted for according to their the relationship between the hedging instrument and the hedged classiﬁcation as described below. The classiﬁcation depends on item, its risk management objectives and its strategy for under - the purpose for which the ﬁnancial instruments were acquired taking the hedge. The Company also requires a documented assess- and their characteristics. Except in very limited circumstances, ment, both at hedge inception and on an ongoing basis, of whether the classiﬁcation is not changed subsequent to initial recognition. or not the derivatives that are used in the hedging transactions are Financial assets purchased and sold, where the contract requires highly effective in offsetting the changes attributable to the hedged the asset to be delivered within an established timeframe, are risks in the fair values or cash ﬂows of the hedged items. recognized on a trade-date basis. a) Held-for-trading Derivatives that are not designated as effective hedging relationships continue to be accounted for at fair value with changes in fair value being included in other income in the con- Financial assets and ﬁnancial liabilities that are purchased and solidated statement of earnings. incurred with the intention of generating proﬁts in the near term When derivatives are designated as hedges, the Com pany are classiﬁed as held-for-trading. Other instruments may be des- classiﬁes them either as: (i) hedges of the change in fair value of ignated as held-for-trading on initial recognition. These instru- recognized assets or liabilities or ﬁrm commitments (fair value ments are accounted for at fair value with changes in fair value hedges); (ii) hedges of the variability in highly probable future cash recognized in earnings. ﬂows attributable to a recognized asset or liability or a forecasted transaction (cash ﬂow hedges); or (iii) hedges of net investments in a foreign self-sustaining operation (net investment hedges). 86 Onex Corporation December 31, 2009 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) Fair value hedges Capital disclosures The Company’s fair value hedges principally consist of interest Onex considers the capital it manages to be the amounts it has in rate swaps that are used to protect against changes in the fair cash, cash equivalents and near-cash investments, the invest- value of ﬁxed-rate long-term ﬁnancial instruments due to move- ments made by it in the operating companies, Onex Real Estate ments in market interest rates. and Onex Credit Partners. Onex also manages the third-party cap- Changes in the fair value of derivatives that are desig- ital invested in the Onex Partners and ONCAP funds. nated and qualify as fair value hedging instruments are recorded in the statement of earnings, along with changes in the fair value Onex’ objectives in managing capital are to: of the assets, liabilities or group thereof that are attributable to (cid:129) preserve a ﬁnancially strong parent company with substantial the hedged risk. b) Cash flow hedges liquidity and no, or a limited amount of, debt so that it can have funds available to pursue new acquisitions and growth oppor- tunities as well as support the growth of its existing businesses. The Company is exposed to variability in future interest cash Onex does not generally have the ability to draw cash from ﬂows on non-trading assets and liabilities that bear interest at its operating companies. Accordingly, maintaining adequate variable rates or are expected to be reinvested in the future. li quid ity at the parent company is important; The effective portion of changes in the fair value of (cid:129) achieve an appropriate return on capital commensurate with derivatives that are designated and qualify as cash ﬂow hedges is the level of risk taken on; recognized in other comprehensive earnings. Any gain or loss in (cid:129) build the long-term value of its operating companies; fair value relating to the ineffective portion is recognized immedi- (cid:129) control the risk associated with capital invested in any particu- ately in the consolidated statement of earnings in other income. lar business or activity. All debt ﬁnancing is within the oper - Amounts accumulated in other comprehensive earnings ating companies and each operating company is required to are reclassiﬁed in the consolidated statement of earnings in the support its own debt. Onex does not normally guarantee the period in which the hedged item affects income. However, when debt of the operating companies and there are no cross-guar- the forecasted transaction that is hedged results in the recogni- antees of debt between the operating companies; and tion of a non-ﬁnancial asset or a non-ﬁnancial liability, the gains (cid:129) have appropriate levels of committed third-party capital avail- and losses previously deferred in other comprehensive earnings able to invest along with Onex’ capital. This enables Onex to are transferred from other comprehensive earnings and included respond quickly to opportunities and pursue acquisitions of in the initial measurement of the cost of the asset or liability. businesses it could not achieve using only its own capital. The When a hedging instrument expires or is sold, or when a management of third-party capital also provides management hedge no longer meets the criteria for hedge accounting, any fees to Onex and the ability to enhance Onex’ returns by earning cumulative gain or loss existing in other comprehensive earnings a carried interest on the proﬁts of third-party participants. at that time remains in other comprehensive earnings until the forecasted transaction is eventually recognized in the consolidated At December 31, 2009, Onex, the parent company, had approxi- statement of earnings. When a forecasted transaction is no longer mately $890 of cash and cash equivalents on hand and $148 of expected to occur, the cumulative gain or loss that was reported near-cash investments. Onex, the parent company, has a conserva- in other comprehensive earnings is immediately transferred to tive cash management policy that limits its cash investments to the consolidated statement of earnings. short-term high-rated money market products. At December 31, c) Net investment hedges 2009, Onex had access to US$3,887 of uncalled committed third- party capital for acquisitions through the Onex Partners funds and Hedges of net investments in foreign operations are accounted for ONCAP, which included US$3,389 of committed third-party capital in a manner similar to cash ﬂow hedges. Any gain or loss on the from Onex Partners III. hedging instrument relating to the effective portion of the hedge The strategy for risk management of capital has not is recognized in other comprehensive earnings. The gain or loss changed signiﬁcantly since December 31, 2008. relating to the ineffective portion is recognized immediately in the consolidated statement of earnings. Gains and losses accumu- lated in other comprehensive earnings are included in the consol- idated statement of earnings upon the reduction or disposal of the investment in the foreign operation. Onex Corporation December 31, 2009 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 2 . C O R P O R AT E I N V E S T M E N T S During 2009 and 2008 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 acquisitions are without recourse to Onex. 2 0 0 9 A C Q U I S I T I O N S Details of the 2009 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 Tropicana Las Vegas(a) EMSC(b) Other(c) Total $ 107 $ 12 – – 267 386 (31) – 355 (104) 1 6 36 46 3 92 (11) (1) 80 – $ – – 2 7 6 15 – – 15 – $ 108 18 38 53 276 493 (42) (1) 450 (104) $ 251 $ 80 $ 15 $ 346 a) In May 2008, Tropicana Entertainment, LLC and its Las Vegas subsidiaries (collectively, “Tropicana”) ﬁled for relief under During the year ended December 31, 2009, Onex, Onex Partners III and Onex management purchased investments in Chapter 11 of the U.S. Bankruptcy Code. After Tropicana’s ﬁling, Tropicana Las Vegas at a cash value of $107, of which Onex’ share Onex and Onex Partners III acquired a majority of the principal of is $22. Tropicana’s US$440 term loan secured against its Las Vegas prop- Onex, Onex Partners III and Onex management’s invest- erty. The debt was purchased at various discounts to par value ment in the common shares and the preferred rights offering, and ﬁnanced through a credit facility established for the pur - including the 2009 purchased investments as mentioned above, chases. Amounts then outstanding on the credit facility were totalled $225, of which Onex’ share is $49. Onex, Onex Part ners III repaid in May 2009 using the equity capital contributed by Onex and Onex management’s ownership on an as-converted basis at and Onex Partners III. December 31, 2009 is 71%, of which Onex’ share is 15%. In May 2009, the U.S. Bankruptcy Court conﬁrmed Tropi - In January 2010, Tropicana Las Vegas initiated a second cana’s plan of reorganization, which became effective July 1, 2009. rights offering for up to US$75 of additional capital. While not yet The new company now operates as Tropicana Las Vegas, Inc. (“Tropi- ﬁnalized, Onex and Onex Partners III expect to contribute their cana Las Vegas”). Onex began consolidating Tropicana Las Vegas as pro-rata share of the offering, plus additional amounts should of the effective date. Under the plan, the secured creditors received certain third-party investors not participate. Of the total Onex and 100% of the equity in the Las Vegas property, and Alex Yemeni djian, Onex Partners III investment, Onex would contribute its share former President of MGM Mirage and Onex’ partner, was appoint- based on its commitment level to Onex Partners III at the time ed the new Chief Executive Ofﬁcer of the property. In addition, as of the initial Tropicana Las Vegas investment. The amount of the part of the reorganization, creditors were given the opportunity to second rights offering will be ﬁnalized in the ﬁrst quarter of 2010. subscribe to a US$75 rights offering of preferred shares, with the funds to be used to renovate the Tropicana Las Vegas facilities. Upon emergence from bankruptcy, a valuation was performed that b) In December 2009, EMSC completed the acquisitions of Pin - nacle Consultants Mid-Atlantic and the management services assigned an enterprise value of US$230 to Tropicana Las Vegas, company of Pinnacle Anesthesia Consultants, P.A., anesthesiology exclusive of the rights offering. services providers in the United States. The total purchase price of As Onex had previously written down the value of the this acquisition was $79, which was ﬁnanced by EMSC. investment in Tropicana Las Vegas based on transaction values at In addition, EMSC completed two other acquisitions for the time, the investment was written up to fair value determined total consideration of $1. at the time of emergence from bankruptcy, and non-cash income of $92, including the effect of foreign exchange, has been included in other income. Onex’ share of the income is $21. 88 Onex Corporation December 31, 2009 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) Other includes acquisitions made by Skilled Healthcare and Caliber Collision Centers (“Caliber Collision”). party valuations of certain assets, which could result in further reﬁnement of the fair-value allocation of certain purchase prices and accounting adjustments could be recorded at that time. The The purchase prices of the acquisitions described above were results of operations for all acquired businesses are included in allocated to the net assets acquired based on their relative fair val- the consolidated statement of earnings and the consolidated ues at the dates of acquisition. In certain circumstances where statement of shareholders’ equity and comprehensive earnings of estimates have been made, the companies are obtaining third- the Company from their respective dates of acquisition. 2 0 0 8 A C Q U I S I T I O N S 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 a) In October 2008, Oncap II completed the acquisition of Caliber Collision. Caliber Collision, headquartered in Irvine, California, is The purchase prices of these acquisitions were allocated to the net assets acquired based on their relative fair values at the dates of a leading provider of auto collision repair services in Texas and acquisition. In certain circumstances where estimates had been Southern California. The Company’s investment of $67 was made made a further reﬁnement of the fair-value allocation of certain by Onex, ONCAP II and management for an initial controlling own- purchase prices and accounting adjustments was recorded subse- ership interest. Onex’ net investment in the acquisition was $30. quent to the acquisition. The results of operations for all acquired In the ﬁrst quarter of 2008, EnGlobe Corp. (“EnGlobe”) businesses are included in the consolidated statement of earnings acquired a ground remediation contractor with operating locations and the consolidated statement of shareholders’ equity and com- in the United Kingdom. In addition, during the year Mister Car prehensive earnings of the Company from their respective dates Wash purchased additional car wash locations in the United States. of acquisition. 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. 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 2008 earnings from discontinued operations consist of resid- ual proceeds received relating to the 2007 sales of ONCAP I’s oper- ating companies WIS International and CMC Electronics. The 2008 proceeds of $11 were recorded net of a tax provision of $2. Onex Corporation December 31, 2009 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 4 . I N V E N T O R I E S 5 . O T H E R C U R R E N T A S S E T S Inventories comprised the following: Other current assets comprised the following: As at December 31 Raw materials Work in progress Finished goods 2009 2008 As at December 31 2009 2008 $ 920 $ 1,067 Current portion of ceded claims recoverable 1,785 380 1,834 570 $ 3,085 $ 3,471 held by The Warranty Group (note 12) $ 275 $ 373 Current portion of prepaid premiums of The Warranty Group Current portion of deferred costs of The Warranty Group (note 8) Current future income taxes (note 14) Other 218 187 262 442 259 252 255 556 $ 1,384 $ 1,695 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 2009 Cost Accumulated Amortization $ 398 $ 1,500 3,832 456 – 399 2,028 – Net Cost 2008 Accumulated Amortization $ 398 $ 243 $ 1,101 1,804 456 1,546 4,459 414 – 350 2,246 – Net $ 243 1,196 2,213 414 $ 6,186 $ 2,427 $ 3,759 $ 6,662 $ 2,596 $ 4,066 The above amounts include property, plant and equipment under capital leases of $100 (2008 – $257) and related accumulated amor- a) In October 2008, the Company acquired an interest in RSI. RSI, headquartered in Anaheim, California, is a leading manufacturer of tization of $52 (2008 – $160). cabinetry for the residential marketplace in North America. The As at December 31, 2009, property, plant and equipment Company’s investment of $338 was in the form of convertible pre- included $49 (2008 – $48) of assets held-for-sale. ferred shares and was made by Onex, Onex Partners II and Onex management. The shares have a liquidation preference to the com- mon shares and earn a preferred 10% return. The preferred shares are convertible into 50% of the outstanding common shares of RSI. Onex’ net investment in the acquisition was $133, for an initial 20% equity ownership interest on an as-con verted 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 this U.S. dollar investment has been adjusted to account for the change in the foreign exchange rate since its acquisition. 7. I N V E S T M E N T S Investments comprised the following: As at December 31 2009 2008 Equity-accounted investment in RSI(a) $ 334 $ 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) Investment in Onex Credit Partners funds(h) Other 159 358 129 157 166 1,658 229 65 406 599 147 274 162 1,646 71 204 $ 3,255 $ 3,897 90 Onex Corporation December 31, 2009 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 b) In March 2007, the Company, together with GS Capital Partners, an afﬁliate of The Goldman Sachs Group, Inc., completed the share of Allison Transmission’s earnings, the carrying value of this U.S. dollar investment has been adjusted to account for the change acquisition of Hawker Beechcraft. The equity investment of in the foreign exchange rate since its acquisition. 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 d) In June 2004, Onex and Onex Partners made an initial $114 equity investment in ResCare. Onex’ portion of the investment was approx- acquisition was $238. In accordance with equity accounting, in imately $27. In accordance with equity accounting, in addition to addition to Onex and Onex Partners’ share of Hawker Beechcraft’s Onex and Onex Partners’ share of ResCare’s earnings, the carrying earnings, the carrying value of this U.S. dollar investment has value of this U.S. dollar investment has been adjusted to account for been adjusted to account for the change in the foreign exchange the change in the foreign exchange rate since its acquisition. rate since its acquisition. c) In August 2007, the Company, together with The Carlyle Group, completed the acquisition of Allison Transmission. The equity investment of US$1,525 was split equally between the Company and e) Other equity-accounted investments include Cine plex Enter - tainment (sold in 2009), Cypress Insurance Group (“Cy press”), Onex Credit Partners and certain real estate partnerships. The Carlyle Group. The Company’s investment of $805 was made by Onex, Onex Partners II, certain limited partners and management. f) EMSC insurance collateral consists primarily of government and investment grade securities and cash deposits with third par- Onex’ net investment in the acquisition was $250. In accordance ties, and supports its insurance program and reserves. with equity accounting, in addition to Onex and Onex Partners’ 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 2009 2008 Amortized Cost(1) Fair Value Amortized Cost(1) Fair Value $ 85 168 345 928 215 114 $ 1,855 (252) $ 1,603 $ 86 177 357 959 218 117 $ 1,914 (256) $ 1,658 $ 84 239 330 901 235 160 $ 1,949 (241) $ 1,708 $ 91 244 318 839 231 158 $ 1,881 (235) $ 1,646 (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 The amortized cost and fair value of ﬁxed-maturity securities securities traded in the public marketplace or analytically deter- owned by The Warranty Group at December 31, 2009, by contrac- mined values for securities not traded in the public marketplace. tual maturity, are shown below: Management believes that all unrecognized losses on individual securities are the result of normal price ﬂuctuations due to market conditions and are not an indication of other-than-tem- porary impairment. Management further believes it has the intent and ability to hold these securities until they fully recover in value. These determinations are based on an in-depth analysis of individ- ual securities. Years to maturity: One or less After one through five After five through ten After ten Mortgage-backed securities Other Amortized Cost Fair Value $ 252 921 334 19 215 114 $ 256 960 348 15 218 117 $ 1,855 $ 1,914 Onex Corporation December 31, 2009 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 7. I N V E S T M E N T S ( c o n t ’d ) 9. I N TA N G I B L E A S S E T S Intangible assets comprised the following: As at December 31 2009 2008 Intellectual property with limited life, net of accumulated amortization of $50 (2008 – $237) $ 301 $ 406 Intangible assets with limited life, net of accumulated amortization of $1,309 (2008 – $791) Intangible assets with indefinite life 1,528 257 2,008 341 $ 2,086 $ 2,755 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, software and contract rights obtained in the acquisition of certain facilities. Expected maturities differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. At December 31, 2009, certiﬁcates of deposit, money market funds and available-for-sale ﬁxed-maturity securities with a carrying value of $36 (2008 – $39) were on deposit with various insurance departments and regulators to satisfy various regula - tory requirements. h) Investments in Onex Credit Partners funds include a December 2009 investment of $137 (US$130) in an Onex Credit Partners unleveraged senior secured loan fund. The investments in Onex Credit Partners funds are classiﬁed as held-for-trading and are recorded at fair value. 8 . O T H E R L O N G - T E R M A S S E T S Other long-term assets comprised the following: As at December 31 2009 2008 Deferred development charges Future income taxes (note 14) Deferred pension (note 25) 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(a) Other $ 507 435 347 479 382 302 244 $ 569 501 370 748 423 272 242 $ 2,696 $ 3,125 a) Deferred costs of The Warranty Group consist of certain costs of acquiring warranty and credit business including commis- sions, 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, 2009, $489 (2008 – $524) of costs were deferred, of which $187 (2008 – $252) have been recorded as current (note 5). 92 Onex Corporation December 31, 2009 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 10 . L O N G - T E R M D E B T O F O P E R AT I N G C O M PA N I E S , W I T H O U T R E C O U R S E T O O N E X Long-term debt of operating companies, without recourse to Onex, is as follows: As at December 31 Carestream Health(a) Senior secured first lien term loan due 2013 Senior secured second lien term loan due 2013 Other Celestica(b) 7.875% senior subordinated notes due 2011 7.625% senior subordinated notes due 2013 Center for Diagnostic Imaging(c) Revolving credit facility and term loan due 2009 and 2010 Revolving credit facility and term loan due 2013 Other Cosmetic Essence(d) Revolving credit facility and term loans due 2013 and 2014 Subordinated secured notes due 2014 Emergency Medical Services(e) Revolving credit facility and term loan due 2011 and 2012 Senior subordinated secured notes due 2015 Other Husky(f) Sitel Worldwide(g) Skilled Healthcare(h) Spirit AeroSystems(i) 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 2012 Senior subordinated notes due 2014 Other Revolving credit facility and term loan due 2012 and 2013 Senior subordinated notes due 2017 Other The Warranty Group(j) Term loan due 2012 Tube City IMS(k) Revolving borrowings and senior secured term loan due 2013 and 2014 Senior subordinated notes due 2015 Subordinated notes due 2020 Other ONCAP II companies (l) Revolving credit facility and term loans due 2012 to 2014 Subordinated notes due 2012 and 2014 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, without recourse to Onex 2009 $ 1,359 462 15 1,836 2008 $ 1,687 536 9 2,232 – 234 234 – 47 3 50 – – – 210 263 1 474 414 639 92 – 731 337 136 7 480 601 309 18 928 204 173 234 62 2 471 292 105 5 402 12 624 276 900 68 – 6 74 138 107 245 246 304 2 552 494 776 93 1 870 404 158 8 570 704 – 11 715 239 259 274 16 – 549 373 107 4 484 136 (197) 6,039 (109) 5,930 (425) (247) 7,813 (138) 7,675 (532) Consolidated long-term debt of operating companies, without recourse to Onex $ 5,505 $ 7,143 Onex Corporation December 31, 2009 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 10 . L O N G - T E R M D E B T O F O P E R AT I N G C O M PA N I E S , ratios. Based on the required minimum ﬁnancial ratios, at Decem - 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 ) ber 31, 2009, Celestica had full access to its US$200 of available debt incurrence. Celestica also has uncommitted bank overdraft Onex does not guarantee the debt of its operating companies, nor facilities available for operating requirements that total US$65 at are there any cross-guarantees between operating companies. December 31, 2009. The ﬁnancing arrangements for each operating com pany In March 2009, Celestica paid US$150, excluding accrued typically contain certain restrictive covenants, which may include interest, to repurchase a portion of its notes due in 2011, with prin- limitations or prohibitions on additional indebtedness, payment of cipal amounts of US$150 at maturity and a carrying value of cash dividends, redemption of capital, capital spending, making of US$159. In November 2009, Celestica paid US$346, excluding investments and acquisitions and sale of assets. In addition, certain accrued interest, to repurchase the remaining 2011 notes, with ﬁnancial covenants must be met by the operating companies that principal amounts of US$339 at maturity and a carrying value of have outstanding debt. US$356. Celestica recognized a gain of US$9 in the ﬁrst quarter of Future changes in business conditions of an operating 2009 and a gain of US$10 in the fourth quarter of 2009 on the repur- company may result in non-compliance with certain covenants chase of the 2011 notes. Celestica also terminated interest rate by the company. No adjustments to the carrying amount or clas- swap agreements in the amount of US$500 related to the 2011 siﬁcation of assets or liabilities of any operating company have notes. In connection with the termination of the swap agreements, been made in the consolidated ﬁnancial statements with respect Celestica discontinued fair value hedge accounting on the notes to any possible non-compliance. due in 2011 and recorded an expense of US$16. The net gain of US$3 is recorded against interest expense in the audited annual a) Carestream Health consolidated statement of earnings. In April 2007 Carestream Health entered into senior secured ﬁrst Celestica’s senior subordinated notes due 2013 have an and second lien term loans with an aggregate principal amount of aggregate principal amount at December 31, 2009 of US$223 US$1,510 and US$440, respectively. Additionally, as part of the ﬁrst (2008 – US$223) and a ﬁxed interest rate of 7.625%. In Janu ary lien term loan, Carestream Health obtained a senior revolving 2010, Celestica announced its intention to redeem the 2013 notes, credit facility with available funds of up to US$150. The ﬁrst and as described in note 27(a); as such, the 2013 notes are classiﬁed second lien term loans bear interest at LIBOR plus a margin of as current. 2.00% and 5.25%, respectively, or at a base rate plus a margin of 1.00% and 4.25%, respectively. c) Center for Diagnostic Imaging The ﬁrst lien term loan matures in April 2013, with quar- In July 2009, CDI entered into a new credit agreement. The new terly instalment payments of US$18. The second lien term loan agreement consists of a US$55 term loan and a US$15 revolving matures in October 2013, with the entire balance due upon matu- credit facility. The term loan and revolving credit facility bear rity. The senior revolving credit facility, with nil outstanding at interest at LIBOR, plus a margin of 4.5%, and mature in July 2013. December 31, 2008 and 2009, matures in April 2012. The term loan requires quarterly principal repayments beginning At December 31, 2009, US$1,293 and US$440 (2008 – in March 2010. The proceeds of the term loan were used to repay US$1,385 and US$440) were outstanding under the senior secured and terminate the previous credit agreement. At December 31, ﬁrst and second lien term loans, respectively. 2009, US$45 was outstanding under the term loan and nil was Substantially all of Carestream Health’s assets are pledged outstanding under the revolving credit facility. as collateral under the term loans. CDI has entered into an interest rate swap agreement In connection with the term loans, Carestream Health that effectively ﬁxes the interest rate on a portion of the bor - has four interest rate swap agreements that swap the variable rate rowings under the credit agreement. The interest rate swap agree- for a ﬁxed rate ranging from 2.8% to 4.0%. The agreements, with ment has a notional amount of US$45 and expires in March 2010. notional amounts totalling US$725, expire in 2010. In November 2009, CDI entered into a two-year interest rate cap b) Celestica agreement in order to hedge a portion of its exposure to ﬂuctua- tions in three-month LIBOR rates above 3.5%. The cap agreement In April 2009, Celestica renewed its revolving credit facility on begins in April 2010 and terminates in September 2012. generally similar terms and conditions and reduced its size from US$300 to US$200. This credit facility matures in April 2011. No d) Cosmetic Essence amounts were drawn on the facility at December 31, 2009. At December 31, 2008, CEI was in violation of certain of its ﬁnancial The facility has restrictive covenants relating to debt convenants under its credit agreement. As a result, all amounts incurrence and the sale of assets and also contains ﬁnancial outstanding under the credit agreement were classiﬁed as current. covenants that require Celestica to maintain certain ﬁnancial The debt under the credit agreement was without recourse to Onex. At December 31, 2008, US$80 and US$34 were outstanding on the 94 Onex Corporation December 31, 2009 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 term loan and revolving line of credit, respectively. At December 31, g) Sitel Worldwide 2008, CEI also had a promissory note outstanding in the amount of In December 2008, Sitel Worldwide amended its credit facility. US$88, of which US$80 was held by the Company. The amendment included increases to the applicable interest In May 2009, the Company ceased to have an ownership rates and changes to the ﬁnancial covenants. interest in CEI, as described in note 19(b). Sitel Worldwide’s credit facility, as amended, consists of e) Emergency Medical Services a US$675 term loan, maturing in January 2014, and a US$85 revolving credit facility maturing in January 2013. As a result of In February 2005, EMSC issued US$250 of senior subordinated repayments and repurchases made in 2007 and 2008, no quarterly notes and executed a US$450 credit agreement. The senior subor- payments are due under the term loan until maturity. The term dinated notes have a ﬁxed interest rate of 10%, payable semi- loan and revolving credit facility bear interest at a rate of LIBOR annually, and mature in February 2015. plus a margin of up to 5.5% or prime plus a margin of 4.5%. Bor - The credit agreement consists of a US$350 senior secured rowings under the facility are secured by substantially all of Sitel term loan and a US$100 senior secured revolving credit facility. The Worldwide’s assets. senior secured term loan matures in February 2012 and requires At December 31, 2009, US$592 and US$16 (2008 – US$587 principal repayments of US$2 annually. The revolving facility and US$50) were outstanding under the term loan and revolving requires the principal to be repaid at maturity in February 2011. credit facility, respectively. Interest is determined by reference to a leverage ratio and can Sitel Worldwide is required under the terms of the facil - range from prime or LIBOR plus 1.0% to 2.0%. As at December 31, ity to maintain certain ﬁnancial ratio covenants. The facility also 2009, US$200 and nil (2008 – US$202 and nil) were outstanding contains certain additional requirements, including limitations or under the senior secured term loan and the senior secured re - prohibitions on additional indebtedness, payment of cash divi- volving credit facility, respectively. dends, redemption of stock, capital spending, investments, acqui- Substantially all of EMSC’s assets are pledged as collat- sitions and asset sales. eral under the credit agreement. f) Husky Included in other long-term debt at December 31, 2009 is US$52 (2008 – US$46) of mandatorily redeemable Class B pre- ferred shares, of which US$34 (2008 – US$30) was held by Onex. In December 2007, Husky entered into a US$520 committed, The mandatorily redeemable Class B preferred shares accrue secured credit agreement comprised of a US$410 term loan and annual dividends at a rate of 12% and are redeemable at the a US$110 revolving credit facility. Borrowings under the credit option of the holder on or before July 2014. Also included in other agreement bear interest at LIBOR plus a margin of 3.00% or 3.25% long-term debt at December 31, 2009 is US$36 (2008 – US$30) of as determined by a consolidated leverage ratio. The term loan has mandatorily redeemable Class C preferred shares, of which US$27 mandatory principal repayments of US$21 in 2010 and 2011 with (2008 – US$23) is held by Onex. The mandatorily redeemable the outstanding principal balance due in 2012. Additionally, 25% Class C preferred shares accrue annual dividends at a rate of 16% or 50% of excess cash ﬂows (as deﬁned in the credit agreement and are redeemable at the option of the holder on or before May and determined by a consolidated leverage ratio), if any, must be 2014. Outstanding amounts related to preferred shares at Decem - used to prepay the loan annually. As a result, in 2010, Husky will ber 31, 2009 include accrued dividends. be required to repay an additional US$9 of its term loan. In 2008, Husky entered into interest rate swap agreements that effectively h) Skilled Healthcare ﬁxed the interest rate on a portion of the borrowings under the In December 2005, Skilled Healthcare issued unsecured senior credit agreement. Outstanding agreements, with notional amounts subordinated notes in the amount of US$200 due in 2014. In June of US$339, expire in 2011 and 2012. 2007, using proceeds from its May 2007 initial public offering, The revolving credit facility is available to Husky and its Skilled Healthcare redeemed US$70 of the notes. The notes bear key subsidiaries in Canada. At December 31, 2009, there were interest at a rate of 11.0% per annum and are redeemable at the US$7 in letters of credit issued under the credit facility, leaving option of the company at various premiums above face value US$103 in available borrowing capacity. The revolving credit facil- beginning in 2009. At December 31, 2009, US$130 (2008 – US$129) ity matures in December 2012. was outstanding under the notes. At December 31, 2009, US$394 and nil (2008 – US$406 Skilled Healthcare’s ﬁrst lien credit agreement consists and nil) were outstanding under the term loan and revolving of a US$260 term loan and a US$135 revolving loan. The term loan credit facility, respectively. is due in 2012, with annual principal instalments of US$3. In April The credit agreement has restrictions on new debt 2009, Skilled Healthcare amended its credit agreement to extend incurrence, the sale of assets, capital expenditures, and the main- the maturity of the revolving loan commitment from June 15, 2010 tenance of certain ﬁnancial ratios. Substantially all of Husky’s to June 15, 2012, while maintaining existing interest rates. The assets are pledged as collateral under the credit agreement. Onex Corporation December 31, 2009 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 10 . L O N G - T E R M D E B T O F O P E R AT I N G C O M PA N I E S , 7.875% to maturity. The net proceeds were used to repay US$200 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 ) in borrowings under its existing revolving credit facility without any reduction of the lenders’ commitment, with the remainder revolving line of credit has a capacity of US$135 up to June 15, to be used for general corporate purposes. Interest is payable 2010, reducing to US$124 until maturity. The term loan bears semi-annually beginning in April 2010. The senior notes may be interest at the prime rate plus an initial margin of 1.25% or LIBOR redeemed prior to maturity at various premiums above face value. plus an initial margin of 2.00%. The revolving loan bears interest Additionally, if a change in control of Spirit AeroSystems occurs, at the prime rate plus an initial margin of 1.75% or LIBOR plus an the holders of the senior notes have the right to require Spirit initial margin of 2.75%. The margin can be reduced by as much as AeroSystems to repurchase the senior notes at a price of 101% plus 0.50% on the term loan, depending on the company’s credit rat- accrued and unpaid interest. At December 31, 2009, the senior ing. At December 31, 2009, US$248 and US$72 (2008 – US$251 and notes, with US$300 outstanding, were recorded net of the unamor- US$81) were outstanding under the term loan and revolving loan, tized discount of US$6. The senior notes are subordinate to the respectively. The ﬁrst lien credit agreement is secured by the real senior secured credit facility. property of Skilled Healthcare. In December 2009, Skilled Healthcare entered into two j) The Warranty Group interest rate swap agreements with total notional amounts of In November 2006, The Warranty Group entered into a US$225 US$245 expiring in December 2010. Under the interest rate swap credit agreement consisting of a US$200 term loan and up to agreements, the company swaps the variable portion (LIBOR) of US$25 of revolving credit and swing line loans. The amounts the rate with a ﬁxed rate of 0.6%. i) Spirit AeroSystems outstanding on the credit agreement bear interest at LIBOR plus a margin based on The Warranty Group’s credit rating. The term loan requires annual payments of US$2, with the balance due in In June 2005, Spirit AeroSystems executed a US$875 credit agreement 2012. Revolving credit and swing line loans, if outstanding, are due that consists of a US$700 senior secured term loan and a US$175 2011. At December 31, 2009, US$194 and nil (2008 – US$196 and senior secured revolving credit facility. In November 2006, Spirit nil) were outstanding on the term loan and revolving and swing AeroSystems used a portion of the proceeds from its initial public loans, respectively. offering to permanently repay US$100 of the senior secured term The debt is subject to various terms and conditions, loan and amended its credit agreement. In March 2008, Spirit including The Warranty Group maintaining a minimum credit AeroSystems amended the agreement to increase the amount avail- rating and certain ﬁnancial ratios relating to minimum capitaliza- able under the senior revolving credit facility to US$650 and add a tion levels. provision allowing additional indebtedness of up to US$300. In June 2009, Spirit AeroSystems further amended its credit agreement to k) Tube City IMS extend the maturity of the revolving credit facility from June 2010 to In January 2007 Tube City IMS entered into a senior secured asset- June 2012 as well as increase the size of the facility to US$729 from based revolving credit facility with an aggregate principal amount US$650 through June 2010 before stepping down to US$409 through of up to US$165, a senior secured term loan credit facility with an June 2012. At December 31, 2009, US$572 and nil (2008 – US$578 and aggregate principal amount of US$165 and a senior secured syn- nil) were outstanding under the term loan and revolving facility, thetic letter of credit facility of US$20. The credit facilities bear respectively. The senior secured term loan requires quarterly princi- interest at a base rate plus a margin of up to 2.50%. pal instalments of US$1, with the balance due in four equal quar terly The senior secured asset-based revolving credit facility instalments of US$139 beginning Decem ber 2012. The revolving is available through to January 2013. The maximum availability credit facility requires the principal to be repaid at maturity. under the revolving facility is based on speciﬁed percentages of The borrowings under the credit agreement bear inter- eligible accounts receivable and inventory. As at December 31, est based on LIBOR or a base rate plus an interest rate margin of 2009, US$4 (2008 – US$46) was outstanding under the revolving up to 4.0%, payable quarterly. In connection with the term loan, facility. The obligations under the senior secured asset-based Spirit AeroSystems entered into interest rate swap agreements on lending facility are secured on a ﬁrst-priority lien basis by Tube US$500 of the term loan. The agreements, which mature in 2010 City IMS’ accounts receivable, inventory and cash proceeds there- and 2011, swap the ﬂoating interest rate with a ﬁxed interest rate from and on a second-priority lien basis by substantially all of that ranges between 3.2% and 4.4%. Tube City IMS’ other property and assets, subject to certain Substantially all of Spirit AeroSystems’ assets are pledged exceptions and permitted liens. as collateral under the credit agreement. The senior secured term loan credit facility and senior In September 2009, Spirit AeroSystems completed an secured synthetic letter of credit facility are repayable quarterly, offering of US$300 in aggregate principal amount of 7.5% senior with annual payments of US$2, and mature in January 2014. The notes due in 2017. The offering price was 97.804% of par to yield facilities require Tube City IMS to prepay outstanding amounts 96 Onex Corporation December 31, 2009 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 under certain conditions. At December 31, 2009, US$160 (2008 – Certain ONCAP II investee companies have entered into US$162) was outstanding under the term loan and there were interest rate swap agreements to ﬁx a portion of their interest ex - US$13 (2008 – US$17) of letters of credit outstanding relating to pense. The total notional amount of these swap agreements at De - the synthetic letter of credit facility. The obligations under the cember 31, 2009 was $205, with portions expiring through to 2012. senior secured term loan facility and senior secured synthetic The senior debt is generally secured by substantially all letter of credit facility are secured on a ﬁrst-priority lien basis by of the assets of the respective company. all of Tube City IMS’ property and assets (other than accounts receivable and inventory and cash proceeds therefrom) and on a m) Other second-priority lien basis on all of Tube City IMS’ accounts receiv- Other long-term debt at December 31, 2008 included US$97 of able and inventory and cash proceeds therefrom, subject to cer- amounts outstanding on a US$125 line of credit held by an entity tain exceptions and permitted liens. controlled by Onex Partners III. Amounts borrowed on the line of In connection with the senior secured term loan credit credit were used to purchase investment securities in Tropicana facility, Tube City IMS entered into rate swap agreements that Las Vegas. The line of credit was repaid in 2009. In addition, swap the variable rate portion of the interest for a ﬁxed rate of included in other long-term debt at December 31, 2009 was $10 4.7% through March 2010 and 2.3% thereafter. The agreements (2008 – $16) outstanding relating to Radian. have total notional amounts of US$120 to March 2010, reducing to US$80 until March 2012. The annual minimum repayment requirements for the next In addition, Tube City IMS has US$225 of unsecured ﬁve years on consolidated long-term debt are as follows: senior subordinated notes outstanding, issued in 2007. The notes bear interest at a rate of 9.75% and mature in February 2015. The notes are redeemable at the option of the company at various pre- miums above face value, beginning in 2011. At December 31, 2009, notes of US$223 (2008 – US$225) were outstanding. In December 2008 and the ﬁrst quarter of 2009, Tube 2010 2011 2012 2013 2014 City IMS issued subordinated notes in the amount of US$51, of Thereafter which US$49 are held by the Company. The notes are due in 2020 and bear interest at a rate of 15% in the 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 pre- pay the notes, in whole or in part, without premium penalty or discount, at any time. At December 31, 2009 US$59 (2008 – US$13) was outstanding, including accrued interest, of which US$56 (2008 – US$12) was held by the Company. l) ONCAP II companies ONCAP II’s investee companies consist of EnGlobe, CSI, CiCi’s Pizza, Mister Car Wash and Caliber Collision. Each has debt that is included in the Company’s consolidated ﬁnancial statements. There are separate arrangements for each of the investee compa- nies with no cross-guarantees between the companies or by Onex. Under the terms of the various credit agreements, com- bined term borrowings of $272 are outstanding and combined For the year: 2010 2011 2012 2013 2014 Thereafter Total future minimum lease payments Less: imputed interest 11. L E A S E C O M M I T M E N T S Future minimum lease payments are as follows: Capital Leases Operating Leases $ 425 306 1,220 2,247 1,019 822 $ 6,039 242 182 141 104 76 363 $ 1,108 $ 25 $ 16 10 7 3 9 $ 70 (8) 62 (21) revolving credit facilities of $20 are outstanding. The available facili- Balance of obligations under capital ties bear interest at various rates based on a base ﬂoating rate plus a leases, without recourse to Onex margin. At December 31, 2009, interest rates ranged from 2.3% to Less: current portion 7.5% on borrowings under the revolving credit and term facilities. Long-term obligations under capital The term loans have quarterly repayments and are due between leases, without recourse to Onex $ 41 2012 and 2014. The companies also have subordinated notes of $105, due between 2012 and 2014, that bear interest at rates ranging from Substantially all of the lease commitments relate to the operating 7.5% to 15.0%, of which the Company owns $69. companies. Operating leases primarily relate to premises. Onex Corporation December 31, 2009 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 12 . W A R R A N T Y R E S E R V E S A N D U N E A R N E D P R E M I U M S The following describes the reserves and unearned premiums liabilities of The Warranty Group, which was acquired in November 2006. Reserves The following table provides a reconciliation of The Warranty Group’s beginning and ending reserves for losses and loss adjustment expenses (“LAE”), net of ceded claims recoverable for the year ended December 31, 2009: Current portion of reserves, December 31, 2008 Long-term portion of reserves, December 31, 2008 Gross reserve for losses and LAE, December 31, 2008(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, 2008 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, 2009 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, 2009(2) Current portion of reserves, December 31, 2009 Property and Casualty(a) Warranty(b) Total Reserves $ 334 $ 253 $ 587 748 – 748 $ 1,082 $ 253 $ 1,335 $ $ (334) (748) – – – – – 239 477 716 (239) (39) – 214 (373) (748) 214 $ 615 $ 615 (627) (20) (627) (20) $ 182 $ 182 36 2 220 (186) 275 479 936 (425) Long-term portion of reserves, December 31, 2009 $ 477 $ 34 $ 511 (1) Ceded claims recoverable represent the portion of reserves ceded to third-party reinsurers. (2) Reserves for losses and LAE represent the estimated ultimate net cost of all reported and unreported losses incurred and unpaid through December 31, as described in note 1. a) Property and casualty reserves represent estimated future losses on property and casualty policies. The property and casualty b) Warranty reserves represent estimated future losses on warranty policies written by The Warranty Group. Due to the nature of the reserves and the corresponding ceded claims recoverable were warranty reserves, substantially all of the ceded claims recoverable acquired on acquisition of The Warranty Group. The property and and warranty reserves are of a current nature. casualty business is being run off and new business is not being booked. The reserves are 100% ceded to third-party reinsurers. Unearned premiums A subsidiary of Aon Corporation, the former parent of The War ranty at December 31. Group, was the primary reinsurer for 44% of the non-warranty property and casualty reserves and provided guarantees on all of those reserves at December 31, 2008. In August 2009, the subsidiary Unearned premiums was sold to National Indemnity Company. As part of the sale, Current portion of unearned premiums 2009 2008 $ 2,508 (985) $ 2,924 (1,111) The following table provides details of the unearned premiums as National Indemnity Company became the primary reinsurer for 42% of the non-warranty property and casualty reserves and pro- vided guarantees on all of those reserves at December 31, 2009. Long-term portion of unearned premiums $ 1,523 $ 1,813 98 Onex Corporation December 31, 2009 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 13 . O T H E R L I A B I L I T I E S Other liabilities comprised the following: As at December 31 Reserves(a) Boeing advance(b) Deferred revenue and other deferred items Pension and non-pension post-retirement benefits (note 25) Stock-based compensation Other(c) 2009 2008 $ 197 724 358 206 138 332 $ 239 1,077 377 211 52 331 b) Pursuant to Spirit AeroSystems’ 787 aircraft long-term supply agreement with Boeing, Boeing made advance payments to Spirit Aero Systems. As at December 31, 2009, advance payments of US$1,111 (2008 – US$1,095) had been made, of which US$187 has been recognized as revenue and US$924 will be settled against future sales of Spirit AeroSystems’ 787 aircraft units to Boeing. US$235 of the payments has been recorded as a current liability. c) Other includes the long-term portion of acquisition and re - structuring accruals, amounts for liabilities arising from indem- niﬁcations, mark-to-market valuations of hedge contracts and $ 1,955 $ 2,287 warranty provisions. a) Reserves consist primarily of US$144 (2008 – US$139) estab- lished by EMSC for automobile, workers compensation, general liability and professional liability. This includes the use of an off- shore captive insurance program. 14 . I N C O M E TA X E S The reconciliation of statutory income tax rates to the Company’s eﬀective tax rate is as follows: Year ended December 31 Income tax recovery (provision) at statutory rates Change related to: Increase in valuation allowance Amortization of non-deductible items Income tax rate differential of operating investments Book to tax differences on property, plant and equipment and intangibles Non-taxable gains Foreign exchange Other, including permanent differences Provision for income taxes Classified as: Current Future Provision for income taxes 2009 $ (213) 2008 $ 356 (10) (88) 96 (36) 239 (36) (124) (116) (39) (361) (85) (58) 158 (107) $ (172) $ (252) $ (276) 104 $ (172) $ (318) 66 $ (252) Onex Corporation December 31, 2009 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 14 . I N C O M E TA X E S ( c o n t ’d ) The Company’s future income tax assets and liabilities comprised the following: As at December 31 Future income tax assets(1): Net operating losses carried forward Net capital losses carried forward Accounting provisions not currently deductible Property, plant and equipment, intangible and other assets Share issue costs of operating investments Acquisition and integration costs Pension and non-pension post-retirement benefits Deferred revenue Scientific research and development Other Less valuation allowance(2) Future income tax liabilities(1): Property, plant and equipment, intangible and other assets Pension and non-pension post-retirement benefits Gains on sales of operating investments Foreign exchange 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 2009 2008 $ 1,071 $ 1,254 47 460 201 (2) 19 14 96 43 124 (1,376) 697 (496) (98) (571) (141) 3 (1,303) $ (606) $ 262 435 (66) (1,237) $ (606) 39 463 217 (3) 15 8 95 42 64 (1,438) 756 (600) (81) (684) (138) 24 (1,479) $ (723) $ 255 501 (29) (1,450) $ (723) (1) Income tax assets and liabilities relating to the same tax jurisdiction have been recorded on a gross basis in the consolidated balance sheets. (2) Future tax assets are recorded based on their expected future tax value. The valuation allowance claimed against the future tax assets primarily relates to non-capital losses of Celestica and Sitel Worldwide. A valuation allowance on non-capital losses is recorded where it is more likely than not that the non-capital losses will expire prior to utilization. At December 31, 2009, Onex and its investment-holding compa- amount of $3,240, of which $920 had no expiry, $703 were available nies had $299 of non-capital loss carryforwards and $283 of capi- to reduce future income taxes between 2010 and 2014, inclusive, and tal loss carryforwards. $1,617 were available with expiration dates of 2015 through 2029. At December 31, 2009, certain operating companies in Cash taxes paid during the year amounted to $268 Canada and the United States had non-capital loss carryforwards (2008 – $313). available to reduce future income taxes of those companies in the 100 Onex Corporation December 31, 2009 15 . S H A R E C A P I TA L a) The authorized share capital of the Company consists of: i) 100,000 Multiple Voting Shares, which entitle their holders to elect 60% of the Company’s Directors and carry such number of votes in the aggregate as represents 60% of the aggregate votes attached to all shares of the Company carrying voting rights. The Multiple Voting Shares have no entitlement to a distribution on winding up or dissolution other than the payment of their 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 other wise will cease to have any general voting rights. The Sub or - dinate Voting Shares would then carry 100% of the general voting rights and be entitled to elect 80% of the Directors. 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 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 2009, under the Dividend Reinvestment Plan, the Com - pany issued 3,060 (2008 – 6,279) Subordinate Voting Shares at a total value of less than $1 (2008 – less than $1). In 2009 and 2008, no Subordinate Voting Shares were issued upon the exercise of stock options. Onex renewed its Normal Course Issuer Bid in April 2009 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 9.3 million shares. The Company repurchased and cancelled under Normal Course Issuer Bids 1,784,600 (2008 – 3,481,381) of its Subordinate Voting Shares at a cash cost of $41 during 2009 (2008 – $101). The excess of the purchase cost of these shares over the average paid-in amount was $34 (2008 – $87), which was charged to retained earnings. As at December 31, 2009, the Company had the capacity under the current Normal Course Issuer Bid to purchase approximately 7.5 million shares. c) At December 31, 2009, the issued and outstanding share capital consisted of 100,000 (2008 – 100,000) Multiple Voting Shares, 120,317,445 (2008 – 122,098,985) Subordinate Voting Shares and 176,078 (2008 – 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, 2007 Granted Additional units issued in lieu of compensation and cash dividends Outstanding at December 31, 2008 Granted Additional units issued in lieu of compensation and cash dividends Outstanding at December 31, 2009 Director DSU Plan Management DSU Plan Number of DSUs Weighted Average Price Number of DSUs Weighted Average Price 225,914 45,000 26,443 297,357 40,000 31,662 369,019 $ 32.54 $ 24.30 $ 22.98 $ 20.01 – – 202,902 202,902 – 69,978 272,880 $ – $ 30.96 $ – $ 18.62 Onex Corporation December 31, 2009 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 15 . S H A R E C A P I TA L ( c o n t ’d ) e) The Company has a Stock Option Plan (the “Plan”) under which options and/or share appreciation rights for a term not exceeding its exercise price. Upon receipt of such a 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. 10 years may be granted to Directors, ofﬁcers and employees for Details of options outstanding are as follows: 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 Number of Options Weighted Average Exercise Price share appreciation rights may be exercised unless the average Outstanding at December 31, 2007 12,777,500 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 - Granted Surrendered Expired 702,500 (538,550) (10,000) ber 31, 2009, 15,612,000 (2008 – 15,612,000) Subordinate Voting Outstanding at December 31, 2008 12,931,450 Shares were reserved for issuance under the Plan, against which options representing 13,450,050 (2008 – 12,931,450) shares were outstanding. The Plan provides that the number of options issued Granted Surrendered Expired 727,500 (197,900) (11,000) $ 18.07 $ 15.95 $ 14.97 $ 34.00 $ 18.07 $ 23.35 $ 20.20 $ 20.76 to certain individuals in aggregate may not exceed 10% of the Outstanding at December 31, 2009 13,450,050 $ 18.33 shares outstanding at the time the options are issued. Options granted vest at a rate of 20% per year from the During 2009, total cash consideration paid on options surren- date of grant, with the exception of the 774,500 remaining options dered was $1 (2008 – $9). This amount represents the difference granted in December 2007, which vest at a rate of 16.7% per year. between the market value of the Subordinate Voting Shares at the When an option is exercised, the employee has the right to request time of surrender and the exercise price, both as determined that the Company repurchase the option for an amount equal to the under the Plan. difference between the fair value of the stock under the option and Options outstanding at December 31, 2009 consisted of the following: Number of Outstanding Options Exercise Price Number of Exercisable Options Hurdle Price Remaining Life (years) 607,500 505,000 7,260,000 2,433,550 135,000 285,000 20,000 774,500 702,000 727,500 13,450,050 $ 20.50 $ 14.90 $ 15.87 $ 18.18 $ 19.25 $ 29.22 $ 33.40 $ 35.20 $ 15.95 $ 23.35 – 505,000 7,260,000 2,433,550 – – – – 140,400 – 10,338,950 $ 25.63 $ 18.63 $ 19.84 $ 22.73 $ 24.07 $ 36.53 $ 41.75 $ 44.00 $ 19.94 $ 29.19 2.5 3.1 4.2 4.9 6.1 6.9 7.3 7.9 8.9 9.9 102 Onex Corporation December 31, 2009 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 16 . I N T E R E S T E X P E N S E O F O P E R AT I N G C O M PA N I E S 18 . 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 2009 2008 Year ended December 31 2009 2008 Interest on long-term debt of operating companies Interest on obligations under capital leases of operating companies Other interest of operating companies $ 483 $ 513 Parent company(a) 4 8 6 31 Celestica Spirit AeroSystems Other Interest expense of operating companies $ 495 $ 550 $ 93 43 12 13 $ (196) 25 17 12 $ 161 $ (142) Cash interest paid during the year amounted to $505 (2008 – $514). a) Parent company includes an expense of $61 (2008 – recovery of $176) relating to Onex’ stock option plan, as described in note 15(e), 17. 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 primarily due to the increase (2008 – decrease) in the market price I N V E S T M E N T S of Onex shares during the year. Year ended December 31 2009 Hawker Beechcraft(a) Allison Transmission(b) Onex Real Estate(c) Other $ (237) $ (181) (97) 18 2008 (80) (198) (68) 24 $ (497) $ (322) a) During the third quarter of 2009, Hawker Beechcraft completed a review of the value of its business and general aviation segment in light of the current decline in demand for new business aircraft. As a result of this review, Hawker Beechcraft recorded impairment 19. G A I N S O N D I S P O S I T I O N S O F O P E R AT I N G I N V E S T M E N T S Year ended December 31 2009 2008 Gain on sale of Cineplex Entertainment(a) Gain on disposition of CEI(b) Gain on partial sales of EMSC(c) Gain on partial sale of Celestica(d) Other $ 160 20 595 6 2 $ $ 783 $ – – – – 4 4 charges of US$521, which included an impairment of US$340 for a) Cineplex Entertainment the full amount of goodwill associated with this segment. In addi- In March 2009, Onex entered into an agreement to sell all of its tion, Hawker Beechcraft concluded that additional charges of remaining units of Cineplex Galaxy Income Fund to a syndicate of US$205 were necessary to reduce the carrying value of other underwriters at a gross price of $14.25 per unit. The transaction assets in this segment as well as to increase reserves for losses on closed in April 2009 and Onex received net proceeds of approxi- certain aircraft programs and potential supplier claims. mately $175. As a result of this transaction, Onex recorded a pre- Primarily as a result of these impairments and other tax gain of $160 in the second quarter of 2009. non-cash charges, the Company recorded a loss from equity- accounted investments of $237 relating to its 49% interest in b) CEI Hawker Beechcraft, of which Onex’ share was $95. At December 31, 2008, CEI was not in compliance with its debt covenants. During the ﬁrst quarter of 2009, CEI was in discussions b) A signiﬁcant portion of the 2009 loss from Allison Transmission is due to a US$190 impairment of certain intangible assets. In addi- with its lenders to achieve a restructuring of its debt. A mutually agreeable restructuring and investment transaction was not tion, Allison Transmission wrote down certain long-term receivables achieved. Therefore, in May 2009 Onex contributed its debt secu- and established reserves for other matters that the company had rities in CEI’s parent to CEI’s parent company and transferred its with General Motors Corporation (“GM”) as a result of the GM shares to an entity controlled by CEI’s lenders, who agreed to pro- bankruptcy. The net charge from the GM items was US$37. vide additional liquidity to CEI. At that time, Onex and Onex Primarily as a result of the impairment and GM charges, Partners I ceased to have an equity ownership in the business. the Company recorded a loss from equity-accounted investments Onex’ and Onex Partners I’s original December 2004 investment of $181 relating to its 49% interest in Allison Transmission, of in CEI was $138, of which Onex’ portion was $32. As a result of which Onex’ share was $58. c) Onex Real Estate’s 2009 loss was primarily from provisions established against the carrying value of a number of Onex Real Estate investments as a result of the current economic conditions. previously recorded losses, Onex’ investment had a negative car- rying value of $20 at March 31, 2009. Therefore, Onex recorded a non-cash accounting gain of $20 upon disposition in the second quarter of 2009. Onex Corporation December 31, 2009 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 19. G A I N S O N D I S P O S I T I O N S O F O P E R AT I N G d) Celestica I N V E S T M E N T S ( c o n t ’d ) c) EMSC In the third quarter of 2009, under a secondary public offering of EMSC, Onex, Onex Partners I and certain limited partners of Onex Part ners I sold 9.2 million shares of EMSC, of which Onex’ portion was approximately 3.5 million shares. The offering was completed at a price of US$40.00 per share, before underwriter commissions of US$1.90 per share. Onex’ cash cost for these shares was US$6.67 per share. Total net cash proceeds received from the sale were $381, resulting in a pre-tax gain of $275. Onex’ share of the net proceeds In October 2009, Onex sold 11.0 million Subordinate Voting Shares of Celestica, which included shares held under the MIP, to a syn - dicate of underwriters at a gross price of $10.30 per share. Onex received net proceeds of $104 from the transaction and Onex recorded a pre-tax gain of $6 in the fourth quarter of 2009. As a result of this transaction, Onex’ economic ownership in Celestica was reduced to 8% and Onex’ voting interest was re - duced to 69%. Onex continues to control and consolidate Celestica. 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 and pre-tax gain was $148 and $90, respectively. Year ended December 31 2009 2008 Amounts received on account of the carried interest relating to the third-quarter transaction totalled $12. Consistent Celestica Carestream Health with market practice and the terms of Onex Partners, Onex is allo- Husky cated 40% of the carried interest with 60% allocated to manage- Sitel Worldwide ment. Onex’ share of the carried interest received was $5 and is Other $ 92 44 42 25 16 $ 39 92 22 36 31 $ 219 $ 220 Acquisition, restructuring and other expenses are typically to pro- vide for the costs of facility consolidations, workforce reductions and transition costs incurred at the operating companies. The operating companies record restructuring charges relating to employee terminations, contractual lease obligations and other exit costs when the liability is incurred. The recognition of these charges requires management to make certain judge- ments regarding the nature, timing and amounts associated with the planned restructuring activities, including estimating sublease income and the net recovery from equipment to be disposed of. At the end of each reporting period, the operating companies evaluate the appropriateness of the remaining accrued balances. included in the net proceeds and the gain. Management’s share of the carried interest was $7. As a result of the proceeds to the third- party limited partners of Onex Partners I on this disposition, the May 2009 loss on CEI will not give rise to any clawback of prior carried interest distributions. In the fourth quarter of 2009, under a secondary public offering of EMSC, Onex, Onex Partners I and certain limited part- ners of Onex Partners I sold 9.2 million shares of EMSC, of which Onex’ portion was approximately 3.5 million shares. The offering was completed at a price of US$48.31 per share, before underwriter commissions of US$2.17 per share. Onex’ cash cost for these shares was US$6.67 per share. Total net cash proceeds received from the sale were $446, resulting in a pre-tax gain of $320. Onex’ share of the net proceeds and pre-tax gain was $183 and $104, respectively. Amounts received on account of the carried interest re - lating to the fourth-quarter transaction totalled $38. Consistent with market practice and the terms of Onex Partners, Onex is allocated 40% of the carried interest with 60% allocated to management. Onex’ share of the carried interest received was $15 and is included in the net proceeds and the gain. Management’s share of the carried interest was $23. As a result of these transactions, Onex’ economic owner- ship in EMSC was reduced to 12% and Onex’ voting interest was reduced to 82%. Onex continues to control and consolidate EMSC. 104 Onex Corporation December 31, 2009 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 Non-cash Charges $ $ $ 424 412 4 Non-cash Charges $ $ $ – – – Total $ 1,505(a) $ 1,446(b) $ $ 93 66 (96) 89 (8) $ 51 $ $ $ $ Total 120(a) 96(b) 69 57 (96) 69 (8) activities were initiated. Years Prior to 2008 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, 2009 $ $ $ Reconciliation of accrued liability Closing balance – December 31, 2008 $ Cash payments Charges Other adjustments 822 788 78 24 (75) 78 (3) $ $ $ $ 201 192 8 39 (17) 8 (5) Closing balance – December 31, 2009 $ 24 $ 25 (a) (b) Includes Celestica $1,479. Includes Celestica $1,435. $ $ $ $ $ 58 54 3 3 (4) 3 – 2 Initiated in 2008 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, 2009 $ $ $ Reconciliation of accrued liability Closing balance – December 31, 2008 $ Cash payments Charges Other adjustments 33 23 24 34 (33) 24 (8) Closing balance – December 31, 2009 $ 17 (a) (b) Includes Husky $73 and Carestream Health $31. Includes Husky $53 and Carestream Health $31. $ $ $ $ $ 9 9 2 8 (7) 2 1 4 $ $ $ $ 78 64 43 15 (56) 43 (1) Employee Termination Costs Lease and Other Contractual Obligations Facility Exit Costs and Other Initiated in 2009 Total estimated expected costs Cumulative costs expensed to date Expense for the year ended December 31, 2009 Reconciliation of accrued liability Cash payments Charges Other adjustments $ $ $ $ 33 32 31 (19) 31 (1) Closing balance – December 31, 2009 $ 11 (a) (b) Includes Carestream Health $14 and Sitel Worldwide $26. Includes Carestream Health $13 and Sitel Worldwide $24. $ 1 $ 22 $ $ $ $ $ 5 5 5 (1) 5 – 4 $ $ $ $ $ 23 21 20 (15) 20 – 5 Non-cash Charges $ $ $ 1 1 1 $ $ $ $ Total 62(a) 59(b) 57 (35) 56 (1) $ 20 Onex Corporation December 31, 2009 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 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 ) Total Total estimated expected costs Cumulative costs expensed to date Expense for the year ended December 31, 2009 Reconciliation of accrued liability: Employee Termination Costs $ $ $ 888 843 133 Closing balance – December 31, 2008 $ 58 Cash payments Charges Other adjustments (127) 133 (12) Lease and Other Contractual Obligations Facility Exit Costs and Other $ $ $ $ 215 206 15 47 (25) 15 (4) $ $ $ $ 159 139 66 18 (75) 66 (1) Closing balance – December 31, 2009 $ 52 $ 33 $ 8 Non-cash Charges $ $ $ 425 413 5 Total $ 1,687 $ 1,601 $ 219 $ 123 (227) 214 (17) $ 93 21. 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 Celestica(a) Skilled Healthcare(b) Sitel Worldwide(c) Tube City IMS(d) CiCi’s Pizza(e) CEI(f) Carestream Health(g) Other(h) 2009 14 180 $ 64 62 44 – – 6 2008 $ 1,061 – 129 – – 206 142 46 $ 370 $ 1,584 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 the impact of economic uncertain- ties on expected future demand. At December 31, 2008, the remaining goodwill balance at Celestica was nil. The goodwill impairment charge was non-cash in nature and did not affect Celestica’s liquidity, cash ﬂows from operating activities, or its compliance with debt covenants. b) Due to a reduction in the expected future growth rates for Medi - care and Medicaid and their effect on expected future cash ﬂows, Skilled Health care recorded a non-cash goodwill impairment charge of $180 in the fourth quarter of 2009. 106 Onex Corporation December 31, 2009 c) Sitel Worldwide’s 2009 writedowns consist primarily of a sec- ond quarter non-cash goodwill impairment charge of $52, which was a result of the loss of certain business contracts in its Euro - pean region. 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 intangi- ble assets primarily related to the purchase of SITEL Corporation in January 2007. The impairment was due to the shift in customers from Europe to other regions. d) In the second quarter of 2009, Tube City IMS revised its long- term outlook to reﬂect changes in expectations for certain cus- tomers and contracts. As a result, Tube City IMS performed a goodwill impairment test that resulted in a non-cash goodwill impairment charge of $62. e) In the fourth quarter of 2009, as a result of its annual intangible asset impairment test, CiCi’s Pizza recorded non-cash impair- ment charges. The impairment was caused primarily by an in - crease in the discount rate used due to market risks associated with the current economic environment. f) In the fourth quarter of 2008, as a result of its annual goodwill impairment test, CEI recorded a non-cash charge relating to goodwill. The impairment was driven by a combination of factors including signiﬁcant end-market deterioration and the impact of economic uncertainties on expected future demand. g) In the fourth quarter of 2008, as a result of its annual goodwill and intangible asset impairment test, Carestream Health recorded non-cash impairment charges on goodwill and intangible assets relating to its Carestream Molecular Imaging business unit. h) Other primarily consists of impairments of long-lived assets. 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 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 2009 122 122 2008 123 123 2 3 . 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 Celestica EMSC Skilled Healthcare Spirit AeroSystems Tube City IMS The Warranty Group 2009 Number of Significant Customers 1 1 1 2 2 1 1 Percentage of Revenues 12% 17% 23% 67% 96% 25% 10% 2008 Number of Significant Customers 1 – 1 2 2 2 – Percentage of Revenues 11% – 23% 68% 97% 39% – Accounts receivable from the above signiﬁcant customers at December 31, 2009 totalled $587 (2008 – $762). Onex Corporation December 31, 2009 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 4 . C O M M I T M E N T S , C O N T I N G E N C I E S A N D The Company and its operating companies also have R E L AT E D PA R T Y T R A N S A C T I O N S insurance to cover costs incurred for certain environmental mat- 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, 2009, US$1,477 (2008 – US$1,477) has been invested of the total approximately US$1,655 of capital committed. Onex has funded US$347 (2008 – 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 December 31, 2009 was US$33 (2008 – US$41). Prior to November 2006, Onex received annual manage- ment fees based on 2% of the capital committed to Onex Part ners I by investors other than Onex and Onex management. The annual management fee was reduced to 1% of the net funded commitments 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 and Onex management, to the extent of 20% of the gains, provided that those investors have achieved a mini mum 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 pur- pose takes into consideration management fees and other amounts paid by Onex Partners I investors. The returns to Onex Partners I investors, other than Onex and Onex management, are based on all investments made through Onex Partners I, with the result that the initial carried interests achieved by Onex on gains could be recovered from Onex if subsequent Onex Partners I investments do not exceed the overall target return level of 8%. Consistent with market practice, Onex, as sponsor of Onex Partners I, is allocated 40% of the car- ried interest with 60% allocated to management. Onex defers all gains associated with the carried interest until such time as the potential for repayment of amounts received is remote. For the year ended December 31, 2009, $20 (2008 – nil) has been received by Onex as carried interest and recognized as income while man- agement received $30 (2008 – nil) with respect to the carried inter- est. At December 31, 2009, the total amount of carried interest that has been deferred from income was $58 (2008 – $58). 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, 2009, the amounts potentially payable in respect of these guarantees to - talled $467. The Company, which includes the operating companies, has commitments in the total amount of approximately $60 with respect to corporate investments. A signiﬁcant portion of this amount is funded by third-party limited partners of the Onex funds. The Company, which includes the operating companies, has also provided certain indemniﬁcations, including those related to businesses that have been sold. The maximum amounts from many of these indemniﬁcations cannot be reasonably estimated at this time. However, in certain circumstances, the Company and its operating companies have recourse against other parties to miti- gate the risk of loss from these indemniﬁcations. The Company, which includes the operating companies, has commitments with respect to real estate operating leases, which are disclosed in note 11. The aggregate commitments for capital assets at De cem- ber 31, 2009 amounted to $383. b) Onex and its operating companies are or may become parties to legal claims, product liability and warranty claims arising from the ordinary course of business. Certain operating companies, as conditions of acquisition agreements, have agreed to accept cer- tain pre-acquisition liability claims against the acquired compa- nies. The operating companies have recorded liability provisions based on their consideration and analysis of their exposure in respect of such claims. Such provisions are reﬂected, as appropri- ate, in Onex’ consolidated ﬁnancial statements. Onex, the parent company, has not currently recorded any further liability provi- sion and does not believe that the resolution of known claims would reasonably be expected to have a material adverse impact on Onex’ consolidated ﬁnancial position. However, the ﬁnal out- come with respect to outstanding, pending or future actions cannot be predicted with certainty, and therefore there can be no assurance that their resolution will not have an adverse effect on Onex’ consolidated ﬁnancial position. c) The operating companies are subject to laws and regulations concerning the environment and to the risk of environmental liability inherent in activities relating to their past and present operations. As conditions of acquisition agreements, certain oper- ating companies have agreed to accept certain pre-acquisition liability claims on the acquired companies after obtaining indem- niﬁcation from prior owners. 108 Onex Corporation December 31, 2009 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S e) In August 2006, Onex completed the closing of Onex Partners II with funding commitments totalling approximately US$3,450. June 30, 2009. On December 31, 2008, Onex gave notice to the investors of Onex Partners III that Onex’ commitment would be Onex Partners II provides committed capital for Onex-sponsored decreasing to US$500 effective July 1, 2009. In December 2009, acquisitions not related to Onex’ operating companies at Decem - Onex notiﬁed the investors of Onex Partners III that it would be ber 31, 2003 or to ONCAP or Onex Partners I. As at December 31, increasing its commitment to US$800 effective June 16, 2010. This 2009, US$2,903 (2008 – US$2,903) has been invested of the total commitment may be increased up to approximately US$1,500 at approximately US$3,450 of capital committed. Onex has funded the option of Onex but may not be decreased. Onex controls the US$1,148 (2008 – US$1,148) of its US$1,407 commitment. Onex Gen eral Partner and Manager of Onex Partners III. Onex manage- controls the General Partner and Manager of Onex Partners II. ment has com mitted, as a group, to invest a minimum of 1% of Onex management has committed, as a group, to invest a mini- Onex Partners III, which may be adjusted annually up to a maxi- mum of 1% of Onex Partners II, which may be adjusted annually mum of 6%. At Decem ber 31, 2009, management and directors had up to a maximum of 4%. As at December 31, 2009, management committed 3% (2008 – 3%). The total amount invested in Onex and directors had committed approximately 3% (2008 – 4%). The Partners III’s investments by Onex management and directors at total amount invested in Onex Partners II’s investments by Onex December 31, 2009 was US$5. management and directors at December 31, 2009 was US$115, of Onex receives annual management fees based on 1.75% which nil (2008 – US$14) was invested in the year ended Decem- of the capital committed to Onex Partners III by investors other ber 31, 2009. than Onex and Onex management. The annual management fee Onex received annual management fees based on 2% of is reduced to 1% of the net funded commitments at the earlier of the capital committed to Onex Partners II by investors other than the end of the commitment period, when the funds are fully Onex and Onex management. The annual management fee was invested, or if Onex establishes a successor fund. A carried inter- reduced to 1% of the net funded commitments at the end of the est is received on the overall gains achieved by Onex Partners III initial fee period in November 2008, when Onex established a suc- investors, other than Onex and Onex management, to the extent cessor fund, Onex Partners III. A carried interest is received on the of 20% of the gains, provided that those investors have achieved a overall gains achieved by Onex Partners II investors, other than minimum 8% return on their investment in Onex Partners III over Onex and Onex management, to the extent of 20% of the gains, the life of Onex Partners III. The investment by Onex Partners III provided that those investors have achieved a minimum 8% investors for this purpose takes into consideration management return on their investment in Onex Partners II over the life of fees and other amounts paid by Onex Partners III investors. Onex Partners II. The investment by Onex Partners II investors for The returns to Onex Partners III investors, other than this purpose takes into consideration management fees and other Onex and Onex management, are based on all investments made amounts paid by Onex Partners II investors. through Onex Partners III, with the result that the initial carried The returns to Onex Partners II investors, other than interests achieved by Onex on gains could be recovered from Onex if Onex and Onex management, are based on all investments made subsequent Onex Partners III investments do not exceed the overall through Onex Partners II, with the result that the initial carried target return level of 8%. Consistent with market practice and Onex interests achieved by Onex on gains could be recovered from Partners I and Onex Partners II, Onex, as sponsor of Onex Part- Onex if subsequent Onex Partners II investments do not exceed ners III, will be allocated 40% of the carried interest with 60% the overall target return level of 8%. Consistent with market prac- allocated to management. Onex defers all gains associated with the tice and Onex Partners I, Onex, as sponsor of Onex Partners II, will carried interest until such time as the potential for repayment of be allocated 40% of the carried interest with 60% allocated to amounts received is remote. As at December 31, 2009, no amount management. Onex defers all gains associated with the carried has been received as carried interest related to Onex Partners III. interest until such time as the potential for repayment of amounts received is remote. As at December 31, 2009, no amount has been received as carried interest related to Onex Partners II. g) Under the terms of the MIP, management members of the Company invest in all of the operating entities acquired by the Company. f) In December 2009, Onex completed the closing of Onex Partners III with funding commitments totalling approximately US$4,300. Onex Partners III provides committed capital for Onex-sponsored acquisitions not related to Onex’ operating com- panies at Decem ber 31, 2003 or to ONCAP, Onex Partners I or Onex Partners II. As at December 31, 2009, approximately US$195 (2008 – The aggregate investment by management members under the MIP is limited to 9% of Onex’ interest in each acquisi- tion. The form of the investment is a cash purchase for 1⁄6th (1.5%) of the MIP’s share of the aggregate investment, and investment rights for the remaining 5⁄6ths (7.5%) of the MIP’s share at the same price. Amounts invested under the minimum investment nil) has been invested, of which Onex’ share was US$45. Onex had requirement in Onex Partners transactions are allocated to meet a US$1,000 commitment for the period from January 1, 2009 to the 1.5% Onex investment requirement under the MIP. For invest- Onex Corporation December 31, 2009 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 4 . 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 ( c o n t ’d ) ments 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 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, 2009 was $13 (2008 – $16). k) In connection with the 2007 purchase of Carestream Health from Eastman Kodak Company (“Kodak”), if, upon the disposition of Carestream Health, Onex and Onex Partners realize an internal rate of return on its initial US$471 investment in excess of 25%, Kodak is entitled to 25% of the excess return, up to US$200. At disposes of all of an investment before the seventh year. Under December 31, 2009, Onex and Onex Partners had received distri - the MIP and amended MIP, the investment rights related to a par- butions of US$142 from Carestream Health. No amount has been ticular acquisition are exercisable only if the Company earns a recorded for any potential payment to Kodak in the consolidated minimum 15% per annum compound rate of return for that ﬁnancial statements. acquisition after giving effect to the investment rights. Under the terms of the MIP, the total amount paid by management members for the interest in the investments in 2009 l) In March 2009, Onex entered into a sale of an entity, whose sole assets were certain tax losses, to a public company controlled by was $1 (2008 – $2). Investment rights exercisable at the same price Mr. Gerald W. Schwartz, who is also Onex’ controlling shareholder. for 7.5% (2008 – 7.5%) of the Company’s interest in acquisitions Onex received $3 in cash for tax losses of $23. The entire $3 was were issued at the same time. Realizations under the MIP including recorded as a gain and was included in other income in the consol- the value of units distributed were $20 in 2009 (2008 – less than $1). idated statement of earnings in the ﬁrst quarter of 2009. Onex has h) Members of management and Directors of the Company invested $8 in 2009 (2008 – $11) in Onex’ investments made out- valuation allowances have been established against the beneﬁt of all of these losses in the consolidated ﬁnancial statements. side of Onex Partners at the same cost as Onex and other outside As such, Onex does not expect to generate sufﬁcient taxable investors. Those investments by management and Directors are income to fully utilize these losses in the foreseeable future. In signiﬁcant Canadian non-capital and capital losses available and subject to voting control by Onex. i) Each member of Onex management is required to reinvest 25% of the proceeds received related to their share of the MIP and carried connection with this transaction, Onex obtained a tax ruling from the Canada Revenue Agency, and Deloitte & Touche LLP, an inde- pendent accounting ﬁrm retained by Onex’ Audit and Corporate Gover nance Committee, provided an opinion that the value interest to acquire Onex shares in the market until the manage- received by Onex for the tax losses was fair. Onex’ Audit and ment member owns one million Onex Subordinate Voting Shares Corporate Gov ernance Committee, all the members of which are and/or management DSUs. During 2009, Onex management rein- independent directors, unanimously approved the transaction. vested $2 (2008 – $2) to acquire Onex shares. 110 Onex Corporation December 31, 2009 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 . 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. Onex, the parent company, does not provide pension, other retirement or post-employment beneﬁts to its employees or to those of any of the operating companies. The total costs during 2009 for deﬁned contribution pension plans were $142 (2008 – $142). 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 pension plans for funding purposes were December 2008 to December 2009, and the next required valuations will be during 2010. In 2009, total cash payments for employee future beneﬁts, consisting of cash contributed by the operating companies to their funded pension plans, cash payments directly to beneﬁciaries for their unfunded other beneﬁt plans and cash contributed to their deﬁned contribution plans, were $183 (2008 – $177). Included in the total was $31 (2008 – $32) contributed to multi-employer plans. For the deﬁned beneﬁt pension plans and non-pension post-retirement plans, the estimated present value of accrued beneﬁt obligations and the estimated market value of the net assets available to provide these beneﬁts were as follows: As at December 31 Accrued benefit obligations: Opening benefit obligations Current service cost Interest cost Contributions by plan participants Benefits paid Actuarial (gain) loss in year Foreign currency exchange rate changes Acquisitions 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 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 2009 2008 2009 2008 2009 2008 $ 919 $ 789 $ 400 $ 390 $ 151 $ 128 1 53 – (16) (5) (108) – – (2) 3 – 2 50 – (14) – 139 – – – (50) 3 15 21 1 (15) 40 (30) 1 1 (12) (3) 1 16 23 1 (19) (50) (8) 1 1 (6) 50 1 5 9 – (4) 7 (13) – (1) (1) – – 5 7 – (4) 2 14 – – (1) – – $ 845 $ 919 $ 420 $ 400 $ 153 $ 151 $ 1,008 $ 1,129 $ 282 $ 279 $ 178 7 – (16) (128) – (3) (10) – (221) 4 – (14) 173 – – (59) (4) 42 36 1 (15) (22) 1 (12) 10 (1) (55) 40 1 (19) (14) 2 (6) 59 (5) – – 4 – (4) – – – – – – $ $ – – 4 – (4) – – – – – – Onex Corporation December 31, 2009 111 Closing plan assets $ 1,036 $ 1,008 $ 322 $ 282 $ 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 . 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 ) Asset category Equity securities Debt securities Real estate Other Percentage of Plan Assets 2009 52% 42% 3% 3% 100% 2008 46% 47% 2% 5% 100% Equity securities do not include direct investments in the shares of the Company or its subsidiaries but may be invested indirectly as a result of the inclusion of the Company’s and its subsidiaries’ shares in certain market investment funds. The funded status of the plans of the operating subsidiary companies, excluding discontinued operations, was as follows: As at December 31 Deferred benefit amount: Plan assets, at fair value Accrued benefit obligation Plan surplus (deficit): Unrecognized transitional obligation and past service costs Unrecognized actuarial net 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 2009 2008 2009 2008 2009 2008 $ 1,036 $ 1,008 $ 322 (845) (919) (420) $ 282 (400) $ – (153) $ – (151) $ 191 $ – 109 47 89 – 240 41 $ (98) $ (118) $ (153) $ (151) (4) 73 (47) (6) 88 (41) (8) 31 – (9) 26 – Deferred benefit amount – asset (liability) $ 347 $ 370 $ (76) $ (77) $ (130) $ (134) 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 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 Pension Plans in which Assets Exceed Accumulated Benefits Pension Plans in which Accumulated Benefits Exceed Assets Non-Pension Post-Retirement Benefits 2009 2008 2009 2008 2009 2008 $ 1 53 (178) $ 2 50 221 $ 106 (6) (307) 6 17 – – (11) – – 15 21 (42) 29 32 (30) 3 (1) $ 16 23 55 (75) (48) 49 1 – $ 5 9 – – 8 (7) – (1) $ 5 7 – – 2 (1) – (1) Net periodic costs (income) $ (7) $ (39) $ 27 $ 21 $ 14 $ 12 112 Onex Corporation December 31, 2009 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 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 2009 2008 2009 2008 4.56%–7.00% 4.10%–7.50% 4.00%–6.40% 5.50%–6.46% 0.00%–4.33% 0.00%–4.80% 0.00%–4.69% 0.00%–4.68% 5.32%–7.50% 4.10%–6.60% 4.00%–7.50% 5.60%–7.50% rate of return on plan assets 4.29%–8.00% 5.00%–8.50% n/a n/a Weighted average rate of compensation increase Assumed healthcare cost trend rates Initial healthcare cost trend rate Cost trend rate declines to Year that the rate reaches the level it is assumed to remain at 0.00%–4.80% 0.00%–4.80% 0.00%–4.68% 0.00%–5.30% 2009 2008 3.50%–14.00% 3.50%–5.00% 3.50%–15.00% 3.50%–5.00% Between 2010 and 2030 Between 2009 and 2019 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 2009 $ $ 2 20 1% Increase 2008 $ $ 2 20 2009 $ (2) $ (17) 1% Decrease 2008 $ (2) $ (16) Onex Corporation December 31, 2009 113 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 . F I N A N C I A L I N S T R U M E N T S A N D FA I R VA L U E M E A S U R E M E N T S Credit risk Credit risk is the risk that the counterparty to a ﬁnancial instru- ment will fail to perform its obligation and cause the Company to incur a loss. Substantially all of the cash, cash equivalents and mar- ketable securities consist of investments in debt securities. In addi- tion, 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 primar ily of investments in debt securities. The investments in highly liquid debt instru- ments are subject to credit risk. A description of the investments Uncompensated care or doubtful account provisions are related primarily to services provided to self-paying uninsured patients and are estimated at the date of service based on histori- cal write-off experience and other economic data. The following table outlines EMSC’s accounts receivable allowances, which have been deducted in arriving at EMSC’s net receivables balance of $483 at December 31, 2009: Allowance for Uncompensated Care Allowance for Contractual Discounts Balance at December 31, 2008 $ 627 $ 1,078 Additions Reductions 1,966 (1,992) 4,568 (4,594) held by EMSC and The Warranty Group is included in note 7. Balance at December 31, 2009 $ 601 $ 1,052 At December 31, 2009, Onex, the parent company, held $890 of cash and cash equivalents in short-term high-rated Additions to the allowances consist primarily of provisions money market instruments. In addition, Celestica had $986 of against earnings and reductions to these accounts are primarily cash and cash equivalents, comprised of cash (approximately due to write-offs. 28%) and cash equivalents (approximately 72%). Celes tica’s cur- rent portfolio consists of certiﬁcates of deposit and certain money Liquidity risk market funds that hold exclusively U.S. government securities. Liquidity risk is the risk that Onex and its subsidiaries will have The majority of Celestica’s and Onex’, the parent company’s, cash insufﬁcient funds on hand to meet their respective obligations and cash equivalents are held with ﬁnancial institutions, each of as they come due. Accounts payable are primarily due within which has a current Standard & Poor’s rating of A-1 or above. 90 days. The repayment schedules for long-term debt and capital Accounts receivable are also subject to credit risk. At December 31, and 11. Onex, the parent company, has no signiﬁcant debt and has the aging of consolidated accounts receivable was as follows: not guaranteed the debt of the operating companies. leases of the operating companies have been disclosed in notes 10 Current 1–30 days past due 31–60 days past due >60 days past due 2009 2008 Market risk $ 2,700 $ 3,427 Market risk is the risk that the future cash ﬂows of a ﬁnancial 187 73 102 310 112 165 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. dollar and $ 3,062 $ 4,014 ﬂuctuations in the LIBOR and U.S. prime interest rate. At December 31, 2009, the provision for uncollectible accounts Foreign currency exchange rates totalled $1,726 (2008 – $1,791) and primarily relates to accounts Onex’ operating companies operate autonomously as self-sus- receivable at EMSC. Companies in the emergency healthcare taining companies. In addition, the functional currency of sub- industry maintain provisions for contractual discounts and for stantially all of Onex’ operating companies is the U.S. dollar. As uncompensated care or doubtful accounts. EMSC is contractually investments in self-sustaining subsidiaries are excluded from the required, in most circumstances, to provide care regardless of the ﬁnancial instrument disclosure, the Company’s exposure on patient’s ability to pay. ﬁnancial instruments to the Canadian/U.S. dollar foreign currency EMSC records gross revenue based on fee-for-service rate exchange rate is primarily at the parent company through the schedules that are generally negotiated with various contracting enti- holding of U.S.-dollar-denominated cash and cash equivalents. A ties, including municipalities and facilities. Fees are billed for all rev- 5% strengthening (5% weakening) of the Canadian dollar against enue sources and to all payors under the gross fee schedules for that the U.S. dollar at December 31, 2009 would result in a $33 de - speciﬁc contract; however, reimbursement in the case of certain state crease ($33 increase) in net earnings. As all of the U.S.-dollar- and federal payors, including Medicare and Medicaid, will not change denominated cash and cash equivalents at the parent company as a result of the gross fee schedules. EMSC records the difference are designated as held-for-trading, there would be no effect on between gross fee schedule revenue and Medicare, Medicaid and other comprehensive earnings. other contracted payor reimbursement as a contractual provision. 114 Onex Corporation December 31, 2009 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 addition, two operating companies have signiﬁcant effectively ﬁxed by interest rate swap contracts. The long-term debt exposure to the U.S. dollar/Canadian dollar foreign currency of the operating companies is without recourse to Onex. exchange rate. A 5% strengthening (5% weakening) of the Cana - In addition, The Warranty Group holds substantially all dian dollar against the U.S. dollar at December 31, 2009 would of its investments in interest-bearing securities, as described in result in a US$10 increase (US$9 decrease) in other comprehen- note 7. A 0.25% (25 basis point) increase in the interest rate would sive earnings of Celestica. A 5% strengthening (5% weakening) of decrease the fair value of the investments held by US$11 and re - the Canadian dollar against the U.S. dollar at December 31, 2009 sult in a corresponding decrease to other comprehensive earnings would result in a US$26 increase (US$26 decrease) in other com- of The Warranty Group. However, as the investments are rein - prehensive earnings of Husky. Interest rates vested, a 0.25% increase in the interest rate would increase the annual interest income recorded by The Warranty Group by US$5. The Company is exposed to changes in future cash ﬂows as a Commodity risk result of changes in the interest rate environment. The parent Certain of Onex’ operating companies have exposure to commodi- company is exposed to interest rate changes primarily through its ties. In particular, aluminum, titanium and raw materials such as cash and cash equivalents, which are held in short-term term carbon ﬁbres used to manufacture composites are the principal deposits and commercial paper. Assuming no signiﬁcant changes raw materials for Spirit AeroSystems’ manufacturing operations. To in cash balances held by the parent company from those at limit its exposure to rising raw materials prices, Spirit Aero Systems Decem ber 31, 2009, a 0.25% increase (0.25% decrease) in the inter- has entered into long-term supply contracts directly with its key est rate (including the Canadian and U.S. prime rates) would suppliers of raw materials and collective raw materials sourcing result in a $2 increase ($2 decrease) in annual interest income. As contracts arranged through certain of its customers. all of the U.S. dollar cash and cash equivalents at the parent com - In addition, diesel fuel is a key commodity used in Tube pany are designated as held-for-trading, there would be no effect City IMS’ operations. To help mitigate the risk of changes in fuel on other comprehensive earnings. prices, substantially all of its contracts contain pricing escalators The operating companies’ results are also affected by based on published commodity or inﬂation price indices. changes in interest rates. A change in the interest rate (including Silver is a signiﬁcant commodity used in Carestream LIBOR and the U.S. prime interest rate) would result in a change in Health’s manufacture of x-ray ﬁlm. The company’s management interest expense being recorded due to the variable-rate portion of continually monitors movement and trends in the silver market the long-term debt of the operating companies. At Decem ber 31, and enters into forward agreements when considered appropriate 2009, approximately 66% (2008 – 70%) of the operating companies’ to mitigate some of the risk of future price ﬂuctu ations for periods long-term debt had a ﬁxed interest rate or the interest rate was generally of up to a year. Financial instruments classification Financial assets were classiﬁed as follows: Held-for-trading(2) Available-for-sale(3) Held-to-maturity(4) December 31, 2009 December 31, 2008 Carrying Value Fair Value(1) Carrying Value Fair Value(1) $ 617 $ 2,017 $ 4 $ 617 $ 2,017 $ 4 $ 242 $ 2,008 $ 9 $ 242 $ 2,008 $ 9 (1) The fair value of substantially all financial instruments is determined by using prices quoted in an active market. (2) Amounts are included in marketable securities and investments in the consolidated balance sheet. At December 31, 2009 and 2008, 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, 2009, cash and cash equivalents of $3,206 (2008 – $2,921) have been primarily classiﬁed as held- for-trading. Long-term debt has not been designated as held-for-trading and therefore is recorded at amortized cost subsequent to initial recognition. Onex Corporation December 31, 2009 115 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 . F I N A N C I A L I N S T R U M E N T S A N D quoted market prices for similar assets in active markets, quoted FA I R VA L U E M E A S U R E M E N T S ( c o n t ’d ) market prices for identical assets in inactive markets, inputs Fair Value Measurements other than quoted market prices that are observable for the asset, such as interest rates or yield curves, or other inputs The Company’s estimates of fair value for ﬁnancial assets and derived principally from other observable market information. ﬁnancial liabilities are based on the framework established in the When quoted market prices in active markets are not available, fair value accounting guidance. The fair value hierarchy gives the fair values are derived through matrix pricing, which is a math- highest priority to quoted prices with readily available indepen dent ematical technique used principally to value debt securities data in active markets for identical assets or liabilities (Level 1) and by relying on the securities’ relationship to other benchmark the lowest priority to unobservable market inputs (Level 3). The quoted securities and not by relying exclusively on quoted three levels of the hierarchy are as follows: market prices for speciﬁc securities. (cid:129) Level 1 includes ﬁnancial instruments whose fair value is deter- (cid:129) Level 3 includes ﬁnancial instruments whose fair value is deter- mined based on observable unadjusted quoted market prices mined from techniques in which one or more of the signiﬁ cant for identical ﬁnancial assets or liabilities in active markets inputs, such as assumptions about risk, are unobservable. Be - which the Company has the ability to access at the measure- cause Level 3 fair values contain unobservable market inputs, ment date. This is the most reliable fair value measurement and judgement must be used to determine fair values. Level 3 fair includes, for example, active exchange-traded equity securities. values represent the best estimate of an amount that could be (cid:129) Level 2 includes ﬁnancial instruments whose fair value is deter- realized in a current market exchange in the absence of actual mined based on various inputs including, but not limited to, market exchanges. The table below summarizes the available-for-sale investments of The Warranty Group within the fair value hierarchy at December 31, 2009: Fixed-maturity securities Equity securities Total % of Total Total $ 1,883 25 $ 1,908 100.0% Level 1 $ $ – 24 24 1.3% Level 2 $ 1,881 1 $ 1,882 98.6% $ $ Level 3 2 – 2 0.1% The following table represents a summary of the changes in the In addition, substantially all of Onex’ $229 investment in the Onex fair value of The Warranty Group’s available-for-sale investments Credit Partners funds is recorded at fair value using Signiﬁcant measured on a recurring basis using Level 3, for the year ended Other Observable Inputs (Level 2 in the fair value hierarchy). December 31, 2009: Balance, December 31, 2008 Purchases, issuances, settlements Transfers in and/or out of Level 3 Foreign exchange Balance, December 31, 2009 The carrying values of the consolidated balances for cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair values due to the short maturity of these ﬁnancial instruments. Consolidated long-term debt at December 31, 2009 had a carrying value of $6,039 (2008 – $7,813) and a fair value of $5,729 (2008 – $5,934). $ 26 (15) (7) (2) $ 2 116 Onex Corporation December 31, 2009 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 2 7. S U B S E Q U E N T E V E N T Certain operating companies may enter into agreements to acquire or make investments in other businesses. These transac- tions are subject to a number of conditions, many of which are beyond the control of Onex or the operating companies. The effect of such planned transactions, if completed, may be signiﬁ- cant to the consolidated ﬁnancial position of Onex. a) In January 2010, Celestica announced its intention to redeem all of its outstanding 7.625% Senior Subordinated Notes due 2013. At December 31, 2009, the outstanding principal on the notes was US$223. In accordance with the terms of the notes, the redemption will be at a price of 103.813% of the principal amount, together with accrued and unpaid interest to the redemption date. Celestica expects to complete the redemption in the ﬁrst quarter of 2010. 2 8 . 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 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 2009 (2008 – seven): electronics manufacturing services; aerostructures; healthcare; ﬁnancial services; customer support services; metal services; and other. The electronics manufacturing services segment consists of Celestica, which provides manufacturing services for electronics original equipment manufacturers. The aerostructures segment consists of Spirit AeroSys tems, which manufactures aero - struc tures. The healthcare segment consists of EMSC, a leading provider of ambulance transport services and outsourced hospital emergency department physician stafﬁng and management ser - vices in the United States; Carestream Health, a leading global provider of medical imaging and healthcare information technology solutions; CDI, which owns and operates diagnostic imaging cen- tres 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 consists of The Warranty Group, which underwrites and administers extended warranties on a vari- ety of consumer goods and also provides consumer credit and other specialty insurance products primarily through automobile dealers. The customer support services segment consists of Sitel Worldwide, which provides services for telecommunications, consumer goods, retail, technology, transportation, ﬁnance and utility companies. The metal services segment consists of Tube City IMS, a leading provider of outsourced services to steel mills. Other includes Husky, one of the world’s largest suppliers of injection molding equipment and services to the plastics industry; Tropicana Las Vegas, one of the best-known and most storied casinos in Las Vegas; Allison Trans - mission, a leading designer and manufacturer of automatic trans- missions for on-highway trucks and buses, off-highway equipment and military vehicles worldwide; Hawker Beechcraft, a leading manufacturer of business jet, turboprop and piston aircraft; RSI, a leading manufacturer of cabinetry for the residential marketplace in North America; Cineplex Entertainment, Canada’s largest ﬁlm exhibition company (sold in 2009); as well as CEI (disposed of in 2009), Onex Real Estate, ONCAP II and the parent company. The operations of ResCare, Allison Transmission, Hawker Beechcraft, RSI and Cine plex Entertainment (sold in 2009) are accounted for using the equity-accounting method, as described in note 1. Onex Corporation December 31, 2009 117 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 8 . I N F O R M AT I O N B Y I N D U S T R Y A N D G E O G R A P H I C S E G M E N T ( c o n t ’d ) 2009 Industry Segments Electronics Manufacturing Services Aero- structures Healthcare Financial Services Customer Support Services Metal Services Other Consolidated Total $ 6,909 $ 4,641 $ 6,590 $ 1,359 $ 1,780 $ 1,472 $ 2,080 $ 24,831 Revenues Cost of sales Selling, general and administrative expenses (6,319) (224) (3,946) (199) (4,766) (771) Earnings before the undernoted items 366 496 1,053 (656) (509) 194 (13) (22) (3) – – 1 (1) – – (2) – 154 (46) (76) 32 – 32 (1,140) (487) 153 (57) (24) (82) 1 – (10) – – – (25) (64) (108) (17) (1) (126) – (126) 745 660 25 – 124 (1,329) (48) 95 (66) (14) (49) – – (1) – – – – (1,312) (581) (19,468) (2,819) 187 2,544 (84) (50) (46) 37 (504) (75) (98) 104 783 (55) (636) (364) (495) 53 (497) (90) (161) 97 783 (219) (62) (50) (370) (97) 7 59 (31) – (31) 149 126 (94) 181 – 181 645 (172) (361) 112 – 112 $ $ $ $ $ 891 $ 4,937 $ 25,481 401 43 – 252 $ $ $ $ 738 $ 5,930 66 7 $ $ 713 53 507 $ 2,312 (86) (25) (39) – – (2) (43) – – (92) (14) 65 (5) (54) 6 – 6 (130) (200) (5) (50) 8 – 3 (12) 4 – (1) (224) (226) 7 7 (6) (7) (11) – (44) – (180) 313 (107) (192) 14 – 14 169 (130) (3) 36 – 36 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 dispositions of operating investments 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 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 (a) Long-term debt includes current portion, excludes capital leases and is net of deferred charges. 118 Onex Corporation December 31, 2009 $ 3,265 $ 4,821 $ 5,616 $ 5,206 $ $ $ $ 234 69 – – $ $ $ $ 902 $ 2,792 335 – 3 $ $ 163 46 $ 1,065 $ $ $ $ 203 12 – 361 $ $ $ $ $ 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 2008 Industry Segments Electronics Manufacturing Services Aero- structures Healthcare Financial Services Customer Support Services Metal Services Other Consolidated Total $ 8,220 $ 3,965 $ 6,152 $ 1,388 $ 1,856 $ 3,112 $ 2,188 $ 26,881 Revenues Cost of sales Selling, general and administrative expenses (7,556) (274) (3,215) (188) (4,504) (740) Earnings before the undernoted items 390 562 908 (117) (186) (229) (255) 10 13 (9) (5) (1) – (92) 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) Stock-based compensation recovery (expense) Other income (expense) Gains on dispositions of operating investments (97) (16) (53) 16 – (19) (25) – – Acquisition, restructuring and other expenses (39) Writedown of goodwill, intangible assets and long-lived assets (1,061) 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) (6) 791 (119) – (119) 4,612 892 124 – – $ $ $ $ $ $ $ $ $ $ $ $ (5) (42) 20 – (6) (17) 4 – – – 399 (137) (245) 17 – 17 4,821 697 299 – 3 (665) (460) 263 (12) (19) (9) – – – (1) (16) – (7) (1,197) (520) 139 (64) (19) (69) 2 – 10 – – – (36) (2,932) (71) 109 (65) (13) (41) – – – – – – – (1,650) (491) 47 (83) (65) (81) (13) (335) 107 190 (64) 4 (46) (21,719) (2,744) 2,418 (624) (366) (550) 35 (322) 83 142 (77) 4 (220) (142) – (129) (1) (251) (1,584) 12 (108) 34 (62) – (62) 6,660 3,367 225 64 1,398 $ $ $ $ $ $ 199 (65) (94) 40 – 40 6,095 237 21 – 419 $ $ $ $ $ $ (166) (3) (1) (170) – (170) 1,020 796 67 7 199 $ $ $ $ $ $ (11) 4 5 (2) – (2) 1,026 519 73 4 355 $ $ $ $ $ $ (590) 63 531 4 9 13 (1,061) (252) 1,021 (292) 9 $ (283) 5,498 $ 29,732 1,167 50 96 572 $ $ $ $ 7,675 859 171 2,946 $ $ $ $ $ $ (a) Long-term debt includes current portion, excludes capital leases and is net of deferred charges. Onex Corporation December 31, 2009 119 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 8 . I N F O R M AT I O N B Y I N D U S T R Y A N D G E O G R A P H I C S E G M E N T ( c o n t ’d ) Geographic Segments North America Europe 2009 Asia and Oceania Other Total North America Europe 2008 Asia and Oceania Other Total Revenue(1) $ 15,570 $ 3,639 $ 4,934 $ 688 $ 24,831 $ 14,605 $ 4,412 $ 5,978 $ 1,886 $ 26,881 Property, plant and equipment $ 2,954 $ 406 $ 350 $ 49 $ 3,759 $ 2,946 $ 506 $ 467 $ 147 $ 4,066 Intangible assets $ 1,701 $ 293 $ 74 $ 18 $ 2,086 $ 2,198 $ 408 $ 108 $ 41 $ 2,755 Goodwill $ 1,896 $ 269 $ 101 $ 46 $ 2,312 $ 2,436 $ 357 $ 117 $ 36 $ 2,946 (1) Revenues are attributed to geographic areas based on the destinations of the products and/or services. North America revenue and assets are primarily in the United States. Other consists primarily of operations in Central and South America, and Mexico. Signiﬁcant customers of operating companies are discussed in note 23. 120 Onex Corporation December 31, 2009 SHAREHOLDER INFORMATION Year-end closing share price As at December 31 Toronto Stock Exchange 2009 2008 2007 2006 2005 $ 23.60 $ 18.19 $ 34.99 $ 28.35 $ 18.92 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 2009 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 6, 2010 at 10:00 a.m. (Eastern Daylight Time) at Four Seasons Hotel, Windows West Room, 32nd Floor, 21 Avenue Road, Toronto, Ontario. Typesetting and copyediting by Moveable Inc. www.moveable.com Printed in Canada

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